oversight

Export Controls: U.S. Agencies Need to Assess Control List Reform's Impact on Compliance Activities

Published by the Government Accountability Office on 2012-04-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Requesters




April 2012
             EXPORT CONTROLS

             U.S. Agencies Need to
             Assess Control List
             Reform’s Impact on
             Compliance Activities




GAO-12-613
                                             April 2012

                                             EXPORT CONTROLS
                                             U.S. Agencies Need to Assess Control List Reform’s
                                             Impact on Compliance Activities
Highlights of GAO-12-613, a report to
congressional requesters




Why GAO Did This Study                       What GAO Found
To protect its national security and         U.S. agencies engaged in export controls use various compliance activities to
commercial interests, the United States      prevent the diversion or misuse of exported items against U.S. interests or allies
has implemented an export control            and reduce illicit transshipment risk. Compliance activities include (1) vetting
system to limit sensitive technologies       transactions prior to export, (2) analyzing shipping data and monitoring the end
from falling into the wrong hands. The       use of items, and (3) educating companies and foreign governments about illicit
Department of State regulates U.S.           transshipment risks. To vet transactions, agencies review license applications for
defense exports and the Department of        the export of controlled items, consult multiple lists of entities known or
Commerce regulates dual-use exports          suspected of violating export control laws or regulations, and screen foreign end
that have commercial and military
                                             users to determine their eligibility to receive items without a license. Agencies
applications. Each agency uses a
                                             also review shipping records to identify patterns of abuse and to plan end-use
separate control list of items that may
require a license to export. Agencies
                                             checks—visiting foreign companies to verify the approved use and location of
use compliance activities to prevent         exported items on both licensed items and those eligible for export without a
the diversion or misuse of exported          license. From 2008 to 2010, Commerce conducted 56 percent of its end-use
items against U.S. interests or allies.      checks on unlicensed exports. In the 13 transshipment countries, unlicensed
Misuse can occur through illicit             exports accounted for about 94 percent of unfavorable end-use check
transshipment, the diversion of items        determinations, which indicates that the end use or end user of an export were
from their origin through an                 not appropriate. For example, some unlicensed items transshipped illicitly to Iran
intermediary country to an                   through Hong Kong were used to build improvised explosive devices used
unauthorized destination. In 2010, the       against Coalition troops in Iraq. When an unfavorable determination is made, the
President announced reforms to the           Department of Commerce (Commerce) or Department of State (State) may take
export control system.                       further action, such as denying a license or referring involved entities to
This review examines (1) agencies’           enforcement agencies for investigation and possible penalties. To educate U.S.
compliance activities to address             companies and foreign governments about illicit transshipment risks, Commerce
transshipment risk and (2) the extent to     and State review the internal controls of companies’ compliance programs;
which U.S. agencies assessed the             conduct outreach to U.S. companies to inform exporters of their responsibilities
impact of export control reforms on the      to comply with export control laws and regulations; and provide training to foreign
resource needs for compliance                governments.
activities. GAO analyzed U.S. licensing
                                             Agencies have not fully assessed the potential impact that control list reforms
data for 13 transshipment countries
                                             may pose for the resource needs of their compliance activities. Agencies
and visited Hong Kong, Singapore, and
the United Arab Emirates.                    estimate that Commerce will receive between 16,000 and 30,000 additional
                                             license applications as a result of proposed reforms to move less sensitive items
                                             from State to Commerce. Agency documents state that this step would allow
What GAO Recommends                          them to focus resources on items most critical to national security and may make
                                             compliance easier for exporters because Commerce imposes fewer
GAO recommends that Commerce and
                                             requirements than State’s controls. However, Commerce has not assessed the
State should assess the potential
                                             impact this added responsibility would have on its end-use check resource
impact of control list reforms on the
resource needs of their compliance           needs. Also, under the reforms, fewer items may require export licenses, thereby
activities. Commerce and State               reducing uncertainty as to whether export sales will be approved. Some agency
concurred with GAO’s                         officials suggested potential risks, such as an increased need for more end-use
recommendation.                              checks and the loss of information from reviewing exports through the licensing
                                             process prior to export. The agencies have not yet assessed the impact of these
                                             potential risks on their resource needs.


View GAO-12-613. For more information,
contact Thomas Melito at (202) 512-9601 or
melitot@gao.gov.

                                                                                     United States Government Accountability Office
Contents


Letter                                                                                           1
                       Background                                                                4
                       Compliance Activities Address Illicit Transshipment Risk in Three
                         Areas                                                                   8
                       Agencies Have Not Fully Assessed Potential Impact of Control List
                         Reforms on Resource Needs for Compliance Activities                   21
                       Conclusions                                                             28
                       Recommendations for Executive Action                                    29
                       Agency Comments and Our Evaluation                                      29

Appendix I             Scope and Methodology                                                   31



Appendix II            Descriptions of Compliance Activities                                   34



Appendix III           License Application Review                                              35



Appendix IV            List Maintenance                                                        36



Appendix V             End-Use Monitoring                                                      37



Appendix VI            Comments from the Department of Commerce                                41



Appendix VII           Comments from the Department of State                                   45



Appendix VIII          GAO Contact and Staff Acknowledgments                                   47



Related GAO Products                                                                           48




                       Page i                                            GAO-12-613 Export Controls
Tables
          Table 1: Categories and Lists of Entities of Concern                    10
          Table 2: Descriptions of Compliance Activities                          34
          Table 3: Number of License Applications for Commerce and State
                   for 13 Transshipment Countries, Fiscal Years 2008–2010         35
          Table 4: Commerce and State End-Use Checks, Fiscal Years 2008–
                   201038


Figures
          Figure 1: Total Commerce PSVs Conducted on Exports Shipped
                   Without Prior U.S. Government Review Worldwide and in
                   13 Transshipment Countries, Fiscal Years 2008–2010             17
          Figure 2: Unfavorable PSVs for Transshipment Countries, Fiscal
                   Years 2008-2010                                                18
          Figure 3: Numbers of Parties on State and Commerce Watch List by
                   Transshipment Country for 2011                                 37
          Figure 4: Commerce’s End-Use Checks in 13 Transshipment
                   Countries, Fiscal Years 2008–2010                              39
          Figure 5: State’s Blue Lantern End-Use Checks in 13 Transshipment
                   Countries, Fiscal Years 2008–2010                              40




          Page ii                                           GAO-12-613 Export Controls
Abbreviations

BIS               Bureau of Industry and Security
CCL               Commerce Control List
DDTC              Directorate of Defense Trade Controls
DOD               Department of Defense
EAR               Export Administration Regulations
ECO               Export Control Officer
EXBS              Export Controls and Border Security
OFAC              Office of Foreign Assets Control
PSV               post-shipment verification
SDN               Specially Designated Nationals
STA               Strategic Trade Authorization
UAE               United Arab Emirates
USML              U.S. Munitions List
VEU               Validated End-User
WMD               weapons of mass destruction




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Page iii                                                       GAO-12-613 Export Controls
United States Government Accountability Office
Washington, DC 20548




                                   April 23, 2012

                                   The Honorable Susan M. Collins
                                   Ranking Member
                                   Committee on Homeland Security
                                   and Governmental Affairs
                                   United States Senate

                                   The Honorable Jon Kyl
                                   Ranking Member
                                   Subcommittee on Crime and Terrorism
                                   Committee on the Judiciary
                                   United States Senate

                                   To further its national security and economic interests, the United States
                                   controls the export of sensitive defense and dual-use items (having both
                                   commercial and military applications) to foreign governments and
                                   commercial entities. Such items can range from sophisticated technology
                                   designed for military use, such as F-15 aircraft, to unsophisticated and
                                   commonly available electronic switches that have ultimately been used in
                                   improvised explosive devices by terrorists in Iraq and Afghanistan. The
                                   U.S. government seeks to limit the risk of sensitive items falling into the
                                   wrong hands, while allowing legitimate trade to occur and uses the export
                                   control system to balance these U.S. interests. Multiple federal agencies
                                   administer the laws, regulations, and processes that make up the
                                   regulatory compliance and enforcement framework governing the export
                                   control system. Primarily, the Department of State (State) regulates
                                   defense exports, and the Department of Commerce (Commerce)
                                   regulates dual-use exports. 1 Each agency maintains a separate list of
                                   items to be controlled and exported with a license after government
                                   review, or without a license under designated exceptions.

                                   The U.S. government also conducts activities to encourage compliance
                                   with its export control laws and to prevent the diversion or misuse of



                                   1
                                    In addition, the Department of Defense (DOD) provides input on which items should be
                                   controlled by either State or Commerce and conducts technical and national security
                                   reviews of export license applications submitted by exporters to either State or
                                   Commerce.




                                   Page 1                                                      GAO-12-613 Export Controls
exported items against U.S. interests or allies. 2 Compliance activities
include reviewing export license applications to decide whether to
approve or deny them, visiting foreign companies to verify the approved
use and location of exported items—referred to as end-use checks—and
conducting courses for exporters—called outreach—to inform them of
their responsibilities to comply with export control laws and regulations.
Of particular concern to the agencies conducting compliance efforts is
illicit transshipment of items—the transfer of merchandise from its place
of origin through an intermediary country—to an unauthorized final
destination such as Iran. 3 Illicit transshipment challenges compliance
efforts because it poses a significant risk to the safe transfer of sensitive
U.S. technologies to authorized end users.

Our reports to Congress and testimony at congressional hearings have
highlighted the need for export control reform. We have called for, among
other things, a strategic reexamination of existing programs within the
U.S. export control system to identify needed changes and ensure the
advancement of U.S. interests. In 2010, the United States announced a
fundamental reform of its export control system, by proposing, among
other things, to reduce the numbers and types of items requiring
government review and licensing before export. Members of Congress
raised concerns that, absent efforts to first address compliance and
enforcement shortfalls, reform of the system could exacerbate current
weaknesses, including the risk of illicit transshipment.

In this review, we (1) examined how U.S. agencies use compliance
activities to address the risk of illicit transshipment and (2) analyzed the
extent to which U.S. agencies assessed the impact of the export control
reform on the resource needs of compliance activities. This is the fourth in
a series of four reports we have issued on this subject since November


2
 “Diversion” refers to the transfer or release, directly or indirectly, of a good, service, or
technology to an end user or an intermediary that is not an authorized recipient of the
good, service, or technology.
3
 The U.S. government has no agreed-upon definition of transshipment. However, the
Census Bureau proposed a definition stating that “transshipment” refers to the transfer of
merchandise from the country or countries of origin through an intermediary country or
countries to the country of destination. We use that definition for the purposes of this
report. Transshipment is one type of reexport, according to Commerce, whose regulations
define reexport as the shipment or transmission of an item subject to the Export
Administration Regulations from one foreign country to another. According to Commerce,
diversion can occur through transshipment.




Page 2                                                              GAO-12-613 Export Controls
2010. Our first report identified the extent to which agencies’ actions and
the proposed export control framework addressed findings in our previous
reports in the areas of export control lists, licensing, enforcement, and
information technology. 4 Our second report, issued on March 14, 2012,
was a version of this report containing information designated “For Official
Use Only.” Our third report, issued on March 27, 2012, covered the
enforcement of U.S. export controls in light of the Export Control Reform
Initiative. 5

To address the two objectives of this review, we analyzed licensing, end-
use monitoring, and other data from Commerce, State, and the
Department of the Treasury (Treasury) for 13 transshipment countries
and locations. 6 We also drew a random, nongeneralizable sample of 56
Commerce end-use checks and 21 State end-use checks to determine
how results from those activities were incorporated into other compliance
activities. We identified export control compliance activities that
Commerce, State, and Treasury conduct to encourage compliance with
export control laws and to prevent the diversion or misuse of exported
items against U.S. allies or interests. We identified these compliance
activities through interviews with agency officials and review of
documentation. Appendix II lists and describes the eight compliance
activities that we reviewed. We met with U.S. officials of Commerce, the
DOD, State, and Treasury, and representatives of companies in
Washington, D.C., and with U.S. embassy and foreign government
officials in Hong Kong, Singapore, and the United Arab Emirates (UAE).
We reviewed documentation on agency actions taken to encourage


4
 GAO, Export Controls: Agency Actions and Proposed Reform Initiatives May Address
Previously Identified Weaknesses, but Challenges Remain, GAO-11-135R (Washington,
D.C.: Nov. 16, 2010).
5
 GAO, Export Controls: Proposed Reforms Create Opportunities to Address Enforcement
Challenges, GAO-12-246 (Washington, D.C.: Mar. 27, 2012).
6
  For the purpose of this report, we designated as transshipment countries Canada, China,
Cyprus, Hong Kong (a special administrative region of China), Indonesia, Jordan,
Malaysia, Malta, Philippines, Singapore, Taiwan, Thailand, and UAE. We generated this
list of 13 transshipment countries by reviewing prior GAO work on transshipment and
diversion; congressional testimony; countries with entities on the Entity List or Unverified
List; input from State and Commerce; lists of the busiest transshipment ports worldwide;
and those countries where a Commerce Export Control Officer has been stationed. We
refer to Hong Kong and Taiwan as transshipment “countries” only for the purposes of this
report. None of the agencies we contacted maintains a comparable list of transshipment
countries.




Page 3                                                          GAO-12-613 Export Controls
                        compliance actions and interviewed U.S. government officials, including
                        representatives of Commerce’s Bureau of Industry and Security (BIS);
                        DOD’s Defense Technology Security Administration; State’s Directorate
                        of Defense Trade Controls (DDTC); and Treasury’s Office of Foreign
                        Assets Control (OFAC). We also spoke with export control reform task
                        force members and reviewed recent White House press releases on the
                        export reform initiatives. U.S. agencies engage in a variety of activities
                        intended to foster compliance with U.S. export control law and
                        regulations, and other activities to enforce these laws and exact penalties
                        for violating them. We did not review enforcement activities that address
                        investigations, civil and criminal penalties, seizures, indictments,
                        prosecutions, or convictions as our third report addressed these activities.
                        Commerce provided us with transshipment-related information that it
                        controls as being “For Official Use Only.” We have not included that
                        information in this report but have instead incorporated it into a “For
                        Official Use Only” report that is not publicly available. Appendix I
                        discusses our scope and methodology in more detail.

                        We conducted this performance audit from August 2010 to April 2012 in
                        accordance with generally accepted government auditing standards.
                        These standards require that we plan and perform the audit to obtain
                        sufficient, appropriate evidence to provide a reasonable basis for our
                        findings and conclusions based on our audit objectives. We believe that
                        the evidence obtained provides a reasonable basis for our findings and
                        conclusions based on our audit objectives.



Background
Export Control System   The current U.S. export control system seeks to limit sensitive items from
                        falling into the wrong hands and, at the same time, allow legitimate trade
                        to occur. The export control system is governed by a complex set of laws,
                        regulations, and processes and multiple federal agencies administer its
                        regulatory framework and ensure compliance. State and Commerce each
                        have a role in U.S. export licensing. Generally, exporters may submit a
                        license application to State if their items are controlled on the U.S.
                        Munitions List (USML) or to Commerce if their items are controlled on the
                        Commerce Control List (CCL) to receive export approval. Exemptions are
                        permitted under various circumstances, such as allowing for the export of
                        certain items to Canada without a license. Even though many dual-use
                        items do not require a license for export to most destinations, they are still
                        subject to U.S. export control laws. All items subject to the Export


                        Page 4                                                GAO-12-613 Export Controls
Administration Regulations (EAR), whether or not on the CCL, require
exporters to comply with the EAR. 7 As part of the application review
process, State and Commerce consult with other agencies, including
DOD. Exporters require a license for most arms exports. In 2010,
Commerce processed 21,660 export licenses, and State processed
82,937 export licenses. 8 Additionally, offices within State, Commerce,
Treasury, and the Departments of Homeland Security and Justice
conduct compliance activities to identify potential violations or prevent
them before they occur; they also conduct export control enforcement
activities to identify and penalize violations after they occur. When
compliance activities, such as end-use checks, result in unfavorable
determinations, Commerce or State may take further action, such as
denying a license or referring involved entities to enforcement agencies
for investigation and possible penalties. Enforcement also strives to
prevent or deter the illegal export of defense and dual–use items, such as
controlled components that were shipped to countries like Iran, which
were later found in weapons and devices used against U.S. forces in Iraq.
Export control enforcement activities include inspecting items to be
exported, investigating potential export control violations, and pursuing
and imposing criminal and administrative penalties against violators.

The imposition of economic sanctions has been a long-standing tool for
addressing a range of national security threats. As of February 2012,
OFAC maintains primary responsibility for administering more than 20
separate sanctions programs. These sanctions programs include (1)
country-based programs that apply sanctions to an entire country—such
as Iran, or Sudan; and (2) targeted, list-based programs that address
individuals or entities engaged in specific types of activities such as



7
  For items controlled by Commerce, exporters are to determine whether a license is
required or one of the licensing exceptions permissible under the EAR is applicable.
Commerce may require a license for an export based on a variety of reasons, including
limiting the proliferation of chemical, biological weapons and the country of destination. A
license exception, as opposed to a license requirement, is an authorization that allows an
exporter to export or reexport without a license, under stated conditions, items subject to
the EAR, which would otherwise require a license. If an item is not listed on the control list
but is subject to the EAR, it falls into a category known as EAR99. State refers to the
eligibility of exports of items on the USML without a license under certain conditions as
exemptions.
8
 This State number represents all arms export license processed by DDTC, which include
applications for the export of arms and agreements between U.S. industry and foreign
entities to provide technical assistance or manufacturing capability.




Page 5                                                           GAO-12-613 Export Controls
                        terrorism, proliferation of weapons of mass destruction (WMD), or
                        narcotics trafficking. For example, according to Treasury officials, they
                        use the authorities under the International Emergency Economic Powers
                        Act and Executive Order 13224 to designate those who provide support
                        to terrorists, freezing any assets they have under U.S. jurisdiction and
                        preventing U.S. persons from doing business with them. 9


Export Control Reform   In August 2009, the President announced that he was directing a
Initiative              comprehensive review of the U.S. export control system. This review
                        found that the U.S. export control system has a complicated structure with
                        multiple agencies and control lists, which has led to jurisdictional
                        confusion and hindered the ability of allies to cooperate with U.S. forces.
                        In April 2010, the administration announced a reform framework that
                        would create an export control system that is more effective, transparent,
                        and predictable by creating a single control list, licensing agency,
                        enforcement agency, and information technology system for licensing.
                        The administration also found that licensing procedures and conditions
                        are not consolidated or uniform across agencies, with various agencies
                        monitoring and enforcing export controls. 10 The current process relies on
                        separate information systems, some of which are paper-based, which are
                        not accessible to all agencies involved.

                        Our past work has highlighted the need for export control reform through
                        reports to Congress and testimony at congressional hearings. Over the
                        last decade, GAO has made a number of key findings and
                        recommendations directed to State, Commerce, DOD, Homeland
                        Security, Justice, and Treasury, to improve the U.S. export control
                        system. 11 Some of the issues we identified include a lack of systematic
                        assessments, poor interagency coordination, and inefficiencies in the
                        license application process.


                        9
                         Under the authority provided by the International Emergency Economic Powers Act (50
                        U.S.C. §§1701 et seq.), the President has continued the EAR in effect through Executive
                        Order No. 13222 of August 17, 2001 (3 C.F.R., 2001 Comp. p. 738 (2002)), as extended
                        most recently by Notice of August 12, 2011, 76 Fed. Reg, 50661.
                        10
                         In 2007, GAO designated the programs that identify and protect technologies critical to
                        U.S. national security interests as a high-risk area. GAO has maintained its designation.
                        See GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: January 2007);
                        and High Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011).
                        11
                            A list of Related GAO Products appears at the end of this report.




                        Page 6                                                           GAO-12-613 Export Controls
                    The administration plans to begin implementing export control reforms
                    through interim changes that can be carried out by regulation or executive
                    order. Reforms requiring legislative action—creation of a single licensing
                    agency, control list, and enforcement agency—will come last and had not
                    been proposed as of March 2012. As of February 2012, the
                    administration has taken steps to implement export control reform
                    including proposing regulations to move controlled export items from the
                    USML to the CCL, and clarifying which items pertain to each list, and
                    establishing an Export Enforcement Coordination Center by executive
                    order. 12


Transshipment and   In July 2010, a senior State official testified that transshipment hubs (i.e.,
Diversion           countries or areas that function as major hubs for the legitimate trading
                    and shipment of cargo) with weak controls on imports, exports, and
                    reexports represent an important vulnerability to efforts to prevent illicit
                    proliferation-related trade. Our previous work identified cases of illicit
                    transshipment involving parties in UAE, Singapore, and Malaysia. 13 As
                    congressional attention focused on transshipment, members also raised
                    concerns about the resources needed for compliance activities,
                    domestically and overseas. For example, in the same July 2010 hearing,
                    a member expressed concern that only one Commerce individual was
                    stationed in the UAE to conduct end-use checks for dual-use exports. 14
                    According to U.S. officials, Iran has obtained U.S. military and dual-use
                    goods that have been illegally transshipped by firms and individuals
                    through locations in numerous countries, including the UAE, Malaysia,
                    and Singapore. The goods included components for U.S.-built fighter
                    aircraft, electronics, and specialized metals. To address the problem, U.S.


                    12
                         See Exec. Order No. 13558, 75 Fed. Reg. 69, 573 (Nov. 15, 2010).
                    13
                     GAO, Iran Sanctions: Complete and Timely Licensing Data Needed to Strengthen
                    Enforcement of Export Restrictions, GAO-10-375 (Washington, D.C.: Mar. 4, 2010).
                    14
                      End-use checks are conducted to determine the bona fides of the transaction and the
                    end user, and to ensure that an exported item is being used in accordance with U.S.
                    export control regulations and the terms of the export license. Commerce determines that
                    end-use checks had favorable, unfavorable, or limited and nonconclusive results. A check
                    is favorable when it can confirm the end use and end user of an export are appropriate.
                    An unfavorable determination means that Commerce considers the end user to be
                    unreliable. Nonconclusive determinations result when Commerce cannot determine the
                    reliability of the end user. For example, if Commerce is unable to conduct a site visit. A
                    limited result means that the individual conducting the check provided incomplete
                    information or did not follow Commerce guidance in carrying out the check.




                    Page 7                                                        GAO-12-613 Export Controls
                             agencies have conducted undercover investigations to detect Iranian
                             procurement networks, prosecuted criminal cases against at least 30
                             firms and individuals for transshipping or attempting to transship goods to
                             Iran, and provided export control training and support to the UAE and
                             other countries.


                             U.S. agencies engaged in export controls use multiple compliance
Compliance Activities        activities to reduce illicit transshipment risk. These activities include (1)
Address Illicit              vetting transactions prior to export by screening applications against four
                             categories of lists of parties of concern, among other steps, (2) analyzing
Transshipment Risk in        shipping data and monitoring end use of items, and (3) educating
Three Areas                  companies and foreign governments about the risks of illicit
                             transshipment, although State’s outreach efforts have been largely
                             inactive since 2008.


U.S. Agencies Vet            To address illicit transshipment risks, agencies vet parties to transactions
Transactions Prior to        prior to export in three ways. First, agencies examine license applications
Export                       to assess the transaction. Second, they vet individual parties to the
                             transaction by, for example, confirming their credentials before issuing a
                             license (a prelicense check). Third, agencies screen applicants to identify
                             trusted end users for the Validated End-User (VEU) program.

License Application Review   When deciding to approve or deny an export license application,
Vets Transactions Prior to   Commerce and State evaluate it against several factors, including an
Export                       assessment of all parties to the transaction and how the recipient plans to
                             use the item. Commerce factors the risk of illicit transshipment into the
                             license application review process through a risk assessment tool that
                             assigns a weighted score to an application, based on the level of concern
                             associated with the listed party, country, product, and exporter. A high
                             score may prompt further investigation and an end-use check by
                             Commerce or embassy officials. In technical comments on a draft of this
                             report, Commerce stated that the risk assessment tool would affect the
                             license review process only when Commerce determined that a
                             prelicense check would be necessary. In those cases, Commerce
                             incorporates transshipment risk in the license application review process
                             by dividing countries into three categories of risk, with the third category
                             including countries identified as transshipment points. Commerce’s list of
                             highest risk countries includes 7 of the 13 transshipment countries in our
                             review. For fiscal years 2008 through 2010, Commerce reviewed 63,304
                             license applications worldwide, 19,693 (31 percent) of which were for
                             exports to the 13 transshipment countries we identified. It approved 84


                             Page 8                                                GAO-12-613 Export Controls
percent of license applications for these transshipment countries, denied
1 percent, and returned 15 percent of the applications to exporters
without taking action on them. 15 Appendix III contains additional
information on the number of license applications that Commerce and
State reviewed for the 13 transshipment countries between fiscal years
2008 and 2010.

State conducts a case-by-case review of export license applications
against established criteria or “warning flags” for determining potential risk
of exporting USML items to foreign recipients. As part of the license
review process, State may conduct a prelicense end-use check to provide
more information on the transaction before it acts on the license
application. State’s guidance on conducting end-use checks (known as
Blue Lantern monitoring) identifies three broad categories that may trigger
an end-use check, including whether there are indicators for
transshipment through multiple countries or companies. 16 For fiscal years
2008 through 2010, State reviewed 164,998 license applications
worldwide and 28,550 for exports to the 13 transshipment countries (17
percent of all applications). 17 It approved 86 percent of license
applications for these countries, 18 denied 1 percent, returned without
action 13 percent, and suspended or revoked 1 percent of preexisting
licenses. 19

Treasury does not review licenses for the 13 transshipment countries
because none of these countries is an embargoed or sanctioned country.


15
  A licensing agency may return an export license application without action because the
application lacked needed information or the applicant withdrew the application, among
other reasons.
16
  Blue Lantern end-use monitoring entails the prelicense, postlicense, or postshipment
inquiries or “checks” undertaken to verify the legitimacy of a transaction and to provide
“reasonable assurance” that the recipient complies with the requirements imposed by the
U.S. government with respect to use, transfers, and security of defense articles and
defense services; and that such articles and services are being used for the purposes for
which they were provided.
17
  For the purpose of this report, we reviewed licenses for permanent export. State also
authorizes temporary exports and technical data.
18
  Approved license applications include those that were approved with provisos, such as
those specifying how items can be used and by whom.
19
   Suspending a license temporarily removes the privilege of exporting, while revoking a
license annuls it and rescinds the authority to export.




Page 9                                                         GAO-12-613 Export Controls
                                            However, it assesses illicit transshipment risk when it licenses goods to
                                            several destinations, such as Iran and Sudan, in its administration of U.S.
                                            embargoes and sanctions. According to Treasury officials, OFAC screens
                                            end users in the license review process against the sanctions lists it
                                            administers because it assesses the risk of illicit transshipment or of
                                            reexport when placing individuals on these lists.

Agencies Screen Applications                Commerce, State, and Treasury each maintain several screening lists
against Four Categories of Lists            that inform the licensing process by providing information on entities of
of Parties of Concern                       concern to licensing officers and the public. These lists encompass a
                                            range of designations including those related to proliferation of WMD,
                                            terrorism, and actions contrary to U.S. national security and foreign policy
                                            interests. We reviewed four categories of lists outlined in table 1 below. 20

Table 1: Categories and Lists of Entities of Concern

Category                      List                        Agency        Description
Additional Licensing          Entity List                 Commerce      List of parties that are subject to specific license
Requirements                                                            requirements for the export, reexport, and/or in country
                                                                        transfer of specified items. Parties on this list are subject to
                                                                        licensing requirements.
Unverified Parties            Unverified List             Commerce      List of persons in foreign countries who were parties to past
                                                                        export transactions where prelicense checks or postshipment
                                                                        verifications could not be conducted for reasons outside the
                                                                        control of the U.S. government.
Prohibited and Sanctioned     Specially Designated        Treasury      List of blocked persons, blocked vessels, specially
Parties                       Nationals List                            designated nationals, specially designated terrorists,
                                                                        specially designated global terrorists, foreign terrorist
                                                                        organizations, and specially designated narcotics traffickers
                                                                        whose assets are blocked and U.S. persons are generally
                                                                        prohibited from dealing with them.
                              Nonproliferation            State         List of parties that have been sanctioned under various
                              Sanctions List                            statutes, designed to combat the proliferation of WMD.




                                            20
                                              Commerce officials also suggested that the public screen parties against the Denied
                                            Persons List and the AECA Debarred List. For the purposes of this report, we have
                                            classified these activities as enforcement rather than compliance activities.




                                            Page 10                                                          GAO-12-613 Export Controls
Category               List                           Agency             Description
Internal Watch Lists   Watch List – State             State              List of parties whose association with an export license
                                                                         application indicates a need for closer examination by
                                                                         licensing officers.
                       Watch List – Commerce          Commerce           List of individuals and companies that Commerce has
                                                                         determined warrant increased scrutiny for export licensing
                                                                         purposes, including those companies that receive
                                                                         unfavorable end-use checks.
                                   Source: GAO analysis of agency documents.


                                   •     Entity List: Commerce’s considerations for additions to the Entity List
                                         include the end use of allegedly transshipped items. For example, on
                                         October 31, 2011, the End-User Review Committee added a firm
                                         located in Hong Kong and Singapore for diverting U.S.-origin items
                                         from Hong Kong to Iran. 21 The diversion was part of the efforts of a
                                         larger procurement network that arranged for the transshipment of
                                         radio frequency modules from Singapore to Iran for use in improvised
                                         explosive devices found in Iraq. Placement of an individual’s name on
                                         the Entity List notifies exporters of a potential licensing requirement or
                                         a ban on exports. In August 2008, Commerce expanded criteria for
                                         addition to the Entity List to allow an entity to be placed on the list if
                                         there is reasonable cause to believe, based on specific and articulable
                                         facts, that the entity has been involved, is involved, or poses a
                                         significant risk of becoming involved in activities that are contrary to
                                         the national security or foreign policy interests of the United States. As
                                         of December 2010, at least 56 percent of the 359 entities on the Entity
                                         List 22 were from the 13 transshipment countries in our review.

                                   •     Unverified List: The Commerce Unverified List is a public list that
                                         includes the names and countries of foreign entities that were parties
                                         to transactions for which Commerce could not conduct a prelicense
                                         check or postshipment verification (PSV) due to factors outside of
                                         U.S. government control. The list informs the licensing process by
                                         providing exporters with information about entities of concern. For
                                         example, we determined that, of the 36 persons or entities currently


                                   21
                                     The End-User Review Committee, composed of representatives of the Departments of
                                   State, Defense, Energy, and Commerce, and other agencies, as appropriate, is
                                   responsible for placing entities on the Entity List based on evidence that the entities pose
                                   a significant risk of involvement in activities contrary to U.S. national security or foreign
                                   policy interests. Commerce chairs the End-User Review Committee.
                                   22
                                     In our analysis of the Entity List, we included entities and their subordinates and aliases
                                   in our calculations.




                                   Page 11                                                                 GAO-12-613 Export Controls
     on the Unverified List, 78 percent are from the 13 transshipment
     countries we reviewed. When Commerce established the Unverified
     List in 2002, it advised exporters that the participation of a person on
     this list in any proposed transaction would raise a ‘‘red flag’’ for
     exporters under established guidance. Commerce stopped updating
     the Unverified List after it expanded the scope of the Entity List in
     August 2008 and is considering eliminating the Unverified List in
     2012. Commerce officials said that they will review the Unverified List
     and assess the 36 entities currently on it against criteria for inclusion
     on the Entity List, transferring them, if warranted, on a case-by-case
     basis. Commerce will monitor the entities that are not transferred
     through its internal Watch List.

•    State and Treasury Sanctions Lists: State and Treasury publish lists
     of individuals sanctioned under various statutes for activities relating
     to concerns ranging from nonproliferation to drug enforcement.
     Treasury officials indicated that both direct exports and
     transshipments from the United States to a sanctioned entity or to an
     embargoed country without authorization constitute diversion and are
     thus violations. For example, in December 2008, Treasury sanctioned
     an Iranian shipping line for facilitating the transport of cargo and
     employing deceptive shipping practices to advance Iran’s nuclear and
     missile programs. Additionally, Treasury designated the company’s
     subsidiaries in four transshipment countries—China, Malta,
     Singapore, and UAE. Of the 4,929 designations on the Specially
     Designated Nationals (SDN) list, 167 were from the 13 transshipment
     countries. 23

•    State and Commerce Watch Lists: State and Commerce screen
     parties named in a license application against internal Watch Lists,
     which include participants added because of illicit transshipment risk.
     Specifically, Commerce and State both add names of entities
     identified through unfavorable end-use checks, including names of




23
  The 167 entities designated on the SDN list from the 13 transshipment countries
represent designations that trigger a license requirement under the EAR, such as
Specially Designated Global Terrorist and Nonproliferation and Weapons of Mass
Destruction.




Page 12                                                      GAO-12-613 Export Controls
     entities from transshipment countries, to the Watch Lists. 24 According
     to State and Commerce, officials check all names on every export
     license application against their Watch Lists. As of September 2011,
     State’s Watch List contained 100,248 entities, of which 8,731 (about 9
     percent) were from the 13 transshipment countries we reviewed. As of
     November 2011, the Commerce Watch List contained 36,849 active
     entities, of which 8,309 (about 23 percent) were from the 13
     transshipment countries we reviewed. Appendix IV details the
     numbers of entities from each transshipment country listed on State
     and Commerce Watch Lists for 2011. To confirm that the results of
     end-use checks are incorporated into the license application review
     process, we analyzed a random, nongeneralizable sample of 21 State
     end-use checks and 56 Commerce end-use checks during our site
     visits in Hong Kong, Singapore, and the UAE. 25 We submitted 11
     unfavorable checks to State to determine the actions in response to
     the unfavorable determinations. State placed or updated the
     placement of 9 of the 11 entities identified in these unfavorable end-
     use checks on agency watch lists and referred 6 to State’s
     enforcement division for possible investigation. For Commerce,
     according to its Watch List guidance, all companies that receive
     unfavorable prelicense checks or PSVs are placed on the Watch List.
     However, for the 26 end-use checks with unfavorable results that we
     submitted to Commerce, we could not confirm that Commerce placed
     the names of the associated entities on its Watch List.

Agencies may also conduct a prelicense check to verify the credentials of
a party in advance of approving a license. A prelicense check may
include a site visit to the proposed end user or consignee. Commerce and
State may also seek the input of other agencies, particularly DOD, to vet
transactions by reviewing end-user history and other factors.



24
  Commerce and State end-use checks may have favorable, unfavorable, or inconclusive
results. A check is favorable when it can confirm that the end use and end user of an
export are appropriate, unfavorable when it confirms that they are not, and inconclusive
when it cannot confirm them, usually through an inability to conduct the check. Due to an
unfavorable result, Commerce or State may take further action, such as denying a license
or referring involved entities to enforcement agencies for investigation and possible
penalties.
25
 GAO reviewed UAE-specific State end-use data collected for and reported in our report,
Persian Gulf: Implementation Gaps Limit the Effectiveness of End-Use Monitoring and
Human Rights Vetting for U.S. Military Equipment, GAO-12-89 (Washington, D.C.: Nov.
17, 2011).




Page 13                                                       GAO-12-613 Export Controls
Commerce Screens Applicants       Commerce screens applicants for a variety of factors, including reexport,
to Identify Trusted End Users     to identify trusted end users for the VEU program. 26 The VEU is an export
for the VEU Program               licensing framework that allows validated end users to receive eligible
                                  items on the Commerce Control List without a license. As of November
                                  2011, Commerce conferred VEU status on 11 companies from 2
                                  countries, China—one of the 13 GAO-designated transshipment
                                  countries—and India. The End-User Review Committee considers factors
                                  such as the entity’s record of compliance with U.S. export controls and its
                                  willingness to host on-site reviews by U.S. government personnel to
                                  ensure program compliance. 27 Commerce also vets potential recipients of
                                  VEU authorizations with the law enforcement and intelligence
                                  communities. In addressing illicit transshipment risk, Commerce requires
                                  VEU applicants to adhere to conditions on diversion, retransfer, and
                                  reexport of specified items.


Agencies Address Illicit          To confirm exporters’ and recipients’ adherence to U.S. export control
Transshipment Risk by             requirements, Commerce and State analyze shipping data and conduct
Analyzing Shipping Data           end-use checks of items exported overseas. They use these activities to
                                  confirm compliance with export control requirements by verifying the end
and Monitoring End Use            use of controlled items and by reviewing export documentation for
of Items                          potential violations.

Two Agencies Analyze Shipping     Both Commerce and State analyze shipping information to identify illicit
Information to Identify Illicit   transshipments and other potential violations of export control laws. The
Transshipments and Other          Census Bureau maintains shipping information on U.S. exports in the
Potential Violations              Automated Export System, the primary instrument for collecting export
                                  trade data. The U.S. government requires exporters to file shipping
                                  information with the system for any items subject to Commerce or State
                                  control, whether they need licenses or are eligible for exceptions.

                                  Commerce uses data from the Automated Export System to determine
                                  exporter’s compliance with the EAR on items subject to licensing
                                  requirements, select candidates for end-use checks, and target other
                                  compliance and enforcement activities. In addition, Commerce used



                                  26
                                   Transshipment is one form of reexport, according to Commerce regulations.
                                  27
                                    In addition to administering the Entity List, the End-User Review Committee also is
                                  responsible for determining whether to add to, remove from, or otherwise amend the list of
                                  validated end users and associated eligible items set forth in the EAR.




                                  Page 14                                                       GAO-12-613 Export Controls
                              available Automated Export System and international Customs data to
                              develop a methodology that assesses the potential risk of illicit diversion
                              of items on the Commerce Control List. This methodology is part of a
                              Commerce developed Transshipment Identification Strategy that also
                              included the publication of seven best practices for preventing diversion
                              through transshipment points. U.S. agencies have assessed a risk of illicit
                              transshipment from Hong Kong to mainland China, from UAE to Iran, and
                              from China to Iran.

                              State also uses shipping information as part of its end-use monitoring
                              program to identify illicit transshipments and other forms of diversion.
                              Specifically, State officials said that they check shipping information
                              against approved license applications for discrepancies when considering
                              whether to initiate an end-use check and use such information to verify
                              the exporter’s use of license exemptions. For example, in fiscal year
                              2009, State reported reviewing 35,000 shipments to Canada made under
                              an exemption specific to that country. As a result of that review, State
                              reported initiating eight end-use checks to verify the credentials of end
                              users who were listed on State’s Watch List. State determined that the
                              export in question did not result in a diversion. Like Commerce, State
                              obtains shipping data from the Automated Export System maintained by
                              the Census Bureau, pursuant to a Memorandum of Understanding with
                              that organization. As the Memorandum of Understanding expired in
                              November 2011, State and Census must complete a new Memorandum
                              of Understanding for State to continue receiving this shipping data,
                              according to a senior Census Bureau official. A State official stated that
                              they continued to receive the shipping data between November 2011 and
                              February 2012, but Census stopped providing this data, pending
                              completion of a new Memorandum of Understanding, according to the
                              Census Bureau official.

Commerce and State Verify     Commerce and State address illicit transshipment risk by verifying the
End Use of Controlled Items   end use of controlled items. Guidance for both agencies identifies illicit
                              transshipment as a factor to consider in assessing the need for end-use
                              checks.

Commerce’s End-Use Checks     Commerce may conduct an end-use check on any item subject to the
for Transshipment Countries   EAR that is exported. Commerce’s authority to conduct PSV checks is
                              established in the Export Administration Act of 1979, which provides the
                              legal and administrative basis for U.S. controls on dual-use exports and is
                              supplemented by the EAR. According to Commerce, PSV checks
                              strengthen assurances that exporters, shippers, importers, and end users
                              comply with the terms of export license and licensing conditions.


                              Page 15                                             GAO-12-613 Export Controls
Commerce conducts PSV checks to confirm that the dual-use item
arrived at its destination and is being used as intended. Commerce
Export Control Officers (ECO), special agents, or other U.S. government
personnel visit companies overseas to meet with importers or end users
in an attempt to verify the use and location of these items.

Our analysis of end-use checks, where Commerce made a favorable or
unfavorable determination, indicated that Commerce focused its efforts
on transshipment countries; it conducted 57 percent of 1,412 end-use
checks for fiscal years 2008 to 2010 in the 13 transshipment countries we
reviewed. Of these checks, 33 percent were unfavorable. Appendix V
provides additional data on end-use checks for the 13 transshipment
countries. The three locations where we conducted site visits—Hong
Kong, Singapore, and UAE—represented about 36 percent of Commerce
end-use checks conducted globally for this period and nearly 62 percent
of unfavorable determinations worldwide.

To address transshipment concerns in Southeast Asia, Commerce
stationed an ECO in Singapore, with regional responsibilities in Malaysia,
Indonesia, Thailand, and the Philippines to conduct end-use checks,
among other duties. 28 Commerce end-use check guidance indicates that
ECOs should be aware of warning signals, including whether a consignee
is aware of relevant restrictions to the reexport or retransfer of the item.
For fiscal years 2008 through 2010, Commerce conducted 49 percent of
all its end-use checks in five locations: UAE, Hong Kong, Singapore,
Taiwan, and China. Moreover, Commerce determined that 62 percent of
all unfavorable end-use checks for this period occurred in three of these
locations: Hong Kong, the UAE, and Singapore.

Commerce also conducts a significant number of its PSVs on unlicensed
exports. 29 Specifically, Commerce conducted 913, or about 56 percent, of
the 1,619 checks on such transactions. Moreover, Commerce checks on
unlicensed exports shipped in the 13 transshipment countries accounted


28
  In total, BIS has ECOs with areas of operation covering 12 of the 13 transshipment
countries that we designated. Commerce has five ECOs stationed in 4 of the 13
transshipment countries that we designated—China (2), Hong Kong, Singapore, and the
UAE. The ECOs in Hong Kong, Singapore, and the UAE also have regional
responsibilities.
29
 For the purposes of this report, unlicensed exports include exports requiring no prior
government review, including items subject to the EAR eligible for license exceptions.




Page 16                                                        GAO-12-613 Export Controls
                                      for 70 percent of all such checks worldwide. Figure 1 shows the numbers
                                      of Commerce PSVs conducted on unlicensed exports in the 13
                                      transshipment countries.

Figure 1: Total Commerce PSVs Conducted on Exports Shipped Without Prior U.S. Government Review Worldwide and in 13
Transshipment Countries, Fiscal Years 2008–2010




                                      Commerce can conduct a PSV on any exported item for any reason
                                      related to a compliance concern, such as an enforcement investigation,
                                      intelligence information, or other information that analysts have available
                                      to them. Additionally, in technical comments on a draft of this report,
                                      Commerce stated that PSVs on licensed exports are more likely to result
                                      from commodity or regional concerns, including transshipment, which will
                                      prompt further scrutiny to ultimate or intermediate consignees even
                                      though they are known not to be the end user.

                                      Between 2008 and 2010, 223 (94 percent) of the 238 Commerce
                                      unfavorable postshipment checks in transshipment countries were on
                                      unlicensed exports. Unfavorable postshipment checks on unlicensed
                                      exports in the 13 transshipment countries accounted for 88 percent of all
                                      unfavorable postshipment checks in these countries in 2008 and rose to
                                      97 percent in 2010. (See fig. 2.)




                                      Page 17                                               GAO-12-613 Export Controls
Figure 2: Unfavorable PSVs for Transshipment Countries, Fiscal Years 2008-2010




Note: Numbers may not add due to rounding.


Items exported without a license may pose risks to U.S. national security,
according to U.S. government officials. These items include those not on
the CCL and those on the CCL that do not require a license to certain
destinations. For example, agencies discovered that U.S. electronics
components and devices were used to build improvised explosive devices
that were deployed against Coalition forces in Iraq after they were illicitly
transshipped to Iran through Hong Kong. According to Commerce
officials, the U.S. government established an interagency task force
consisting of several defense intelligence units, and Treasury’s Financial
Crimes Enforcement Network, to address the threat posed by these
devices.

EAR items subject to license requirements have also been transferred
without a license to unauthorized destinations through transshipment
points. It is the policy of the U.S. government to facilitate U.S. exports to
legitimate civilian end users in the People’s Republic of China (China),
while preventing exports that would enhance the military capability of that



Page 18                                                GAO-12-613 Export Controls
                             country. Commerce officials stated that integrated electronic circuits have
                             been diverted to China (a destination requiring a license for these items)
                             through Hong Kong (where no license is required). A senior Commerce
                             official stated that certain types of integrated electronic circuits contribute
                             to China’s military advancement.

State’s End-Use Checks for   The Arms Control Export Act, as amended in 1996, requires, to the extent
Transshipment Countries      practicable, that end-use monitoring programs provide reasonable
                             assurance that recipients comply with the requirements imposed by the
                             U.S. government in the use, transfer, and security of defense articles and
                             services. 30 In addition, end-use monitoring programs are to provide
                             assurances that defense articles and services are used for the purposes
                             for which they are provided. Accordingly, under State’s monitoring effort
                             known as the Blue Lantern program, State conducts end-use monitoring
                             of direct commercial sales of defense articles and services and related
                             technology. Specifically, a PSV is used (1) to confirm whether licensed
                             defense goods or services exported from the United States have been
                             received by the party named on the license and (2) to determine whether
                             those goods have been or are being used in accordance with the
                             provisions of that license.

                             Our analysis of State end-use checks under its Blue Lantern program
                             showed that State focused a smaller portion of its end-use checks on
                             transshipment countries than did Commerce. According to U.S. and Hong
                             Kong government officials, the risk of illicit transshipment of dual-use
                             exports is higher than for military exports, in part because proliferators
                             hide their relatively small number of proliferation-related transactions—
                             most of which involve dual-use items—within a large volume of fast-
                             moving commercial goods. For fiscal years 2008 through 2010, State
                             conducted 26 percent of the total number of end-use checks in the 13
                             transshipment countries we reviewed; 22 percent of these checks were
                             unfavorable. In conducting end-use checks, State guidance indicates that
                             end-use check officers are required to determine that the proposed end
                             user appears to be a reliable recipient of sensitive U.S. defense articles,
                             technology, or services, and that the end user is familiar with U.S.
                             restrictions with respect to use, transfer, or reexport. See appendix V for
                             more detailed information on Commerce and State end-use checks.




                             30
                              22 U.S.C. § 2785.




                             Page 19                                                GAO-12-613 Export Controls
Agencies Educate U.S.       To educate companies and foreign governments about illicit
Exporters and Foreign       transshipment risks, agencies have programs to review the internal
Governments about Illicit   controls of U.S. companies’ compliance programs, conduct outreach to
                            U.S. companies and universities, and provide training to foreign
Transshipment Risks, but    governments.
One Program Is Largely
Inactive                    Commerce helps firms address illicit transshipment risk by conducting an
                            informal review of firms’ compliance programs at the firms’ request.
                            Commerce reviews the written procedures and internal controls for a
                            company’s compliance program against Commerce’s Export
                            Management Compliance Program guidelines to help it develop an
                            internal control program that can thwart diversion of technologies to
                            countries of concern. The Export Management Compliance Program
                            guidance identifies indicators of risks posed by transshipment, such as
                            insufficient compliance safeguards throughout the shipping process and
                            unverified end destination addresses. In fiscal year 2010, Commerce
                            conducted 18 reviews of corporate written compliance programs and
                            conducted two 2-day and three 1-day seminars on developing an export
                            management and compliance program in various U.S. cities.

                            Commerce and State officially have outreach programs to educate
                            industry on issues, including illicit transshipment risks. Commerce’s
                            outreach program expanded in 2011 to increase its focus on illicit
                            transshipment, but State’s program is largely inactive. Between January
                            and November 2011, Commerce has conducted approximately 24
                            outreach events across the United States. Commerce has added a
                            training session on its Best Practices for Preventing Unlawful Diversion of
                            U.S. Dual-Use Items Subject to the Export Administration Regulations,
                            Particularly through Transshipment Trade, published in August 2011,
                            which identifies seven best practices that guard against diversion risk,
                            particularly through transshipment. A Commerce official stated that, due
                            to the ongoing risk of illicit diversion of controlled items subject to the
                            EAR, Commerce has added the best practices component to outreach
                            events.

                            State’s program to visit companies has been largely inactive since 2008.
                            This program had considered transshipment risks and was in place to
                            determine whether companies were properly exercising their regulatory
                            responsibility in licensing and compliance. State also used the information
                            gathered from visits to adjust or revise U.S. regulations and practices.
                            State visited more than 60 companies between October 2005 and
                            September 2008. While State has made two such visits since 2008, the



                            Page 20                                             GAO-12-613 Export Controls
                       visits were made to companies due to ongoing enforcement actions,
                       rather than mainly for outreach.

                       State also addresses illicit transshipment risk by conducting export control
                       training of foreign governments through its Export Controls and Border
                       Security (EXBS) program. In determining the countries of focus for EXBS,
                       State conducts country-by-country threat assessments to determine the
                       points of greatest risk, assessing risk factors in a given country, including
                       the risks of diversion, production, and proliferation. EXBS categorized as
                       a diversion risk 9 of the 13 transshipment countries we examined; 7 of
                       those countries are currently EXBS partner countries. 31 In fiscal years
                       2009 and 2010, EXBS conducted training in the UAE, which included a
                       seminar on how to investigate, survey, detect, and interdict unauthorized
                       transfers of items. EXBS announced in its 2011 Strategic Plan that transit
                       and transshipment trade will be a priority, and EXBS will work with each
                       shipment hub to build its capacity to target transit and transshipment
                       cargo efficiently, without negatively affecting legitimate trade and
                       competitiveness.


                       State and Commerce have not fully assessed the potential impact of
Agencies Have Not      reforming the agency control lists and transferring items from State to
Fully Assessed         Commerce on the resource needs of their compliance activities.
                       Assessing impact includes analyzing the potential benefits and risks of
Potential Impact of    the control list reforms, but the agencies lack information on how control
Control List Reforms   list changes will impact their resource needs for conducting compliance
on Resource Needs      activities. They expressed the view that some benefits would likely
                       include a reduced compliance burden for industry and enhanced national
for Compliance         security for the United States by focusing on items, destinations, and end
Activities             users of concern. In the one assessment that it performed, Commerce
                       estimated financial benefits of one regulatory change but did not assess
                       any potential risks to compliance activities beyond licensing. In contrast,
                       several compliance officials stated that risks could include the burden on
                       Commerce’s and State’s capacity to monitor the end use of an increased
                       number of items and the loss of information prior to export resulting from
                       fewer license requirements. However, the agencies did not evaluate the
                       implications of these risks on their resource needs.



                       31
                        The seven transshipment countries that are EXBS partner countries are Indonesia,
                       Malaysia, Philippines, Singapore, Taiwan, Thailand, and UAE.




                       Page 21                                                     GAO-12-613 Export Controls
Agencies Propose to Move   As an interim step to creating a single control list, the administration
Items from State to        proposed revising the list of items controlled by Commerce and State.
Commerce and to            Thus, Commerce proposed a rule in July 2011 establishing a structure to
                           move items from the USML to the CCL that the President has determined
Introduce a New License    no longer need to be controlled on that list. 32 As we previously reported,
Exception                  an interagency task force created export control criteria to determine the
                           items and technologies that should be controlled by Commerce or State. 33
                           A DOD-led interagency team is currently revising the lists so controlled
                           items will be identified using objective criteria such as horsepower, speed,
                           and accuracy rather than maintaining an item on the USML simply
                           because, historically, its form and fit has associated it with a military item.
                           Those items that do not remain on the USML after this review will move to
                           Commerce’s jurisdiction. As of January 2012, State has proposed
                           revisions to 5 of 20 categories of military items. The 5 categories include
                           items such as tanks, aircraft, and submersible vessels. Proposed
                           revisions to 4 of the 5 USML categories would change the USML controls
                           on generic parts, components, accessories, and attachments that are
                           specifically designed or modified for a defense article to control specific
                           types of parts, components, accessories, and attachments. 34 Items whose
                           functions provide immediate tactical utility without modification will remain
                           on the USML, while all other items would move to the CCL.

                           Those items moved to the CCL may also become eligible for export for
                           ultimate government end use to the destinations identified on a new
                           license exception known as the Strategic Trade Authorization (STA). In


                           32
                             76 Fed. Reg. 41,958 (July 15, 2011). Before the President may make such jurisdictional
                           changes, however, he must report the results of the review to Congress. 22 U.S.C. §
                           2778(f)(1). The President must describe how items moved from the ITAR will be controlled
                           under other provisions of law. The purpose of the proposed rule is to describe how items
                           that no longer warrant control on the USML will be controlled on the CCL. 76 Fed. Reg.
                           76,072 (Dec. 6, 2011).
                           33
                            GAO-11-135R.
                           34
                             These categories include Category VII, Tanks and Military Vehicles; Category VIII,
                           Aircraft and Associated Equipment; Category XX, Submersible Vessels Oceanographic,
                           and Associated Equipment; Category VI, Surface Vessels of War and Special Naval
                           Equipment. See 76 Fed. Reg. 41,958 (July 15, 2011); 76 Fed. Reg. 68,675 (Nov. 7, 2011);
                           76 Fed. Reg. 80,291 (Dec. 23, 2011); 76 Fed. Reg. 80,282 (Dec. 23, 2011); 76 Fed. Reg.
                           76,085 (Dec. 6, 2011); 76 Fed. Reg. 76,072. The administration also proposed the
                           creation of a new category for gas turbine engines that would combine parts of multiple
                           categories. 76 Fed.Reg.76, 072 (Dec. 6, 2011). For submersible vessels, the
                           administration determined that most parts and components would remain on the USML
                           because they provide a critical military and technological advantage to the United States.




                           Page 22                                                       GAO-12-613 Export Controls
June 2011, Commerce finalized this new license exception to allow
exports of certain items without a license to countries determined to be
low risk. 35 These items would be subject to certain notification
requirements. Specifically, the STA authorizes certain exports that
Commerce now controls for multiple reasons to 36 destinations, many of
which are NATO allies or export control regime participants. 36 Further, the
exception authorizes certain exports to an additional eight countries but
limits the exception for items that Commerce now controls for national
security reasons only. 37 These countries include four transshipment
countries that we reviewed, Hong Kong, Singapore, Malta, and Taiwan.
The licensing exception imposes additional requirements, such as
directing the exporter, reexporter, or transferor to exchange information
with the recipient regarding the applicable control list category number,
and stating that the export occurs under the STA exception to mitigate the
risk of reexport to an unauthorized destination or end user.




35
  76 Fed. Reg. 35,276 (June 16, 2011). A license exception is an authorization that allows
a company to export, under stated conditions, items subject to the EAR that would
otherwise require a license.
36
  15 C.F.R. § 740.20. Commerce authorizes exports that are controlled for specific
reasons to 36 countries: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia,
Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway,
Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden,
Switzerland, Turkey, and the United Kingdom.
37
  The eight destinations to which the license exception authorizes exports controlled for
National Security reasons are Albania, Hong Kong, India, Israel, Malta, Singapore, South
Africa, and Taiwan. According to technical comments provided by Commerce, the use of
the exception is limited to those items that the Wassenaar Arrangement, a multilateral
export control regime that aims to restrict trade in dual-use technologies, considers less
sensitive.




Page 23                                                        GAO-12-613 Export Controls
Agencies Have Not Fully      U.S. agencies have not fully assessed the potential impact that export
Assessed Potential Impact    control reform of control lists might pose for the resource needs of the
of Control List Reforms on   range of compliance activities agencies undertake, as suggested by
                             federal internal control standards and executive branch requirements. 38
All Compliance Activities
                             State and Treasury officials confirmed that they have not conducted such
but Have Assessed the        an assessment. In technical comments on a draft of this report,
Estimated Resource           Commerce stated that it had conducted an assessment of compliance
Impact on License Review     activities and that it is hiring eight dedicated compliance officers.
                             However, Commerce provided no evidence of such an assessment.
                             Moreover, Commerce’s fiscal year 2013 Congressional Budget
                             Justification did not identify the need for compliance officers in its request
                             for 24 additional licensing officers. Although the administration intends to
                             move up to 30,000 license applications from State’s to Commerce’s
                             jurisdiction, Commerce is targeting only 850 end-use checks in each of
                             fiscal years 2013 and 2014, the same number it targeted for fiscal year
                             2012. Federal standards call for, among other things, a regulatory
                             analysis to include the following three basic elements: (1) a statement of
                             the need for the proposed action, (2) an examination of alternative
                             approaches, and (3) an evaluation of the benefits and costs—quantitative
                             and qualitative—of the proposed action and the main alternatives
                             identified by the action. The evaluation of benefits and costs is to be
                             informed by a risk assessment. In November 2011, Commerce’ s
                             Inspector General identified Commerce’s need to ensure adequate
                             resources to monitor compliance and to detect and prevent diversions of
                             controlled technology in the context of export control reform as among its
                             top management challenges for fiscal year 2012. 39

                             Risk assessment is one of five standards for an internal control system
                             that provides reasonable assurance that an organization will achieve
                             effective and efficient operations, reliable financial reporting, and
                             compliance with applicable laws and regulations. Commerce has not


                             38
                              GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1.
                             (Washington, D.C.: November 1999). The five standards for internal control are: control
                             environment, risk assessment, control activities, information and communications, and
                             monitoring. Also see GAO, Transportation Worker Identification Credential: Internal
                             Control Weaknesses Need to Be Corrected to Help Achieve Security Objectives,
                             GAO-11-657 (Washington, D.C.: May 10, 2011); OMB, Circular No. A-94,Guidelines and
                             Discount Rates for Benefit-Cost Analysis of Federal Programs (Washington, D.C.: October
                             1992); OMB, Circular No. A-4, Regulatory Analysis (Washington, D.C.: September 2003).
                             39
                              See Department of Commerce: Fiscal Year 2011 Performance and Accountability
                             Report, Appendix E.




                             Page 24                                                     GAO-12-613 Export Controls
analyzed the impact of the reform on its compliance activities beyond
estimating the number of State licenses that will move to its jurisdiction
and potential resources needed to address them. State also has not
assessed the risks of reform proposals on its compliance activities.
According to a State official, current export control reform efforts are
focused on revising the USML. The State official noted that, as items are
moved from the USML to the CCL, the department will have better insight
into potential impacts and will be able to assess resource needs.

Agencies have stated some potential benefits for national security and for
exporters as a result of reform. However, agencies did not provide an
analysis supporting the expected benefits. According to agencies’
statements, the U.S. government would

•    have greater interoperability with NATO and other allies;

•    be able to focus its resources on sensitive technologies, destinations,
     and end users of higher risk than those found in NATO counterparts
     or other allies; and

•  benefit from an enhanced defense industrial base by reducing the
   current incentives for foreign companies to avoid U.S. parts and
   components.
State and Commerce documents identify the following four potential
advantages to industry of moving items from the USML to the CCL:

•    relief from more stringent USML requirements, such as registration
     fees and the need to obtain manufacturing and technical assistance
     agreements;
•    reduction of license requirements;
•    simplification of license application procedures; and

•    increased availability of exceptions. 40



40
   According to Commerce, the USML, with few exceptions, allows exemptions from
licensing requirements only to Canada. Under the rule proposed on November 7, 2011,
many exports and reexports of the USML Category VII parts and components that would
be moved to the CCL would become eligible for license exceptions that apply to
shipments to U.S. government agencies, shipments valued at less than $1,500, parts and
components being exported for use as replacement parts, temporary exports, and License
Exception STA, reducing the number of licenses that exporters of these items would need.




Page 25                                                      GAO-12-613 Export Controls
Commerce assessed the potential impact of control list reform on its
resources only for the compliance activity of license application review.
Commerce documents indicate that, as of July 2011, it did not have the
workforce in place to accommodate the 16,000 to 30,000 additional
license applications estimated to result from the move of a significant
number of items from the USML to the CCL without causing backlogs and
delays. In March 2012, Commerce established a new office to adjudicate
license applications and conduct other actions for items moved from the
USML, and it has begun to solicit applicants to staff the office. 41
Furthermore, according to a Commerce cost benefit analysis, the new
STA license exception would help remove the burdens associated with
applying for a license and reduce the uncertainty associated with the
license application review process. Commerce’s Bureau of Industry and
Security (BIS) estimated that approximately 2,300 licensed transactions
would have been eligible for the STA exception in 2010. Therefore, BIS
estimated that the public benefit to foregoing the license application
review for those transactions eligible for the STA exception could result in
a savings ranging from $1.5 million to $5.1 million per year. 42 BIS also
stated that the license exception would reduce uncertainty by removing
the need for U.S. exporters to inform prospective buyers of U.S.
technology that sales are contingent upon government approval for each
transaction. BIS also estimated that the license exception would benefit
the government by allowing Commerce to focus its licensing resources on
transactions of greater risk than those eligible for the STA exception. BIS
officials stated that the STA exception would not increase costs to the
government.




41
  Commerce also reprogrammed funds from both within BIS and from the Census Bureau
to staff the new office.
42
  BIS calculated a range of $1.5 million to $5.2 million in potential savings to exporters by
estimating several scenarios that made different assumptions about key factors such as
interest rates and the face value of the licenses. The benefits of the STA exception might
be even greater if Commerce included in its estimates the approximately 20,000
transactions that would be eligible for the exception once items moved from the USML to
the CCL.




Page 26                                                          GAO-12-613 Export Controls
Agency Officials Identified   Although U.S. agencies have not fully assessed the risks and resource
Two Potential Risks of        implications that reform of export control lists may present in
Reform for Compliance         implementing compliance activities, agency officials conducting those
                              activities identified two potential risks. These include an increased
Activities, but Agencies      workload at Commerce from the transfer of thousands of license
Have Not Assessed             applications from State’s to Commerce’s jurisdiction, as well as the loss of
Implications of These         information from the licensing process prior to export. Neither Commerce
Risks on Resource Needs       nor State has conducted a detailed risk assessment of the impact of the
                              reforms on any of the compliance activities they undertake besides
                              licensing and their associated workforce needs. Standards for Internal
                              Control in the Federal Government indicates that internal controls should
                              provide for an assessment of the external and internal risks the agency
                              faces and that management needs to address.

                              A Commerce official also stated that a reduction in exports needing
                              licenses would likely make compliance activities, such as end-use
                              monitoring, more difficult because officials use export licenses for some of
                              the information they rely on. Without such information, U.S. officials
                              conducting end-use checks might need to expend more time and
                              resources obtaining the needed information, according to the official. In
                              fact, Commerce has focused more end-use checks on unlicensed items.
                              We found that unlicensed exports may also pose resource implications for
                              compliance activities concerning specific transshipment countries—Hong
                              Kong, Singapore, and Taiwan. Items exported to these countries might be
                              eligible to use a license exception for certain controlled items. Thus, some
                              exports would avoid the need for prior government approval for each
                              transaction. Commerce officials said that they might mitigate any risks
                              that this might pose by shifting resources to target and increase
                              compliance actions, such as outreach and shipping data analysis. In
                              technical comments on a draft of this report, Commerce stated that it
                              conducts end-use checks on unlicensed items now without significant
                              difficulty and does not understand the basis for the conclusion that
                              unlicensed exports may also pose resource implications for compliance
                              activities concerning specific transshipment countries. However, BIS
                              reported as recently as 2011 that it is considering requiring exporters to
                              include additional information in the Automated Export System for
                              unlicensed exports. Requiring this information, according to BIS, would
                              allow it to determine more quickly the accuracy of a claimed use of
                              authority to ship without a license or pursuant to a license exception, in
                              some transactions. In addition, this information would enable BIS to target
                              its end use checks of exports more effectively because it could select
                              items of the greatest significance without extensive follow-up information
                              from the exporter. By taking advantage of the additional information, BIS


                              Page 27                                             GAO-12-613 Export Controls
              indicated that it could make more effective use of its enforcement
              resources.

              A State compliance official said that losing the information generated by
              license applications would make tracking entities and commodities that
              are at risk more difficult and resource intensive. State officials also noted
              that, if reform resulted in the removal of some license requirements for
              certain goods, then State would need to shift its emphasis on reviewing
              license application data to reviewing shipping data. Currently, most
              defense items require a license for export. However, in certain instances,
              arms may be exported without a license (i.e., under an exemption) but are
              still subject to the Arms Export Control Act. Fewer license requirements
              would mean that more compliance verification would need to be
              conducted after the item has shipped, thereby increasing the need for
              PSVs, according to the official.


              U.S. export control agencies generally address illicit transshipment risk in
Conclusions   implementing their compliance activities, and Commerce, in particular,
              has focused on this risk by performing increased end-use checks in
              transshipment countries and on excepted or unlicensed items. Moreover,
              several of the agencies’ compliance activities are interdependent. For
              example, the results of unfavorable postshipment verifications provide
              entity names for agencies to add to the sanctions and Watch Lists, and
              Watch Lists provide names that should be flagged for further scrutiny
              during the license review process. Therefore, changes that affect one
              compliance activity may also affect others. Despite this interdependence
              of compliance activities, agencies have not fully assessed the potential
              impact of the reform initiative that licensing and control list reforms may
              pose for resource needs. The administration’s framework to reform U.S.
              export controls, with initial changes to Commerce and State control lists,
              may significantly affect the entire export control system. Moving numbers
              of items from State’s control list to Commerce’s list will shift the licensing
              burden for addressing concerns over misuse or diversion of these items
              in such countries from one agency to another. Moreover, control list
              reform may also shift the burden among various compliance activities in
              ways that cannot be anticipated without assessing the impact on
              resources of such changes for each activity.




              Page 28                                               GAO-12-613 Export Controls
                      As the administration moves forward with its control list reforms, we
Recommendations for   recommend that the Secretaries of Commerce and State, in consultation
Executive Action      with other relevant agencies, assess and report on the potential impact,
                      including the benefits and risks of proposed export control list reforms, on
                      the resource needs of their compliance activities, particularly end-use
                      monitoring.


                      We provided a draft of this report to Commerce, DOD, State, and
Agency Comments       Treasury for their review and comment. Both Commerce and State
and Our Evaluation    provided written comments, which we have reprinted in appendixes VI
                      and VII, respectively. 43 DOD and Treasury did not provide comments on
                      the draft. Commerce and State also provided technical comments, which
                      we incorporated in this report, as appropriate.

                      Commerce and State agreed with our recommendation to assess and
                      report on the potential impact of export control list reforms on the
                      resource needs of their compliance activities. State said that it will be in a
                      better position to evaluate the resource needs for compliance activities, to
                      include end-use monitoring, as decisions are made on moving items from
                      the USML to the CCL. It stated that its intent to dedicate all necessary
                      resources to compliance activities commensurate with the requirements
                      of a revised USML remains unchanged.

                      Commerce stated that, to the extent that information is available, BIS has
                      used licensing data, public comments, and interagency expertise to
                      address both benefits and risks of moving items from the USML to CCL.
                      However, Commerce provided no evidence that it completed such an
                      assessment or that it assessed the benefits and risks of control list reform
                      changes on the range of other compliance activities discussed in this
                      report. Nonetheless, the availability of such information shows that such
                      an assessment can be done.

                      Commerce also stated that several references throughout this report refer
                      to the USML as “more stringent” and state that the CCL “imposes fewer
                      requirements than State’s controls.” Commerce said it would be more
                      accurate to say that the CCL’s flexibility provides more options in



                      43
                        These written comments apply to both the earlier report issued March 14, 2012, which
                      contained information designated “For Official Use Only” and to this report.




                      Page 29                                                      GAO-12-613 Export Controls
protecting national security interests. However, State reported in its
August 2011 Final Plan for Retrospective Analysis of Existing Rules that
defense articles that do not require the stringent controls of the Arms
Export Control Act will be moved to the jurisdiction of Commerce, where
the licensing burden on exports can be dramatically reduced. Also, we
reported in 2008 that, in most cases, Commerce’s controls over dual-use
items are less restrictive than State’s controls over arms. 44 Many items
controlled by Commerce do not require licenses for export to most
destinations, while State-controlled items generally require licenses for
most destinations. Also, some sanctions and embargoes only apply to
items on State’s U.S. Munitions List and not to those on the CCL.


We are sending copies of this report to the appropriate congressional
committees; the Secretaries of Commerce, Defense, State, and the
Treasury; and other interested parties. In addition, the report is available
at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please
contact me at (202) 512-9601 or at melitot@gao.gov. Contact points for
our offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to this
report are listed in appendix VIII.




Thomas Melito
Director, International Affairs and Trade




44
 GAO, Export Controls: State and Commerce Have Not Taken Basic Steps to Better
Ensure U.S. Interests Are Protected, GAO-08-710T (Washington, D.C.: Apr. 24, 2008).




Page 30                                                    GAO-12-613 Export Controls
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             In this review, we (1) examined how U.S. agencies use compliance
             activities to address the risk of illicit transshipment and (2) analyzed the
             extent to which U.S. agencies assessed the impact of the export control
             reform on the resource needs of compliance activities. Commerce
             provided us with transshipment-related information that it controls as
             being “For Official Use Only.” We have not included that sensitive
             information in this report but have instead incorporated it into a “For
             Official Use Only” report that is not publicly available. To examine how
             U.S. agencies use compliance activities to address the risk of illicit
             transshipment, we reviewed documents from the Departments of
             Commerce, State, the Treasury, and Defense, including guidance,
             staffing information, and Congressional Budget Justifications. We also
             interviewed officials at each agency. We then identified examples of
             cases for each compliance activity where agency documents or officials
             indicated that they implemented the compliance activity to address illicit
             transshipment risk. We also analyzed available data, including licensing
             statistics, numbers of end-use checks for 13 transshipment countries,
             numbers of designations on various lists for entities from the 13 GAO-
             designated transshipment countries, numbers of 13 transshipment
             countries that are partner countries for Export Control and Related Border
             Security program training, Department of Commerce correspondence to
             Validated End-User designees, and agency outreach materials for
             companies. We also reviewed relevant laws and regulations, interviewed
             U.S. and host country officials, and analyzed end-use monitoring and
             licensing data. To identify 13 transshipment countries, we examined prior
             GAO work on transshipment and external diversion; congressional
             testimony; countries with a Commerce Export Control Officer in place;
             input from the Departments of State, Commerce, Justice, and Homeland
             Security; countries with entities on either the Entity List or Unverified List;
             and a listing of the world’s busiest transshipment ports. We interviewed
             host government officials in Hong Kong and Singapore to obtain
             information on joint efforts with the U.S. government to mitigate illicit
             transshipment risks.

             In examining the end-use monitoring compliance activity, we reviewed
             Departments of State and Commerce end-use monitoring activities
             through reviewing relevant program guidance, including State’s Blue
             Lantern Guidebook, and cables associated with selected end-use checks.
             We interviewed officials in State’s Directorate of Defense Trade Controls
             who administer the Blue Lantern program and reviewed export licenses.
             We also traveled to Singapore, Hong Kong, and the United Arab Emirates
             (UAE) to interview Blue Lantern points of contact and Commerce Export
             Control Officers. In examining State and Commerce end-use checks, we


             Page 31                                               GAO-12-613 Export Controls
Appendix I: Scope and Methodology




conducted an analysis of global end-use check data for fiscal years
2008–2010 and data on those checks conducted in transshipment
countries. We also reviewed a random, nongeneralizable sample of end-
use checks records during our overseas visits to Hong Kong, Singapore,
and UAE, during which we obtained information from State and
Commerce officials on how they conduct end-use checks. We reviewed
21 State Blue Lantern end-use checks from fiscal year 2009 and 2010 in
Hong Kong and Singapore. Twelve of these 21 checks resulted in
unfavorable determinations, and we confirmed that actions had been
taken in 11 of those cases. For State end-use checks in UAE, we relied
on a related GAO engagement (GAO-12-89) that reviewed State end-use
monitoring in the UAE among other countries. 1 We reviewed 56
Commerce end-use checks from fiscal year 2009 through the third
quarter of 2011 in Hong Kong, Singapore, and UAE. 2 We also examined
the parties on the State and Commerce Watch Lists that were from the 13
transshipment countries we reviewed.

We determined that the licensing data, end-use check data, and Watch
List data were sufficiently reliable for the purpose of describing how U.S.
agencies use compliance activities to address the risk of illicit
transshipment. For the Departments of State and Commerce licensing
data, we interviewed knowledgeable agency officials in coordination with
other ongoing GAO reviews of export controls. We also reviewed
technical manuals related to both departments’ licensing databases and
determined that they were both sufficiently reliable for us to report overall
statistics for how many licenses were issued for fiscal years 2009 and
2010, around the world, and for the number of licenses issued in this time
period for transshipment countries. For end-use monitoring data, we also
interviewed agency officials, consulted agency manuals, and compared
the number of checks we received with data published by the agency. We
determined that the end-use check information provided by the agency
was reliable for the purposes of describing how agencies monitor the end-
use of items to address the risk of illicit transshipment. For State and


1
GAO-12-89.
2
 In drawing our sample of Commerce end-use checks, we considered an additional fiscal
year, fiscal year 2011, as two Commerce officials responsible for conducting end-use
checks in Singapore and UAE had arrived during that time, and we wanted to learn about
the checks they conducted. Our sample of Commerce checks reflects a range of fiscal
years, the type of checks that were conducted, and the actions that resulted from the
checks.




Page 32                                                     GAO-12-613 Export Controls
Appendix I: Scope and Methodology




Commerce Watch List data, we interviewed agency officials about the
sources of information they incorporate into the Watch List and reviewed
the guidance agencies use in updating the Watch List. We determined
that the data was sufficiently reliable for the purpose of describing how
agencies monitor the end-use of items to address the risk of illicit
transshipment.

To analyze the extent to which agencies assessed the potential impact of
the export control reform initiative for the resource needs of compliance
activities, we reviewed the proposed export control reform initiatives,
White House press releases on the export reform initiatives, relevant
executive orders, Federal Register notices, comments from the public,
relevant laws and regulations, and agency documentation and studies on
the proposed impact of the reform initiative on their compliance activities.
We interviewed agency officials and interagency and export control
reform task force members to gather information on the proposed reform
initiatives and agency assessments of the benefits and risks posed by
those initiatives. To gather industry input into the potential impact of
proposed Export Control Reform initiatives, we met with industry
representatives from: (1) The Aerospace Industry Association, (2) The
National Council on International Trade Development, (3) The National
Association of Manufacturers, and (4) the American Chamber of
Commerce in Singapore.

We conducted this performance audit from August 2010 to April 2012 in
accordance with generally accepted government auditing standards.
These standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 33                                              GAO-12-613 Export Controls
Appendix II: Descriptions of Compliance
                                           Appendix II: Descriptions of Compliance
                                           Activities



Activities

                                           Compliance activities provide information for exporters, licensing officials,
                                           and enforcement agencies to assess the validity of particular export
                                           transactions or to identify potential violations or prevent them before they
                                           occur. We identified eight export control compliance activities that the
                                           Departments of Commerce, State, and Treasury conduct to encourage
                                           compliance with export control laws and to prevent the diversion or
                                           misuse of exported items against U.S. allies or interests. Table 2
                                           identifies and describes those eight compliance activities that are relevant
                                           to transshipment.

Table 2: Descriptions of Compliance Activities

Compliance activity          Description
License application review   When deciding whether to approve or deny an export license application, State and Commerce
                             evaluate it against several factors, including an assessment of all parties to the transaction and how
                             the recipient plans to use the item.
End-use monitoring           Prelicense or postshipment checks, including visits, to verify the bona fides of entities and appropriate
                             receipt and use of controlled items.

Shipping data analysis       Review of selected Shippers Export Declarations to identify Export Administration Regulation
                             violations and refer them to the Office of Export Enforcement for further investigation.
Training                     A program of education, seminars, and workshops designed to help countries develop and improve
                             their strategic trade and related border control systems.
Compliance program           Reviews and critiques of companies’ programs to manage export-related decisions and transactions to
reviews                      ensure compliance with the Export Administration Regulations and license conditions.
List maintenance             Lists that inform the licensing process by providing key information on entities of concern to licensing
                             officers and the public.
Outreach                     Courses, workshops, seminars, visits for exporters to inform them of their responsibilities to comply
                             with export control laws and regulations.
Validated end-user           Licensing framework that allows select screened end users to receive controlled items without a
assessments                  license.
                                           Sources: GAO analysis of Commerce, State, and Treasury data.




                                           Page 34                                                          GAO-12-613 Export Controls
Appendix III: License Application Review
                                        Appendix III: License Application Review




                                        When deciding whether to approve or deny an export license application,
                                        the Departments of State and Commerce evaluate it against several
                                        factors, including an assessment of all parties to the transaction and how
                                        the recipient plans to use the item. Table 3 shows the total number of
                                        Commerce and State license applications for fiscal years 2008 through
                                        2010 worldwide and for the 13 transshipment countries that we reviewed,
                                        as well as their status for this period.

Table 3: Number of License Applications for Commerce and State for 13 Transshipment Countries, Fiscal Years 2008–2010

                                               Number of license                        Number       Number            Number returned
Agency                      Location               applications                        approved       denied             without action
Commerce                    Worldwide                            63,304                     53,051      435                       9,818
                            Transshipment                        19,693                     16,596      170                       2,927
State                       Worldwide                          164,998                      82,902      865                      20,319
                            Transshipment                        28,550                     10,127      232                       3,767
                                        Sources: GAO analysis of Commerce and State data.




                                        Page 35                                                                GAO-12-613 Export Controls
Appendix IV: List Maintenance
              Appendix IV: List Maintenance




              U.S. export control agencies maintain lists that inform the licensing
              process by providing key information on entities of concern to licensing
              officers and the public. The top three locations with the most entities of
              concern, in order, were China, the UAE, and Hong Kong for the State
              Watch List and China, Hong Kong, and UAE for the Commerce Watch
              List. Figure 3 shows the numbers of parties on State’s and Commerce’s
              Watch Lists from the 13 transshipment countries that we reviewed. As of
              September 2011, State’s Watch List contained 100,248 parties, of which
              8,731 (about 9 percent) were from the 13 transshipment countries we
              reviewed. As of December 2011, the Commerce Watch List contained
              36,849 active entities, of which 8,309 (about 23 percent) were from the 13
              transshipment countries we reviewed.




              Page 36                                            GAO-12-613 Export Controls
Appendix V: End-Use Monitoring
             Appendix V: End-Use Monitoring




             Figure 3: Numbers of Parties on State and Commerce Watch List by Transshipment
             Country for 2011




             Page 37                                               GAO-12-613 Export Controls
                                      Appendix V: End-Use Monitoring




                                      Our analysis of the Department of Commerce’s end-use checks shows
                                      that Commerce focused its efforts on transshipment countries; it
                                      conducted 57 percent of all end-use checks for fiscal years 2008 to 2010
                                      in the 13 transshipment countries we reviewed. Of these checks, 33
                                      percent were unfavorable. In contrast, the Department of State conducted
                                      26 percent of all end-use checks for fiscal years 2008 to 2010 in the 13
                                      transshipment countries we reviewed. Table 4 shows end-use checks for
                                      Commerce and State for the 13 transshipment countries and worldwide
                                      for fiscal years 2008-2010.

Table 4: Commerce and State End-Use Checks, Fiscal Years 2008–2010

                                                                                                  Percentage of      Percentage of
                                                      Checks-                        Checks-          checks in          checks in
                   Total-         Total-        transshipment                  transshipment     transshipment      transshipment
               worldwide      worldwide              countries                      countries         countries          countries
Fiscal year    Commerce            State             Commerce                            State      Commerce                 State
2008                  376           543                         197                       158             52 %                29 %
2009                  547           649                         317                       156             58 %                24 %
2010                  489           723                         290                       178             59 %                25 %
Total               1,412         1,915                         804                       492             57 %                26 %
                                      Source: GAO analysis of Commerce and State data.



                                      For fiscal years 2008 through 2010, Commerce conducted about 57
                                      percent of the total number of end-use checks in the 13 transshipment
                                      countries we reviewed. (See fig. 4.)




                                      Page 38                                                             GAO-12-613 Export Controls
Appendix V: End-Use Monitoring




Figure 4: Commerce’s End-Use Checks in 13 Transshipment Countries, Fiscal
Years 2008–2010




Note: This figure represents only completed prelicense and postshipment verifications for 2008
through 2010.

a
 Other transshipment countries include: Malta, Canada, Cyprus, Philippines, Jordan, Indonesia,
Thailand, Malaysia.


For fiscal years 2008 through 2010, State conducted about 26 percent of
the total number of end-use checks in the 13 transshipment countries we
reviewed; 22 percent of these checks were unfavorable (see fig. 5).




Page 39                                                               GAO-12-613 Export Controls
Appendix V: End-Use Monitoring




Figure 5: State’s Blue Lantern End-Use Checks in 13 Transshipment Countries,
Fiscal Years 2008–2010




Page 40                                                 GAO-12-613 Export Controls
Appendix VI: Comments from the
                            Appendix VI: Comments from the Department
                            of Commerce



Department of Commerce

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




                            Page 41                                     GAO-12-613 Export Controls
Appendix VI: Comments from the Department
of Commerce




Page 42                                     GAO-12-613 Export Controls
               Appendix VI: Comments from the Department
               of Commerce




               Following are GAO’s comments on the Department of Commerce’s letter
               dated March 9, 2012.


               1. Commerce stated that its new Munitions Control Division will include
GAO Comments      24 personnel; eight of these 24 will be compliance specialists who will
                  work within the organization to monitor items shipped. These
                  compliance specialists will work with enforcement analysts to identify
                  entities to conduct both end-use checks overseas and U.S. company
                  onsite audits. However, the rationale for these eight compliance
                  specialists is unclear. Commerce’s fiscal year 2013 budget request
                  listed only 24 licensing officers and Commerce did not provide us with
                  any analysis to show that these would include specifically 8
                  compliance specialists. In addition, while the administration intends to
                  move up to 30,000 license applications from State to Commerce’s
                  jurisdiction, Commerce is targeting only 850 end-use checks for each
                  fiscal year 2013 and 2014, which is the same number as for fiscal
                  year 2012.

               2. Commerce stated that, to the extent that information is available, BIS
                  has used licensing data, public comments, and interagency expertise
                  to address both benefits and risks of moving items from the USML to
                  CCL. It stated that the benefits include moving less sensitive
                  munitions items, mostly parts and components, to a more flexible
                  licensing regime. However, Commerce provided no evidence that it
                  completed an assessment of benefits and risks, nor that it assessed
                  the benefits and risks of control list reform changes on the range of
                  other compliance activities this report discussed. Nonetheless, the
                  availability of such information shows that such an assessment can be
                  done.

               3. Commerce stated that our report makes several references to the
                  USML as “more stringent” and that the CCL “imposes fewer
                  requirements than State’s controls.” Commerce said it would be more
                  accurate to say that the CCL’s flexibility provides more options in
                  protecting national security interests. However, State reported in its
                  August 2011 Final Plan for Retrospective Analysis of Existing Rules
                  that defense articles that do not require the stringent controls of the
                  Arms Export Control Act will be moved to Commerce’s jurisdiction,
                  where the licensing burden on exports can be dramatically reduced. In
                  addition, we reported in 2008 that, in most cases, Commerce’s




               Page 43                                             GAO-12-613 Export Controls
Appendix VI: Comments from the Department
of Commerce




      controls over dual-use items are less restrictive than State’s controls
      over arms. 1 Many items that Commerce controls do not require
      licenses for export to most destinations, while State-controlled items
      generally require licenses for most destinations. Also, some sanctions
      and embargoes only apply to items on State’s USML and not to those
      on the CCL.




1
    GAO-08-710T.




Page 44                                               GAO-12-613 Export Controls
Appendix VII: Comments from the
             Appendix VII: Comments from the Department
             of State



Department of State




             Page 45                                      GAO-12-613 Export Controls
Appendix VII: Comments from the Department
of State




Page 46                                      GAO-12-613 Export Controls
Appendix VIII: GAO Contact and Staff
                             Appendix VIII: GAO Contact and
                             Staff Acknowledgments



Acknowledgments

                  Thomas Melito, (202) 512-9601 or melitot@gao.gov.
GAO Contact
                  In addition to the individual named above, key contributors to this report
Staff             were Joseph A. Christoff, Director (ret.); Jeff Phillips, Assistant Director;
Acknowledgments   Richard G. Howland, Analyst-in-Charge; Mason Thorpe Calhoun; Alberto
                  Leff; Elena McGovern; and Lynn Cothern. Martin de Alteriis, Justin Fisher,
                  Mitchell Karpman, and Hai Tran provided assistance with design and
                  methodology, statistics, data analysis, and technical expertise,
                  respectively. Grace Lui provided legal support, Etana Finkler provided
                  graphics support, and Joyce Evans, Jeremy Sebest, and Cynthia S.
                  Taylor provided assistance in editing and report preparation.




                  Page 47                                              GAO-12-613 Export Controls
Related GAO Products
                       Related GAO Products




             Export Controls: Proposed Reforms Create Opportunities to Address
             Enforcement Challenges. GAO-12-246. Washington, D.C.: March 27,
             2012.

             Persian Gulf: Implementation Gaps Limit the Effectiveness of End-Use
             Monitoring and Human Rights Vetting for U.S. Military Equipment,
             GAO-12-89. Washington, D.C.: November 17, 2011.

             Export Controls: Improvements Needed to Prevent Unauthorized
             Technology Releases to Foreign Nationals in the United States.
             GAO-11-354. Washington, D.C.: February 2, 2011.

             Defense Exports: Reporting on Exported Articles and Services Needs to
             Be Improved. GAO-10-952. Washington, D.C.: September 21, 2010.

             Persian Gulf: U.S. Agencies Need to Improve Licensing Data and to
             Document Reviews of Arms Transfers for U.S. Foreign Policy and
             National Security Goals. GAO-10-918. Washington, D.C.: September 28,
             2010.

             Export Controls: Observations on Selected Countries’ Systems and
             Proposed Treaties. GAO-10-557. Washington, D.C.: June 28, 2010.

             Iran Sanctions: Complete and Timely Licensing Data Needed to
             Strengthen Enforcement of Export Restrictions. GAO-10-375.
             Washington, D.C.: March 4, 2010.

             Export Controls: Challenges with Commerce’s Validated End-User
             Program May Limit its Ability to Ensure That Semiconductor Equipment
             Exported to China is Used as Intended. GAO-08-1095. Washington, D.C.:
             October 27, 2008.

             Defense Trade: State Department Needs to Conduct Assessments to
             Identify and Address Inefficiencies and Challenges in the Arms Export
             Process. GAO-08-89. Washington, D.C.: January 8, 2008.

             Nonproliferation: U.S. Efforts to Combat Nuclear Networks Need Better
             Data on Proliferation Risks and Program Results. GAO-08-21.
             Washington, D.C.: October 31, 2007.

             Defense Trade: Clarification and More Comprehensive Oversight of
             Export Exemptions Certified by DOD Are Needed. GAO-07-1103.
             Washington, D.C.: October 19, 2007.


             Page 48                                           GAO-12-613 Export Controls
                      Related GAO Products




           Export Controls: Challenges Exist in Enforcement of an Inherently
           Complex System. GAO-07-265. Washington, D.C.: December 20, 2006.

           Export Controls: Agencies Should Assess Vulnerabilities and Improve
           Guidance for Protecting Export-Controlled Information at Universities.
           GAO-07-70. Washington, D.C.: December 5, 2006.

           Export Controls: Improvements to Commerce’s Dual-Use System Needed
           to Ensure Protection of U.S. Interests in the Post-9/11 Environment.
           GAO-06-638. Washington, D.C.: June 26, 2006.

           Defense Trade: Arms Export Control System in the Post-9/11
           Environment. GAO-05-234. Washington, D.C.: February 16, 2005.

           Nonproliferation: Improvements Needed To Better Control Technology
           Exports For Cruise Missiles And Unmanned Aerial Vehicles.
           GAO-04-175. Washington, D.C.: January 23, 2004.

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

           Defense Trade: Better Information Needed To Support Decisions
           Affecting Proposed Weapons Transfers. GAO-03-694. Washington, D.C.:
           July 11, 2003.

           Nonproliferation: Strategy Needed To Strengthen Multilateral Export
           Control Regimes. GAO-03-43. Washington, D.C.: October 25, 2002.

           Export Controls: Processes for Determining Proper Control of Defense-
           Related Items Needs Improvement. GAO-02-996. Washington, D.C.:
           September 20, 2002.

           Export Controls: Department of Commerce Controls over Transfers of
           Technology to Foreign Nationals Need Improvement. GAO-02-972.
           Washington, D.C.: September 6, 2002.

           Lessons to Be Learned From the Country Export Exemption. GAO-02-63.
           Washington, D.C.: March 29, 2002.

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



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           Page 49                                              GAO-12-613 Export Controls
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