oversight

Export Controls: Compliance and Enforcement Activities and Congressional Notification Requirements under Country-Based License Exemptions

Published by the Government Accountability Office on 2012-11-16.

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

United States Government Accountability Office
Washington, DC 20548



          November 16, 2012

          The Honorable Ileana Ros-Lehtinen
          Chairman
          The Honorable Howard Berman
          Ranking Member
          Committee on Foreign Affairs
          House of Representatives

          Subject: Export Controls: Compliance and Enforcement Activities and Congressional
          Notification Requirements under Country-Based License Exemptions

          In 2010, the United States announced a reform of its export control systems that
          proposed, among other things, to reduce the numbers and types of items requiring
          government review and licensing before export. The U.S. government uses the export
          control system to limit the risk of sensitive items falling into the wrong hands, while at the
          same time allow legitimate trade of these items to occur. In particular, the United States
          controls the export of sensitive defense and dual-use items (items with both commercial
          and military, proliferation or terrorist applications) to foreign governments and commercial
          entities and non-governmental organizations. As part of the export control reform effort,
          the Department of State (State), the Department of Commerce (Commerce), and other
          agencies are reassessing the level of control warranted for certain defense items they
          consider to be less sensitive.

          The U.S. government generally requires each export of defense articles, services, and
          dual-use items to undergo a government review and receive a license before export.
          However, State and Commerce provide certain exemptions1—commonly referred to as
          country-based license exemptions—for the export of selected items to particular
          destinations that present a lower risk of misuse or diversion.2 In April 2012, State began
          implementing a bilateral defense cooperation treaty between the United Kingdom (UK)
          and the United States to allow certain defense articles and services to be exported without
          a license.3 A similar treaty with Australia is expected to enter into force in 2013. In
          addition, State implements a long-established country-based license exemption for




          1
            In this report, we use the term “exemption” to refer to both State’s license exemptions and Commerce’s
          license exceptions.
          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
           Announcement of Entry Into Force of the Defense Trade Cooperation Treaty Between the United States and
          the United Kingdom, 77 Fed. Reg. 23,538 (Apr. 19, 2012).


                                                             GAO-13-119R Country-Based Export License Exemptions
Canada for the export of specific items without a license.4 In 2011, Commerce established
the Strategic Trade Authorization (STA) license exemption, which allows the export,
without a license, of items controlled for multiple reasons, including national security and
nuclear nonproliferation, to 36 destinations judged to be of low risk of diversion.5 The STA
also allows the export of items controlled only for national security reasons to eight
additional destinations judged to be of low risk of diversion for such items.6

Additionally, as part of the export control reform, the administration is working to establish
a framework to transfer control of thousands of defense items from State’s U.S. Munitions
List to Commerce’s Commerce Control List.7 In comments on a draft of this report,
Commerce stated that the President’s Export Control Reform Initiative will enhance
national security by (1) allowing greater interoperability with NATO and our other allies
while still maintaining and expanding robust controls and, in some cases, prohibitions on
exports or reexports to other countries and for proscribed end users and end uses;
(2) enhancing the U.S. defense industrial base by reducing the current incentives for
foreign companies to design out or avoid U.S.-origin content that is controlled by the
International Traffic in Arms Regulations (ITAR) particularly with respect to generic,
unspecified parts and components; and (3) permitting the U.S. government to focus its
resources on controlling, monitoring, investigating, analyzing, and, if need be, prohibiting
exports and reexports of more significant items to destinations, end uses, and end users
of greater concern than our NATO allies and other multiregime partners.

Historically, State has controlled defense items, while Commerce controlled dual-use
items. According to the Acting Secretary of Commerce, items that will be transferred from
State’s list to the more flexible Commerce list are those that do not perform an inherently
military function and do not provide the United States with a military or intelligence
advantage. This would allow the United States to put in place more logical controls on
trade with close allies while maintaining strict controls over exports and re-exports to
others, according to the Acting Secretary. According to documents obtained from
Commerce, most of the defense articles being considered for transfer to Commerce are
those determined to no longer warrant stricter controls under State, and include largely


4
22 C.F.R. § 126.5.

5
 15 C.F.R. § 740.20. The complete list of reasons for control include national security, chemical or biological
weapons, nuclear nonproliferation, regional stability, crime control, or significant items. The 36 destinations
are 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.
6
The eight destinations are Albania, Hong Kong, India, Israel, Malta, Singapore, South Africa, and Taiwan.

7
  The United States Munitions List identifies defense items controlled by State, and the Commerce Control List
identifies dual-use and commercial items controlled by Commerce. According to § 730.3 of the Export
Administration Regulations (EAR), the convenient term dual use is sometimes used to distinguish the types of
items covered by the EAR from those that are covered by the regulations of certain other U.S. government
departments and agencies with export licensing responsibilities. In general, the term dual use serves to
distinguish EAR-controlled items that can be used for both military and other strategic uses (e.g., nuclear) and
commercial applications. Although the short-hand term “dual use” may be employed to refer to the entire
scope of the EAR, the EAR also applies to some items that have solely civil uses. For the purposes of this
report, we refer to items under Commerce jurisdiction as “dual-use” items.




Page 2                                         GAO-13-119R Country-Based Export License Exemptions
generic parts and components of military equipment.8 As part of the process, Commerce
has proposed to establish a new classification category called the “600 series” to control
                                                         9
the export of defense articles transferred to Commerce. Under the proposed rules,
certain defense items placed in the 600 series will be subject to additional export
restrictions when using an STA license exemption in comparison to those in place for
dual-use items. Under the proposed rules, certain defense items placed under Commerce
control will be eligible for an STA license exemption.10

In your request, you raised concerns about compliance and enforcement activities11 for
items exported without a license, such as those under the country-based license
exemptions. Of particular concern are those defense items proposed to be transferred
from State’s to Commerce’s control, which may include items such as certain firearms and
satellite technology. You also raised concerns about potentially diminishing congressional
notification requirements. U.S. law requires State to notify Congress of certain defense
exports and to report to Congress certain statutory violations and has different
requirements for Commerce to do so for dual-use Items.12 Finally, you raised concerns
about whether notifications to Congress for the export of certain defense articles and
services and for statutory violations related to those exports would continue if such articles
and services move to Commerce for control.

As such, in response to your request, we analyzed State’s and Commerce’s compliance
and enforcement activities for items exported with a license and those that could be
exported under four existing or proposed country-based license exemptions: the Defense
Trade Cooperation Treaties with the UK and Australia (hereafter referred to as “the
treaties”), the Canadian exemption, and the STA.13 Specifically, this report describes
existing and proposed (1) compliance and enforcement activities for exports under both
licenses and country-based license exemptions and (2) requirements for State and
Commerce to notify Congress of certain defense exports and of violations of export
control laws.

To address these objectives, we reviewed relevant statutory authorities that guide State’s
and Commerce’s export controls processes. We identified the existing country-based
license exemptions and interviewed State and Commerce officials to determine the
compliance and enforcement activities each agency implements with respect to these


8
 We did not assess the level of controls warranted for items being considered for transfer to Commerce for
control.
9
76 Fed. Reg. 41,958 (July 15, 2011).

10
    77 Fed. Reg. 37,524 (June 21, 2012).

11
  Compliance activities, such as vetting parties to a transaction and review of recordkeeping, are intended to
encourage compliance with export control laws and regulations, while enforcement activities, such as
investigations of potential violations of export control laws and regulations, are intended to apply penalties for
violating them.
12
    22 U.S.C. §§ 2776(c)(6) and 2753 and 50 U.S.C. app. §§ 2405, 2413.

13
  Although Commerce implements several license exemptions that take into account destination and item or
technology, we limited our review to the STA.




Page 3                                          GAO-13-119R Country-Based Export License Exemptions
exemptions.14 We also identified and compared the various congressional notification
requirements for the three country-based license exemptions to the requirements for
licensed items. We conducted this performance audit from March 2012 to November 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.

Summary

Some compliance activities for the export of controlled items under State and Commerce
licenses differ from compliance activities under country-based license exemptions, but
enforcement activities are generally the same. Compliance activities provide information
for exporters, licensing officials, and enforcement agencies to help assess the validity of
export transactions, identify potential violations, or prevent violations before they occur. Of
the seven compliance activities we identified, three differ for licensed exports compared
with country-based license exemptions. These activities are (1) license application review,
(2) vetting parties to transactions, and (3) compliance program reviews (recordkeeping).15
In contrast to these compliance activities, the other four compliance and three
enforcement activities, such as inspection of exports, investigations, and punitive actions
for violations, are generally the same for both licensed exports and country-based,
license-exempt exports.

The congressional notification requirements for State and Commerce to report proposed
exports and statutory violations vary because each agency’s authority stems from different
legislative statutes.16 Specifically, each agency’s export control regulations derive from
different legislative authorities and aim to control articles that have different levels of
concern for diversion or unintended use. State is required by law to notify Congress of
proposed exports of major defense equipment, articles, and services that meet specific
dollar thresholds under a license or treaty.17 Commerce is required to notify Congress of
proposed exports that are destined for a designated state sponsor of terrorism or could
make a significant contribution to the military potential of the government of a country that
has repeatedly provided support for acts of international terrorism.18 However, in June
2012, Commerce issued a proposed rule that would add a new requirement to notify
Congress of pending exports of major defense equipment, such as articles under the
proposed 600 series, including those exported under the STA, that meet the same dollar


14
 We did not assess the potential effectiveness of the compliance and enforcement activities conducted by
State and Commerce.
15
  For the purposes of this report, we characterize the license application review as a compliance activity to be
consistent with Commerce’s own usage in its annual report and congressional testimony as well as our past
reports.
16
 State’s authority stems from the Arms Export Control Act (AECA). 22 U.S.C. §§ 2751-2799aa-2.
Commerce’s authority stems from the Export Administration Act (EAA). 50 U.S.C. app. §§ 2401-2420.
17
 22 U.S.C. § 2776(c)(6).

18
 50 U.S.C. app. § 2405(j).



Page 4                                         GAO-13-119R Country-Based Export License Exemptions
thresholds as those required of State.19 As of November 2012, Commerce was
considering how to implement its proposal. In terms of enforcement actions, State is
required to notify Congress of certain violations of export laws.20 Commerce is required to
provide an annual report to Congress that includes statutory violations resulting in
administrative and criminal penalties.21

Background

The U.S. export control system seeks to prevent defense and dual-use items from falling
into the wrong hands and, at the same time, allow legitimate trade to occur. Defense items
can include sophisticated technology designed for military use—such as tanks, fighter
aircraft, submarines, firearms, satellites, missiles—and training. Dual-use items can
include less-sensitive, commonly available items such as computers, radars, and
telecommunication equipment. Historically, State regulates defense exports, and
Commerce regulates dual-use exports. Defense items controlled by State are identified in
the United States Munitions List, which is implemented under the ITAR.22 Dual-use Items
controlled by Commerce are identified in the Commerce Control List, which is
implemented under the Export Administration Regulations (EAR).23 Table 1 identifies the
U.S. agencies and offices that regulate, enforce, or participate in the defense and dual-
use export control systems.


Table 1: Roles and Responsibilities in the U.S. Defense and Dual-Use Export Control Systems

Principal
regulatory                              Statutory            Implementing
agency/office        Mission            authority            regulations     Control list
State Department’s   Regulates and      Arms Export          International   United States Munitions List
Directorate of       enforces           Control Act          Traffic in Arms
Defense Trade        controls on the    (AECA), as           Regulations
Controls             export of          amended              (ITAR)
                     defense articles
                     and services
Commerce             Regulates and      Export               Export         Commerce Control List
Department’s         enforces           Administration Act   Administration
Bureau of Industry   controls on the    (EAA) of 1979, as    Regulations
            a        export of dual-             b           (EAR)
and Security                            amended
                     use items

19
 77 Fed. Reg. 37,524 (June 21, 2012).

20
 22 U.S.C. § 2753.

21
 50 U.S.C. app. § 2413.

22
 State implements the ITAR and regulates the export of defense items pursuant to the Arms Export Control
Act (AECA). 22 U.S.C. § §2751-2799aa-2.
23
   Commerce implements the EAR and regulates the export of items subject to the EAR, including dual-use
items, pursuant to the Export Administration Act (EAA). 50 U.S.C. app. §§ 2401-2420. The Export
Administration Act (EAA) of 1979, as amended lapsed on August 20, 2001. However, the President has, to the
extent permitted by law, kept in effect the provisions of the EAA and its implementing regulations through
Executive Order 13222 of August 17, 2001 (66 Fed. Reg. 44,025). Executive Order 13222 was issued under
the authority provided by the International Emergency Economic Powers Act (50 U.S.C. §§ 1701 et seq.) and
most recently was extended by Presidential Notice of August 15, 2012. 77 Fed. Reg. 49,699 (Aug. 16, 2012).


Page 5                                       GAO-13-119R Country-Based Export License Exemptions
    Principal
    regulatory                             Statutory           Implementing
    agency/office       Mission            authority           regulations     Control list
    Other federal agencies
    Department of       Provides input on which items should be controlled by either State or Commerce and
    Defense             conducts technical and national security reviews of export licenses submitted by
                        exporters to either State or Commerce.

    Department of        Enforces defense and dual-use export control laws and regulations through border
    Homeland Security    inspections and investigations.

    Department of        Investigates suspected criminal violations in certain areas of counterintelligence,
    Justice              including potential export control violations, and prosecutes suspected violators of arms
                         and dual-use export control laws.

    Department of        Participates in the review of export license applications submitted to State and
    Energy               Commerce and provides input on which items should be subject to control under the
                         ITAR and EAR, respectively.
Source: GAO.

Notes: Data are from GAO, Export Controls: Observations on Selected Countries’ Systems and Proposed Treaties,
GAO-10-557 (Washington, D.C.: May 27, 2010).
a
 Commerce’s Bureau of the Census implements the Foreign Trade Regulations which require, with some exceptions, that
exporters provide shipping data through the Automated Export System (AES).The AES is the central point through which
exporters must electronically file the export shipment data required by multiple agencies. 15 C.F.R. part 30.
b
 50 U.S.C. app. §§ 2401-2420. The Export Administration Act (EAA) of 1979, as amended, lapsed on August 20, 2001.
However, the President has, to the extent permitted by law, kept in effect the provisions of the EAA and its implementing
regulations through Executive Order 13222 of August 17, 2001 (66 Fed. Reg. 44,025). Executive Order 13222 was issued
under the authority provided by the International Emergency Economic Powers Act (50 U.S.C. §§ 1701 et seq.) and most
recently was extended by Presidential Notice of August 15, 2012. See 77 Fed. Reg. 49,699 (Aug. 16, 2012).


Generally, to receive approval to export certain items, exporters must submit a license
application to State if their export is a defense item or to Commerce if their export is a
controlled dual-use item that requires a license. However, both State and Commerce
provide exemptions that allow the export of controlled items without a license if certain
conditions are met. State implements three country-based license exemptions: the
Defense Trade Cooperation Treaty with the United Kingdom (UK), the Defense Trade
Cooperation Treaty with Australia, and a license exemption for Canada. Although
Commerce implements several license exemptions, the STA is the only exemption based
primarily on the destination of the export.24 According to Commerce, license exemptions
reduce uncertainty and delays faced by exporters of items in the licensing process.


State-Implemented Treaties and the Canada Exemption

In 2007, the United States signed separate Defense Trade Cooperation Treaties with the
UK and Australia to provide for the license-free export or transfer of selected defense
items under certain circumstances. The treaty with the UK entered into force in April 2012,
while the treaty with Australia is expected to enter into force in 2013. State’s
implementation of the UK treaty and future implementation of the Australia treaty fall
under the authority of the AECA. The stated goals of the treaties include achieving fully

24
  Commerce implements other license exemptions. For example, the exemption “Servicing and Replacement
of Parts and Equipment” allows for the export and reexport of one-for-one replacement of parts or servicing
and replacement of previously exported equipment without a license.




Page 6                                             GAO-13-119R Country-Based Export License Exemptions
interoperable forces, establishing a closer framework for security and defense
cooperation, and leveraging strengths of the security and defense industries. Only
authorized governmental and nongovernmental entities, facilities, departments, agencies,
and personnel in each country party to the treaties are eligible to export, acquire, or
transfer applicable items under the treaties. The treaties establish the process for certain
defense articles to be exported into and within these “approved communities” without a
license as long as exports are in support of certain (1) combined military and
counterterrorism operations; (2) cooperative security and defense research, development,
production, and support programs; (3) mutually agreed-upon security and defense
projects in which the end user is the UK or Australian government; or (4) U.S. government
end-uses. According to State, as of September 2012, there were no reported exports of
U.S. Munitions List hardware made pursuant to the UK Treaty exemption in the ITAR.25

Established in 1954, State’s Canadian exemption grew out of the U.S. and Canadian
geographic relationship, economic partnership, and mutual interest in the defense of North
America. As with the treaties, State implements the Canadian exemption through the
ITAR.26 The scope of the Canadian exemption has evolved since its inception. Earlier
versions allowed, without a license, the export and import of arms, ammunition, and
implements of war, and the export of unclassified technical data. Later revisions expanded
the items eligible for the exemption to include defense services and increased the types of
items requiring a license.27 According to State, between October 1, 2007, and September
30, 2008—the latest data available from State—exporters conducted roughly 35,000
transactions, worth an estimated $1.7 billion, using the Canadian exemption.28


Commerce-Implemented Strategic Trade Authorization License Exemption

Under the STA license exemption, the export, reexport, and in-country transfer of dual-use
items may be made without a license to destinations that pose a relatively low risk of
misuse or diversion. The STA, implemented through the EAR, authorizes the export,
reexport, and in-country transfer of items subject to controls for reasons of national
security, chemical or biological weapons, nuclear nonproliferation, regional stability, crime


25
  State can verify only exports of hardware technology transfers for which exporters are required to file export
shipment data electronically. This requirement does not apply to technology exports; as such, technology
exports may have occurred under the treaty without State’s knowledge.
26
     22 C.F.R. § 126.5.
27
  In April 1999, State revised its regulations to clarify when the exemption could be used, and limited the
defense items that could be exported under the exemption. State took this action on the basis of its analysis
that exports were being reexported from Canada to countries of concern without U.S. government approval
and that controls over defense and ammunition transfers needed strengthening. For additional information see
GAO, Defense Trade: Lessons to Be Learned from the Country Export Exemption, GAO-02-63 (Washington
D.C.: Mar. 29, 2002).
28
  State’s End-use Monitoring of Defense Articles and Defense Services, Commercial Exports FY 2009,
contains a review of the Canadian exemption and determined the number of transactions and dollar value
associated with the Canadian exemption for fiscal years 2007 and 2008. In this report, State erroneously
reported to Congress that $17 billion in exports were conducted under the Canadian exemption during this
period; the correct amount is $1.7 billion; State officials told GAO they plan to report the correct amount to
Congress.




Page 7                                          GAO-13-119R Country-Based Export License Exemptions
control, or significant items to 36 destinations.29 It also enables the export of certain items
controlled for national security reasons to another eight destinations. According to
Commerce, from July 2011 to July 2012—the 12 months after the STA exemption entered
into effect—74 exporters used the STA exemption to conduct 604 transactions worth
$33.9 million.

Under the rules proposed by Commerce in June 2012, certain defense items and services
transferred to Commerce control, such as those to be placed in the 600 series, will be
eligible for an STA license exemption.30 However, for these eligible defense items, the
use of the STA is limited to ultimate government end use by one of the 36 authorized
destinations and requires a previously issued State or Commerce license.31

Export Processes for Defense and Dual-Use Articles

Generally, exporters are responsible for determining if State or Commerce controls the
article they seek to export and if a license is required or an exemption may be used. If the
item requires an export license, the exporter must submit a license application to State or
Commerce, depending on which agency controls the item, and then follow the designated
export control process. Exporters seeking to export items controlled by State must register
with the department regardless if the item is exported under a license or a license
exemption; however, exporters are not required to register with Commerce.32 If the item is
eligible for a license exemption—such as under the treaties, the Canadian exemption, or
the STA—the exporter may choose not to submit a license and follow the streamlined
export control process under the respective exemption.33 Figure 1 outlines the U.S. export
control processes when items are exported under a license or a country-based license
exemption. A full description of these processes is included in enclosure II.




29
  15 C.F.R. § 740.20. See 15 C.F.R. § 742.14 for the regulatory explanation of significant item as a reason for
control.
30
  77 Fed. Reg. 37,524 (June 21, 2012).
31
 The proposed rule states that the purchaser, intermediate consignee, ultimate consignee and end user must
have been previously approved on a State or Commerce export license.
32
 22 C.F.R. § 122.1.
33
 The items that Commerce controls may be eligible for other license exemptions.



Page 8                                        GAO-13-119R Country-Based Export License Exemptions
Figure 1: Export Control Process under a License and Selected Country-Based License Exemption




Notes: Other agencies may review license applications referred to them by State or Commerce.

Under Commerce’s proposed rules, certain defense items to be placed in the proposed 600 series would be eligible for the
STA, but 600 series items that would require a congressional notification would not be eligible for the STA.


Congressional Notifications

Items controlled under State’s jurisdiction have different controls from those under
Commerce’s jurisdiction, including different requirements to notify Congress of defense
transfers and statutory violations. State implements export controls of defense items,
including country-based license exemptions, pursuant to the Arms Export Control Act
(AECA), which requires that State notify Congress of certain defense transfers and export
statutory violations.34 Commerce implements controls of dual-use exports, including the
STA and other license exemptions, under the Export Administration Act (EAA), which

34
 22 U.S.C. §§ 2776, 2753.




Page 9                                             GAO-13-119R Country-Based Export License Exemptions
requires Commerce to notify Congress of proposed exports which are destined for
designated state sponsors of terrorism or could make a significant contribution to the
military potential of a government of a country that has repeatedly provided support for
acts of international terrorism.35 However, Commerce is also required to provide an
annual report to Congress with information on the number of administrative cases and
criminal convictions as a result of export control statutory violations by individuals and
companies.36 Since Commerce is expected under export control reform to have
jurisdiction over certain defense items, members of Congress have raised concerns about
whether notifications to Congress for the exports currently controlled by State will continue
after they are transferred to Commerce.

Certain Compliance Activities for Exempted Exports Differ from Activities for
Licensed Exports, but Enforcement Activities Are Generally the Same

Certain compliance activities for the export of controlled items under State and Commerce
licenses differ from compliance activities under country-based license exemptions, but
enforcement activities are generally the same. The three compliance activities that differ
are (1) license application review, (2) vetting parties to transactions, and (3) compliance
program reviews (recordkeeping). In contrast to these compliance activities, the other four
compliance and three enforcement activities, such as inspection of exports, and
investigations and punitive actions for violations, are generally the same for both licensed
exports and country-based license-exempt exports.

Compliance and Enforcement Activities Aim at Preventing Export Control Violations

Compliance activities provide information for exporters, licensing officials, and
enforcement agencies to assess the validity of particular export transactions, identify
potential violations, or prevent violations before they occur. Enforcement activities strive to
prevent or deter the illegal export or transshipment of defense and dual-use items. We
identified seven export control compliance activities and three enforcement activities that
the Departments of Commerce, Homeland Security (DHS), Justice, State, and the
Treasury conduct to encourage compliance with export control laws and prevent the
diversion or misuse of exported items against U.S. allies or interests.37 Within each
compliance and enforcement activity, State, Commerce, or other agencies perform
specific tasks. Table 2 describes the seven compliance and three enforcement activities,
along with selected tasks associated with the export of defense and dual-use items.




35
 50 U.S.C. app. § 2405.

36
 50 U.S.C. app. § 2413.

37
 See GAO, Export Controls: U.S. Agencies Need to Assess Control List Reform’s Impact on Compliance
Activities, GAO-12-613 (Washington, D.C.: Apr. 23, 2012); and Export Controls: Proposed Reforms Create
Opportunities to Address Enforcement Challenges, GAO-12-246 (Washington, D.C.: Mar. 27, 2012).


Page 10                                      GAO-13-119R Country-Based Export License Exemptions
Table 2: Description of Compliance and Enforcement Activities and Selected Tasks for Export of
Defense and Dual-Use Items

Activity              Activity description                         Selected tasks associated with activity
Compliance activities
License application   When deciding whether to approve or                 Agencies review transaction prior
review                deny an export license application,                  to export to identify parties to
                      State and Commerce, among other                      transaction, proposed export’s end
                      agencies, evaluate it against several                use, and destination.
                      factors, including how the recipient
                      plans to use the item.
Vet parties to the    Review and assess all parties to the                Reviewing agencies vet license
transaction           transaction.                                         applicant, end-user, and any other
                                                                           parties to the transaction against
                                                                           internal lists, as well as export and
                                                                           licensing histories, intelligence, law
                                                                           enforcement, and public
                                                                           information.

                                                                          State or Commerce vets parties to
                                                                           country-based exemption export
                                                                           prior to the first transaction or after
                                                                           shipment of selected exports.
End-use monitoring      Conduct checks, as needed, including              State and Commerce conduct
                        site visits, to verify the bona fides of           prelicense checks of applicant,
                        entities and appropriate receipt and               end-user, or other parties to
                        use of controlled items.                           transaction to verify bona fides.

                                                                          State and Commerce conduct
                                                                           postshipment verification checks to
                                                                           determine appropriate receipt and
                                                                           use of export.
Shipping data analysis Review selected export declarations to             Commerce conducts real-time
                       identify potential violations and select            analysis of information input into
                       exports for postshipment verification               the Automated Export System
                       check.                                              (AES).

                                                                          State and Commerce conduct
                                                                           regular postshipment analysis of
                                                                           AES data.
Compliance program      Review and critique companies’                    State and Commerce review
reviews                 programs to manage export-related                  exporter’s records to ensure the
                        decisions and transactions to ensure               exporter meets requirements.
                        compliance with regulations and
                        license conditions.                               State and Commerce conduct on-
                                                                           site review of exporters’
                                                                           compliance programs.
List maintenance        Update and maintain lists that inform             State and Commerce update and
                        the licensing process by providing key             maintain internal “watch lists,”
                        information on entities of concern to              among other lists.
                        licensing officers and the public.
                                                                          State, Commerce, and Treasury
                                                                           maintain prohibited and sanctioned
                                                                           parties’ lists.




Page 11                                        GAO-13-119R Country-Based Export License Exemptions
 Activity                          Activity description                                      Selected tasks associated with activity
 Outreach                          Provide courses, workshops, and                                  State and Commerce provide
                                   seminars for exporters to inform them                             information to exporters to assist in
                                   of their responsibilities to comply with                          compliance efforts.
                                   export control laws and regulations.
                                   Provide training to foreign government                               State, Commerce, DHS, and
                                   officials.                                                            Justice provide training and
                                                                                                         seminars to foreign government
                                                                                                         officials on how to investigate,
                                                                                                         detect, and interdict unauthorized
                                                                                                         transfers of items.
 Enforcement activities
 Inspection of goods    Inspect items, including review and                                             DHS’s Customs and Border
                        validation of documentation, scheduled                                           Protection primarily inspects
                        for export at U.S. air, sea, and land                                            exports at U.S. ports.
                        ports.
 Investigation of       Investigate potential violations of                                             Commerce, DHS’s Immigration
 violations             export control laws for dual-use and                                             and Customs Enforcement, and
                        defense items.                                                                   the Justice Department’s Federal
                                                                                                         Bureau of Investigations may
                                                                                                         investigate potential violations.
 Punitive actions for              Pursue punitive actions, either criminal                             State, Commerce, DHS, and the
 violations                        or administrative, taken against                                      Departments of Justice and the
                                   individuals or companies for violations                               Treasury may all take punitive
                                   of export control laws and regulations.                               actions for violations.
                                   Penalties include imprisonment, fines,
                                   suspension of an export license,                                     Punitive actions taken against
                                   denial, or debarment from exporting,                                  violators may be criminal or
                                   among others.                                                         administrative.
Source: GAO analysis of State, Commerce, DHS, and Departments of Justice and the Treasury information.




Vetting and Compliance Program Reviews for Country-Based License-Exempt Exports
Are Different from Those Followed for Licensed Exports

We identified three compliance activities that differ for licensed exports compared with
country-based license-exempt exports. The compliance activities that differ are (1) license
application reviews (2) vetting parties to transactions and (3) compliance program reviews
(recordkeeping). The other four compliance and three enforcement activities are generally
the same.

            License Application Reviews

Because country-based license exemptions do not require a license, neither State nor
Commerce conducts license application reviews for items exported under an exemption.
For transactions requiring a license, the exporter submits an application that State or
Commerce officials review. As part of the application review process, State and
Commerce may consult with other agencies. When deciding whether to approve or deny
an export license application, State and Commerce evaluate it against several factors,
including how the recipient plans to use the item.

            Vetting Parties to a Transaction

The process for compliance activities undertaken to vet parties to a transaction for
licensed exports is different from the process for those activities undertaken to vet parties
for country-based license-exempt exports. Generally, for items exported under a State or


Page 12                                                            GAO-13-119R Country-Based Export License Exemptions
Commerce license, U.S. agency officials review the license application and screen all
entities that are party to each transaction against various agency lists, as well as export
and licensing histories, and public, law enforcement, and intelligence information. These
lists include State’s internal Watch List; Commerce’s internal Watch List; Commerce’s
Denied Persons List, Entity List, and Unverified List; State’s Nonproliferation Sanctions
List and the AECA Debarred List; and the Department of the Treasury’s Specially
Designated Nationals List.38 State and Commerce may also conduct a prelicense check to
verify the credentials of a party before approving a license.39 Such prelicense checks may
include a site visit to the proposed end-user or foreign consignee.40 Both State and
Commerce may request input or a review of the license application by another agency,
such as the Departments of Defense and Energy, as part of the vetting process.41

The vetting process for State-licensed exports differs from the process for exports under
the UK and Australia treaties. Although the treaties do not require a license, they do
require prior vetting and membership into an “approved community.” Approved
communities include exporters and end users that both treaty members (the United States
and the UK, or the United States and Australia) have vetted and approved. UK officials vet
UK applicants for approved community membership; applicants must have “List-X”
approved facilities, an indication that the facility is approved to hold classified information.
Once the UK approves applicants, State and other agencies, such as the Departments of
Defense and Justice, vet the member applicants. Once applicants become members of
the approved community, State does not vet exporters or end-users before each
transaction. According to State officials, State can limit the eligibility of or remove
members from the approved community. State officials explained that the vetting process
will be similar for Australia once the treaty enters into force.

In contrast to the process for State-licensed exports and for the treaties, State does not
vet parties to transactions under the Canadian exemption before the transaction. The
38
  The Denied Persons List includes individuals and entities that have been denied export privileges. Any
dealings with a party on this list that would violate the terms of its denial order are prohibited. The Entity List
includes parties whose presence in a transaction can trigger a license requirement supplemental to those
elsewhere in the EAR. The list specifies the license requirements and policy that apply to each listed party.
The Unverified List includes end users whom Commerce’s Bureau of Industry and Security has been unable
to verify in prior transactions. The presence of a party on this list in a transaction is a “red flag” that should be
resolved before proceeding with the transaction. The Nonproliferation Sanctions List includes parties that
have been sanctioned under various statutes. The AECA Debarred List includes entities and individuals
prohibited from participating directly or indirectly in the export of defense articles, including technical data and
defense services. The AECA Debarred List includes persons convicted in court of violating or conspiring to
violate the AECA and subject to “statutory debarment” or persons established to have violated the AECA in an
administrative proceeding and subject to “administrative debarment.” The Specially Designated Nationals List
includes parties who may be prohibited from export transactions on the basis of the Department of the
Treasury’s Office of Foreign Assets Control regulations. The EAR requires a license for exports or reexports to
any party in any entry on this list.
39
  According to Commerce guidance on end-use checks, an on-site visit is a requirement for all prelicense
checks except under unusual circumstances that must be reported. State, however, does not require an on-
site visit for all prelicense checks.
40
     Consignee refers to a recipient of the exported item during any phase of the export transaction.
41
   As provided for under Executive Order 12981, State and the Departments of Defense and Energy have the
authority to review any export license application submitted to Commerce, and Commerce may refer export
license applications to other departments or agencies as appropriate. Exec. Order No. 12,981, 60 Fed. Reg.
62,981 (Dec. 5, 1995). If there is disagreement among the agencies on the disposition of the application, the
application goes through an interagency dispute resolution process.


Page 13                                            GAO-13-119R Country-Based Export License Exemptions
Canadian Controlled Goods Directorate vets end users and approves them to receive
U.S. exports. State officials said that Canadian government officials have briefed them on
the vetting and registration process. State officials expressed confidence in the vetting
process because, according to them, Canada wants to protect U.S. defense articles and
be seen as a reliable trading partner. Table 3 summarizes the differences in the
compliance activities for State-licensed exports and State’s country-based license
exemptions.

Table 3: Differences among Compliance Activities for State-Licensed Exports, Exports under the UK
and Australia Treaties, and Exports under the Canadian Exemption

                                                                          UK and pending
                                                                          Australia treaty
                                                                                       a
    Activity                                State-licensed export         exemptions                 Canadian exemption
    License application review              State reviews the license     Members of the             State does not review
                                            application and proposed approved community              the transaction prior to
                                            transaction before a          may export to other        export.
                                            license is issued.            members of the
                                                                          approved community
                                                                          without prior State
                                                                          approval.
    Vet parties to the transaction          State vets all entities party State vets all exporters   State does not vet
                                            to the export transaction     applying for membership    entities party to a
                                            before a license is issued. in “approved                 transaction under the
                                                                                                                           b
                                                                          communities.” Only         Canadian exemption.
                                                                          members of the
                                                                          approved communities
                                                                          are allowed to export
                                                                          items under the treaty.
    Compliance program review               State reviews exporter’s      State reviews exporter’s   State reviews
                                            compliance program and        compliance program and     exporter’s compliance
                                            records; in accordance        records. In addition to    program and records.
                                            with ITAR, exporters are      the standard ITAR          In addition to the ITAR
                                            required to maintain          requirements, exporters    requirements,
                                            specific records of their     must apply treaty          exporters must
                                            transactions for inspection markings to the items        provide an annual
                                            upon request.                 exported.                  report to State on
                                                                                                     transactions
                                                                                                     conducted under the
                                                                                                     Canadian exemption.
Source: GAO analysis of State and Commerce information.

a
 Although signed and ratified by the United States, the treaty with Australia had not entered into force as of the
date of this report. The information in this column is based on the regulations for the treaty with the UK, which
State officials said would be similar.
b
 The Canadian Controlled Goods Directorate vets end users and approves them to receive U.S. exports.

For transactions using the STA for current dual-use items, Commerce does not vet parties
to the transaction before export. Commerce officials said that after the shipment has
occurred, they identify and vet parties to the transaction and subsequently review new
exporters to ensure compliance with STA requirements. However, Commerce has
proposed that in order to use the STA for the export of defense items that may be placed
under its control, the item must be destined for the end use of a government of one of the
36 authorized destinations. In addition, certain parties to the transaction would be required
to have a previously issued State or Commerce license, or have been listed on a previous




Page 14                                                    GAO-13-119R Country-Based Export License Exemptions
license, indicating that those parties had been previously vetted.42 Table 4 summarizes
the differences among the compliance activities for Commerce-licensed items and
Commerce’s STA exemption.

Table 4: Differences among Compliance Activities for Commerce-Licensed Exports and STA License
Exemption Exports

                                                                                            STA license exemption
                                                                                            for defense items
    Activity                         Licensed export           STA license exemption        (proposed 600 series)a
    License application              Commerce reviews the      Commerce does not            Commerce does not plan
    review                           license application and   review the transaction prior to review the transaction
                                     proposed transaction      to export.                   prior to export unless
                                     before a license is                                    certain parties to the
                                     issued.                                                transaction were not
                                                                                            previously authorized on a
                                                                                            State or Commerce
                                                                                            license.
    Vet parties to the export        Commerce vets entities    Commerce identifies and      Specified parties will be
    transaction                      party to the export       vets parties to the          required to have a
                                     transaction before a      transaction postshipment. previous State or
                                     license is issued.                                     Commerce license to use
                                                                                            the STA for defense items.
    Compliance program               Commerce reviews          Commerce reviews             Commerce will review
    review                           exporter’s records. In    exporter’s records. In       exporter’s records. In
                                     accordance with the       addition to the              addition to the
                                     EAR, exporters are        requirements for licensed requirements for licensed
                                     required to maintain      exports, exporters are       exports, exporters will be
                                     specific records of their required to obtain and       required to obtain and
                                     transactions and produce maintain consignee            maintain enhanced
                                     them for inspection upon statements.                   consignee statements.
                                     request.
Source: GAO analysis of State and Commerce information.

a
 On June 21, 2012, Commerce proposed limitations on the export of items to be placed in the 600 series,
including those eligible for export under the STA. The information in this column represents the proposed
regulations in the June 21, 2012, Federal Register notice. 77 Fed. Reg. 37,524.

            Compliance Program Review

If there are compliance concerns, State and Commerce each review and critique
companies’ compliance programs and records to manage export-related decisions and
transactions to help ensure they conform with regulations and license conditions. Both the
ITAR and the EAR require exporters to maintain specific documentation for licensed
exports, including a description of the item, transaction date, and destination, which helps
facilitate such reviews and ensure compliance with laws and regulations.43 In addition to

42
   The proposed rule states that the STA may be used for 600 series items only if the purchaser, intermediate
consignee, ultimate consignee, and end user have been previously approved on a State or Commerce export
license. 77 Fed. Reg. 37,524 (June 21, 2012).
43
  Specifically, the ITAR requires maintenance of records concerning the manufacture, acquisition, and
disposition (to include copies of all documentation on exports using exemptions and applications and licenses
and their related documentation) of defense articles; technical data; defense services; brokering activities; and
information on political contributions, fees, or commissions furnished or obtained (22 C.F.R. § 122.5).
Additionally, requirements specific to the EAR include contracts, financial records, and export control
documents such as the license and AES filing (15 C.F.R. § 762.2).




Page 15                                                   GAO-13-119R Country-Based Export License Exemptions
the requirements outlined in the ITAR and EAR, each of the three country-based license
exemptions has one additional requirement:

        Under the treaties, exporters are required to apply and maintain appropriate treaty
         markings or other identification on the items to help ensure that future approved
         community members understand compliance requirements.

        Exporters using State’s Canadian exemption must also submit semiannual reports
         to State on their use of the defense service provisions of the Canadian exemption.

        Exporters using Commerce’s STA exemption must obtain and maintain consignee
         statements. The statement, which the exporter obtains from the consignee, serves
         as an acknowledgement of an agreement to the STA requirements. The statement
         must include, among other things, (1) an indication that the consignee receiving
         the shipment acknowledges it was shipped pursuant to the STA exemption; (2) an
         indication that the consignee receiving the shipment agrees not to transfer or
         reexport the items to any destination, use, or user prohibited by the EAR; and (3)
         the export control classification numbers of the specific items exported.44 If an item
         exported using the STA is re-exported or retransferred, the re-exporter or
         transferor must furnish the export control classification number for the item
         shipped to the subsequent consignee, according to Commerce.

According to Commerce officials, although the STA exemption is the only Commerce
license exemption that requires the specific STA consignee statement, other Commerce
exemptions require written assurances from foreign parties and also serve as a
compliance mechanism.45 Commerce officials noted that, in enforcement cases, the STA
consignee statements would be useful if a violation of export laws and regulations occurs
because the statement would help prove intent to violate the regulation. Commerce
recently proposed that the STA consignee statement for the export of the defense items
that may be placed under its control would be enhanced to include a specific provision
that would permit end-use checks by the U.S. government.46

Other Compliance and Enforcement Activities Are Generally the Same

Other compliance activities are generally the same for licensed exports and country-based
exempted exports. According to State and Commerce officials, all exports, whether under
a license or a license exemption, may be subject to end-use monitoring checks, which
helps ensure that parties to the transaction comply with export license terms, licensing
conditions, exemption terms, and export regulations. Both State and Commerce analyze
shipping data to determine which exports should receive postshipment verification checks
(part of end-use monitoring) for licensed exports, for country-based license-exempt
exports, and for any other exports subject to the ITAR and EAR. In addition to selecting
exports for postshipment verification checks, Commerce also analyzes STA shipping data
to verify that the item–country relationship is correct and to identify exporters using the

44
 15 C.F.R. § 740.20.

45
 In previous discussions with Commerce officials, we were told that the STA exemption is the only
Commerce license exemption that requires a consignee statement.
46
 77 Fed. Reg. 37,524 (June 21, 2012).



Page 16                                       GAO-13-119R Country-Based Export License Exemptions
STA exemption for the first time. According to Commerce officials, all first-time users of
the STA exemption for current dual-use items are subject to a Commerce Compliance
Review to verify compliance with the license exemption regulations (such as obtaining the
consignee statement). In addition, Commerce officials conduct real-time analysis of
shipping data in order to verify compliance with laws and regulations, and to detect and
prevent illegal transactions. According to State and Commerce officials, country-based
license exemptions do not influence the process the agencies use for updating and
maintaining lists of parties against which applicants or end-users are screened during the
vetting process. As part of their ongoing outreach efforts, both State and Commerce
officials said they have conducted outreach to exporters and foreign government officials
to educate them about the country-based license exemptions.

Enforcement activities are generally the same for licensed exports and country-based
exempted exports. According to State and Commerce officials, all exports, regardless of
how they are exported, are subject to inspection and possible seizure at the border,
investigation for potential violations, and punitive actions for actual violations. Further,
State officials said that all exports under ITAR, including exports under a license, the
treaties, and the Canadian exemption are subject to retransfer or reexport restrictions in
accordance with ITAR regulations. Items exported under the treaties may only be
retransferred or reexported to another member of the approved community in accordance
with the requirements outlined in the exemption. Items exported under STA cannot be
transferred or reexported in violation of the EAR. In addition, items exported under the
STA are not eligible to use certain parts of the license exemption “Additional Permissive
Re-exports,” which allows for reexport without a license and may be used under certain
circumstances with licensed exports.47

State and Commerce Have Different Requirements for Notifying Congress of
Proposed Controlled Exports and Statutory Violations; Commerce Has Proposed
Harmonizing Certain Notification Requirements

State is required by statute to notify Congress of certain proposed defense exports and
statutory violations; Commerce is required to notify Congress of exports of dual-use items
in specific cases and is not required to provide notification of statutory violations
generally.48 The congressional notification requirements for exports and statutory
violations vary because State and Commerce export control regulations derive from
different authorities and aim to control articles that have different levels of concern for
diversion or unintended use. State is required to notify Congress of proposed exports of
major defense equipment, articles, and services that meet specific dollar thresholds under
a license or treaty.49 Commerce is required to notify Congress in cases in which proposed
exports are destined for a designated state sponsor of terrorism or could make a
significant contribution to the military potential of a government of a country that has
repeatedly provided support for acts of international terrorism.50 However, in June 2012,
Commerce issued a proposed rule that would require congressional notification of
47
 15 C.F.R. § 740.20. Items exported under the STA are not eligible for paragraphs (a) or (b) of the license
exemption Additional Permissive Re-exports.
48
 22 U.S.C. §§ 2776, 2753 and 50 U.S.C. app. §§ 2405, 2413.

49
 22 U.S.C. §§ 2776 and 2753; see also 22 C.F.R. § 126.17.

50
 50 U.S.C. app. § 2405.



Page 17                                         GAO-13-119R Country-Based Export License Exemptions
pending exports of major defense equipment, such as articles under the 600 series,
including those exported under the STA, that meet the same dollar thresholds as those
required of State.51 As of November 2012, Commerce was considering how to implement
its proposal. In terms of enforcement actions, State is required to notify Congress of
certain violations of export laws that exceed specified statutory dollar thresholds.52
Commerce reports statutory violations that result in administrative and criminal cases as
part of its annual report to Congress.

State Is Required to Notify Congress of Proposed Exports for Certain Defense Items and
of Statutory Violations

The AECA requires State to notify Congress of proposed exports for major defense
equipment on the basis of set thresholds that vary among items requiring a license and
those under the treaties.53 According to State officials, exporters are responsible for
informing State when controlled items exported with a license or under any of the country-
based license exemptions will reach the congressional notification threshold. When State
obtains this information, it is required to submit a notification to Congress. Since export of
major defense equipment, articles, and services are not included under the Canadian
exemption and continue to require a license, AECA congressional notification
requirements do not apply.54

State must notify Congress of planned exports of controlled items that required a license
within certain parameters. Specifically:

        State must notify Congress at least 30 days before the export of any major
         defense equipment requiring an export license in the amount of $14 million or
         more, of defense articles or defense services sold under a contract in the amount
         of $50 million or more, and firearms in an amount of $1 million or more to countries
         outside of the North Atlantic Treaty Organization (NATO), Japan, Australia, New
         Zealand, South Korea, and Israel.55

        State must notify Congress at least 15 days before the export of any major
         defense equipment requiring an export license in the amount of $25 million or
         more, of defense articles or defense services sold under a contract in the amount
         of $100 million or more, or of firearms in an amount of $1 million or more to NATO,
         Japan, Australia, New Zealand, South Korea, and Israel.56
51
 77 Fed. Reg. 37,524.

52
 22 U.S.C. § 2753.

53
 22 U.S.C. §§ 2753 and 2776.

54
  Specifically, the Canadian exemption does not cover firearms and ammunition, generation III (or more
sophisticated) night vision equipment, launch vehicles, most spacecraft, missiles, USML items, and related
technical data identified on the Missile Technology Control Regime Annex, as well as other sensitive military
technologies, including those that require congressional notification.
55
  22 U.S.C. § 2776. Pursuant to the AECA, major defense equipment means any item of significant military
equipment on the USML having a nonrecurring research and development cost of more than $50 million or a
total production cost of more than $200 million (22 U.S.C. § 2794(6)).
56
 22 U.S.C. § 2776.


Page 18                                         GAO-13-119R Country-Based Export License Exemptions
State is also required in the notification to identify the foreign country or international
organization to which such export will be made, the dollar amount of the items to be
exported, and a description of the items to be exported.57

Regulations for the implementation of the UK treaty require similar congressional
notification for proposed exports.58 The specific thresholds for congressional notification
for exports of major defense equipment under the UK treaty are the same as those
required under licensed exports to NATO countries listed above. Approved community
members are required to notify State of a proposed export that meets the above
thresholds.59 State then has 30 days to respond to the exporter. An exporter may not
export the item until an official response from State has been received. In addition, State
is required to submit an annual report to Congress on the treaties. This report should
include a summary of the amount of exports under the treaty and the defense articles
transitioned into the treaty, with an analysis of how the treaty is being used.

In addition, the AECA requires State to notify Congress of certain violations of export
laws.60 According to State officials, Section 3 of the AECA mandates State to notify
Congress of certain violations concerning transfers of defense articles, training, and
services under Foreign Military Sales, Excess Defense Articles, and Military Assistance
Programs, and in some cases defense articles under Direct Commercial Sales. State
officials noted that State provides notifications of violations of Direct Commercial Sales for
cases where exports exceed certain statutory thresholds.61 According to State officials, if
there is such a violation, State notifies Congress in writing or through a briefing to the
Speaker of the House of Representatives and to the Chairperson of the Senate Foreign
Relations Committee. In addition, State issues an annual report to Congress on its Blue
Lantern end-use monitoring program,62 which includes, among other things, information
on the number of unfavorable determinations from end-use checks conducted during the
fiscal year.63 According to State officials, all defense exports under State’s control,
regardless of license requirements, may be subject to Blue Lantern inquiries. In addition to
the Blue Lantern annual report, Congress also requires a separate annual report on end-
use monitoring and compliance activities specifically related to the treaties.




57
     22 U.S.C. § 2776(c).

58
   Implemented in 22 CFR C.F.R. § 126.17(o). The regulations for the implementation of the Australia treaty
have not been developed because the treaty is not yet in effect.
59
     22 C.F.R. § 126.17(o).

60
     22 U.S.C. § 2753.

61
 According to State, the set threshold to report Defense Commercial Sales is $14 million in major defense
equipment or $50 million of other defense articles.
62
     The Blue Lantern program is operated in accordance with section 40A of the AECA (22 U.S.C. § 2778).
63
  An unfavorable determination means that the Blue Lantern’s findings of fact are not consistent with the
information contained in the application or license.




Page 19                                          GAO-13-119R Country-Based Export License Exemptions
Commerce Is Proposing to Notify Congress Voluntarily of Certain Controlled Exports and
Currently Reports on Some Statutory Violations

The Export Administration Act (EAA) requires Commerce to notify Congress of certain
proposed dual-use exports, but no general requirement to notify Congress of statutory
violations. The EAA requires Commerce to notify Congress of proposed exports which are
destined for a designated state sponsor of terrorism or could make a significant
contribution to the military potential of a government of a country that has repeatedly
provided support for acts of international terrorism.64 According to Commerce officials, the
absence of a broader congressional notification requirement under the EAA raised
concerns that Congress would no longer have oversight of exports of certain defense
items that might be transferred from State control to Commerce control. Subsequently, in
June 2012, Commerce issued a proposed rule that includes notifying Congress of planned
exports of major defense equipment to be placed under Commerce control that meet the
same dollar thresholds as those required of State.65 Commerce officials also said that the
requirement would apply to major defense equipment that might be eligible for the STA
exemption. As of September 2012, Commerce was reviewing comments on and
considering how to implement the proposed rule.

The EAA also does not contain specific requirements for Commerce to notify Congress of
export controls violations. However, it requires Commerce to submit an annual report to
Congress that includes information on export control violations.66 The report includes
information on the number of administrative cases and criminal convictions as a result of
export control violations by individuals and companies. For example, in 2011 Commerce
reported its investigations resulted in the criminal conviction of 39 individuals and
businesses for export violations and that penalties for these convictions came to
$20,214,000 in criminal fines and more than 572 months of imprisonment.67 Cases include
violations such as attempting to export controlled goods without a license and making
false statements in a license to export firearms. The report provides information on the
amount collected in fines resulting from convictions and administrative cases each year.
According to Commerce officials, any violations related to the STA that result in criminal or
administrative penalties will also be included in the report.


Agency Comments and Our Evaluation

We provided a draft of this report to the Departments of Commerce and State for their
review and comment. In written comments (which are reproduced in enclosure III),
Commerce stated that our report could be improved by describing the rationale for making
less-sensitive items moved from the United States Munitions List to the “600 series” in the
Commerce Control List eligible for the STA license exemption. We have incorporated the

64
 50 U.S.C. app. § 2405.

65
 77 Fed. Reg. 37,524.

66
 50 U.S.C. app. § 2413(a)(19).

67
  Department of Commerce, Bureau of Industry and Security, Annual Report to Congress for Fiscal Year 2011
(Washington, DC: Department of Commerce), accessed July 2, 2012,
http://www.bis.doc.gov/news/2012/bis_annual_report_2011.pdf.


Page 20                                      GAO-13-119R Country-Based Export License Exemptions
suggested language as provided. Commerce also provided additional technical
comments, which we incorporated as appropriate. State did not provide written comments
on the draft of this report but provided technical comments, which we incorporated into the
report, as appropriate.



As agreed with your offices, unless you publicly announce the contents of this report
earlier, we plan no further distribution until 30 days from the report date. At that time, we
will send copies to interested congressional committees, the Secretary of State, and the
Secretary of Commerce. In addition, the report will be available at no charge on the GAO
website at http://www.gao.gov. If you or your staffs have any questions about this report,
please contact me at (202) 512-9601 or 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 contributed to this report are listed in Enclosure IV.




Thomas Melito
Director
International Affairs and Trade

Enclosures (4)




Page 21                                 GAO-13-119R Country-Based Export License Exemptions
Enclosure I


                          Objectives, Scope, and Methodology

In this review, we analyzed the Departments of State’s (State) and Commerce’s
(Commerce) compliance and enforcement activities and congressional notification
requirements for controlled items exported with a license and those exported under four
country-based license exemptions: the Defense Trade Cooperation Treaties with the
United Kingdom (UK) and Australia (hereafter referred to as “the treaties”), the Canadian
exemption, and the Strategic Trade Authorization (STA). Specifically, we compared
existing and proposed (1) compliance and enforcement activities for exports under both
licenses and country-based license exemptions, and (2) requirements for State and
Commerce to notify Congress of certain defense exports and of violations of export
control laws or regulations.

To address the first objective, we first identified and reviewed statutory authorities, their
implementing regulations, and proposed changes to these regulations that guide State
and Commerce’s defense and dual-use export control processes. Specifically, we
reviewed the Arms Export Control Act (AECA) and the International Traffic in Arms
Regulations (ITAR), as well as the Export Administration Act (EAA) and the Export
Administration Regulations (EAR), and selected Federal Register notices. To identify and
describe the country-based license exemptions, we interviewed officials from State and
Commerce and reviewed related regulatory and statutory authorities noted above, as well
as the U.S.-U.K Treaty on Defense Trade Cooperation, the U.S.-Australia Treaty on
Defense Trade Cooperation, each treaty’s Implementing Arrangements, and applicable
Federal Register notices. To identify the compliance and enforcement activities for State
and Commerce’s licensed exports and for the agencies’ country-based license
exemptions, we interviewed State and Commerce officials, and reviewed agency
documents and reports, as well as past GAO reports. Specifically, we interviewed officials
from State’s Directorate of Defense Trade Controls (DDTC), which manages the license
and license exemption process for defense exports; and Commerce’s Bureau of Industry
and Security (BIS), which manages the licensing and license exemption process for dual-
use items. We reviewed agency documents related to the compliance and enforcement
activities for both the licensing process and country-based license exemption process,
including State’s standard operating procedures for admitting members to the UK treaty’s
approved community, State’s standard operating procedures for providing annual reports
on the UK treaty, Commerce’s compliance plan for the STA exemption, State’s annual
Blue Lantern program reports, BIS’s annual reports to Congress, and previous GAO
reports. To determine and compare proposed compliance and enforcement activities for
items moving from the United States Munitions List to the Commerce Control List, we
reviewed selected Federal Register notices and interviewed State and Commerce
officials.

To compare the existing and proposed congressional notification requirements for
transfers and export violations for State’s and Commerce’s licensed exports and these
requirements for State and Commerce’s country-based license exemptions, we reviewed
statutory regulations and proposed changes to these regulations, including the Arms
Export Control Act, International Traffic in Arms Regulations, Export Administration Act,
Export Administration Regulations, the U.S.-U.K Treaty on Defense Trade Cooperation,
the U.S.-Australia Treaty on Defense Trade Cooperation, the treaties’ Implementing
Arrangements, and applicable Federal Register notices. In addition, we interviewed
officials from State and Commerce, including officials from State’s DDTC and



Page 22                                 GAO-13-119R Country-Based Export License Exemptions
Enclosure I


Commerce’s BIS, which manage the licensing and license exempt processes for defense
and dual-use items, respectively.

We conducted this performance audit from March 2012 to November 2012 in accordance
with generally accepted government auditing standards. Those 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 23                              GAO-13-119R Country-Based Export License Exemptions
Enclosure II


 Export Process for Defense and Dual-Use Items and Services under Licenses and
                          Country-Based Exemptions

The Departments of State (State) and Commerce (Commerce) administer the regulatory
frameworks for the export of defense and dual-use items. State administers controls for
defense items and services, and Commerce does so for dual-use items, which have both
military and civilian applications.

Generally, exporters are responsible for determining which agency (State or Commerce)
controls the item or service they seek to export and which regulatory requirements apply,
if any. Generally, unless an exemption applies, exporters submit a license application to
the requisite agency if their item or service is controlled by either State or Commerce to
receive approval to export. Once a license application is submitted by the exporter, the
agency reviews the application and may approve, approve with conditions, deny, or return
the license to the exporter without action.68 When deciding whether to approve or deny an
application, State or Commerce evaluates it against several factors, including an
assessment of all parties to the transaction and how the recipient plans to use the item.
As part of the application review process, State and Commerce may consult with other
agencies such as the Departments of Defense or Energy.69 If the application for export
meets certain thresholds, the agencies may provide notification to Congress of the
pending export.70 If the export license application is approved, the exporter files data into
the Automated Export System (AES), the central point through which exporters are
required to electronically file shipment data required by multiple agencies.

The initial export process differs for country-based license exempt exports because a
license application is not required. For State’s Canadian exemption and the United
Kingdom and Australia treaties, exporters first must verify the recipient’s eligibility to
receive the export, either through verifying their registration with the Canadian Controlled
Goods Directorate or as a member in the “approved community” for the treaties.71 For the
treaties, the exporter must also determine if the export reaches a threshold that requires
notification to Congress of the proposed sale. Once registration or membership has been
verified and notification provided to Congress, if needed for the treaties, the exporter files
data into the AES.

68
  An agency may return a license application without action if, for example, the agency needs additional
information.
69
   As provided for under Executive Order 12981, State and the Departments of Defense and Energy have the
authority to review any export license application submitted to Commerce, and Commerce may refer export
license applications to other departments or agencies as appropriate. Exec. Order No. 12,981, 60 Fed. Reg.
62,981 (Dec. 5, 1995).
70
  State is required by statute to notify Congress of pending exports that meet specific dollar thresholds. 22
U.S.C. § 2776. Commerce is required to notify Congress of pending exports where the item is destined for a
designated state sponsor of terrorism or could make a significant contribution to the military potential of a
government of a country that has repeatedly provided support for acts of international terrorism. 50 U.S.C.
app. 2405. Commerce recently proposed notifying Congress of pending exports of 600 series items that meet
the same dollar thresholds required for State.
71
  Although signed and ratified by the United States, the treaty with Australia had not entered into force as of
the date of this report. The information in this enclosure is based on the regulations for the treaty with the UK,
which State officials said would be similar.




Page 24                                          GAO-13-119R Country-Based Export License Exemptions
Enclosure II


For all exporters utilizing the Strategic Trade Authorization (STA) exemption, exporters
must obtain a consignee statement prior to export.72 As proposed, for 600 series items the
exporter must also verify that a previous State or Commerce license has been issued and
that the ultimate end-user is the government of one of the 36 destinations, and determine
if the proposed export reaches a threshold that requires notification to Congress.73 Once
the consignee statement has been obtained, the exporter files data into the Automated
Export System.

Once the exporter files data into the Automated Export System for either licensed exports
or country-based license exempt exports, the Department of Homeland Security’s
Customs and Border Protection and other agencies may review and validate the export
documentation, inspect outbound cargo and detain questionable shipments. In addition,
Commerce and State may conduct end-use monitoring checks to verify the receipt and
use of the item or service exported. Exporters are required to maintain STA-related
documentation, such as the consignee statement. In addition, Commerce officials said
new users of the STA are identified and undergo an export compliance review.




72
 15 C.F.R. § 740.20.

73
  On June 21, 2012, Commerce proposed restrictions on the export of 600 series items, including those that
would be eligible for export under the STA. As part of this proposed rule, Commerce proposed notifying
Congress of planned exports of major defense equipment to be placed under the 600 series of the Commerce
Control List that meet the same dollar thresholds as those required of State. However, for exports of 600
series items that meet congressional thresholds, exporters would not be able to use the STA. 77 Fed. Reg.
37,524.


Page 25                                       GAO-13-119R Country-Based Export License Exemptions
Enclosure III


                Comments of the Department of Commerce




Page 26                       GAO-13-119R Country-Based Export License Exemptions
Enclosure IV


                       GAO Contact and Staff Acknowledgments

GAO Contact

Thomas Melito, (202) 512-9601 or melitot@gao.gov

Staff Acknowledgments

GAO staff who contributed to this report includes Jeff Phillips, Assistant Director; Jenna
Beveridge; Francisco M. Enriquez; and Grace Lui.




Page 27                                 GAO-13-119R Country-Based Export License Exemptions
Related GAO Products

Export Controls: U.S. Agencies Need to Assess Control List Reform’s Impact on
Compliance Activities. GAO-12-613. Washington, D.C.: April 23, 2012.

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.

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.




Page 28                               GAO-13-119R Country-Based Export License Exemptions
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.

Defense Trade: 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 29                                GAO-13-119R Country-Based Export License Exemptions
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