oversight

Export-Import Bank: Status of End-Use Monitoring of Dual-Use Exports as of August 2019

Published by the Government Accountability Office on 2019-08-12.

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

441 G St. N.W.
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August 12, 2019

Congressional Committees

Export-Import Bank: Status of End-Use Monitoring of Dual-Use Exports as of August
2019

The mission of the Export-Import Bank of the United States (EXIM) is to support the export of
U.S. goods and services overseas through loans, loan guarantees, and insurance, thereby
supporting U.S. jobs. EXIM’s charter contains a general prohibition on support for defense
articles and services, with limited exceptions. In 1994, Congress passed legislation providing an
exception giving EXIM authority to facilitate the financing of U.S. exports of defense articles and
services with both commercial and military applications, provided it determines that these items
are nonlethal and primarily meant for civilian end use. 1 Such “dual-use” exports have included,
for example, construction equipment for foreign militaries to use to build roads. 2 EXIM’s
Engineering and Environment Division, with assistance from the bank’s Office of General
Counsel, Office of Congressional and Intergovernmental Affairs, and Office of Policy Analysis
and International Relations, implement EXIM’s dual-use authority.


The Export-Import Bank Reform and Reauthorization Act of 2015 extended EXIM’s authority to
finance dual-use exports until the date when EXIM’s authority expires under 12 U.S.C. § 635f. 3
Under this section, EXIM is currently authorized through September 30, 2019. An earlier law,
Pub. L. No. 103-428, § 1(a) (Oct. 31, 1994), created EXIM’s dual-use authority and included a
provision for GAO, in conjunction with the bank, to report annually on the end uses of dual-use
exports supported by EXIM during the second preceding fiscal year. This report (1) examines
the status of EXIM’s monitoring of dual-use exports that it continued to finance in fiscal year
2017, as of August 2019; and (2) identifies any new dual-use exports that EXIM financed in
fiscal year 2018.

To address these objectives, we reviewed EXIM documentation—including EXIM guidance,
technical operating reports, annual end-use certification, dual-use compliance determination,
and database records—and interviewed EXIM officials in Washington, D.C. We did not
independently verify the information that buyers provided to EXIM or assess the effectiveness of
EXIM’s methods to determine end use. However, based on our prior reporting and EXIM’s

1
    12 U.S.C. § 635(b)(6)(I).

2
 According to EXIM’s Military Policy, its definitions of “defense articles” and “defense services” for dual-use exports
are based on who the end user is, and then by the nature of the item and the use to which it will be put. In addition, if
the item is designed primarily for military use, it is presumed to be a defense article. Certain exceptions are applied
under this policy; for instance, if the item is for humanitarian purposes, it would not be considered a defense article.
Under this policy, an export is eligible for financing as a dual-use item if convincing evidence exists that the export is
nonlethal in nature and will be used primarily for civilian activities. Additionally, there is a statutory exception allowing
for EXIM support for certain defense article or service exports sold primarily for antinarcotics purposes, in addition to
the exception, as discussed herein, for certain primarily civilian purpose (dual-use) items or services.
3
    Pub. L. No. 114-94, Div. E, Title LIV, § 54001(b), (Dec. 4, 2015).



Page 1                                                                        GAO-19-656R EXIM Bank Dual-Use Exports
confirmation that as of June 2019 no changes had been made to the database used to maintain
information on dual-use exports, we determined that EXIM’s data on the status of dual-use
exports were sufficiently reliable for our purposes.

We conducted this performance audit from May 2019 to August 2019 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.

Background

In 2015, EXIM revised its guidance for monitoring dual-use transactions to address certain
weaknesses that we had previously identified in our August 2014 report. 4 Specifically, in
response to our recommendation, the revised guidance calls for the EXIM engineer assigned to
monitor the transaction to take the following actions:

    •    Notify buyers. The engineer is to remind buyers of the reports due to be submitted to
         EXIM in advance of the deadlines in the credit agreements. If a dual-use report becomes
         overdue, then the engineer is to notify the buyers and alert EXIM’s Office of General
         Counsel within 30 days of the date when the report or related information was due.
    •    Document monitoring activities. The engineer is to keep a record of his or her activities
         in an electronic folder, which is to contain a number of documents, including any reports
         that the bank requires from the buyer. The required documents vary by loan agreement
         and may include progress reports on construction, testing, and delivery of financed
         exports; technical operating reports once the item is in use; and annual end-use
         certifications or reports. The annual end-use certification describes the civilian and
         military uses of the exported item and includes certification by the buyer that the item is
         being used primarily for civilian purposes.
    •    Determine dual-use compliance. The engineer is to make an annual determination within
         120 calendar days of the beginning of each year—that is, by April 30—as to whether
         information received during the previous year was adequate to demonstrate that the
         transaction complied or failed to comply with the requirements of EXIM’s dual-use policy
         in the previous year, as set forth in the financing agreement and EXIM’s charter. If the
         engineer determines that the buyer is, or may be, out of compliance with the credit
         agreement’s dual-use requirements, the engineer must retain files documenting the
         engineer’s referral of this determination to senior management and the Office of General
         Counsel. The engineer must also retain files documenting any follow-up correspondence
         with the buyer to confirm the actual end use of the exports.




4
 GAO, Export-Import Bank: Monitoring of Dual-Use Exports Should Be Improved, GAO-14-719 (Washington, D.C.:
Aug. 28, 2014). In June 2015, we reported that EXIM had revised its guidance and implemented the revised
guidance. See GAO, Export-Import Bank: Dual-Use Monitoring Guidance Revised and Implemented, GAO-15-611
(Washington, D.C.: June 25, 2015). In August 2017, we reported that EXIM made annual dual-use compliance
determinations for 2015 and 2016 but sometimes did so before receiving end-use documents or after internal
deadlines. See GAO, Export-Import Bank: Status of End-Use Monitoring of Dual-Use Exports as of August 2017,
GAO-17-730R (Washington, D.C.: Aug. 29, 2017).



Page 2                                                         GAO-19-656R EXIM Bank Dual-Use Exports
EXIM Continued to Monitor Its Dual-Use Export Transactions

As of August 2019, EXIM monitored the end use of its dual-use export transactions that it
continued to finance in fiscal year 2017. We reported on three transactions last year, which are
summarized below. 5 Of those, only the government of Mexico satellite transaction required
documentation in 2019. All certifications for that transaction were completed on time.

    •    Two satellites for the government of Mexico. A fixed service satellite was launched in
         December 2012 and became operational in February 2013, and a mobile service
         satellite was launched in October 2015 and became operational in December 2015. For
         2019, EXIM received all documents from the government of Mexico on time and
         subsequently determined that Mexico was in compliance with the bank’s dual-use policy,
         as outlined in table 1.

    •    Construction equipment for the government of Cameroon. The government of Cameroon
         made its final payment under the credit agreement on July 28, 2018, ending the bank’s
         end-use monitoring responsibilities for this transaction, according to EXIM. 6 An EXIM
         official confirmed that no additional reports or certifications were required in 2019.

    •    Satellite for French company Eutelsat. Eutelsat made its final payment on June 29,
         2017, ending the bank’s end-use monitoring responsibilities for this transaction.




5
 GAO, Export-Import Bank: Status of End-Use Monitoring of Dual-Use Exports as of August 2018, GAO-18-683R
(Washington D.C.: August 30, 2018).
6
  EXIM’s revised guidance states that Pub. L. No. 103-428 requires that the bank monitor usage of the items
supported under the bank’s dual-use authority. EXIM officials noted that once the credit agreement is paid in full, the
bank is no longer supporting the transaction and therefore no longer has legal standing to monitor the usage of the
items.



Page 3                                                               GAO-19-656R EXIM Bank Dual-Use Exports
Table 1: Status of Export-Import Bank (EXIM) End-Use Monitoring of Its Dual-Use Transaction, as of August
2019

                                   Government of Mexico: mobile           Government of Mexico: fixed service
                                   service satellite                      satellite (Mexsat 3/ Bicentenario)
                                   (Mexsat 2/Morelos 3)

    Maturity Date/final            Jan. 2025: repayment term 10           Dec. 2022: repayment term 10 years, with
                 a                 years, with 20 semi-annual             20 semi-annual payments beginning June
    payment due
                                   payments beginning July 25, 2015.      25, 2013.

    Technical operating            ✔                                      ✔
    reports
                                   Due from buyer (government of          Due from buyer (government of Mexico)
                                   Mexico) Feb. 4, 2019; the              Apr. 15, 2019; the government of Mexico
                                   government of Mexico submitted in      submitted in English a joint technical
                                   English a joint technical operating    operating report covering both satellites on
                                   report covering both satellites on     time, on Jan. 24, 2019.c
                                   time, on Jan. 24, 2019.b

    Annual end-use                 ✔
    certification
                                   Due from buyer Mar. 31, 2019; submitted in English on time, on Mar. 26, 2019.

    Annual determination           ✔
    of dual-use
    compliance                     Due from EXIM Apr. 30, 2019; Exim engineer communicated on Mar. 29, 2019
                                   that certification and supporting data demonstrated Mexican government’s
                                   compliance with EXIM’s dual-use policy.
Legend: ✔ = submitted on time.
Source: GAO analysis of EXIM documents. | GAO-19-656R


a
 Citing EXIM’s revised guidance, bank officials stated that payment in full ends the buyer’s dual-use reporting obligations to the bank
and effectively ends the bank’s end-use monitoring responsibilities for the transaction.
b
 According to the credit agreement with the government of Mexico, the technical operating report for this satellite is due annually, on
the date that is 60 days after the satellite’s in-orbit acceptance date of December 6, 2015.
c
 According to the credit agreement with the government of Mexico, the technical operating report for this satellite is due annually, on
the date that is 60 days after the satellite’s in-orbit acceptance date of February 14, 2013. The government of Mexico, with EXIM’s
approval, combines into one document progress reports for both satellites.




Page 4                                                                        GAO-19-656R EXIM Bank Dual-Use Exports
EXIM Did Not Finance Any New Dual-Use Exports in Fiscal Year 2018


EXIM did not finance any new exports under its dual-use authority in fiscal year 2018, according
to EXIM authorizations data and EXIM officials. According to EXIM officials, dual-use
transactions require a quorum of board members for approval, and EXIM’s board did not have a
quorum from late 2015 to May 2019, precluding the bank from financing such projects during
that period.

Recommendations


We are not making any recommendations in this report.


Agency Comments and Our Evaluation


We provided a draft of this report to EXIM for comment. EXIM’s letter is reproduced in the
enclosure. We are sending copies of this report to the appropriate congressional committees
and the Chairman and President of the Export-Import Bank. In addition, the report will be
available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-8612 or
gianopoulosk@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 include Christina Werth (Assistant Director), Marc Castellano (Analyst-in-Charge),
Martin de Alteriis, Aldo Salerno, and Alexander Welsh.




Kimberly Gianopoulos
Director, International Affairs and Trade

Enclosure




Page 5                                                  GAO-19-656R EXIM Bank Dual-Use Exports
List of Committees

The Honorable Michael Crapo
Chairman
The Honorable Sherrod Brown
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Lindsey Graham
Chairman
The Honorable Patrick Leahy
Ranking Member
Subcommittee on State, Foreign Operations, and Related Programs
Committee on Appropriations
United States Senate

The Honorable Maxine Waters
Chairman
The Honorable Patrick McHenry
Ranking Member
Committee on Financial Services
House of Representatives

The Honorable Nita Lowey
Chairman
The Honorable Hal Rogers
Ranking Member
Subcommittee on State, Foreign Operations, and Related Programs
Committee on Appropriations
House of Representatives




Page 6                                             GAO-19-656R EXIM Bank Dual-Use Exports
Enclosure: Comments from the Export-Import Bank of the United States




Page 7                                          GAO-19-656R EXIM Bank Dual-Use Exports
Related GAO Products

Export-Import Bank: Status of End-Use Monitoring of Dual-Use Exports as of August
2018. GAO-18-683R. Washington, D.C.: Aug. 30, 2018.

Export-Import Bank: Status of End-Use Monitoring of Dual-Use Exports as of August 2017.
GAO-17-730R. Washington, D.C.: Aug. 29, 2017.

Export-Import Bank: Status of Dual-Use Exports as of August 2016. GAO-16-844R.
Washington, D.C.: Aug. 31, 2016.

Export-Import Bank: Dual-Use Monitoring Guidance Revised and Implemented. GAO-15-611.
Washington, D.C.: June 25, 2015.

Export-Import Bank: Status of Actions to Address GAO Recommendations since the Bank’s
2012 Reauthorization. GAO-15-557T. Washington, D.C.: Apr. 15, 2015.

Export-Import Bank: Monitoring of Dual-Use Exports Should Be Improved. GAO-14-719.
Washington, D.C.: Aug. 28, 2014.

Export-Import Bank: Financing of Dual-Use Exports. GAO-13-628R. Washington, D.C.: May 29,
2013.

Export Promotion: The Export-Import Bank’s Financing of Dual-Use Exports. GAO-12-628R.
Washington, D.C.: Apr. 12, 2012.

Export Promotion: The Export-Import Bank’s Financing of Dual-Use Exports. GAO-10-1052R.
Washington, D.C.: Sept. 15, 2010.

Export Promotion: The Export-Import Bank’s Financing of Dual-Use Exports. GAO-08-1182R.
Washington, D.C.: Sept. 30, 2008.

EXIM Bank: The U.S. Export-Import Bank’s Financing of Dual-Use Exports. GAO-07-1234R.
Washington, D.C.: Sept. 27, 2007.

Export-Import Bank: The U.S. Export-Import Bank’s Financing of Dual-Use Exports. GAO-01-
1110R. Washington, D.C.: Aug. 31, 2001.

Export-Import Bank: The U.S. Export-Import Bank’s Financing of Dual-Use Exports. NSIAD-00-
231R. Washington, D.C.: Sept. 1, 2000.

International Affairs: U.S. Export-Import Bank’s Financing of Dual-Use Exports. NSIAD-99-
241R. Washington, D.C.: Sept. 1, 1999.

International Affairs: U.S. Export-Import Bank’s Financing of Dual-Use Exports. NSIAD-98-
244R. Washington, D.C.: Sept. 1, 1998.

U.S. Export-Import Bank: Process in Place to Ensure Compliance With Dual-Use Export
Requirements. NSIAD-97-211. Washington, D.C.: July 17, 1997.


(103553)




Page 8                                                GAO-19-656R EXIM Bank Dual-Use Exports
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