oversight

Export Controls: 1998 Legislative Mandate for High Performance Computers

Published by the Government Accountability Office on 1999-09-24.

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

                   United States General Accounting Office

GAO                Report to the Chairman and Ranking
                   Minority Member, Committee on Armed
                   Services, House of Representatives


September 1999
                   EXPORT CONTROLS

                   1998 Legislative
                   Mandate for High
                   Performance
                   Computers




GAO/NSIAD-99-208
Contents



Letter                                                                               2


Appendixes   Appendix I NDAA Notifications and License Actions,
               February 3, 1998 - March 19, 1999                                    16
             Appendix II Decisions for HPC License Applications Submitted
               Directly to the Commerce Department, January 1, 1998 -
               March 19, 1999                                                       18
             Appendix III Reasons Why NDAA Post-Shipment Verifications
               Were Not Completed                                                   19
             Appendix IV Comments From the Department of Commerce                   20
             Appendix V   Comments From the Department of Defense                   23


Tables       Table 1: NDAA Post-Shipment Verifications on High Performance
               Computer Exports to Tier 3 Countries, November 18, 1997 -
               November 17, 1998                                                    11




             Abbreviations

             ACDA      Arms Control and Disarmament Agency
             HPC       high performance computer
             MOFTEC    Ministry of Foreign Trade and Economic Cooperation
             MTOPS     millions of theoretical operations per second
             NDAA      National Defense Authorization Act
             PSV       post-shipment verification




             Page 1                                    GAO/NSIAD-99-208 Export Controls
United States General Accounting Office                                                          National Security and
Washington, D.C. 20548                                                                    International Affairs Division



                                    B-283584                                                                                 Leter




                                    September 24, 1999

                                    The Honorable Floyd D. Spence
                                    Chairman
                                    The Honorable Ike Skelton
                                    Ranking Minority Member
                                    Committee on Armed Services
                                    House of Representatives

                                    In 1996, the executive branch streamlined its export controls for high
                                    performance computers by removing licensing requirements for most
                                    exports to civilian end-users while focusing control on military and
                                    proliferation-related end-users. This streamlined process made exporters
                                    responsible for determining if they needed to apply for an export license
                                    because they were selling a computer to a military or proliferation-related
                                    end-user. In 1997, however, several high performance computers were
                                    exported to Russian nuclear weapons laboratories and to a military
                                    end-user in China without a license. Concerned that exporters may not be
                                    aware of the activities of the end-users they sell to, Congress included a
                                    provision in the fiscal year 1998 National Defense Authorization Act
                                    (P.L. 105-85) to require exporters to notify the Commerce Department of
                                    any proposed high performance exports to countries that pose a concern
                                    for military or proliferation reasons1 to determine if these exports need a
                                    license. The act also requires Commerce to verify that high performance
                                    computers exported to countries of concern are being used by the
                                    appropriate end-user for the intended purpose.

                                    In response to your request, we determined (1) whether exporter
                                    notification to Commerce of proposed sales of high performance
                                    computers to countries of concern has resulted in license applications and
                                    what final action was taken on these licenses and (2) how Commerce is
                                    conducting post-shipment verifications of the use of high performance
                                    computers after their export to these countries.




                                    1
                                    Countries that pose such a concern include China, Russia, India, Pakistan, Israel, and
                                    Egypt.




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Results in Brief   Under the review process required by the National Defense Authorization
                   Act, most of the 938 proposed exports of high performance computers to
                   what were believed to be civilian end-users in countries of concern have
                   generally been allowed to continue without export licenses. Specifically,
                   from February 3, 1998, when procedures implementing the new National
                   Defense Authorization Act became effective, to March 19, 1999, reviewing
                   agencies2 allowed 828 proposed high performance computer exports to
                   continue without a license, but they required license applications for
                   101 proposed exports because of military, proliferation, or foreign policy
                   reasons such as human rights violations.3 The majority of the objections
                   made by reviewing agencies to the 101 proposed exports were based on
                   concerns that the proposed end-users of the high performance computers
                   might have been involved in military or proliferation-related activity.
                   Subsequently, of the 101 license applications required by the National
                   Defense Authorization Act review, 16 were approved and 6 were denied.
                   The remaining 79 were returned to the exporter without action.4 Licenses
                   that were approved had additional conditions placed on the reexport or
                   end-use of the high performance computers. The majority of these
                   applications involved China, India, and Israel. After the National Defense
                   Authorization Act procedures were implemented, licenses were required
                   for nine exports of high performance computers to end-users of concern
                   who had previously received high performance computer exports without a
                   license.

                   Post-shipment verifications confirm the physical location of the high
                   performance computers and, to the extent practical, verify if they are being
                   used as intended. However, there are limitations to determining end-use.
                   While the National Defense Authorization Act contains no time limit for
                   completing post-shipment verifications, Commerce has completed
                   verifications on 104 high performance computer exports, or about


                   2
                    The reviewing agencies include the Departments of Commerce, Defense, Energy, and State.
                   The Arms Control and Disarmament Agency also reviewed cases until March 31, 1999, when
                   the Agency was merged with the State Department.
                   3
                    Nine additional proposed exports were classified as “incomplete” and returned to the
                   exporter without action.
                   4
                    Commerce will return license applications “without action” to exporters at their request or
                   because the required documentation has not been submitted to proceed with the
                   application. Because reviewing agencies have determined that a license is needed to export,
                   returning license applications without action in effect blocks the export.




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27 percent of those verifications required on the 390 high performance
computers exported during fiscal year 1998. In a report to Congress,
Commerce stated that all 104 post-shipment verifications were favorable,
meaning that the computer had been seen during an on-site visit and that
nothing was inconsistent with the license or the license exception.
However, verification conducted by Commerce but not yet completed
detected the possible diversion of two computers to a military end-user, in
apparent violation of U.S. export control regulations. The Commerce
Department has opened an investigation of these diversions. Of the 286
high performance computer exports that have not yet been verified, almost
two-thirds (187) involve exports to China. According to Commerce, the
main reasons why these post-shipment verifications were not conducted
were that (1) Chinese policy prior to June 1998 did not permit
post-shipment verifications to be made or (2) the exports did not meet the
requirements agreed upon in a June 1998 memorandum of understanding
between the Department of Commerce and China’s Ministry of Foreign
Trade and Economic Cooperation. Although the National Defense
Authorization Act requires post-shipment verifications on all high
performance computers exported since November 18, 1997, whether
licensed or not, Commerce believes that it is futile to seek to visit high
performance computers exported to China before the end-use visit
arrangement or without end-user certificates. In addition, they believe it
would not be the most effective use of Commerce’s limited resources.




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Background   In 1996, the executive branch revised export controls and licensing
             conditions for high performance computers (HPC) based on the risks
             specific countries and end-users posed to U.S. national security. The
             executive branch organized countries into four tiers, with each tier after
             tier 1 representing a successively higher level of concern to U.S. security
             interests. Tier 3 contains 50 countries of concern for military or
             proliferation reasons. The executive branch also established separate
             control levels for different types of end-users in tier 3. For end-users of
             military or proliferation concern, the controls require a license to export
             HPCs performing over 2,000 millions of theoretical operations per second
             (MTOPS). For civilian end-users in tier 3, the controls require a license to
             export HPCs that perform over 7,000 MTOPS. For exports of HPCs
             performing between 2,000 and 7,000 MTOPS, an exporter could ship the
             computers without a license,5 provided the exporter determined that the
             end-user was involved only in civilian activities.6 The revision did not affect
             export licensing requirements to the seven countries in tier 4 countries, for
             which the United States has a virtual embargo on all computer exports.7
             The fiscal year 1998 National Defense Authorization Act requires an
             exporter to notify Commerce in advance that it proposes to export or
             reexport HPCs that perform between 2,000 and 7,000 MTOPS to civilian
             users in tier 3 countries. During a 10-day period, Commerce circulates the
             notifications to the Departments of Defense, State and Energy, and the
             Arms Control and Disarmament Agency (ACDA)8 for review. The NDAA
             requires a license to export if any of these agencies raises a written
             objection to the export without a license. According to National Security
             Council guidance, agency objections shall state whether the proposed

             5
             Under 15 C.F.R. Part 740 of the Export Administration regulations.
             6
              On July 1, 1999, the executive branch further revised licensing levels for tier 3 countries.
             The levels for civilian end-users were raised from 7,000 MTOPS to 12,300 MTOPS effective
             immediately, and for military end-users from 2,000 MTOPS to 6,500 MTOPS effective in
             6 months. The executive branch also raised the National Defense Authorization Act (NDAA)
             notification levels from 2,000 MTOPS to 6,500 MTOPS. By law, this change will take effect
             6 months after the executive branch reports the changes to Congress. The revision does not
             affect the NDAA requirement to conduct post-shipment verifications on all exported
             computers over 2,000 MTOPS to tier 3 countries.
             7
             The seven countries are Iraq, Iran, Libya, North Korea, Cuba, Syria, and Sudan.
             8
              On March 31, 1999, ACDA was terminated as an independent entity, and its arms control
             and nonproliferation functions were merged with those of the State Department. ACDA
             therefore did not have a role in the NDAA process as a reviewing agency after March 31,
             1999.




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                             export represents a risk of diversion to a military or proliferation end-use
                             or end-user of concern. If no objection is raised during the 10-day period,
                             the exporter may ship the HPCs without a license. Exporters that want to
                             ship HPCs to known military end-users or end-users of proliferation
                             concern must directly apply to Commerce for a license; they do not go
                             through the notification process. In addition, the NDAA requires
                             Commerce to conduct post-shipment verifications on all licensed and
                             unlicensed HPCs above 2,000 MTOPS exported to tier 3 countries. This
                             requirement applies to all HPCs exported from the United States on or after
                             November 18, 1997, the date of enactment of the NDAA.



NDAA’s Effect on HPC         Of 938 HPC export notifications to tier 3 countries that were reviewed by
                             Commerce between February 3, 1998, and March 19, 1999, the executive
Exports                      branch agencies objected to 101 notifications and, as a result, these
                             notifications were converted to license applications. (App. I contains a
                             detailed breakdown of NDAA notifications, licenses, and license actions.)
                             During this same time period, HPC manufacturers submitted 146 license
                             applications directly to the Department of Commerce. (App. II contains a
                             country breakout of license applications submitted directly to Commerce.)
                             The Arms Control and Disarmament Agency and the Department of
                             Defense raised most of the NDAA objections. Most of the license
                             applications for which objections were raised were returned to the
                             exporter without action, either at the exporter’s request or because
                             Commerce had not received additional documentation to act on the
                             application.


Executive Branch Agencies’   Of the 101 objections raised regarding the proposed HPC exports, ACDA
Objections to Exports        and the Department of Defense submitted 59 and 55, respectively; the State
                             Department submitted 14; and Commerce submitted 3. The Department of
                             Energy raised no objections. According to Commerce, an agency will often
                             not object if an objection has already been raised by another agency.

                             The majority of the objections were based on concerns that the proposed
                             end-users of the HPCs might have been involved in some military or
                             proliferation-related activity. This was particularly evident in ACDA’s
                             objections to telecommunications end-users in China. Of ACDA’s 59
                             objections, 39 were for exports to China and 29 of those involved
                             telecommunications end-users, which, according to ACDA officials, have
                             close ties with China’s military. The HPCs could therefore contribute to the
                             military’s command and control capability. The Defense Department had


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similar concerns with several other civil entities in China about the risk of
diversion of HPCs to military end-users/uses.

State, ACDA, and Defense also raised objections based on proliferation
concerns: they raised 21 objections over HPC exports to India, primarily
because of sanctions imposed on India and Pakistan for the nuclear testing
both countries had conducted in May 1998.9 Before the sanctions took
place, objections had been made on proposed HPC exports to research
institutes and government entities in India because of the risk of diversion
to proliferation end-users/uses, such as missiles or nuclear weapons.

State objected to two HPC exports to Chinese public security entities and
one HPC export involving an intermediate consignee in Serbia based on
foreign policy and human rights concerns. According to State Department
officials, although National Security Council guidance requires that
objections state whether proposed HPC exports represent a risk of
diversion to military or proliferation end-users or end-uses, it does not rule
out the use of foreign policy reasons other than proliferation as grounds for
objections. However, Commerce disagrees with State on this matter.

We found that from the NDAA review process, objections were made to
nine proposed HPC exports to end-users that had previously received HPCs
without a license.10 Of the nine proposed exports, four were for end-users
in China, four were for India, and one was for Israel. The agencies raised
objections on the four proposed HPC exports to China based on their
potential diversion from telecommunication and university end-users to
military and proliferation-related activities. Objections to the four
proposed HPC exports to India were based on the sanctions imposed due
to proliferation concerns. One objection to a proposed HPC export to Israel
involved an Israeli university that might have had connections to
proliferation-related activities. Commerce approved a license for one
export and returned the remaining eight applications to the exporters
without action.




9
The President imposed sanctions on June 18, 1998, under the authority of the Arms Export
Control Act (22 U.S.C. section 2799aa-1).
10
 These HPC exports, completed prior to NDAA review procedures, did not require a license
under the regulations at that time, if the HPC was between 2,000 and 7,000 MTOPS and if the
exporter believed the HPC was going to a civilian end-user.




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Outcome of NDAA              Of the 101 license applications required by the NDAA review, 16 were
Notifications Converted to   approved and 6 were denied. The remaining 79 were returned to the
                             exporter without action. The 16 applications for licenses that were
License Applications for
                             approved included additional licensing conditions. The conditions, which
Tier 3 Countries             were the same for all 16 licenses, were that (1) no reexport or retransfer of
                             the HPCs could be made without prior Commerce Department approval,
                             (2) the end-user must comply with Security Safeguard Plans,11 and (3) the
                             exporter must verify delivery and installation of the HPCs.

                             Six licenses were denied for foreign policy, military, and proliferation
                             reasons. For example, license denials of HPC exports destined for China
                             involved research institutes that were reportedly engaged in military or
                             proliferation activities, and license denials of HPC exports to India
                             involved end-users that were engaged in missile proliferation activities.

                             As previously mentioned, the majority of license applications required due
                             to NDAA objections (79 of the 101) were returned without action. One
                             reason that applications were returned without action was that the time
                             period for exporters to submit additional information to process the
                             applications (30 days) had expired. Typically, additional information is
                             needed on end-users, remote access end-users, or the entity that will install
                             and/or service the HPCs. The exporter must resubmit a regular export
                             license application if it obtains the required information after the first
                             application has been returned. Applications were also returned at the
                             exporters’ requests for various other reasons: the end-user sometimes
                             canceled the order, changed the HPC’s MTOPS level to a higher or lower
                             capability, or changed the proposed end-use. For example, in some cases,
                             the exporter canceled the license application and substituted exports of
                             HPCs that performed below 2,000 MTOPS and therefore did not require a
                             license.

                             Commerce has no system for tracking resubmissions of license
                             applications that were returned without action. The Department instead
                             depends on the memory of its licensing officers or on exporters to inform
                             the Department that they are resubmitting an application. According to a
                             Commerce licensing officer, the Department received very few


                             11
                              Commerce may require that the exporter submit a Security Safeguard Plan signed by the
                             end-user and, sometimes, also certified by the export control authorities of the importing
                             country. The plan identifies a range of safeguards required by Commerce, which the
                             end-user agrees to implement as a condition for receiving a license.




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                         resubmissions of applications returned without action that were originally
                         converted to a license application.



Implementation of        Section 1213 of the NDAA requires the Secretary of Commerce to conduct
                         post-shipment verifications (PSV) on each HPC exported over 2,000
Post-Shipment            MTOPS from the United States to a tier 3 country, whether licensed or
Verifications Is         unlicensed, on or after the date of the statute’s enactment, which was
                         November 18, 1997.12 Commerce uses either export enforcement officers
Incomplete and Has       sent from the United States or Foreign Commercial Service officers from
Several Limitations      U.S. embassies or consulates to perform the PSVs. The PSVs confirm the
                         physical location of the HPC and, to the extent practical, verify if it is being
                         used as intended. However, there are limitations to determining end-use.
                         While the NDAA contains no time limit for completing PSVs, Commerce
                         has completed PSVs on 104 HPC exports, or about 27 percent of those
                         verifications required for the HPCs exported during fiscal year 1998.
                         Commerce reported that all 104 PSVs were favorable. However, a PSV
                         conducted by Commerce that has yet to be completed detected the
                         possible diversion of two computers to a military end-user, in apparent
                         violation of U.S. export control regulations. The Commerce Department
                         has opened an investigation.


How Commerce Conducts    The Commerce Department uses U.S. personnel from its Bureau of Export
NDAA-Mandated Post-      Administration or its U.S. and Foreign Commercial Service officers located
                         at U.S. embassies and consulates to conduct NDAA-mandated
Shipment Verifications
                         post-shipment verifications on the use of HPCs. Export Administration
                         teams, which typically comprise two agents, go to a country or a group of
                         countries for a 2- to 3-week period to conduct PSVs and pre-license checks
                         and to meet with businesses to educate them on U.S. export control
                         regulations. During fiscal year 1998, Export Administration teams took two
                         trips to Russia, one trip each to Israel and Egypt, and one trip to India to
                         conduct PSVs. No trips were made to China. Commerce’s guidelines
                         instruct the PSV officials to determine

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

                         12
                          The July 1, 1999, revision of licensing levels does not affect the NDAA requirement to
                         conduct post-shipment verifications on all exported computers over 2,000 MTOPS to tier 3
                         countries.




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                              • what the location of the HPC is, including a complete address, telephone
                                number, fax number, and the name of a contact person, if the HPC has
                                been resold or retransferred;
                              • whether the HPC is being used in a manner consistent with the stated
                                purpose;
                              • whether anyone has remote access to the computer and, if so, who does
                                and for what purpose;
                              • whether the HPC is located in a secure area and whether the level of
                                security seems consistent with the function performed or seems overly
                                strict for a commercial facility; and
                              • whether any activities seem inconsistent with the stated end-use,
                                including indications of ownership or operations by a military
                                organization or involvement of an organization in the design,
                                manufacture, storage, use, or testing of nuclear, chemical, or biological
                                weapons.

                              When conducting a PSV, officials confirm that the computer has arrived at
                              the intended location and either qualifies for a license exception (if it has
                              been exported without a license) or is being used under the terms of the
                              license. According to an Export Administration official, a favorable PSV
                              means that an HPC has been seen during an on-site visit and that nothing
                              was inconsistent with the license or the license exception. An unfavorable
                              PSV means that an inconsistency was found between the actual end-use
                              and the end-use intended for the export. The Export Administration’s
                              Office of Export Enforcement may investigate the inconsistency,
                              depending on its seriousness. In its report to Congress, Commerce said that
                              two HPCs sent to a distributor had been sold to a military end-user in
                              apparent violation of U.S. export control regulations and the matter is
                              under investigation.


A Significant Number of       During the first year after enactment of the NDAA (Nov. 18, 1997, to
Post-Shipment Verifications   Nov. 17, 1998), 390 HPC exports were reported to Congress. PSVs had been
                              completed on 104 (27 percent) of the total, and 286 (73 percent) had not
Have Not Been Completed
                              been completed (see table 1). Also, appendix III has a country-by-country
                              breakdown of the reasons why PSVs were not conducted.




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Table 1: NDAA Post-Shipment Verifications on High Performance Computer Exports
to Tier 3 Countries, November 18, 1997 − November 17, 1998

                     Number of Number of PSVs Number of PSVs                          Percent not
Country           HPCs exported    completed   not completed                           completed
China                           191                     1                 190                99.5
Israel                           82                   42                    40               48.8
Russia                           33                   21                    12               36.4
India                            29                   20                     9               31.0
UAE                              20                   11                     9                45
Egypt                            11                     2                    9               81.8
Saudi                              8                    2                    6                75
Arabia
Croatia                            3                    2                    1               33.3
Kuwait                             2                    0                    2               100
Ukraine                            2                    0                    2               100
Algeria                            1                    0                    1               100
Angola                             1                    0                    1               100
Bahrain                            1                    0                    1               100
Lebanon                            1                    0                    1               100
Oman                               1                    0                    1               100
Pakistan                           1                    0                    1               100
Azerbaijan                         1                    1                    0                 0
Kazakstan                          1                    1                    0                 0
Serbia                             1                    1                    0                 0
Total                           390                  104                  286                 73


Source: Fiscal year 1998 National Defense Authorization Act section 1213 annual report.


Two-thirds of the HPCs that have not yet been verified involved exports to
China. According to the Commerce Department, the main reasons why
these PSVs were not conducted were that (1) Chinese policy prior to June
1998 did not permit PSVs or (2) the exports did not conform to the June
1998 memorandum of understanding between Commerce and China’s
Ministry of Foreign Trade and Economic Cooperation (MOFTEC), which is
not legally binding. As shown in appendix III, 105 HPCs were exported to
China after enactment of the NDAA in November 1997, but before June
1998, when the Commerce−MOFTEC arrangement went into effect.
Chinese authorities would not allow PSVs to be conducted on HPCs
shipped before June 1998 because of sovereignty concerns. Under the June



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              1998 arrangement, the Chinese government now allows the United States
              to conduct PSVs on HPC exports under certain conditions. However, PSVs
              could not be conducted on 82 HPCs shipped after the June 1998
              arrangement because the exports did not conform to the arrangement.
              According to the Commerce Department, the 82 HPCs were shipped
              without a license and the exporters were not required to obtain a Chinese
              end-user certificate. An end-user certificate, issued by China, facilitates
              Commerce’s ability to conduct PSVs in China. It was not until January 14,
              1999, that Commerce’s Bureau of Export Administration published
              regulations requiring exporters to obtain a Chinese end-user certificate for
              any computer over 2,000 MTOPS to China, whether under license or a
              license exception, and report the information to the Bureau. This
              requirement, however, became effective only for HPCs shipped after
              February 11, 1999. Although the National Defense Authorization Act
              requires post-shipment verifications on all high performance computers
              exported since November 18, 1997, whether licensed or not, Commerce
              believes that it is futile to seek to visit high performance computers
              exported to China prior to the end-use arrangement or without end-user
              certificates and also that it would not be the most effective use of
              Commerce’s limited resources.

              According to Commerce, 89 PSVs are planned for fiscal year 1999, or
              requests for these visits are pending at embassies or consulates. Many
              Export Administration trips are scheduled for Saudi Arabia, the United
              Arab Emirates, India, Israel, Jordan, Egypt, Russia, Pakistan, and China.
              Seven other PSVs were not done because in two cases the HPC exports
              were canceled, and in five cases the HPCs were exported to countries for
              which the NDAA does not require a PSV.



Scope and     To determine whether exporter notification to Commerce of proposed
              exports of HPCs to countries of concern have resulted in applications for
Methodology   licenses and what final action was taken on these licenses, we obtained
              data on NDAA notifications made by U.S. computer exporters from the
              Commerce Department’s export control database for January 1, 1998, to
              March 19, 1999. From this data, we quantified the number of (1) NDAA
              notifications made since procedures implementing the fiscal year 1998
              NDAA became effective on February 3, 1998, to March 19, 1999;
              (2) objections executive branch agencies raised on these notifications
              during this period; and (3) license applications required from these
              objections and whether these licenses were approved, denied, or returned
              to the exporter without action. We also obtained the basis of agency



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                      objections to NDAA notifications by interviewing agency officials,
                      reviewing their files on the objections, and reviewing the types of end-users
                      and end-uses. Further, using data from the Commerce Department export
                      control database, we determined the reasons why licenses were returned
                      without action and denied. In addition, we determined whether the
                      executive branch is requiring licenses on end-users that previously
                      received HPC exports without a license. We compared data on unlicensed
                      exports to tier 3 countries from January 1, 1996, to September 30, 1997,
                      with NDAA notifications that required a license from February 3, 1998, to
                      March 19, 1999.

                      To assess how the Commerce Department is carrying out the requirement
                      to conduct post-shipment verifications on all HPC exports to tier 3
                      countries, we interviewed Commerce officials to discuss the various
                      methods they use to conduct PSVs and how they assess their results. We
                      also reviewed Commerce guidelines for conducting PSVs on HPCs and
                      reviewed trip reports submitted by Export Enforcement Special Agents
                      conducting PSVs under the Commerce’s safeguards program during 1998.
                      To determine to what extent Commerce had complied with the NDAA
                      requirement that all HPC exports be verified, we (1) reviewed the legal
                      requirements for the PSVs in section 1213 of the fiscal year 1998 National
                      Defense Authorization Act and (2) analyzed data presented in the report
                      mandated by section 1213 of the NDAA, to determine to what extent HPC
                      exports had been verified and the reasons why PSVs had not been
                      performed. In addition, we reviewed the June 1998 memorandum of
                      understanding between Commerce and China’s MOFTEC concerning PSVs
                      conducted in China and discussed its provisions with officials from the
                      General Counsel’s Office of Commerce’s Bureau of Export Administration.

                      We conducted our review between November 1998 and July 1999 in
                      accordance with generally accepted government auditing standards.



Agency Comments and   We provided copies of this report to the Departments of Commerce,
                      Energy, Defense, and State. Energy did not comment on the report. The
Our Evaluation        State Department provided oral technical comments, which we
                      incorporated accordingly. The Defense Department reviewed the report
                      and had no comments. Commerce said that the report did not acknowledge
                      that it had to divert enforcement resources from investigations and other
                      preventive enforcement activities to conduct NDAA-mandated
                      post-shipment verifications and that it will soon be impossible to perform
                      such verifications mandated by the NDAA. Commerce believes it will



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become impossible to perform PSVs in the future because computer power
is increasing and prices are declining. Commerce, however, could not
identify any cases in which PSVs could not be done on non-NDAA cases
because available resources were used on NDAA cases. In addition,
Commerce officials provided no supporting analysis showing at what point
it would be impossible to conduct all mandated verifications. Commerce
also had some technical changes that we incorporated into the report as
appropriate.

Commerce also commented that the licenses required from the NDAA
notification process for HPC exports to nine end-users of concern, who
previously received HPC exports without a license, represented only
2.61 percent of those exports previously made without a license before the
NDAA. We agree that these nine cases represent a small proportion of
those HPCs exported without a license before the NDAA, but they illustrate
that the NDAA notification process is working and has been successful in
identifying suspect end-users.

Commerce stated that most uncompleted PSVs were in China and that
103 of 200 outside of China were completed. Table 1 and supporting
narrative shows that most uncompleted PSVs were in China.

Commerce said that it is futile to seek to visit HPCs exported to China prior
to the end-use visit arrangement or without end-user certificates,
particularly in view of the proposed changes to control levels for exports to
tier 3 military end-users. We agree with Commerce that the proposed
changes to the control levels would remove all future licensing
requirements for many HPCs that have already been exported to China.
Nevertheless, the NDAA currently requires Commerce to conduct PSVs on
all licensed and unlicensed HPCs above 2000 MTOPS exported to tier 3
countries, including China, notwithstanding the control levels established
by the executive branch.

Commerce and Defense Department written comments are reprinted in
appendixes IV and V.


We are sending copies of this report to the Honorable William M. Daley,
Secretary of Commerce; the Honorable Bill Richardson, Secretary of
Energy; the Honorable William S. Cohen, Secretary of Defense; and the
Honorable Madeleine K. Albright, the Secretary of State. We will also make
copies available to other interested parties on request.



Page 14                                        GAO/NSIAD-99-208 Export Controls
B-283584




Please contact me or F. James Shafer on (202) 512-4128 if you or your staff
have any questions concerning this report. Key contributors to this
assignment were Charles T. Bolton and Jason Fong.




Harold J. Johnson, Associate Director
International Relations and Trade Issues




Page 15                                       GAO/NSIAD-99-208 Export Controls
Appendix I

NDAA Notifications and License Actions,                                                                     Appendx
                                                                                                                  ies




February 3, 1998 − March 19, 1999                                                                            Appendx
                                                                                                                   Ii




                  NDAA notifications                                         NDAA licenses
                               License
Countrya       Approved       required      Incompleteb   Total   Approved       Denied      RWA        Total
China               442                59            2     503           9             3       47         59
Russia               91                 3            0      94           0             1         2         3
Israel               82                10            3      95           0             0       10         10
UAE                  29                0             0      29           0             0         0         0
India                18                21            0      39           6             2       13         21
Egypt                17                 1            1      19           0             0         1         1
Saudi Arabia         17                 4            1      22           1             0         3         4
Kuwait               16                 1            0      17           0             0         1         1
Romania              13                0             0      13           0             0         0         0
Norway               11                0             0      11           0             0         0         0
Qatar                10                0             0      10           0             0         0         0
Ukraine               7                0             0       7           0             0         0         0
Kazakhstan            7                0             0       7           0             0         0         0
Croatia               7                0             0       7           0             0         0         0
Lebanon               6                0             0       6           0             0         0         0
Bahrain               5                0             0       5           0             0         0         0
Lithuania             5                0             0       5           0             0         0         0
Estonia               5                0             0       5           0             0         0         0
Jordan                5                0             0       5           0             0         0         0
Serbia                4                0             0       4           0             0         0         0
Latvia                4                0             0       4           0             0         0         0
Oman                  4                0             0       4           0             0         0         0
Australia             3                0             0       3           0             0         0         0
Bulgaria              3                0             0       3           0             0         0         0
Hong Kong             3                 1            0       4           0             0         1         1
Belgium               2                0             0       2           0             0         0         0
Cyprus                2                0             0       2           0             0         0         0
Singapore             0                0             2       2           0             0         0         0
Morocco               2                0             0       2           0             0         0         0
Azerbaijan            2                0             0       2           0             0         0         0
Angola                2                0             0       2           0             0         0         0
Belarus               2                0             0       2           0             0         0         0
Algeria               1                0             0       1           0             0         0         0




                               Page 16                                       GAO/NSIAD-99-208 Export Controls
                           Appendix I
                           NDAA Notifications and License Actions,
                           February 3, 1998 - March 19, 1999




              NDAA notifications                                                           NDAA licenses
                           License
Countrya   Approved       required          Incompleteb         Total        Approved          Denied         RWA          Total
Yemen             1                 0                    0           1                 0              0           0             0
Germany           0                 1                    0           1                 0              0           1             1
Total           828            101                       9        938                16               6          79          101


                           Legend
                           NDAA=National Defense Authorization Act
                           RWA=Returned Without Action
                           UAE=United Arab Emirates
                           a
                            Several NDAA notifications involved tier 1 and 2 countries because the intermediate consignee for the
                           export was located in a tier 3 country or the HPC was to be used on a ship going into the territorial
                           waters of a tier 3 country.
                           b
                            Returned without action to the exporter because incomplete information was submitted or the export
                           required a license.
                           Source: Commerce’s Bureau of Export Administration Export Control Database.




                           Page 17                                                         GAO/NSIAD-99-208 Export Controls
Appendix II

Decisions for HPC License Applications
Submitted Directly to the Commerce
Department, January 1, 1998 − March 19, 1999                                                            Appendx
                                                                                                              iI




Country        Approved                       Denied                        RWA                     Total
China                12                             0                          25                     37
Russia               12                             2                          17                     31
India                11                             5                           8                     24
Saudi Arabia             7                          0                           8                     15
Oman                     2                          0                           2                      4
Romania                  0                          0                           1                      1
Switzerland              0                          0                            1                     1
Poland                   0                          0                           1                      1
UAE                      2                          0                          11                     13
Belarus                  0                          1                           2                      3
Syria                    2                          0                           7                      9
Bahrain                  0                          0                           1                      1
Kazakhstan               2                          0                           0                      2
Australia                2                          0                           0                      2
Bulgaria                 1                          o                           0                      1
Pakistan                 0                          1                           0                      1
Total                53                             9                          84                    146


                Legend
                RWA=Returned Without Action
                UAE=United Arab Emirates
                Source: Commerce’s Bureau of Export Administration Export Control Database




                Page 18                                                  GAO/NSIAD-99-208 Export Controls
Appendix III

Reasons Why NDAA Post-Shipment
Verifications Were Not Completed                                                                                                          Appendx
                                                                                                                                                Ii




                                                              Transaction does not
                              Chinese policy prior to              conform to U.S.
                                        the end-use              arrangement with            Request is          Check is
               Number of PSVs   arrangement did not              China for end-use           pending at       planned for
Country         not completed   permit such checksa                        checksb                post       coming year             Otherc
China                      190                       105                            82                  3                 0              0
Israel                      40                          0                             0                16                20              4
Russia                      12                          0                             0                11                 0              1
India                        9                          0                             0                 0                 9              0
UAE                          9                          0                             0                 0                 7              2
Egypt                        9                          0                             0                 0                 7              2
Saudi Arabia                 6                          0                             0                 0                 6              0
Croatia                      1                          0                             0                 1                 0              0
Kuwait                       2                          0                             0                 0                 2              0
Ukraine                      2                          0                             0                 2                 0              0
Algeria                      1                          0                             0                 0                 1              0
Angola                       1                          0                             0                 0                 1              0
Azerbaijan                   0                          0                             0                 0                 0              0
Bahrain                      1                          0                             0                 0                 1              0
Kazakstan                    0                          0                             0                 0                 0              0
Lebanon                      1                          0                             0                 1                 0              0
Oman                         1                          0                             0                 0                 1              0
Pakistan                     1                          0                             0                 1                 0              0
Serbia                       0                          0                             0                 0                 0              0
Total                      286                       105                            82                 35                55              7


                                     Legend
                                     PSV=Post-shipment Verification
                                     HPC=High performance computer
                                     a
                                      Exports occurred prior to June 1998 arrangement between the United States and China for
                                     post-shipment checks.
                                     b
                                      Exports shipped without a Chinese end-users certificate, which is required for post-shipment
                                     verifications.
                                     c
                                      Includes two HPCs located on ships controlled by companies in countries that do not require a PSV
                                     under the NDAA, three HPCs reexported to countries not requiring a PSV under the NDAA, two HPC
                                     exports canceled, and a PSV for two HPC exports that has not been completed but is under
                                     investigation.
                                     Source: Fiscal year 1998 NDAA section 1213 annual report.




                                     Page 19                                                      GAO/NSIAD-99-208 Export Controls
Appendix IV

Comments From the Department of
Commerce                                                    Appendx
                                                                  i
                                                                  IV




              Page 20        GAO/NSIAD-99-208 Export Controls
               Appendix IV
               Comments From the Department of
               Commerce




Now on p. 3.




Now on p. 3.




Now on p. 4.




               Page 21                           GAO/NSIAD-99-208 Export Controls
               Appendix IV
               Comments From the Department of
               Commerce




Now on p. 8.




               Page 22                           GAO/NSIAD-99-208 Export Controls
Appendix V

Comments From the Department of Defense                       Appendx
                                                                    i
                                                                    V




(711399)     Leter   Page 23   GAO/NSIAD-99-208 Export Controls
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