[Senate Hearing 106-350]
[From the U.S. Government Publishing Office]
S. Hrg. 106-350
THE INSPECTORS GENERAL REPORT ON THE EXPORT-CONTROL PROCESS FOR DUAL-
USE AND MUNITIONS LIST COMMODITIES
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HEARING
BEFORE THE
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JUNE 23, 1999
__________
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
60-283 cc WASHINGTON : 2000
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For sale by the Superintendent of Documents, Congressional Sales Office
U.S. Government Printing Office, Washington, DC 20402
COMMITTEE ON GOVERNMENTAL AFFAIRS
FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
Hannah S. Sistare, Staff Director and Counsel
Christopher A. Ford, Chief Investigative Counsel
Curtis M. Silvers, Professional Staff Member
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Laurie Rubenstein, Minority Chief Counsel
Darla D. Cassell, Administrative Clerk
C O N T E N T S
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Opening statements:
Page
Senator Thompson............................................. 1
Senator Lieberman............................................ 4
Senator Akaka................................................ 33
Witnesses
Donald Mancuso, Acting Inspector General, Department of Defense.. 6
Johnnie E. Frazier, Acting Inspector General, Department of
Commerce....................................................... 11
John C. Payne, Deputy Inspector General, Department of State..... 13
Gregory H. Friedman, Inspector General, Department of Energy..... 15
Lawrence W. Rogers, Acting Inspector General, Department of
Treasury....................................................... 15
L. Britt Snider, Inspector General, Central Intelligence Agency.. 16
Alphabetical List of Witnesses
Frazier, Johnnie E.:
Testimony.................................................... 11
Prepared statement........................................... 73
Friedman, Gregory H.:
Testimony.................................................... 15
Prepared statement........................................... 104
Mancuso, Donald:
Testimony.................................................... 6
Prepared statement........................................... 50
Payne, John C.:
Testimony.................................................... 13
Prepared statement........................................... 94
Rogers, Lawrence W.:
Testimony.................................................... 15
Prepared statement........................................... 119
Snider, L. Britt:
Testimony.................................................... 16
Prepared statement........................................... 127
Appendix
Chart entitled ``Referrals of Dual-Use Cases''................... 47
.................................................................
Letter from Senator Thompson, dated Aug. 26, 1998, to six
agencies....................................................... 47
Information submitted by Senator Akaka entitled ``Dual-Use
License Process''.............................................. 132
Letter from R. Andrew German, Managing Counsel, Legal Policy
Section, Law Department, U.S. Postal Service, dated June 30,
1993, to William A. Reinsch, Under Secretary for Export
Administration, U.S. Department of Commerce concerning the
letter report of June 15, 1999................................. 137
THE INSPECTORS GENERAL REPORT ON THE EXPORT-CONTROL PROCESS FOR DUAL-
USE AND MUNITIONS LIST COMMODITIES
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WEDNESDAY, JUNE 23, 1999
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10:06 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Fred
Thompson, Chairman of the Committee, presiding.
Present: Senators Thompson, Collins, Specter, Lieberman,
and Akaka.
OPENING STATEMENT OF CHAIRMAN THOMPSON
Chairman Thompson. Good morning. Let us come to order,
please.
During the Cold War, export control rules were a major
plank in our national security strategy. Things have changed a
lot since then. Back in those days, we elevated it to such
importance that we had an international regime called COCOM,
where we got together with other countries to try to make sure
that we all kept the wrong kinds of materials out of the wrong
hands.
Since the Cold War, we have taken a different attitude. We
have relaxed our controls considerably as a matter of national
policy. There are far fewer items that even require a license,
and that is reflected in the numbers, some of which we will see
today.
COCOM is gone now. It has been replaced by other regimes
that are not nearly as stringent and that basically depend upon
the voluntary compliance of the members nation. So that has
been going on for some time now.
Recently, our attention has been grabbed again and we have
been hearing things at an ever-increasing rate that should
cause us all great concern with regard to matters of national
security and whether or not we are losing items, elements,
information, and technology that will turn out to be dangerous
to this country. We certainly are very much aware of the
espionage issues that we have seen.
But while that is a back-door problem, we have also got a
substantial front-door problem, and that has to do with our own
policies and the way that we treat our exports in this country.
While we have been relaxing our standards, we know that we are
targeted in this country. Our technology is targeted. As
Senator Rudman has pointed out, not only do we do the Nation's
best work in these laboratories of ours, but we do world class
work in terms of our technology there. They are certainly
targeted.
The Cox report has pointed out that with regard to
satellite technology, supercomputers, and machine tools, all
these things, we are targeted. People want this stuff, and if
it is proper and legitimate, then we want them to have it. We
are interested in sales. But I think there is a growing
concern, and I think properly so in this country, that we have
tilted the balance too far in favor of sales and away from
national security at a time when we should know better. If we
did not know better even a few months ago, we know better now.
We know that some of this dual-use technology is being
diverted. We put these conditions on these licenses and say you
cannot do this and cannot do that and then people proceed to do
this and do that and we have few ways of checking up on them.
Indeed, the ways that we do have, we do not utilize.
We stumble across things like the McDonnell Douglas machine
tool case a while back, where the Chinese said that they were
buying all these tools for commercial airline purposes. The
only problem was, it was for military purposes, as we only
accidentally found out.
We know, by the same token, that many of these countries
that we are dealing with proliferate weapons as a matter of
policy. The world's greatest proliferators, with whom we are
trading, send weapons of mass destruction, biological and
chemical capabilities, to these rogue nations. Yet we expect
them to honor their word concerning what they are going to do
with the products that we send them. I think we have been very
naive and I think that what has been going on recently surely
will be a wake-up call to us.
In August 1998, I wrote to the Inspectors General at six
Federal agencies, the Departments of Commerce, Defense, State,
Treasury, and Energy, and the Central Intelligence Agency. I
requested that they undertake a review of U.S. export control
policy and report their findings to this Committee. Several of
these IGs had undertaken a review of the export-control
processes in 1993, but in the world of export control rules,
that was a very long time ago. The statute governing export
controls, the Export Administration Act, lapsed in 1994 and has
been continued and amended since then only through Executive
Orders.
I requested that the IGs give us an assessment of how the
post-Cold War export control system works and how it does not.
The interagency report that we have before us today is the
fruit of their labors, and I think it is particularly timely.
It is no less important today than ever before that we strike a
sensible balance between promoting commerce and protecting
national security.
The Senate is presently working on the reauthorization of
the Export Administration Act and it is our hope that this IG
review will help inform and educate members on the complexities
of the major export control system, thus equipping us to meet
the challenges of adapting the Export Administration Act to
today's world of rapidly-changing technologies and new security
threats.
This is the second hearing the Governmental Affairs
Committee has had as a result of the IG's export control
review. We held a hearing on June 10 with the Department of
Energy Inspector General that helped illuminate Energy's role
in the export-control process and highlighted the problem of
uncontrolled ``deemed exports'' which occur when foreign
nationals visiting DOE weapons labs come into contact with
sensitive dual-use and munitions technologies. We will have a
chance to explore that a little bit further today.
I want to thank all of you for your hard work in this area
over a long period of time. I think that we are going to learn
some important things today. Many of us have had a chance to go
through the reports that you have filed, and they speak for
themselves. Hopefully, we can use this forum to highlight and
elucidate the points you make in the reports.
I think that what we are going to see is that these matters
are becoming more and more complex, and licensing officers are
required to do more and more all the time. But we are giving
them less time in which to do it. We are giving them
practically no formal training. We are not making any
assessment of the cumulative effect of this technology that we
are giving to these various nations. We examine this little
hole in the dike and say, that is no big problem, and nobody
has any idea how many holes there are in the dike.
We have got a process where, by law, the Department of
Commerce, primarily concerned with selling things, is given
responsibility in this area. They are supposed to bring in,
when appropriate, these other agencies to take a look. The
President's Executive Order allows any agency now to take a
look at what they feel like they ought to take a look at.
But it does not take a rocket scientist, which is perhaps
an appropriate reference, to come away with the notion that
this process is designed basically for Commerce to get its way,
and that this is a process that is designed to basically
discourage appeal. If you are an agency out there and have a
problem with a proposed export license, you do not have time,
for one thing, to do much with it. We will examine some of
these things today.
CIA is supposed to do end-user checks within 9 days, for
example. That is ridiculous. I do not care what your analysis
is on that. On its face, knowing what we know, with the
problems we have--we are dealing with China and we are dealing
with all these other countries, India, former Soviet Bloc
countries--the CIA is given 9 days to check on the end-user
situation and to what they are supposed to be doing with that.
That is just one example.
We place conditions on these licenses that look real good
on paper. They are all there, right there. They are conditions.
We are not going to let them do this, we are not going to let
them do that. But then we do not follow up to see whether or
not they are doing it anyway. There are time constraints,
pressures to get the stuff out the door and get on to the next
one, and in some cases, just clear violations of the law.
The law requires, for example, that there be training
programs for licensing officers. Statutory law requires that.
The Department of Defense, I know, and I assume these other
agencies, also have regulations requiring that, they set this
up. I am sure that, many times, the representatives of these
departments come up here and say, we have got these programs,
requirements and so forth, but, in fact, there is no formal
training that I can detect.
They say it is on-the-job training, which is basically what
you call it when you do not have a training program. When you
are not doing any training, that is what you call it, which is
fine if you are a plumber's helper, but it is not fine if you
are an airline pilot, and we have got to decide whether or not
we are dealing with stuff here that more likely relates to one
or the other.
The Department of Defense is supposed to assess defense-
related export licenses. The Department of Defense is also
supposed to analyze the cumulative effect of what we are doing
here. You would think somebody might be doing that. The
Department of Defense is supposed to be doing it. They do not
do it. Nobody does it. They just do not do it.
That reminds me of some testimony we heard yesterday from
Senator Rudman when he was talking about the Department of
Energy. He was talking about the culture at the Department of
Energy, the problems that they have--arrogant, dysfunctional,
and not even paying any attention to the President of the
United States. When he puts down an Executive Order, it takes
forever to get it done. You get a few people scurrying around
at the top, but down within the bowels of the organization,
they think, ``we were here when you got here, we are going to
be here when you are gone.'' What makes us think that is just
applicable to the Department of Energy?
So I think your assessment seems to be that the railroad is
running on time, there is no real indication that there is any
breakdown, apparently, it is working, and so on. But we do not
know whether it is working or not. All we know are these things
that pop up every once in a while that show that we have
serious diversion problems, we have got serious end-user
problems, and we have got serious espionage problems. What we
need to concentrate on is not necessarily trying to get to the
bottom line of whether or not you can prove that our lunch has
been stolen in any particular instance, which is almost
impossible to prove anyway. We have got to look at the
procedures that we have got and whether or not they are decent
procedures and whether or not they are being followed and
carried out. I think that is what you have done here.
Thank you for your work and I look forward to getting into
it with you. Senator Lieberman.
OPENING STATEMENT OF SENATOR LIEBERMAN
Senator Lieberman. Thanks, Mr. Chairman. Thanks to the IGs.
As you have indicated, Mr. Chairman, for the second time in
recent weeks, we will be taking up an issue this morning of
vital interest, which is the export-control process. In many
ways, it is the other expression of the concern that has
generated a lot of controversy and attention on the Hill right
now, and that is the extent to which we are maintaining
security at our national laboratories. The export-control
process deals with some of the same questions through a
different window.
I do want to say that I am again very impressed by the
reports put together by the IGs. This critical area of national
concern has been given in these reports the kind of careful
attention that it merits, and I truly thank the IGs for that.
Their work will be particularly helpful in light of the
imminent debate over reenactment of the Export Administration
Act.
An export-control process that works well is critical both
to our national security and to our national economic well-
being. These reports, more than any other material that I have
seen on the subject, offer not only insight into the way the
system works now, but also some very helpful guidance on how to
make the system work better in the future.
I was very heartened to read that, on the whole, the IGs
conclude that the current control process is working pretty
well, and, in fact, has, ``greatly improved'' since the 1993 IG
report. I was specifically reassured to note that the IGs found
no evidence of political pressure on licensing officers to
change recommendations on applications.
Nevertheless, the reports do point out that significant
improvements are still needed. Some of these matters, such as
better training and records management, fall to the individual
agencies to address. Others may require interagency
cooperation. In fact, they do require interagency cooperation.
For example, I was surprised to learn of the absence of an
overall mechanism to address the question of the cumulative
effect of multiple exports to a particular country. Various
licensing officers at different places in our government, each
focusing on the sale of one commodity, if I can call it that,
at a time, might consider each purchase to be benign, but if
all the acquisitions were considered together, they might well
paint a more ominous picture of a country or purchaser seeking
to obtain components necessary to design, for instance, a
weapon of mass destruction.
So drawing the agencies together to consider cross-cutting
issues like this should be one of the most important outcomes
of this effort. We should strongly encourage interagency
cooperation to look at this question of cumulative analysis.
We in Congress also need to take steps to strengthen the
export-control process. All of the IGs have endorsed
legislative action to revive the Export Administration Act,
which, hopefully, will be coming up for consideration this
session, and this, too, is an area where I think we will want
to explore and respond to the problem of cumulative effects.
On the whole, I am encouraged that the relevant agencies
seem to agree with the recommendations put forth by these IG
reports and are apparently working to implement responses.
However, in some cases, progress may be hampered by resource
constraints.
Commerce, for example, is currently using an export control
database that was designed in 1984. The Department is seeking
funding, $2.5 million, which in a budget the size that we have
is really not much at all, to create a state-of-the-art system
that would be compatible with the other agencies and, I think,
would pay for itself, certainly in increased security, many
times over.
Finally, Mr. Chairman, with the agencies generally
expressing support for the IG recommendations, I hope that our
Committee will consider holding a follow-up hearing to take
stock of their progress in implementing these recommendations
several months down the road so that our continued oversight
here will, hopefully, help keep the momentum of improvement and
reform going.
But the bottom line is I thank the IGs. I thank you for
requesting these reports. I thank the IGs for their very
carefully considered and constructive responses and I look
forward to their testimony this morning.
Chairman Thompson. Thank you very much.
I would ask that each of you give a short summary of what
we are dealing with here. We will have ample opportunity for
everyone to express their views. Mr. Mancuso, I think you might
have an overview of the entire situation yourself, so we will
just start with you.
TESTIMONY OF DONALD MANCUSO,\1\ ACTING INSPECTOR GENERAL,
DEPARTMENT OF DEFENSE
Mr. Mancuso. Mr. Chairman and Members of the Committee, I
appreciate the opportunity to discuss the Federal Government's
export licensing process for dual-use commodities and
munitions. In response to the Chairman's letter of August 26,
1998,\2\ Inspector General teams from the Departments of
Commerce, Defense, Energy, State, Treasury, and the CIA
conducted an extensive review. Our efforts were coordinated by
a working group, thus avoiding duplication and enabling us to
track individual export license application cases across agency
lines and to address interagency issues. The results are
contained in an interagency report and six individual agency
reports.
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\1\ The prepared statement of Mr. Mancuso appears in the Appendix
on page 50.
\2\ The letter referred to appears in the Appendix on page 47.
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I have Evelyn Klemstine with me today, who is on my staff
and who acted as the facilitator for the team and who will also
be available to answer any questions.
Inasmuch as my office assembled and published the
interagency report, I will begin my testimony by summarizing
its main points in this joint endeavor.
Dual-use commodities are goods and technologies with both
military and commercial applications. The dual-use export
licensing process is governed by the Export Administration Act
of 1979, as amended. Although the Act expired in 1994, its
provisions are continued by Executive Order 12981, under the
authority of the International Emergency Economics Powers Act.
Munitions exports are controlled under the provisions of the
Arms Export Control Act.
The dual-use export licensing process is managed and
enforced by the Department of Commerce, although the Department
of State manages munitions export licensing. The Departments of
Defense and Energy review the applications and make
recommendations to Commerce and State. The Central Intelligence
Agency and Customs Service provide relevant information to
Commerce and State, while Customs also enforces licensing
agreements for all export shipments except outbound mail, which
is handled by the Postal Service. In 1998, the Department of
Commerce received 10,696 dual-use export license applications,
while State received 44,212 munitions export license
applications.
The overall objective of the interagency review was to
determine whether current practices and procedures are
consistent with established national security and foreign
policy objectives. To accomplish this objective, we reviewed
various random samples of licensing cases to determine if
prescribed processing procedures were followed within each
agency and in multi-agency groups.
To a considerable extent, our June 1999 report is an update
of a similar report that was issued jointly by Commerce,
Defense, Energy, and State IGs in 1993. The previous report
covered the pertinent issues under seven headings, and this
current report is structured along similar lines.
The first area relates to the adequacy of export control
statutes and Executive Orders. We concluded that, in general,
the Arms Export Control Act and the provisions of the Export
Administration Act, as clarified by Executive Order 12981, are
consistent and unambiguous. However, the Commerce and Defense
IG teams stressed that the dual-use licensing process would be
best served if the Export Administration Act were reenacted
rather than continue to operate under a patchwork of laws and
Executive Orders.
Executive Order 12981 is generally consistent with the
Export Administration Act. However, the order requires
modification to reflect the merger of the Arms Control and
Disarmament Agency with the Department of State and to clarify
representation at the Advisory Committee on Export Policy. In
addition, policy and regulations regarding the export licensing
requirements for items and information deemed to be exports
needs clarification and the exporter appeals process should be
formalized.
The second area pertains to procedures used in the export
license review processes. Commerce, Defense, Energy, and State
IG teams concluded that processes for the referral of dual-use
license applications and interagency dispute resolution were
adequate. Officials from those Departments were generally
satisfied with the 30-day limit for agency reviews under the
Executive Order. However, not every agency could meet that
limit. Several defense components and the CIA indicated they
would benefit from additional time to review dual-use license
applications.
Defense and State IG teams were satisfied with the referral
of munitions license cases for review. However, the Commerce IG
believed that the inclusion of the Department of Commerce in
the munitions case referral process should be considered. The
Commerce commodity classification process could also benefit
from additional input on munitions-related items from the
Departments of Defense and State. Also, Energy officials
believe that a more formal review process for munitions was
needed, as the officials there were unclear on their role in
the current process.
The third area pertains to the cumulative effect of
multiple exports to individual foreign countries. The U.S.
Government lacks an overall mechanism of conducting cumulative
effect analysis. However, some of the agencies involved in the
licensing process perform limited cumulative effect analysis,
but to varying degrees. Commerce, Defense, Energy, and State IG
teams concluded that additional effect analysis would benefit
the license application review process.
The fourth area relates to information management.
Commerce, Defense, and State teams questioned the adequacy of
automated information systems their Departments use to support
license applications reviews. Specifically, there were
shortfalls in data quality, systems interface, and
modernization efforts. The audit trails provided by most of the
respective export licensing automated databases was adequate,
but Defense procedures did not ensure that final Defense
positions were accurately recorded. The CIA reported
unsatisfactory documentation of end-user checks on munitions
license applications.
The fifth set of issues concern guidance, training, and
undue pressure on case analysis. A review indicated that
Defense, Energy, and State licensing officials had adequate
guidance to perform their mission. However, the Department of
Commerce licensing officers and CIA licensing analysts could
benefit from additional guidance. On-the-job training was the
primary training available at Commerce, Defense, Energy, and
State for licensing officers. The Commerce, Defense, and State
teams identified a need for standardized training in their
agencies. With very few exceptions, Commerce and Defense
licensing officers reported they were not pressured to change
recommendations on license applications. No Energy or State
licensing officials indicated that they had been pressured.
The sixth area regards monitoring and compliance and end-
use checks. Commerce did not adequate monitor exports from
exporters on shipments made against licenses and the Department
of State's end-use checking program could be improved. Commerce
and State still use foreign nationals to conduct an unknown
number of end-use checks. The Commerce IG team found that most
end-use checks were being conducted by U.S. and foreign
commercial service officers or Commerce enforcement agents. The
State IG team concluded it may be appropriate to use foreign
nationals to do the checks under certain conditions.
The seventh area pertains to export controls enforcement.
The Treasury IG team determined that although Customs Service
export enforcement efforts have produced results, the Customs
Service is hindered by current statutory and regulatory
reporting provisions for exporters and carriers. The Treasury
IG team also identified classified operational weaknesses in
Customs export enforcement efforts. The IG teams made specific
recommendations relevant to their own agencies. Those
recommendations and management comments are included in the
separate reports issued by each office.
Now, I would like to change focus from the interagency
report to the report issued by my office. Again, I emphasize
that our objective was to review the export licensing process
and not to assess the appropriateness of individual license
applications. To summarize the results of the Defense team's
review, I will address each of the 14 issues in the Chairman's
letter, as posed in his 1998 letter. The full text of each
issue in the letter is posted to my right on the board.
Issue 1 asked that we examine relevant legislative
authority. We found that the general nature of the Export
Administration Act and the Arms Export Control Act creates a
broad framework, but we found no inconsistencies or ambiguities
in either law. We concluded that the dual-use licensing process
would be best served through the reenactment of the Export
Administration Act.
Issue 2 requested our review of the Executive Order. We
found that the Executive Order, as implemented, is generally
consistent with the objectives of the Export Administration
Act, but inasmuch as the Executive Order decreased from 40 to
30 days the time that the Department has to review license
applications, this has resulted in a potential inability to
locate information necessary to inject into the review process.
Issue 3 questioned whether Commerce is properly referring
export license applications out for review by other agencies.
Our review indicated that Defense officials expressed general
satisfaction with referrals from Commerce but disagreed with
Commerce's decision not to refer 5 of 60 sampled applications.
They also expressed concern that Commerce referred too few
commodity classification requests for review. As a result, in
some cases, decisions on licensing applications with national
security implications were made without the benefit of Defense
Department input.
Issue 4 concerns the interagency dispute resolution
process. With one exception, we found that the interagency
escalation process provides Defense a meaningful opportunity to
appeal disputed dual-use license applications, although the
outcome of the process often favors the Commerce position.
Defense elected not to escalate some disputed dual-use
applications after weighing such considerations as the
substance of the case, the viewpoints expressed by Department
principals, and the likelihood of prevailing at the Committee
appeal process. Disputes over munitions applications were
resolved successfully between office chiefs of Defense and
State.
Issues 5 and 6, I will address concurrently, since the
conclusions are the same and the issues relate to whether
current licensing processes adequately take into account
cumulative effect. We found that the license process at the
Defense Threat Reduction Agency occasionally takes into account
cumulative effect, but that participants in the licensing
process do not routinely analyze the cumulative effect of
proposed exports or receive assessments to use during license
reviews. In addition, Defense did not conduct required annual
assessments that could provide information on the cumulative
effect of proposed exports.
As of March of this year, the Defense Threat Reduction
Agency had initiated action designed to increase the degree to
which cumulative effect analysis was incorporated into the
licensing process. We recognize that organizing and resourcing
a meaningful cumulative effect analysis process poses a
significant challenge, but this is clearly an area that needs
more emphasis.
Issue 7 questions whether license applications are being
properly referred for comment to the military services, the
intelligence community, and other related groups. We determined
that Defense components, except Defense Intelligence Agency,
received about the same number of case referrals over the past
8 years. However, the Defense Threat Reduction Agency did not
always appropriately refer applications to other Defense
components for review. Of the applications we reviewed, various
components considered that 12 percent of the dual-use and 24
percent of the munitions license applications had not been
properly referred.
Issue 8 questions whether license review officials are
provided sufficient training and guidance. We concluded that
Defense organizations involved in the review process receive
appropriate guidance. Nearly all licensing officials told us
that the guidance was adequate for performing their duties.
Licensing officers also stated that they generally had
sufficient training. However, some officials believe that a
classroom training program and training for personnel reviewing
export licensing applications should be established. We
concluded that putting more emphasis on training would be
prudent.
Issue 9 questions the adequacy of the databases used in the
licensing process, such as Defense Foreign Disclosure and
Technical Information System, FORDTIS. We found that FORDTIS
provides a useful communication and coordination mechanism for
the Department on export control matters, although limitations
exist in the system that reduce support to decision makers. In
addition, inadequacies exist in the use of FORDTIS to provide
an audit trail for export licensing decisions.
Issue 10 notes that a Defense licensing official has
described instances wherein licensing recommendations he
entered into FORDTIS were later changed without his consent or
knowledge. We found that instances have, in fact, occurred in
which recommended positions entered in FORDTIS by a licensing
officer were changed without the consent or knowledge of that
officer, although the number of such occurrences could not be
determined. These changes are, however, permissible under
existing Department policy and appear to have been based on
supervisors' disagreements with licensing officers'
conclusions. We note, however, that the documentation related
to the changes was not always complete.
Issue 11 questioned whether license review officials are
being pressured improperly by their superiors to issue or
change specific recommendations. We interviewed all Defense
Threat Reduction Agency licensing officers, and with one
exception, they indicated that they had not been subjected to
any improper pressure to change specific recommendations on
license applications. However, several staff members stated
that management applied indirect pressure and encouraged
certain viewpoints.
Issue 12 asked whether our government still uses foreign
nationals to conduct pre-license or post-shipment licensing
activities and whether such a practice is advisable. In
general, Commerce and State conduct these activities. Defense
provides limited support to them through our Defense attache
offices, and we also monitor certain foreign space launch
activities under the provisions of munitions licenses. Defense
has not used and does not plan to use foreign nationals to
support these efforts.
Issue 13 questions whether the licensing process leaves a
reliable audit trail for assessing license performance. We
concluded that FORDTIS provides a long-term audit trail but
does not always contain complete and accurate records of
Defense and U.S. Government positions. As a result, the audit
trail cannot be used as a reliable means of assessing the
degree to which Defense positions are in agreement with
positions taken by the U.S. Government.
Finally, issue 14 asks that we examine the procedures used
to ensure compliance with conditions placed on export licenses.
The Defense Threat Reduction Agency has adequate procedures for
monitoring foreign space launch activities. An informal process
for reporting potential violations of license conditions and
technology assessment control plans was also adequate. However,
we found that the expected increases in the number of launch
monitoring missions, coupled with a programmed increase in
staff to support these missions, dictate that the Department
move to a more formal approach for reporting violations.
As a result of our overall review, we made numerous
recommendations to the Department to improve the effectiveness
and efficiency of the export licensing review efforts. In this
regard, we recommended that the Department take measures to
clarify responsibility for cumulative effect analysis and to
improve both FORDTIS and internal procedures so as to ensure
that better data is available for licensing officials.
Additional recommendations involve such things as improved
training and enhanced coordination with State and Commerce.
The Department was generally responsive to our findings and
recommendations. We will be tracking progress on the agreed-
upon actions for our audit follow-up process.
In conclusion, Mr. Chairman, we hope that this extensive
multi-agency review will be useful to both the involved
agencies and the Congress as efforts to update and improve U.S.
export licensing practices continue. That concludes my
statement.
Chairman Thompson. Thank you very much.
Mr. Mancuso covered the waterfront here, so feel perfectly
free to be extremely brief. [Laughter.]
If you feel moved to add or subtract from what Mr. Mancuso
said, feel free to do so, but do not feel that you are going to
be compelled to.
Mr. Frazier.
TESTIMONY OF JOHNNIE E. FRAZIER,\1\ ACTING INSPECTOR GENERAL,
DEPARTMENT OF COMMERCE
Mr. Frazier. Thank you, Mr. Chairman. Mr. Chairman and
Members of the Committee, I, too, am very pleased to appear
before you today to discuss our review of the Department of
Commerce's export licensing process for dual-use commodities.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Frazier appears in the Appendix
on page 73.
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Commerce's Bureau of Export Administration administers the
Nation's dual-use export control licensing and export system
for national security, foreign policy, and nonproliferation
reasons. Based on our review of BXA and as generally supported
by the findings of the other IGs, we determined that the
interagency license review process is working reasonably well
and has improved much since 1993.
The Departments of Defense, Energy, State, Justice, and the
CIA now review many more of the license applications submitted
to Commerce. In fiscal year 1998, BXA referred 85 percent of
license applications. That is up from 53 percent in 1993.
Clearly, this multi-agency review brings divergent policy views
and more information to bear on license decision-making. In
addition, the four-level escalation process for resolving
license disputes among the referral agencies is working
relatively well.
While we found significant areas of improvement since our
1993 review, we also identified a number of issues that warrant
the attention of the Commerce Department, the administration,
and the Congress. First and foremost, it is time to push even
harder for new legislation to replace the expired Export
Administration Act.
There is also a need to clarify the licensing policy and
regulations regarding the release of controlled technology to
foreign nationals working in Federal and private research
facilities, commonly referred to as deemed exports. We found a
general lack of knowledge and understanding on the part of U.S.
industry and the Federal laboratories about deemed export
regulations and when such an export license is required.
A third area where we see the need for change involves the
requirement that post-shipment verifications be conducted for
every high-performance computer, or HPC, greater than 2,000
MTOPS that is shipped to countries of concern. Our review
concluded that this is not an effective use of government
resources. This requirement has enforced BXA to divert some of
its enforcement resources to verify shipments of lower-end HPCs
or on multiple visits to the same end users.
Mr. Chairman, in response to your question about the
adequacy of guidance and training for licensing officers, we
have mixed findings. We initially identified the lack of up-to-
date guidelines as one of BXA's major weaknesses. However, near
the end of our review, BXA officials issued new work guidelines
for licensing officers and are considering further changes. We
have also recommended that BXA establish a formal training
program for all of its licensing officers to supplement the
current on-the-job training.
In response to your question, Mr. Chairman, about the
pressure on licensing officers, most BXA licensing officials
reported that they had not been pressured into changing their
recommendations on specific licenses. Two of the 36 licensing
officers who responded to our survey question did State,
however, that they have received some pressure from management,
but our intensive follow-up on this question did not provide
evidence to support these individuals' statements.
We did, however, have questions about BXA managers'
instructions to the chair of the operating committee on her
decision on a few OC cases. We advised them that if the chair
makes a decision that BXA disagrees with, BXA should escalate
the case to the Advisory Committee for Export Policy in order
to avoid even the appearance that this process is not
transparent.
The Commodity Classification Process, or CCATS, is another
area ripe for improvement. First, BXA needs to improve the
timeliness of its processing of exporter CCATS requests.
Second, we recommend that BXA refer all Defense-related CCATS
requests to both the Defense Department and the State
Department.
As I stated earlier, I believe that the overall process is
generally more effective because of greater interagency
involvement. However, we still found problems. We are
especially concerned about the licensing officers amending some
existing licenses without interagency review, inadequate time
being provided to the CIA's Nonproliferation Center for its
end-use checks, and BXA's approval of licenses based on a
favorable end-use check after the pre-license check was
canceled. BXA management has agreed to correct or address most
of these problems.
In addition, I would like to highlight two other problems
that require interagency action and attention by the Congress.
First, we found that the CIA and its Nonproliferation Center,
at their own request, review only 45 percent of all referred
dual-use export licenses. In addition, they do not always
conduct a comprehensive analysis of the applications they do
receive.
Furthermore, there is no mechanism to track the cumulative
effect of technology transfers. Such cumulative effect, while
admittedly difficult to determine, would be a very useful
addition to the license review process. Another key missing
element is the screening of all license applications against
the Treasury Enforcement Communications System database
maintained by Customs.
We also have recommended a change in the exporter appeals
process. Once an export application has been formally denied,
the exporter has the right to appeal to the Under Secretary of
Commerce. Although BXA confers informally with the referral
agencies before deciding on appeals, we believe that the
interagency process should be formalized.
Regrettably, Mr. Chairman, we found that BXA is still not
adequately monitoring license conditions, as we first reported
in 1993. This means that BXA is less able to determine if
licensed goods have been diverted to unauthorized end users and
exporters may receive new licenses even if they did not comply
with previous licenses. We found recurring problems with
respect to end-use checks conducted by Commerce's U.S. and
Foreign Commercial Service, including untimely end-use checks
and the use of foreign service nationals.
And finally, Mr. Chairman, in response to your question
about BXA's automated export licensing system, called ECASS, we
found that the system's internal controls are generally
accurate. At the same time, it is clear that BXA's automated
information system is inefficient and needs to be replaced.
This concludes my statement and I will be glad to answer
any questions.
Chairman Thompson. Thank you very much. Mr. Payne.
TESTIMONY OF JOHN C. PAYNE,\1\ DEPUTY INSPECTOR GENERAL,
DEPARTMENT OF STATE
Mr. Payne. Thank you, Mr. Chairman, and Members of the
Committee. We appreciate the opportunity to testify today on
this very important issue. I have a very brief statement which
I will attempt, as you suggested, to make even briefer, based
on the discussion earlier.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Payne appears in the Appendix on
page 94.
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The Secretary of State is charged with administering the
Arms Export Control Act for defense articles and services on
the U.S. munitions list. Munitions are generally products that
have been specifically designed for military application. In
fiscal year 1998, State's Office of Defense Trade Controls
processed over 44,000 munitions license applications.
The State Department also reviews, for foreign policy
considerations, dual-use license applications referred by
Commerce. During fiscal year 1998, State reviewed over 8,000
dual-use applications, which represent about 75 percent of all
the applications Commerce had received.
In our 1993 review, we found fragmented licensing
responsibilities within State, confusion at overseas posts
about responsibilities for end-use checks and verifications,
and a lack of program files and documentation. State has made
improvements since the 1993 review, including consolidating the
export license functions and improving documentation of the
referral process.
During our current review, we found that, overall, the
export licensing process is working as intended and the State
Department consistently executed its export licensing
responsibilities in accordance with existing policies. We found
no significant inconsistencies or ambiguities in the
legislative authorities that guide the export licensing
process.
Based on a statistical sample of applications processed, we
found that State referred all appropriate applications to other
agencies for review and fully addressed all concerns that they
raised. We found no evidence that State licensing officials had
ever been improperly pressured by their superiors to approve
applications. Finally, we found that an adequate and reliable
audit trail existed for the processing of both munitions and
dual-use licenses at State.
In addition to these improvements, we identified some areas
which need further attention. State's formal process for
conducting end-use checks, referred to as the Blue Lantern
program, was created to verify the ultimate end use and end
user of U.S. defense exports. Although State continues to
refine its program, we believe that further changes are needed.
First, given the limited number of Blue Lantern checks each
year, 418 checks out of 44,000 licenses in 1998, attention
should be concentrated on the most significant munitions
categories. In addition, State needs to more closely monitor
and follow up on Blue Lantern requests assigned to overseas
posts. We found requests that had not been addressed for almost
a year. Also, the Department needs to assist posts with
appropriate expertise for technical on-site inspections when
they are required.
Licensing officers need additional training. State relies
primarily on the apprenticeship approach, and although this
provides important hands-on training, there is no formal
training for new licensing officers. Training for more
experienced licensing officers is practically nonexistent.
The current munitions licensing process does not fully
measure cumulative effect of technology transfers. State can
improve its assessment of the cumulative effect by expanding
the use of trend analyses and other reporting mechanisms.
Nevertheless, State represents only one piece of a much larger
picture. To fully assess the cumulative effect, information on
technology transfers resulting from munitions and dual-use
exports and foreign military and third-country sales need to be
considered, as well as the internal capabilities of the
specific country. A comprehensive assessment will probably
require a joint effort with resources and coordination from
various Federal departments and agencies involved in the
licensing process. It likely will also require Congressional
direction.
Many of the concerns cited above are symptomatic of a
larger problem at the State Department, insufficient resources
to meet the expanding licensing mandate. State has fewer
employees, heavier workloads, and lower pay grades in licensing
activities than its counterparts at Commerce and Defense. In
fiscal year 1998, 16 State licensing officers processed over
44,000 applications. Processing times have also increased. In
1992, State took an average of 4.5 days to process a non-
referred license application. It now takes an average of 21
days, and State's mandate continues to increase as
responsibility for all commercial satellite cases was
transferred from Commerce in March of this year.
Recognizing the need for additional resources and the
recent statutory change in commercial satellite responsibility,
Congress has recommended that State provide an additional $2
million to hire more senior-level personnel and support staff
to improve the scrutiny of the export license applications,
enhance end-use monitoring, and strengthen compliance
enforcement measures. Earlier this month, State increased the
export licensing budget by $2 million and plans to fund an
additional 23 positions.
That concludes my statement, Mr. Chairman. I would be happy
to try to answer any questions.
Chairman Thompson. Thank you very much. Mr. Friedman.
TESTIMONY OF GREGORY H. FRIEDMAN,\1\ INSPECTOR GENERAL,
DEPARTMENT OF ENERGY
Mr. Friedman. Mr. Chairman, considering the fact that I
testified before you on June 10 on this subject, if it is the
will of the Chair, I would be more than happy to forego an
opening statement.
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\1\ The prepared statement of Mr. Friedman appears in the Appendix
on page 104.
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Chairman Thompson. Thank you very much. Mr. Rogers.
TESTIMONY OF LAWRENCE W. ROGERS,\2\ ACTING INSPECTOR GENERAL,
DEPARTMENT OF TREASURY
Mr. Rogers. Well, that is fast. Thank you, Mr. Chairman. I
appear here today on behalf of the Treasury IG and, basically,
our role in answering your letter from last year has been to
look at the process that goes on in Customs, the last check-
point as materials, goods leave the country.
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\2\ The prepared statement of Mr. Rogers appears in the Appendix on
page 119.
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I would like to be very brief and just say, generally, we
noted that while we were not involved in this earlier report, I
think it is good we are here now. Customs has made the outgoing
check on goods as one of their core groups. We looked at their
process and found several things that we reported as issues,
among them being untimely export reporting data that comes
after departure, which makes it very difficult to target
enforcement effort. We think that there needs to be an
improvement in the internal Customs license enforcement
efforts, better training, staffing at checkpoints, and so
forth.
We also think that there is an issue about slowness in
response to data inquires from Customs to the Department of
Commerce, noted also by the Department of Commerce, I think,
that the applications that are being processed by Commerce and
State are not routinely screened against the Treasury
Enforcement Communications System, but this is one of the
issues that Customs agreed to take on, and, in fact, I would
like to say that in every case, they have agreed with the
recommendations and are undertaking some ameliorative effort to
correct them.
Overall, we hope that the recommendations are helpful to
them and we think they have been. I would say also that some of
our report has been classified for limited official use only
because of our concern and Customs' concern that details about
their operations at the borders might enable people to avoid
Customs controls at exit points.
With that, sir, I will conclude my statement.
Chairman Thompson. Thank you very much. Mr. Snider.
TESTIMONY OF L. BRITT SNIDER,\1\ INSPECTOR GENERAL, CENTRAL
INTELLIGENCE AGENCY
Mr. Snider. Thank you, Mr. Chairman. I will also try to be
brief, in view of your admonition.
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\1\ The prepared statement of Mr. Snider appears in the Appendix on
page 127.
---------------------------------------------------------------------------
The CIA supports the export licensing process at State and
Commerce by providing relevant intelligence information that is
available within the agency on end users and intermediaries
identified in export license applications. The CIA obtains this
information in the normal course of its activities to gather
and analyze information on proliferation activities around the
world and on programs that other governments have for
developing weapons of mass destruction.
The agency also provides additional support to the
licensing process by preparing and providing finished
intelligence reports and briefings on the results of its
activities and through its participation in a number of the
advisory committees that participate in the licensing process.
What we attempted to do in our review was to look at what
the CIA is currently doing to support this process and identify
ways that the Agency can improve its support. We found, first,
that not all of the agency databases that might reasonably be
expected to contain relevant information on end users were
routinely being searched by the analysts doing such searches.
We recommended that this be corrected.
Second, we found that the searches undertaken by CIA
analysts were not being documented in a uniform way, either in
terms of what was being done as part of the search or in
documenting what was being reported to the Commerce and State
Department. We recommended that be corrected.
Third, we believe that the response time of 9 days which
the CIA has to review cases from the Department of Commerce is
unrealistic and cannot be satisfied within the existing staff
resources of the Nonproliferation Center. It is recommended
that the agency work with Commerce to establish a more
realistic response time and then that the agency staff its
analytical capabilities accordingly.
Fourth, we found that Commerce does not fully appreciate
the nature and limitations of the agency's capabilities to
support the licensing process, and in turn, we found that
agency analysts did not always understand or have a clear
perception of the licensing officer's needs. To remedy this, we
recommended a full-time agency liaison officer be assigned to
Commerce to help bridge the gap.
Finally, we saw the need for guidance to the agency
analysts who were providing support to the licensing process to
ensure that they understand what management expects in terms of
type of searches, the degree of searches that they are expected
to do, and also guidance that provides for alternative
reporting channels in those cases where sensitive intelligence
information cannot be routinely included in end-user reports.
We recommended that the Special Assistant to the DCI for
Nonproliferation formulate this guidance.
In sum, while the CIA plays a limited supporting role in
the export licensing process, we believe it can play that role
more effectively and more efficiently. Indeed, I might add, Mr.
Chairman, that the offices involved in the process at CIA have,
in fact, taken steps to improve their performance as a result
of our inquiry, so I think it is already having salutary
effects on the agency's performance. Thank you very much.
Chairman Thompson. Thank you very much.
Senator Collins, do you have any preliminary comments
before we get started here?
Senator Collins. I do not, Mr. Chairman. I just want to
thank you for holding this hearing. This is a very important
issue that the Committee has been involved in for some time and
I salute your leadership.
Chairman Thompson. Thank you very much.
Gentlemen, thank you very much. As I said, your reports are
very comprehensive. You have had quite a long time to work on
this and it shows. I congratulate you for that.
I do not necessarily agree with some of the assessments.
Your factual analysis, I think, is probably unassailable, but
the idea that some of these things are working reasonably well
kind of depends on what you expect and what you call reasonably
well.
I mean, it is true, for example, that more cases are being
referred out to these other agencies and the Executive Order
did that. That is a step in the right direction, but when you
look and see that they have less time to deal with these
complex matters and there are more of them to deal with, and
that they are not getting adequate training, and then you find
that when they object, they are immediately rolled and there is
no appeal taken--you have this nice, beautiful appeal process,
but it is not being used. Nothing has ever gotten to the
President. Nothing has ever even gotten to the second level of
appeal. So, I mean, it depends on what you think is working
reasonably well. The process is there. You talk to most of the
managers and I am sure they will tell you that things are
working just great.
It is your job to be objective and you have been and I
appreciate it, but it is our job to be skeptical, so we are
going to have to go through these things one at a time and
maybe try to get underneath the surface a little bit.
There are so many issues here and so many departments, the
best way to handle it maybe is to go back to the questions that
we originally asked, and that is kind of the way that you have
dealt with it in your report. We will see how far I can get
there. I will not go through all of them, Senator Collins,
before I turn to you, so do not get too concerned.
The first two have to do with the statutory framework, and
the second question also has to do with the Executive Order
pursuant to the statute and how that is working. Basically, you
think the statute is not ambiguous, and that is fine. I believe
you all recommend or think it would be a good idea for the
Export Administration Act to be reauthorized, is that basically
correct?
Mr. Frazier. Yes, sir.
Chairman Thompson. Was it you, Mr. Frazier, who said, for
example, that we need to let the world know we are serious
about this? If nothing else, that would do that. Is that
correct?
Mr. Frazier. That is correct. I think that anything that we
can do to remove the ambiguity, the confusion, to send signals
not only to the rest of the world but to all of the referral
agencies. So I think that is the first step, getting the Act
reauthorized.
Chairman Thompson. The Executive Order, of course, set up
this escalation process, whereby the agencies will get
together. First of all, you have an operating committee that is
chaired by an employee of the Department of Commerce, and we
can talk about that a little bit more in a minute, but the
operating committee considers these licenses. The licenses that
are referred to the operating committee are growing, as I
recall. Every year, there are more and more coming in to that
level. It consists of representatives from all the relevant
departments and agencies, and I believe they are at the
operating committee level. I think we will have a chart here in
a minute that will show that.
Basically, at that level, the chair of the operating
committee can basically do what she wants to do. She is
supposed to listen, but she can make the determination at that
level herself as to whether or not to approve or not approve a
license or approve with conditions, is that basically correct?
Mr. Frazier. That is correct, but what we find in practice
is that she surely works to achieve a consensus. In one
instance, I think, we made reference to the fact that she felt
that she had been pressured in a couple of cases to advance the
BXA position. What we have said in that regard to BXA is that
they should treat her as an independent person. If there is a
problem, they should then have it elevated to the next level.
But she is a Commerce representative.
Chairman Thompson. Right. I was thinking more of the
framework right now, more than actually how it works in
practice. But your points are well taken.
Then if one of the agencies wants to appeal that, it goes
to the Advisory Commission on Export Policy, and that is
comprised of people at the assistant secretary level or some
confirmable position, as I recall it, with the advice and
consent of the Senate.
Mr. Frazier. Correct.
Chairman Thompson. Then, if an agency is dissatisfied
there, they can go to the Export Administration Review Board.
Then the next appeal is to the President. So that is the
process this Executive Order set out, and we can discuss that
in a little bit more detail.
I think one of the things that was pointed out that the
Executive Order did not address, and the law apparently does
not address at all, is what about exporter appeals? You have
got this process where it comes into Commerce, Commerce refers
or chooses not to refer to these other agencies and so forth
and everybody has their input and it is supposed to be
considered. But if an exporter is denied and he appeals that
denial, there is a danger that he can circumvent that whole
process if he gets the initial decision overturned by Commerce
alone. Is there not a danger that he can circumvent that whole
process and wind up with his license without having to go
through the process?
Mr. Frazier. Well, it should not work that way. One of the
things that they do now, and it is through an informal----
Chairman Thompson. You mean it should not work that way?
Mr. Frazier. There is an informal process that exists now.
The final decision is left to the Under Secretary for BXA. He
makes the final decision on the appeals. However, we could not
find an example where he made that decision without going back
to the appropriate referral agencies, and what we are
recommending is that process be formalized. As it is now, it is
an informal process and in practice, he looks for the input.
Chairman Thompson. But I think throughout this, it is
important for us to keep in mind and for you gentlemen as
Inspectors General, what you go in there and they tell you how
it works, that is important. You can listen to them and we will
give them the benefit of the doubt on some of these credibility
issues and so forth, despite the Rudman report.
But the formalized process is what we first of all need to
look at. I am not too interested in the fact that somebody who
is in charge of it says that it is working good and he picks up
the phone and does this, that, and the other. The fact of the
matter is, right now, there is no process--I mean, it can work
exactly as I suggested and what you are suggesting is that be
changed.
Mr. Frazier. Yes. In fact, Mr. Chairman, one of the points
that you mentioned was that you, as the Chairman, are
skeptical. I think, as the IG community, that is exactly the
mantle that we wear very proudly. We think that this process
should be formalized. I think that the point you make is right
on the money.
Chairman Thompson. Thank you. The third question was to
please determine if there is a continued lack of interagency
accord, as stated in your 1993 interagency report regarding
whether the Commerce Department is properly referring export
license applications out for review by other agencies. I am
going to broaden that a little bit. This really has to do with
how the whole process works. I want to go through a few points
here and see if we can discuss them a little more.
This timing situation was very much of a surprise to me,
and Mr. Snider referred to the problem that the CIA has.
Anybody who has ever dealt with the Federal Government has been
exasperated. It takes forever to do anything, and yet it looks
like, in dealing with dual-use export items, it is absolutely
imperative to get everything done in as short a period of time
as possible. We have the CIA being given 9 days to check out
end users. Mr. Snider, what is the problem with that?
Mr. Snider. The problem with that is it is simply not
enough time for the analysts who are overwhelmed with many
cases to do that kind of an analysis.
Chairman Thompson. And the cases are escalating, are they
not, the numbers?
Mr. Snider. The number of cases is escalating, the number
of databases they have to check, people they have to consult
are increasing, so timing is a problem.
Chairman Thompson. For the uninitiated, when I say check
out end users, what are we talking about here? What are they
doing?
Mr. Snider. Well, end-users are people or companies who are
identified in license applications as being the ultimate
recipients or the intermediaries to receive the technology or
equipment in question that is being exported. And what we do is
attempt to see what information the agency may have that might
bear upon a decision to license such an export.
Chairman Thompson. In other words----
Mr. Snider. They may be involved in proliferation
activities that the agency has detected heretofore, this sort
of thing.
Chairman Thompson. In order words, you look and see who the
actual end user is probably going to be, and what their
activities have been, and whether or not they are the kind of
people you want to have this technology.
Mr. Snider. Correct.
Chairman Thompson. Then you also look, do you not, at the
likelihood that this might not really be the end user? This
might wind up in somebody else's hands and somebody else not on
the application is really the end user.
Mr. Snider. That is correct.
Chairman Thompson. So that is not an overnight process, is
it?
Mr. Snider. No, it is not.
Chairman Thompson. I mean, you are dealing with foreign
entities and we are dealing in a world now where you have all
these partnerships. You talk to the Russians, you talk to the
Chinese, and when they get caught red-handed in some of the
proliferation activities, they say, well, that was not us, it
was one of these companies out here and we really do not have
much control over these companies, and they do joint ventures a
lot and various kinds of entities are together and they are the
end user.
Mr. Snider. You are correct.
Chairman Thompson. So you get 9 days in order to check all
that out. The Department of Defense components, and when we say
Department of Defense components, we are talking about, what,
Army, Navy, and all the----
Mr. Mancuso. Right, and the intelligence agencies and any
other Office of the Secretary of Defense components.
Chairman Thompson. When they are brought in, when these
matters are referred to them, I believe they get 10 days to
make their assessment, is that correct?
Mr. Mancuso. That is correct. And, in fact, what we found,
for instance, in the Navy is that the 10-day period has forced
them to adopt a system whereby they no longer refer the matters
for review down to the appropriate commands, but rather, they
rely on whatever front office or headquarters expertise they
have developed to make those decisions, because getting it down
to the people who would best be able to analyze it could not be
handled within the 10-day period.
Chairman Thompson. That speaks for itself.
The Bureau of Export Administration, I believe, only has 9
days from the filing of the appeal within which to make a
decision?
Mr. Frazier. From the filing of an application.
Chairman Thompson. I am sorry, for an application for a
license?
Mr. Frazier. Yes.
Chairman Thompson. They have 9 days, and within that time,
they have to decide what?
Mr. Frazier. They have to make a lot of decisions in that
period. They have to look at the reasonableness of the
application to see if it seems to have merit, to see if it is
logical, what is included in the application, and then they
have to make a decision as to who it is going to be referred
to. You would hope that they would check their database, which
is ECASS, they would go to other sources that are available to
them to decide what should happen during those 9 days. I surely
agree with Britt that the 9 days that the CIA has to look at
these licenses that are referred to is unacceptable. It is not
enough time. I think that is something that definitely needs to
be examined.
Chairman Thompson. Chronologically, is it accurate to say
that the Bureau of Export Administration wants this CIA
assessment before they make their determination?
Mr. Frazier. Well, no, not necessarily. In fact, one of the
things that they will be doing, when an application comes in,
they will be making an assessment as to whether it has to go to
the CIA.
Chairman Thompson. I see.
Mr. Frazier. In fact, we had a chart that had the process.
I do not know if that is available.
Chairman Thompson. So that comes first. I think I
understand what you are talking about.
Again, in terms of the process, I think more than one of
you were concerned that we are not taking advantage of the
technology we have over at Treasury to check these people out,
to check these exporters out, to run them through their
database over there to see what kind of record these exporters
have. Customs, I guess, is where the records lie, and that this
has been a problem.
Mr. Frazier. Yes.
Chairman Thompson. You have pointed these things out before
in prior reports. Why do they not check? The conditions on
these licenses are really only as good as the people carrying
them out, and so who the exporter is is important. So let us
see whether or not they have prior violations, for example. Let
us see what kind of citizens they are.
Apparently, Mr. Rogers, you have that information over
there, but it is not being called upon. Is that a correct
assessment?
Mr. Rogers. The information is available. It is used to
some extent, but time pressures, staffing and other
limitations, from our perspective, it is not regularly used.
Chairman Thompson. Any further comments on that point?
Mr. Frazier. Yes, Mr. Chairman. We think that by automating
that data--we have recommended since 1996 that they run the
licenses against the TECS system and it just has not happened.
We have been told recently that they are going to start working
with Customs, but we will believe that when it happens because
it is something that we have been on record about for at least
3 years, is suggesting that it should happen and it should
happen immediately.
Chairman Thompson. All right.
Mr. Payne. Mr. Chairman, the State Department is one of the
agencies that does not run each of the applications that it
receives for munitions list items against the TECS system, but
it does run the registration information. In order to apply for
a license, you have to be registered, and at the time a company
or an individual registers for a license that information is
run against the TECS system. Now, there would be additional
benefits to run the individual applications, as well, because
they will sometimes have additional information, such as
forwarders or other companies or organizations identified on
the application that would not have been in the registration
information.
This is something that State does not object to, sees a
need to, but has attributed to a resource problem just the
additional time needed to run each of the individual 44,000
applications against the database. So we are hopeful that as
the resource problem is alleviated somewhat, that more of the
application information will be run against the TECS system.
Chairman Thompson. With regard to what you are referring
to, does that have to deal with munitions items alone?
Mr. Payne. Yes.
Chairman Thompson. So you are addressing the munitions side
of things and these other gentlemen basically have been
addressing the dual-use side of things. But it all gets back to
what you are talking about, resources and time constraints.
People are being required to do more with less and in a shorter
period of time. That is what it amounts to, and that gives much
more authority to Commerce, frankly, and the chairman of the
operating committee on the front end. Those are policy things
that we can discuss, but I think that picture is fairly clear.
I have one more question before I turn to Senator
Lieberman, the fourth question that we asked. Please determine
if the interagency dispute resolution or escalation process for
appealing disputed license applications allows officials from
dissenting agencies a meaningful opportunity to seek review of
such applications and assess why this process is so seldom
used.
We talked about that a little bit earlier, about the
escalation process. But again, the time constraints here are
interesting to me. You go to the operating committee. A
decision there is made by the chair, hopefully with
consultation, hopefully with a consensus, but she has total
authority. She has the power, if she chooses to exercise it, to
totally ignore everybody, and in one case, with regard to
encryption, she was told by her superiors at the Department of
Commerce to ignore everybody. Does anybody dispute that?
[No response.]
All right. But however that works, I am sure it works fine
in most cases. You can appeal her decision to the Advisory
Commission on Export Policy, ACEP. You can appeal to ACEP and
you have 5 days to appeal that case and it has to be signed by
an assistant secretary. Now, I do not know how many people have
experience in getting a busy assistant secretary's attention on
anything important, or maybe even not so important. But 5 days
to get someone at that level, to track them down and explain
this case, you have to have burning ambition in order to do
that, and it is reflected in the number of cases in which no
appeal occurs.
So that is 5 days. Then if you are still of a mind, if you
have not gotten the picture by then, you can go to the Export
Administration Review Board, and you have 5 days to do that,
and the secretary himself has got to do that to make that
appeal.
This board has decided two cases since 1992. There have
been two cases appealed to this board since 1992. The numbers
are here on the chart, as you can see. Let us take 1998. The
number of cases referred to the agency is 9,100. Then 766 cases
were referred to the operating committee, and as we can see,
those numbers have shown a general increase. They declined
there for a while, and then after the Executive Order, they
picked back up.\1\
---------------------------------------------------------------------------
\1\ The chart referred to appears in the Appendix on page 47.
---------------------------------------------------------------------------
But past the operating committee, the numbers have
decreased. For the cases referred to and reviewed by ACEP, I
guess 1993 was the highest on this chart, when 142 cases were
appealed to ACEP. Last year, only 34 were.
With regard to the next level of appeal, to the Export
Administration Review Board, in 1998, there were no cases. In
1997, one case. In 1996, none. In 1995, none. In 1993, none.
You have to go back to 1991 to find any more, and you have got
20.
So, basically, what does that mean? I think one or two of
you think that means the system is just working dandy because
everybody agrees on everything. But I think, when you get into
it and you talk to folks, like the Department of Defense you
get a different picture. At Defense, for example, who took a
sample of 26 cases. The Department of Defense, on this random
sample, approved 6 and opposed 17, was their recommendation,
almost a 3-to-1 rate of recommended denial over approval.
The operating committee approved 14 of those licenses over
Department of Defense objections, and the Department of Defense
only appealed one case. Out of that whole batch that you
checked, the random sample, they only appealed one case. You
talked to them about it, and apparently they told you. But
after initially opposing these licenses, the Department of
Defense later changed. Of these 14 cases, 9 of the 14 were with
regard to China, India, and Russia on issues of risk of
diversion and end user. But apparently, after a little
discussion, the Department of Defense decided to go along with
the licenses, with conditions. Now, we will learn later that
nobody follows up to see if the conditions are complied with,
apparently.
They told you that, well, ``we look at the likelihood of
success on appeal''--it is kind of like an intersection
lawsuit, I guess, that you lose in court--in which you decide
whether to appeal based upon the likelihood of success and how
important it is. Then they said that they felt like they were
required to have concrete evidence that the end user is a high
diversion risk and they felt like that was obviously a high
standard to have to have--though I do not know how much more
evidence they would need with regard to China and India and
Russia. Our own CIA calls China the world's greatest
proliferator of weapons of mass destruction.
But, anyway, they wind up basically going against their own
judgment. They approved 6 and denied 17. They wound up
basically going along with everything and appealing only one.
Mr. Mancuso, and correct me if I am wrong on my analysis, tell
us what additional information you have about that.
Mr. Mancuso. I have very little----
Chairman Thompson. Tell us as to why they did not appeal
more.
Mr. Mancuso. You are certainly factually correct in your
description of the numbers and of what happened. We queried
them on each of the cases and they had a variety of reasons.
Some of them, they moderated their position after considering
that the items were, in fact, in support of international
programs.
Chairman Thompson. What does that mean?
Mr. Mancuso. In general, it means that it was not a single
application. It was going to be a broader application that had
wider ramifications and they considered that fighting the
denial for this one specific country apparently would have
little overall effect and they, again, moderated their
position.
Chairman Thompson. Does that mean that there were broader
foreign policy objectives involved? I saw where you said, in
support of international programs, and----
Mr. Mancuso. That is correct.
Chairman Thompson [continuing]. I am still not sure exactly
what that means.
Mr. Mancuso. I think, in a minute, I am going to refer back
to the person who handled the audit. But before I do that, in a
number of the cases, they just simply felt that in reviewing
their arguments, because as you escalate you begin to bring in
higher-level officials within Defense and consider the
appropriateness of the escalation, and they felt that they just
did not have a strong enough policy argument to make at that
level.
Chairman Thompson. So you have----
Mr. Mancuso. I am certainly not saying that I would agree
with that rationale, but it is their rationale.
Chairman Thompson. Let us think about this practically. I
understand what you are saying and I appreciate it. But as a
practical matter, this person who has this concern, or all
these concerns with all these items, and this was a random
sample of 26--goodness knows how many there are out there in
terms of, say, the Department of Defense objective--but he has
to go to them and resist. The Department of Commerce, who is
primarily in charge of this, and presumably some other of our
agencies, will then presumably say we are all on the same team
here and this is what we want to do. But this person who thinks
its a bad idea still has to get to Mr. Assistant Secretary,
within 5 days and convince him to go against that grain.
I am not passing judgment on whether or not he should, but
that is the practical reality of what he has to do in order to
escalate it to the ACEP level, is that basically correct?
Mr. Mancuso. That is correct, and I guess in the colloquial
sense, we all say, how often do you want to expend that silver
bullet? And they looked at each one of these issues and in
their own reasoning and with their experience, they decided on
each of these issues to either accept conditions or to not seek
a further level of appeal.
Chairman Thompson. Do they actually change their denial to
approval in some cases?
Mr. Mancuso. I believe in some cases, they went with----
Chairman Thompson. With conditions?
Mr. Mancuso. The term is ``approve with conditions.'' In
others, they simply let their objection stand on the OC level
but failed to follow up within the 5 days to seek appeal. So
the record would reflect the objection.
Chairman Thompson. One final point. Is it not also true
that there is no documentation on why appeals were not taken?
Mr. Mancuso. In some cases----
Chairman Thompson. Basically, you are going back and
talking to them about it, but in terms of a paper trail or in
terms of an audit trail, it is very difficult to determine the
reasons why appeals were not taken after objections had been
lodged, is it not?
Mr. Mancuso. That is correct, and that goes all the way
back to the initial licensing officer's decision, where we
spoke about the fact that we also found that supervisors, in
some cases, changed the licensing officer's position without
that person's knowledge or consent.
Chairman Thompson. We will get to that.
Mr. Mancuso. And the facts behind that were not documented,
as well.
Chairman Thompson. No reasons were given for that, either?
We will have a chance to revisit some of these things a little
later.
Senator Lieberman.
Senator Lieberman. Thanks, Mr. Chairman. I wanted to get to
the subject of deemed exports and the deemed export
regulations. When we had the hearing on Mr. Friedman's report,
this interested us in the basic notion that the exchange of
technical information can be effectively an export and,
therefore, evoke the same kinds of security concerns as the
sale of a commodity. Therefore, it requires an application for
a license, very few of which are filed, as Mr. Friedman's
report showed.
I note that the Commerce IG has identified this issue as a
more widespread problem than just at Department of Energy
facilities. It appears that in addition to problems in the
federally-funded labs, other agencies, including NIST at
Commerce, Defense's Army, Navy, and Air Force labs, and the
Centers for Disease Control and Prevention have not submitted
any applications on behalf of foreign nationals coming to their
facilities.
I know that some people say that the problem here is in the
ambiguity of the deemed export requirements and the Department
of Commerce regulations. I just wanted to take that up a bit
further, and perhaps I will start with Mr. Frazier. Are the
Commerce regulations ambiguous, and if so, what can we do to
help to clarify the application of the rule?
Mr. Frazier. Senator, they are, indeed, ambiguous. I looked
at a couple of them myself, and when it explains the types of
people who would have to come in to get an export or deemed
export, it addresses the question of basic research without
defining clearly what that means.
The other thing is that when we interviewed various people
and we would ask them their impressions as to under what
circumstances you would need to come in for an export license,
most of them had varying interpretations and understandings as
to the circumstances under which you would do that. Even at the
Department of Commerce, we have our NIST labs and we were
uncertain as to whether they, in fact, would be required. We
know that there are various scientists and researchers that
come to visit at NIST often, but not one deemed export license
had been requested there.
It is something that I think is a big loophole. I think
that most people do not have a clue as to the circumstances
under which this should happen. We have encouraged BXA to try
and come up with some better guidelines, to do more outreach,
to get the message out, to target certain labs in the public
and private sectors to make sure that they are aware of this.
It is something that people just do not have a clue on. I think
that is so unfortunate.
Senator Lieberman. Is anything happening? Is anybody at
Commerce responding to try to resolve the situation?
Mr. Frazier. In response to our report, they have, indeed,
suggested that they will do more in this area, that they plan
to do more outreach. I think that it is an area that there
needs to be clearer guidance, there need to be some policy
determinations made to clarify it. It should not be something
that people have to go and make these assessments with these
ambiguous guidelines. We think that it should be something that
it is almost a checklist. If you have this, if this is going
on, come in for the license. I would always encourage people,
when in doubt, to come in and ask about the license anyway, but
that is not happening.
Senator Lieberman. Let me ask anybody who wants to comment
whether you have any judgment or have reached any judgment on
the underlying policy here. Is it right to have the category of
deemed exports and to require license applications, leaving
aside, for a moment, whether the regulation is ambiguous or
not.
Mr. Frazier. I think that it definitely is.
Senator Lieberman. It is?
Mr. Frazier. I think it is no question.
Senator Lieberman. On the theory that I mentioned very
briefly, which is that in the exchange of information, you can
have as much either positive or negative occur as in the
transfer of a commodity.
Mr. Frazier. Very definitely, even more so in certain
cases.
Senator Lieberman. Right.
Mr. Friedman. I would support that.
Senator Lieberman. You would? OK. Let me go briefly to the
cumulative effect problem that we talked about. I appreciate
you drawing that to our attention.
What is being done now to assess the cumulative impact of
controlled exports? Is there any response to the problem or is
it totally running in separate pipes?
Mr. Frazier. Clearly, not enough.
Senator Lieberman. No?
Mr. Frazier. I think, as the Chairman pointed out, people
will look at one part of the dam. They will look at this hole,
they will look at that, but very little is being done on a
collective basis. In fact, when the staff who did the work
raised that issue, I asked them to give me some ideas as to
what kinds of things should happen. You are going to have to be
willing to put a lot more resources into the issue. You are
going to have to be willing to spend additional time. I think
the Chairman has highlighted that repeatedly. Timing becomes an
issue here. But it is something that is seldom done. It is an
area that I think we are fairly vulnerable in.
Senator Lieberman. Did any of you, in your work on this, or
Mr. Mancuso, discover a specific case in which you were able to
conclude that the availability of cumulative effect information
might have changed the outcome of a particular application, or
was the concern more--I do not want to demean it by saying
theoretical, but that you saw a potential loophole here?
Mr. Mancuso. No, Senator, only because we were not
evaluating the appropriateness of each license application.
Rather, we were looking at the process.
Senator Lieberman. Yes.
Mr. Mancuso. But I would add that when we looked, for
instance, at the fact that there were a number of applications
not referred to Defense from Commerce, we did a sampling of
about 10 percent, and in 5 of the 60 samples, we found
disagreement in Defense where Defense components felt they
should have been referred.
Senator Lieberman. Right.
Mr. Mancuso. Three of those were cases in which Commerce
had received an application regarding the transfer of
technology to India. India was under Presidential order at the
time that they could not ship items, so Commerce decided
unilaterally not to share the application request with Defense.
Well, that has a direct bearing on the cumulative effect
analysis, because our license officials feel that even though
Commerce was denying the license, we would want to know what
was being requested, what was being looked for by this
particular country, and we would have benefited from that.
If you are going to look at cumulative analysis, it is not
just of the matters that are currently being referred. It is,
overall, what are the items that are even being denied without
the knowledge of the individual departments, such as Defense.
So we certainly found some loopholes in looking across the
board at all of these issues.
Senator Lieberman. Let me move to that now. I know that DOD
and DOE expressed concern that Commerce was not appropriately
referring license applications to them for review, and the DOE
actually rescinded its delegation of authority to Commerce,
which had previously allowed Commerce to forego referrals to
DOE of some license applications.
Does Commerce disagree with this expression of opinion from
the Department of Energy and the Department of Defense that it
was not referring all the licenses it should have to them for
review?
Mr. Frazier. I think, as Don pointed out, we had a sample
of about 60 cases that were not referred, and in looking at
those, 5 of them should have gone to the Defense Department.
BXA still took the position on reflection that they still felt
that they had acted appropriately on all of them----
Senator Lieberman. They did?
Mr. Frazier [continuing]. So I think that is their
position.
Senator Lieberman. Is any action occurring now within
Commerce to respond to those concerns expressed by the other
two agencies?
Mr. Frazier. In the case of Energy, I think it was returned
without action. So the five that Don referred to were cases
that we did both look at, and I think it is drawing a lot of
attention to that process. We would think that the Department
would have to be very careful in anything that it makes a
decision not to refer.
Senator Lieberman. Finally, I wanted to ask you to
elaborate a bit on this interesting requirement for post-
shipment verification of high-performance computers that I know
was part of the Defense Authorization Act, I think, of 1998.
That is the post-shipment verification to be conducted on all
HPCs with a performance capability between 2,000 and 7,000
MTOPS that went to Tier 3 countries, which are countries that
we have concern are proliferating. First, help us understand
what the mechanism was supposed to be for a post-shipment
verification.
Mr. Frazier. The issue here is that we would either have
the U.S. and Foreign Commercial Service, which is stationed
around the world in 67 countries, do it, or BXA's Safeguard
Verification Program, where we sent export licensing agents
from the United States overseas to verify shipments.
Senator Lieberman. And the verification, obviously, is to
make sure they are being used----
Mr. Frazier. That they have, in fact, ended up where they
said they were going to end up. You go there and you verify
that.
Senator Lieberman. Is the purchaser required as a condition
of the license to give permission for those post-shipment
verifications to occur? In other words, what is the basis for
us to go in through either the BXA or Commerce personnel?
Mr. Frazier. That is a general requirement. One of the
things with China, China has always been a special problem
because we exported, I want to say, in the neighborhood of 191
HPCS to them in FY 1998 alone.
Senator Lieberman. Right.
Mr. Frazier. In the process, Commerce did only one HPC
post-shipment verifications during that year.
Senator Lieberman. That is exactly right. I was going to
ask you about that. My numbers say 390 shipments of high-
performance computers to Tier 3 countries in 1998, 1 year. Only
104 post-shipment verifications occurred, but, just as you say,
of 190 high-performance computers sold to China, only one post-
shipment verification occurred.
Mr. Frazier. Yes. One of the things is that the Chinese
Government requires that we get a special approval from them
before these can be conducted. They usually go with the people
from the United States who do the post-shipment verifications.
The United States now requires exporters to obtain an end-user
certificate from the Chinese Government for each HPC they plan
to export to China, whether or not the export is licensed.
Senator Lieberman. So do you think that change will
increase the proportion of post-shipment verifications----
Mr. Frazier. Yes, because, basically, what it does is put
the Chinese Government on notice that if these commodities,
these high-performance computers, are going to be sent to them,
it is unacceptable for them not to allow these verifications to
take place.
Senator Lieberman. But for now, we do know that of 190
high-performance computers sold to the Chinese last year, that
we only have verified in one case that the computer is being
used for what the representations were that it was going to be
used for.
Mr. Frazier. Regrettably, that is true.
Senator Lieberman. That is something I think we should
focus in on, because as we see this emerging picture, we want
to have trade with China, we want to have relations, economic
and diplomatic, with China, but the picture we get of a very
broad effort, basically, to obtain the technology that we have
worked very hard and invested billions of dollars to develop
and then perhaps to proliferate it, we have got to raise our
guard. It just struck me that you all have pointed out one area
here where our guard has been remarkably low, so I hope as we
continue to oversee, and I ask your help in that, too, what the
departments are doing, that we press in on this to see that
more of that post-shipment verification is occurring.
Thanks to all of you. Thanks, Mr. Chairman.
Chairman Thompson. Thank you very much.
Mr. Friedman. Mr. Chairman, could I just clarify one point
for Senator Lieberman?
Senator Lieberman. Yes, please.
Mr. Friedman. I do not know whether you were relying upon
my testimony from June 10 with regard to the withdrawal of the
delegations of authority. You may well have been, because that
is what we were told.
Senator Lieberman. Right.
Mr. Friedman. In fact, Senator Lieberman, on July 11, the
day after the hearing, I believe, the Department sent a memo to
the Department of Commerce, the responsible parties there, not
withdrawing the delegation but attempting to clarify the
circumstances under which delegations will be appropriate. So
it is a very different----
Senator Lieberman. I see.
Mr. Friedman. The actual outcome turns out to be quite a
bit different than what we had been told and we have not
analyzed the contents of that document.
Senator Lieberman. OK. So there is some negotiation going
on now between the two departments?
Mr. Friedman. I do not know whether--I cannot tell you
there is negotiation----
Senator Lieberman. I appreciate that clarification. As a
matter of fact, the delegation has not been withdrawn?
Mr. Friedman. That is correct.
Senator Lieberman. Thank you.
Chairman Thompson. Thank you. Let us go back just a moment
to the escalation process where we left off and the OC chair,
the operating committee chair where the initial group
discussion, at least, takes place. It looks to me like we could
all benefit from a clarification of the role of the chairperson
of that operating committee. We had a little discussion about
this earlier. Consensus is said to be the practice, but the
authority is clear and in some cases it has been exercised
where unilateral authority could be exercised.
The Department of Commerce, as I read their response to all
this, basically says, well, it says right there in plain
English that she is an employee of the Department of Commerce
and she is reflecting the Commerce position, and in effect, we
make no apology about that.
I think you pointed out that at least the position was, or
the desire was, when this was set up in the Executive Order,
that she would be at least somewhat objective. I know, for
example, in the encryption case, that she told you that she was
told, basically, not to particularly pay any attention to what
anybody else thought. Defense and Justice both, I think, had
problems with that. She is not objective and she ought to be.
Mr. Mancuso, I think Defense was one that had a problem
there. This is a policy decision. If, in fact, we want to set
up someone in Commerce to have unilateral authority, at the
initial stage, anyway--which, of course, in my estimation is
extremely important because of the difficulties of going past
that initial stage--that is a policy decision that I guess
would be consistent with the Act. Or if we want to have someone
who is supposed to be objective, that is another way to go.
It looks to me like we ought to lay our cards on the table
and acknowledge what it is we are doing. Are there any
recommendations in your report in terms of--I do not recall--
clarification of that role, or do you have any thoughts? Mr.
Frazier has discussed it a bit with me, but do you have any
thoughts, Mr. Mancuso?
Mr. Mancuso. As we stated in our report, we clearly feel
that the process favors the Department of Commerce. That is the
way the system was set up, that someone in Commerce would head
up this committee, and it is assumed that the process would
favor Commerce, which again leads to further analysis as to
what might be an appropriate case to escalate.
In that regard, Mr. Chairman, I would respond to your
earlier question about the international programs. My associate
has told me that what we were speaking about there is the
Israeli Arrow program, which has involvement that goes beyond
Israel and has the support of the Department of State and other
agencies. So within Defense, the Defense concerns were
reevaluated in light of the feelings of the other participating
organizations and the Department felt that their concerns----
Chairman Thompson. Your initial concern had something to do
with them, and when you learned that they were a part of the
process, that alleviated some of your concerns?
Mr. Mancuso. Well, it also caused some belief that if the
Defense Department position was not a very strong position,
clearly, we would not prevail.
Chairman Thompson. All right. Back on this other point,
what about the encryption issue? What happened there?
Obviously, that is a very sensitive subject that we are dealing
with up here right now. It is another balancing act. I am not
sure where the administration stands on this today, but in
times past, anyway, the Justice Department and FBI have taken
the position that we have to be very, very careful about this.
Some of our manufacturers over here want to loosen the
standards and there is another debate going on here involving
commerce with a little ``c'', commerce versus national
security.
Encryption was at State at one time, was it not, and it was
transferred to Commerce. Was that part of items taken off of a
munitions list? Anyway, the transfer was made. Then Justice
became a part of the process. Did that happen simultaneously,
or exactly how did it come about that encryption came to
Commerce, and does that sensitive item present a special
problem? Apparently, it was the only time that the OC chair
says that she was given those kinds of instructions back at
Commerce as to how to deal with the subject. First, does
encryption present a special problem for us? I do not want
everybody to speak at once.
Mr. Frazier. I am not aware of the chronology. I think that
what is tripping us up here is how it got to Justice. I just
cannot address that point.
Mr. Payne. Yes. My staff just tells me that in 1996, the
devices moved from the munitions list to the dual-use list and
there is a process for moving items back and forth.
Chairman Thompson. OK. So it was like the satellites?
Mr. Payne. Exactly, like the satellites.
Chairman Thompson. Anybody on the staff may speak up if you
want to. Was Justice involved in the process at that same time,
or do we know?
[No response.]
All right. That is for further consideration.
On the cumulative effect issue, let us move on to question
five. Senator Lieberman dealt with that. In the first place, I
think it is important to point out or highlight what you point
out in your report here. Mr. Mancuso, I think this is your
part.
A Defense science task force report on globalization and
security issued in December 1998 discussed how globalization
and technology increases the need for those concerned with
technology security to focus on the capabilities created by the
integration and military application of uncontrolled
technologies. A study released in early 1999 by the Department
of Commerce discusses how the cumulative effect of
technological transfers to China might pose long-term economic
risk to U.S. competitiveness and suggested that the topic
warranted further study.
In fact, in the Department of Defense policies and
procedures directive 2040.2, international transfers of
technology, the policy states that DOD components--and we've
discussed what the components were within DOD--shall annually
assess the total effect of transfers of goods, munitions,
services, and technology on U.S. security. So there seems to be
a pretty clear policy directive that DOD is supposed to make
such an assessment, is there not, Mr. Mancuso?
Mr. Mancuso. Yes, there is.
Chairman Thompson. And that is not being followed, is it?
Mr. Mancuso. No. We found that it is not. At best, it was
performed on an ad hoc basis.
Chairman Thompson. My notes indicate that when you talked
to them about it, they said that it was too costly and too slow
to make the 30-day turnaround requirement that they had, is
that correct?
Mr. Mancuso. Correct. They attributed it to resources and
timing.
Chairman Thompson. Resources and timing, a recurring
problem. The only problem here is that you have an official who
basically decides to ignore the policy of his own department.
Hopefully, that is not commonplace. I just came from a hearing
yesterday on Energy, you can tell, and we saw this time and
time and time again over there. That is just something that we
are not going to tolerate.
Congress needs to face up to the resources issue. Congress
needs to face up to the timing issue, too, and perhaps we can
address that in the Export Administration Act. It all gets back
to the people administering the program, though, and what their
ideas and proclivities are. If you have a bunch of people who
so heavily weight things in favor of getting the merchandise
out the front door, I am not sure any of the procedures are
going to do you much good. Hopefully, however, we can do
something about it, by pointing out the importance that this
not be the prevailing attitude.
On number seven, the issue of whether or not cases were
properly referred out to the various agencies for comment, Mr.
Frazier, I believe that it was you who suggested that the CIA
should get more time to look at these matters.
Mr. Frazier. Yes.
Chairman Thompson. You said in your prepared remarks, too,
that they were not being referred as many things as you feel
like they should be referred. In fact, here is the CIA
apparently saying, we do not want all this.
Mr. Frazier. That is right.
Chairman Thompson. They had more important things to do.
Therein lies another problem, right, Mr. Snider?
Mr. Snider. That is correct, Mr. Chairman. The
Nonproliferation Center actually takes the position they are
getting referrals they should not be getting, where the license
application really does not involve the potential threat of
proliferation activity or can be applied to proliferation
activity. So there is a disconnect there.
Chairman Thompson. Who makes the determination as to
whether or not it involves proliferation activity? How do you
know that until you take a look at it? You have got somebody on
the other end who does not have the qualifications to make that
determination making it.
Mr. Snider. I am not sure how Commerce makes the
determination. They refer the cases. They decide which should
be referred under the MOU with the agency. They do that and
then our analysts take a look at it and assess it from there.
Chairman Thompson. You generally describe the kind of cases
you want?
Mr. Snider. Yes.
Chairman Thompson. And then they have to decide whether or
not a particular case fits that category? What is the problem
with that, Mr. Frazier?
Mr. Frazier. Well, the thing that we are trying to push,
Mr. Chairman, is that when in doubt, send it. I mean, do not
leave it to chance. You are right. The licensing officer has a
body of information that he or she is working with. They get
that. If they have any remote consideration that it should be
referred, it should be referred. I just do not think that you
leave it to chance. That is the message that we surely have
tried to get BXA to address.
Chairman Thompson. All right. Clearly, this is something we
need to have some further discussion about, and again, if it is
a resources question, then it is something we need to face up
to and Congress needs to face up to. We cannot have our cake
and eat it, too, either.
Senator Akaka, it just occurred to me that I did not call
on you. I am so sorry. I am going to stop right now and defer
to you. You were here earlier and I got carried away.
OPENING STATEMENT OF SENATOR AKAKA
Senator Akaka. Mr. Chairman, do not feel badly about that.
I am patient and I know you have so many important questions to
ask.
Mr. Chairman, I want to commend you for holding this
hearing, especially after we have had an August 1998
investigation on the conduct of this interagency licensing
process for dual-use items, and also a hearing that we had June
10 on dual-use and munitions export control issues relating to
DOE.
Mr. Chairman, I want to ask that my statement be placed in
the record.
Chairman Thompson. It will be made a part of the record.
[The prepared statement of Senator Akaka follows:]
PREPARED STATEMENT OF SENATOR AKAKA
Mr. Chairman, with you, I am pleased to welcome the Inspector
Generals (IGs) from the Departments of Commerce, Defense, Energy,
State, and Treasury and the Central Intelligence Agency to discuss
their reports on the review of the export licensing processes for dual-
use and munitions commodities.
I am heartened to learn that the IG's overall conclusion is that
the dual-use referral and dispute resolution processes work reasonably
well. The dual-use and munitions license processes have greatly
improved since the 1993 review was completed. However, more work needs
to be done to ensure that the United States has a highly efficient,
effective and transparent export-control process.
Mr. Chairman, I, therefore, strongly recommend that the Committee
invite the agencies to report on the measures taken in response to the
IG's reports in 6 to 9 months. As the case with the 1993 IG reports, we
do not want to wait another 5 years before someone reviews the actions
taken by the agencies to implement the sound recommendations made by
the IG's to improve the performance of our export-control process.
A catalyst issue for these IG reports was testimony last year
before this Committee by Dr. Peter Leitner of Defense's Agency on
Threat Reduction. He testified that recommendations he entered into
Defense's computer system were later changed without his consent or
knowledge and that there was undue pressure to issue or change
recommendations.
I am pleased to learn that, apparently with very few exceptions,
although there have been instances of indirect pressure, this is not
the case. Dr. Leitner's reporting was a serious concern to the
Committee. I trust that with the IG's review of this issue and
continued Congressional oversight future problems will be resolved.
Finally, Mr. Chairman, the various agencies generally agreed with
the numerous recommendations made by their IG's for improving the
export-control process, but they highlighted resource and budget
restraints.
If the United States is to implement an effective, efficient and
transparent export license control process, the Congress must ensure
that the appropriations for each of these agencies is adequate for this
purpose.
In light of the recent Cox Report findings and the additional
funding granted to the Department of Energy's National Laboratories for
implementing a secure counter-intelligence program, the Congress should
consider appropriating funds for the specific procedures which need
enhancements, such as Commerce's antiquated computer system, training,
personnel resources for monitoring license conditions, end-user
proliferation reviews and pre-license and post-shipment checks.
I welcome the witnesses and look forward to their testimony.
Senator Akaka. I also want to say that I would hope that
the Committee would not wait another 5 years before we hear
from this group, that maybe even in 6 months, to see what has
been done, and even more importantly, so that we can carry out
your recommendations as they come from you, since you are the
men in the trenches and have been able to see the problems that
we have to face.
I have a question here for Energy. Mr. Friedman, you
requested your general counsel to look into a possible conflict
between Section 12(c) of the Export Administration Act
regarding the protection of companies' proprietary information
and the 1981 Executive Order 12333 regarding the United States'
intelligence activities. What specific issues may be in
conflict and what is the status of your general counsel's
review on this issue?
Mr. Friedman. Let me answer the second part of your
question, Senator Akaka, first. The last time I checked, which
was about 3 or 4 weeks ago, the general counsel had not opined
on that issue. They were waiting for additional information and
they had not rendered an opinion at that point.
The general essence of the issue is whether export control
analysts should have full access to intelligence data gathered
by the Department's intelligence group and to raw information
and others, conversely, whether the Director of Intelligence
should have access to whatever information is generated as part
of the export control licensing process within the Department
of Energy. That was the technical distinction between those two
documents that we asked the general counsel to render an
opinion on.\1\
---------------------------------------------------------------------------
\1\ The information entitled ``Dual-Use License Process'' submitted
by Senator Akaka appears in the Appendix on page 132.
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Senator Akaka. Does the general counsel have any problems
in that?
Mr. Friedman. I cannot speak for them. Certainly, waiting
this long for a legal opinion on a matter of this sort is not
acceptable and I am sure the current general counsel would
agree with that, but I cannot----
Chairman Thompson. You ought to give them 9 days.
[Laughter.]
Mr. Friedman. My guess is this is a case that illustrates
your point earlier, Mr. Chairman.
Senator Akaka. In your report, Mr. Friedman, you indicated
that the State Department does not have an established
interagency fora to discuss routine munitions license
applications and that there is no process for escalating
disputed applications. What steps has DOE taken with the State
Department to rectify these issues?
Mr. Friedman. Well, as I indicated on June 10, the under
secretary has formed a task force to look at the broad range of
export control issues and that is one of the issues on their
plate. At this point, I, frankly, cannot tell you whether they
have instituted any kind of discussions with the State
Department on this matter.
Mr. Payne. Senator Akaka, may I address that from the State
Department perspective?
Senator Akaka. Yes, Mr. Payne?
Mr. Payne. On the munitions side, there is not an
escalation process similar to the dual-use side. The State
Department has the final authority to make the decision. Now,
there is a fairly extensive referral of licenses to the
Department of Defense and Energy and so forth and we are not
aware of any specific cases where the State Department has not
fully taken into consideration the concern expressed by the
other agencies. It is true there is not a process, but we are
not aware of any specific cases where there was concern by
other agencies that the State Department ignored.
Senator Akaka. It seems as though there either needs to be
a process or we cannot let that fall between the cracks and
disappear. Mr. Payne, the reports note that Commerce should
fully implement 1996 NSC guidance on referring commodity
classifications to state and Defense which could involve
possible munitions items and that there should be more
transparency in dual-use classifications, which should perhaps
be open for all agencies to review. How many technical
personnel, it could be engineers or whatever they are, are on
State's Defense Trade Council, DTC's, political and military
affairs staff, excluding any detailed personnel from the armed
services? How many technical personnel are there?
Mr. Payne. I believe, currently, there are 16 licensing
officers on the DTC staff.
Senator Akaka. How many armed services personnel are
detailed to both DTC and PM?
Mr. Payne. I am told four.
Senator Akaka. If State DTC and PM do not have technical
personnel on its staff, my question is, how can it perform
commodity classifications under the Commerce control list,
which is more complex than the U.S. munitions list?
Mr. Payne. I think the main concern the State Department
has in wanting to see more of those commodity classification
applications is that it would be able to spot those items that
are not appropriately classified. For example, had that
information in the Hughes case come to State, it would have
objected to that information and Commerce's decision. I do not
know how much additional technical capability State would need
to review licenses, but State has only seen 21 of those
classifications over the last number of years and there are
something like 2,000-plus each year. State would just like to
have access to more of those so that it could express an
opinion on the appropriateness of the decision being made.
It is true, State already suffers from a shortage of people
and an inability to really perform the current responsibilities
that it has, but we discussed earlier that there is a plan in
motion to provide additional funding and to more than double
the size of the staff in the DTC area.
Senator Akaka. Mr. Snider, all of the IGs determined that
our export license analysis will be better served if we have
data on the cumulative effect of technology transfers. Do you
believe the CIA is the appropriate organization with the U.S.
Government to perform that function?
Mr. Snider. I am not certain the CIA necessarily has all
the answers here. They certainly have a lot of information. It
seems to me that, certainly, we are not looking at cumulative
effect solely in terms of what licenses have been issued in the
past and that sort of thing. We take into account lots of other
factors in terms of what we know about what the country is
producing indigenously, for example, what they are getting from
third countries. There are factors that need to be taken into
account, it seems to me, in the export licensing process but
are not necessarily limited to cumulative analysis of end users
and license applications. So I think intelligence has a
critical part to play here in informing the export license
process even beyond simply reporting on end users and
intermediaries.
Senator Akaka. The Commerce IG's report states that CIA's
Nonproliferation Center is not fully engaged in the license
process because it only receives about 45 percent of dual-use
cases. Further, NPC only reviews applications for items
controlled for proliferation reasons and not for national
security for other foreign policy reasons.
Do you believe that the NPC could provide meaningful input
on these types of applications and should it review a broader
scope of dual-use licenses?
Mr. Snider. Well, let me respond this way, Senator. The
dual-use applications are referred to NPC pursuant to an
agreement, an MOU, between Commerce and the CIA that provides
basically that applications will be referred to NPC that have
some sort of potential implication for proliferation concerns.
That is the business of NPC. That is what its analysts do and
what they analyze.
Whether they can make a meaningful contribution in terms of
analyzing the national security implications of other kinds of
technology or goods or services, I rather doubt. That is not to
say the agency itself could not provide analysis on these other
topics, but I am not sure the NPC would be the correct place to
do it.
Again, I think this is something that needs to be discussed
between the Department of Commerce and the agency management to
come up with a common understanding where we can play a useful
role, if we are not fulfilling that role already.
Senator Akaka. Thank you. I just want to touch on something
that the Chairman raised about the issue of encryption. That is
to anyone that would answer this. Is it not true that
encryption software exports are still tightly controlled and
that this is still an issue of debate in the software industry?
Mr. Frazier. The answer is yes. I mean, one of the things I
see here even in my notes, that this is something that the
National Security Agency is very much interested in. We know it
is a hot issue at the Department of Commerce. So I think there
is a debate. It has not been decided. There is a business
concern that has been raised, a trade issue that has been
raised. There are security issues that have been raised. I know
the Justice Department has weighed into it. So the answer is
definitely, yes, it is an issue that is being debated that
needs more discussion and it will be interesting to see when it
is resolved.
Senator Akaka. I thank you for the responses. Mr. Chairman,
you did accept my full statement, but in that statement, I am
again asking and strongly recommend that these agencies report
to us in 6 to 9 months rather than more than that.
Chairman Thompson. I think that is a very good suggestion.
Thank you very much.
Let us move to the training issue again, because I have a
hard time imagining bringing in these new licensing officers,
especially in some of these sensitive areas--defense, for
example--and not having any formal training period for them.
They rely upon on-the-job training and mentoring. If that is
not a way to keep total control of your new employees, I do not
know what is, because that mentoring is going to reflect and
the on-the-job training whatever the mentality of the people
who are providing the mentoring. You might say the same thing
with the formal job training, but I do not think so.
The thing that strikes me is that in the Federal law, Title
5, Section 4103, Mr. Mancuso, you point out with regard to
question 8, the head of each agency shall establish, operate,
maintain, and evaluate a program or programs and a plan or
plans for training agency employees. The Department of Defense
training policy, the directive carrying that policy out
requires ``heads of DOD components to plan, program, and budget
for training programs to meet employees' development needs,''
etc. You checked with the Army and they have none. The Navy,
they have none. The Air Force, they have none. The Joint
Chiefs, they have none. Nor does DTRA, which does the
technology assessments.
I would hate to think how someone would go over there and
become a licensing officer and have to make a technology
assessment for some kind of a component with nuclear
ramifications without any real training. I guess I would do
what they do for a while, anyway, and I would just kind of do
what I was told. But they are not following the law.
I was struck with what these licensing officers are
required to do. Mr. Frazier, I think it was in your report that
you said that the operating manual being used by licensing
officers at the time of our review included a small section
entitled ``case analysis guidance,'' which outlined eight
points that must be addressed as part of the licensing officer
analysis of an export license application and be included in
the initial referral comments.
So before you can refer it, he has to consider: (1) export
control classification. I am going to abridge some of this.
(2) background statement highlighting licensing history
involving the applicant. Well, of course, we know we do not
check with Customs or Treasury to find out the licensing
history of the applicant. Information about this might come in
over the transom, but that is one source we do not look at. The
officer must also consider previous working group
consultations, issues of interest, any precedent-setting
aspects of the proposed transaction.
(3) the licensing officer has to consider the
characterization of the end user, including type and
relationship with the applicant, if any, such as a bank or a
motel or a U.S. subsidiary.
The licensing officer, (4) has to consider the number of
end users and the reasonableness of the end use. This is what
he has got to do within 9 days, is it not, Mr. Frazier?
Mr. Frazier. Yes, sir.
Chairman Thompson. (5)--we are not through yet--reason for
not referring to an agency.
(6) the licensing officer's written recommendation.
(7) statements as to whether or not conditions are
appropriate, and if so, identification of the specific
conditions of the Department of Commerce.
(8) the licensing officer's name, telephone number,
facsimile number.
All these things this licensing officer has to do and there
is no classroom training, and there is no plan, there is no
program. There is no real training--all, I would submit, in
clear violation of the regulations and directives of the
Department. I think you all point out the need to standardize a
training program.
Yes, you are able to go to some of these people and ask
them, well, do you get sufficient training, and few of them are
going to say, ``No, we are basically flying blind here and do
not know what we are doing.'' They did not report that. They
basically feel like they are doing a pretty good job and they
are up to it and all that, which you might expect.
But accompany this with the further findings that you had
with regard to the pressure. Of course, you did not find many
instances or many people who said much about that. There were
some instances in the Department of Defense, but you could not
really tell because there is generally no paper trail. You
could not tell the extent of it, as I understand it, but you
did get some instances of what was called indirect pressure.
Some of these employees, and I assume licensing officers are
included--if I am not right, you can point that out--said that
they felt that promotions, bonuses, getting to travel, and
things like that were at stake in terms of the extent to which
they went along with the program management policy.
As I say, you accompany that with the fact that these
people are not getting the training that is responsive to what
they need and I think the picture emerges fairly clearly as to
where the process heavily leans. In all these disputes and all
these turn-downs, the people raising the question are always
objecting to the license and the Department of Commerce is
always overruling in favor of approving the license. That is
what I've seen in all these samples, and if I am wrong, you can
tell me. But that is what the dynamics are.
You have these agencies, at least in the beginning, anyway,
who will say no but the weight and the burden--considering the
standard of proof that apparently is being required--is in
favor of granting the export license. Anybody can jump in here
at any time, with the remote possibility that somebody might
disagree with what I say.
Mr. Frazier. Let me jump in on the training issue.
Chairman Thompson. Yes.
Mr. Frazier. One of the points, I think, that you point out
is the importance of training. Unfortunately, too often in
government agencies, training is one of the first things that
is cut. Too often, the people who are very busy doing their
jobs do not have the time to get away for training. At least,
that is the thinking of too many managers.
What we know is that as we try and improve this process,
there should be a formalized training program that is in place,
that we should be able to cross-train people with various
agencies. I ought to be able to send someone from Commerce over
to the Defense Department so that they can work on a brief
internship, for example, to understand better what goes on,
have people from the Defense Department come over.
One of the things that is happening in the Department of
Commerce, one division has a very good training program that
they have instituted for their new licensing officers. We are
encouraging BXA to replicate that, if you will, because we can
see in looking at those individuals, when they have a formal
training program, that it is a better situation. It enables
them to do their job better.
We have come up with many recommendations and ideas as to
some of the things that can be put in place, checklists,
examples, things that will make it easier, if you will, for the
licensing officers to reach a decision. You just elaborated on
the eight or so requirements that they have to deal with. I
mean, there can be checklists that would, in fact, help them.
There are some that exist. They need to be improved.
Training will make a big difference, because I think it
will make sure that everybody is singing from the same song
sheet, if you will. And at the same time, I think that to the
extent that the other agencies understand what we are doing, to
the extent that we understand what they are doing, it just has
to improve the process. Something definitely should happen.
Chairman Thompson. I think that is absolutely right and I
appreciate the clear recognition on behalf of all of you with
regard to that. Not only is it the law, but it just stands to
reason. People of varying levels of experience, I suppose, have
to make determinations about end users. People did not come
into the world knowing about practices of these various
countries and all the complexities and arrangements that we
were talking about earlier with regard to how they disguise
what they are doing. We have also learned that some people do
not always do exactly what they promise to us that they will do
and that they are deceptive.
Mr. Frazier. And it changes daily. The fact that something
was handled one way this week, it will not necessarily be the
same next month.
Chairman Thompson. And we are constantly learning about how
vulnerable we are to being wed to the old world kind of
counter-espionage practices that we have, where we were set up
and designed to counter things that no longer exist, the Soviet
Union, for example. Now, we have different kinds of threats
from different kinds of countries and entities that work in
different ways and it is not easy to recognize warning signs so
that you can bring the CIA into it. If they never see it, I
think it was your point earlier, then they are not going to be
able to do their thing, either.
Mr. Frazier. Mr. Chairman, one of the other points that you
rightly raise is the question of resources. For example, to do
one post-shipment verification to a place in the Soviet Union
may cost about $6,000. That is a resource issue. Someone that
has a limited budget has to weigh that. Do you spend the $6,000
to take that trip to the Soviet Union or do you save that for
training, do you save that for other trips? Those are the kinds
of decisions that ultimately have to be made.
Chairman Thompson. Or is it just too expensive to ship a
supercomputer to them under those circumstances?
Mr. Frazier. That is the other issue.
Chairman Thompson. Thank you for that. On the technology
and information systems, this is another thing that it looks to
me like we could make a lot of progress on. Mr. Mancuso, you
talk about the DOD system, FORDTIS, is that the acronym for it?
Mr. Mancuso. That is correct, Mr. Chairman.
Chairman Thompson. Basically, explain what it is, and maybe
each of you might want to take a crack at that. Everybody seems
to have their own database. There is some access, that you have
one with another, but not total. Now, we learn that some of
your departments are modernizing, but without talking to each
other, so you do not know whether or not it is all going to fit
together. We saw that with the Internal Revenue Service. That
is part of the problem the IRS has. You have a bunch of great
stovepipes, systems totally unrelated to each other and that
cannot talk to each other. Is that where we are headed here if
we are not careful? What do we have and what do we need, Mr.
Mancuso?
Mr. Mancuso. Well, basically, what we have is a system that
is supposed to be a comprehensive reference database and it is
supposed to track all of the goods, munitions, services, and
technology.
Chairman Thompson. When you say ``we'', are you talking
about Defense now?
Mr. Mancuso. ``We,'' meaning the Department of Defense are
supposed to be doing that, and in many ways, FORDTIS does
exactly that. On the other hand, it lacks certain controls and
it also is not as easily accessible and relational to other
databases that we may, in fact, be very much interested in.
We focused, in this case, on who can make changes in
FORDTIS and who is responsible for updates and are those
updates being made. What we found is that some of the problems
with the system were actually planned, not as problems, but
there was a rationale given as to why, for instance,
supervisors could overwrite the positions of their licensing
officers without any concurrent policy that would require some
documentation in the system as to what the initial position was
and the fact that it had been changed, etc.
We also found that, in looking long range, in tracking
through end-use verification, etc., that frequently, there were
not the updates to the system that would be needed and would be
beneficial for future reviews. So in a few instances, we found
that the final Defense position recorded differed when we
looked at the Commerce system, and vice versa.
Basically, what we have is a usable system that needs some
work. We have made some suggestions to management as to what
improvements could be made and suggested the importance of
being able to relate clearly to the State Department and
Commerce and others.
Chairman Thompson. Commerce is one of those departments
that is attempting to modernize their system somewhat, as I
understand it.
Mr. Frazier, you might take us through what happens. An
application comes in. How does the system work now? What do you
need to be able to call on within Commerce? What kind of
information do you need? What do you rely upon? I assume that
if Defense is brought in, then they look to their own systems.
Do they need to be able to use yours or vice versa? What is the
set-up now and what should it be, do you think? Do you happen
to have a chart?
Mr. Frazier. There is a chart that Jennifer has put up that
is on the entire process. But since you are primarily
interested in the systems, our system at Commerce is called the
ECASS system and that system is working. The problem is that,
as I pointed out, that system was developed in 1984. It would
be the same thing if you had a computer from 1984. It would
still work. I mean, it is probably a 286 and it would still
work, but it surely would leave you in the dark ages in many
respects. There is so much information that is available that
if we had an updated system, that the licensing officers would
have right at their fingertips.
They could have information from a classified system, and
that is an issue that we have to, I think, collectively agree,
in terms of whether that information that would come from the
CIA, for example, should be readily available to the licensing
officers. It would have to be a classified system and that
would have to be something that would have to be approved at
the appropriate levels.
Chairman Thompson. Is that not one of the problems that you
have now even with regard to an unclassified situation, and
that is licensing officers not really having access to what is
there?
Mr. Frazier. That is probably the number one problem. For
example, the current system, it is working. That is what we
point out in the report. However, it is not user friendly. So
if while you are doing your research to answer those eight or
nine questions on determining what should happen to a license,
you need to stop and write a letter or something, you have to
get out of that system. It is not user friendly. You cannot
cross-link it with other systems that exist in the Department.
We are aware that the Department has requested a little
over $2 million to begin to upgrade that system. That would be
an investment that would be well worth the money. I think it
would pay for itself in weeks, if not minutes. That is how
important I think that this actually is.
This system can be the lifeblood, if you will, of the
licensing process in terms of improving it. Information is the
key here. As we try and encourage the other referral agencies
to give us more information, that information should be in the
system so that we can always deal with the questions that you
raise, like an audit trail, so we can always have a history as
to what has transpired on every case, that people have a record
of really what happened. If somebody raises a question, that
should be a part of the permanent record.
Chairman Thompson. That could even help on the cumulative
effect issue, could it not?
Mr. Frazier. That is exactly it. I think when we talk about
the cumulative effect, we are talking about information, and
that is what cumulative effect means, getting information from
as many sources as possible. Clearly, the CIA has a major role,
the State Department, Energy, all of the referral agencies, but
other sources, too. We need to get the information pulled
together in such a way that we can deal with the cumulative
issues. It is all about having a system. We have the technology
readily available, again, and it is a relatively small
investment from where I sit.
Chairman Thompson. What about the issue of DOD and DOC both
trying to modernize without integrating much?
Mr. Frazier. The first thing we are saying, we probably
have in here--I am looking at it--we have in excess of 30
specific issues that any changes to the ECASS system should
address. But the most important recommendation that we have is
that the system be developed in concert with the Defense
Department and the other referral agencies. It would be
foolhardy if these systems cannot talk with one another, cannot
interact with one another, including the Treasury system and
others. So that is the number one recommendation that we have.
We think this should not be done in isolation. It is something
that surely should be coordinated amongst the referral
agencies.
Chairman Thompson. That is something we can talk to OMB
about. It seems like it is a very important issue to me. Does
anybody else have any comments on this issue or disagreements?
[No response.]
Mr. Mancuso, you mentioned the fact that on some occasions,
the Department of Defense, there were some occasions when the
recommendations of the licensing officer were actually changed.
In the system, in other words, a change was made, and you point
out that there is, I suppose, legal authority to do that. You
do not have to accept the decision of the person working for
you.
But beside that problem, or potential problem, the other
problem is that there is nothing in the system to tell how many
times that has happened or to tell what changes were made, what
the original recommendation was, or what the override has and
the reasons for that were. We do not have the benefit of that
now, do we?
Mr. Mancuso. Well, in part, we do, Senator, because the
system allows for that information to be included, and, in
fact, many times, that information was included and there is a
clear trail that explains how and why a supervisor changed a
subordinate's decision and, in fact, tracks through the rest of
the process, as well.
But there were also numerous occasions where a licensing
official told us that they had documented a particular opinion,
found later that had been changed, and the system doesn't
reflect that it was a change. You would think common courtesy,
if not good management, would have required that the supervisor
alert the licensing official as to his or her intent to make a
change and it is not there.
Chairman Thompson. And if you were the final decision
maker, you would assume that this was the licensing officer's
opinion when you were making your decision. So they are being
misled.
Mr. Mancuso. That is correct.
Chairman Thompson. You can understand that when there is a
paper trail and reason, a person is willing to stand up and
say, this is what I did and this is why I did it, that is fine.
But changing it, not telling the licensing officer you are
changing it, not giving any reason for it, and making it look
like it is his recommendation, that is not done for any valid
purpose in my opinion. What are you recommending that we do? Is
this just a matter of putting down another policy directing
that they quit doing that?
Obviously, this is a technology problem, in part, is it
not? It gets back to the problem we were just addressing:
Having the capability of putting the information in there so
that you can have an audit trail, so that when these satellite
launches explode and all the politicians start asking
questions, you can go in there and find out who did what.
Mr. Mancuso. And that is a primary recommendation that we
are making, that the system needs to be adjusted to accommodate
those changes and to reflect those changes so as to ensure a
complete audit trail, from the earliest decisions by a
licensing officer to the final DOD and U.S. Government
positions.
Chairman Thompson. All right. On the end-user checks, part
of the justification for lowering our guard, you might say, and
allowing individual license grants, is that sometimes the
government will say, well, OK, we are going to approve it. But
we are going to put some additional conditions on it, but those
conditions are no better than our ability to check up on these
end users and check up on the exporters' adherence to the
conditions.
So we have a system of, first of all, pre-license checks
and then we have a system of post-shipment verification. As I
read your reports, it really does not look like much emphasis
is being placed on either of these.
Mr. Frazier. And, hopefully, those are the exceptions. That
is when someone has to go from the United States. Most of the
end-use checks would be performed by folks that are stationed
overseas. But, of course, one of the real problems there is
that they have other priorities. They have other
responsibilities. Again, you get back to your question of
timeliness.
Chairman Thompson. I believe you pointed out that some of
them told you, anyway, that export promotion takes precedence
over the pre-license checks and the post-shipment verification.
Mr. Frazier. That is their mission overseas.
Chairman Thompson. That is their job.
Mr. Frazier. That is right.
Chairman Thompson. They just happen to be over there, so we
want to use them, but in addition, there is the question of
training and do they really know what they ought to be looking
for.
Mr. Frazier. We have raised the issue of training there,
also. But in theory, Mr. Chairman, the folks who are overseas
should be in the position to better identify the companies.
They should know a little more about the individual companies
that these things have been shipped to. So, in theory, they
should be in a better position to do the work, because they
live in those countries, they deal with those firms on a
regular basis.
Chairman Thompson. Senator Lieberman pointed out, with
regard to China, anyway, that there certainly is hardly
anything going on there. I wonder what reasons they give for
not letting us verify that they are using our high-speed
computers and sophisticated tools the way that they say that
they are going to use them.
Mr. Frazier. The new changes suggest that, in certain
computers, the ones that are the most sophisticated, that
before a license will be issued, they are to get a
certification from the Chinese Government that a post-shipment
verification check will, in fact, be performed, will be
allowed. So the message there is that if you do not agree to
this post-shipment verification, then you will not get this
computer, and that is a recent change. Hopefully, we will be
able to see those numbers go up.
Chairman Thompson. That just has to do with computers?
Mr. Frazier. Yes, the high-performance computers.
Chairman Thompson. The exporters also are supposed to
report actual shipments against the license that they have, but
I believe you found that the Bureau of Export Administration
does not really monitor that, do they?
Mr. Frazier. We found that BXA does do some monitoring of
exports of HPCs and other commodities but that the level of
monitoring is inadequate.
Chairman Thompson. So there is a diversion issue. I mean,
how else are you going to feel comfortable about whether or not
something is being diverted, is that correct?
Mr. Frazier. That is correct.
Chairman Thompson. We talked about the audit trail
difficulties. I think each of you saw some problems there.
FORDTIS is insufficient.
One of the things, for example, as you suggested, is that
we could have more information with regard to what goes in on
these operating committee meetings. For example, explanations
of why decisions are made, should be more than just summaries.
They should include what new information has been brought to
the meeting by those who were there that should impact on the
decision, why a department chooses not to escalate when they
object. We do not have the benefit of that right now and we
need it.
Mr. Frazier. If I can add, if there is one word that I
would like to come out of the Commerce report, that word would
be ``transparency''. That is the message that we are advancing
here. We have not found anything that should be hidden, and so
let us open it up and make people able to see what is going on.
Chairman Thompson. And transparency promotes
accountability.
Mr. Frazier. Yes.
Chairman Thompson. That is what we are all striving for.
On the monitoring programs, in general, I think the burden
there, as DOD points out again, is going to increase, the need
for monitoring is going to increase. But, apparently, we are
not adequately monitoring the license conditions. We talked
about this, of course, before. We put these conditions on
usually, I guess, for reasons having to do with the end users,
but we are not really monitoring whether or not those
conditions are being carried out, are we, Mr. Mancuso?
Mr. Mancuso. We are not.
Chairman Thompson. All right. We have gone through all 14
points at least once. I did not think we could get through with
all the points I wanted to make today, but we did. This is just
the beginning. This is an excellent piece of work and I want to
thank all of you for what you have done and the time you have
put in on this. Your job is not to reach subjective conclusions
in the way that we have the luxury of doing up here. I know it
is a fine line to walk sometimes that you have, but part of our
job on this Committee is making sure that you are allowed to do
your job. I think this report indicates that part is working
reasonably well.
I must say, I come away from this very concerned, although
this is not to say that everything has gone wrong. We have not
had a cause and an opportunity to look at these various
departments the way Senator Rudman, for example, and his people
looked at one particular department. But to me, it is clear
that we have got some real problems and they are under the
radar screen. They are not espionage and they will never make
the front page of the paper, and there is not any one thing
that really grabs you that will make the evening news.
But when you put all this together, we come away with a
picture that is troubling, to say the least. We are dealing
with more and more complex issues all the time. We are asking
more and more of these licensing officers. We are giving
everybody less time to run the checks that they need. There is
very little, if any, formal objective training, contrary to
what they are required to give these people, no assessment as
to the cumulative effect of what we are doing in this area, no
real checks on the front end with Treasury and Customs as to
the track record of these exporters, no real check on the back
end as to what these people are actually doing with the dual-
use items that we are sending them, and we have a process that
basically is set up to make pretty sure that Commerce gets its
way on anything that it really wants to get its way on.
These are my conclusions. I am not asking you gentlemen to
adopt it. It is very cleverly set up and it was highly promoted
and very effectively done, this appeal process, but it is just
not being used and it is ineffective and it is designed to
discourage people within the administration from rocking the
boat. There is also the lack of training, and at least some
people were able to talk about the fact that there is some
informal pressure on them, that to get along, you go along. It
is not a good picture at all. I think that we are hurting
ourselves with the system we have.
Part of the problem is back here on this side of the table,
too. Everything I have mentioned probably costs some money,
probably not nearly as much as people in the departments say it
does, but we have got to be able to restructure our own
priorities and come up with the funding to do what everybody
ought to know is necessary in terms of controlling these
computer systems.
With that, job well done. Thank you very much for what you
have done. I look forward to working with you in the future to
see if we cannot go about resolving some of these problems.
Let us keep the record open for 1 week. We may have
additional written questions or comments that other Members
might want to submit to you.
We are in recess.
[Whereupon, at 12:45 p.m., the Committee was adjourned.]
A P P E N D I X
----------
REFERRALS OF DUAL-USE CASES
------------------------------------------------------------------------
Cases
Cases Referred Cases Cases Referred to
FY to Agencies Referred to Referred to and Reviewed
\1\ and Reviewed and Reviewed by the EARB
by the OC by the ACEP \2\
------------------------------------------------------------------------
1991 7,000 169 89 20
1992 11,100 333 105 0
1993 13,900 493 142 0
1994 6,800 281 97 0
1995 5,100 161 68 0
1996 6,800 435 71 0
1997 10,400 784 38 \3\ 1
1998 9,100 766 34 0
------------------------------------------------------------------------
\1\ Data based on date actual referral occurred.
\2\ Export Administration Review Board.
\3\ One case was referred to the EARB in FY 1997; however, the EARB did
not review it.
__________
LETTER FROM SENATOR THOMPSON TO SIX AGENCIES
Committee on Governmental Affairs,
U.S. Senate,
Washington, DC.
August 26, 1998
The Honorable Eleanor Hill
Inspector General
Department of Defense
400 Army Navy Drive
Arlington, VA 22202
Mr. Gregory H. Friedman
Acting Inspector General
Department of Energy
1000 Independence Avenue, S.W.
Washington, D.C. 20585
Mr. Richard B. Calahan
Acting Inspector General
Department of Treasury
Room 2412, Main Treasury Building
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
The Honorable Jacquelyn Williams-Bridgers
Inspector General
Department of State
2201 C Street, N.W., Room 6817
Washington, D.C. 20520
Mr. Johnnie E. Frazier
Acting Inspector General
Department of Commerce
14th St. and Constitution Ave., N.W.
Washington, D.C. 20230
Ms. Dawn Ellison
Acting Inspector General
Central Intelligence Agency
Room 2X30 New Headquarters
Washington, D.C. 20505
Dear Inspectors General: In 1993, the Inspectors General of the
Departments of Defense, State, Energy, and Commerce collaborated to
conduct an interagency review of the export licensing processes for
dual-use and munitions commodities. I am writing to request that you
update and expand your work in this important area, particularly in
light of testimony the Committee received at a June 25, 1998 hearing. I
have included the Inspectors General of Treasury and the CIA in this
request because the 1993 interagency report concluded that those
agencies played major roles in the licensing process.
On June 25th, the Committee heard from Dr. Peter Leitner, a senior
strategic trade advisor in the Defense Technology Security
Administration. Dr. Leitner provided an unsettling description of the
dual-use review process. I urge you to read the hearing transcript, an
unofficial copy of which is enclosed.\1\ His testimony raised many
specific areas of concern, but he also recounted, drawing on his twelve
years of experience in this area, what he views as a general breakdown
in our licensing controls:\1\
---------------------------------------------------------------------------
\1\ We request that you use the enclosed unofficial transcript for
internal purposes only. We will forward you an official transcript once
it is available.
[O]ver the past six years the formal process to control exports
of dual-use items has failed its stated mission--to safeguard
the national security of the United States. . . . Through a
tireless campaign, the opponents of export controls have
managed to destroy the 16 nation Coordinating Committee on
Export Controls, decontrol vast arrays of critical military
technology, rewire the U.S. domestic export controls process so
that it is structurally unsound and unable to safeguard our
security, and erect a series of ineffectual domestic
regulations and international working groups designed to
project a false impression of security, deliberation and
---------------------------------------------------------------------------
cooperation.
(Hearing transcript at pp.7-8.) Although he took issue with some of
Dr. Leitner's specific criticisms, a second hearing witness, Principal
Deputy Assistant Secretary of Defense Franklin Miller, told the
Committee there was room for improvement in the Department's handling
of dual-use applications.
Your 1993 interagency report detailed a number of problems. For
example, you described that in nearly a quarter of sampled cases
referred for review to Energy by Commerce, the agencies maintained
inconsistent information in their respective databases about a given
case, a shortcoming which ``tends to diminish the credibility of the
licensing process.'' (Report at p. 20.) In addition, you noted that for
dual-use licenses that required exporters to document compliance with
certain conditions, the government received the required documentation
in only four percent of cases sampled. The Commerce Department,
moreover, had taken no steps to bring the 96 percent of nonfiling
exporters into compliance. (Report at p. 3.)
While I leave it to your judgment to determine how best to examine
the dual-use and munitions licensing processes, I ask that in
performing the work you address the questions that are listed below.
Please do not treat the following list as an exhaustive one; rather, it
is suggestive, setting forth some issues arising from the Committee's
June 25th hearing:
1. LPlease examine whether the current, relevant legislative
authority contains inconsistencies or ambiguities regarding the
licensing of dual-use and munitions commodities, and the effect
of any such inconsistencies and ambiguities.
2. LPlease examine whether Executive Order 12981 (1995) as
implemented is consistent with the objectives of the Export
Administration Act and other relevant legislative authority.
3. LPlease determine if there is a continued lack of
interagency accord, as stated in your 1993 interagency report
(at page 13), regarding whether the Commerce Department is
properly referring export license applications (including
supporting documentation) out for review by the other agencies.
4. LPlease determine if the interagency dispute resolution
(or ``escalation'') process for appealing disputed license
applications allows officials from dissenting agencies a
meaningful opportunity to seek review of such applications, and
assess why this process is so seldom used.
5. LPlease review whether the current dual-use licensing
process adequately takes account of the cumulative affect of
technology transfers resulting from the export of munitions and
dual-use items, and the decontrol of munitions commodities.
6. LPlease review whether the current munitions licensing
process adequately takes account of the cumulative affect of
technology transfers resulting from the export of munitions and
dual-use items, and the decontrol of munitions commodities.
7. LPlease determine whether license applications are being
properly referred for comment (with sufficient time for
responsible review) to the military services, the intelligence
community, and other relevant groups (the ``recipient groups'')
by the Defense Department and other agencies. Please consider
in particular numerical trends in the frequency of such
referrals, trends in the types of applications referred, trends
in the nature of the taskings made in connection with the
referrals, and the perceptions of officials at the recipient
groups.
8. LPlease determine whether license review officials at
each of the agencies are provided sufficient training and
guidance relevant for reviewing license applications, and
whether more formal training and guidance is warranted. Dr.
Leitner noted a paucity of such training and guidance in his
Committee testimony. (Hearing transcript at pp. 43-44).
9. LPlease review the adequacy of the databases used in the
licensing process, such as the Defense Department's FORDTIS,
paying particular attention to whether such databases contain
complete, accurate, consistent, and secure information about
dual-use and munitions export applications.
10. LIn his testimony, Dr. Leitner described instances where
licensing recommendations he entered on FORDTIS were later
changed without his consent or knowledge. (Hearing transcript
at pp. 46-47.) Please examine those charges, and assess whether
such problems exist at your agencies.
11. LPlease determine whether license review officials are
being pressured improperly by their superiors to issue or
change specific recommendations on license applications. Dr.
Leitner testified about one such incident that happened to him
at DTSA. (Hearing transcript at pp. 47-50.)
12. LPlease determine whether our government still uses
foreign nationals to conduct either pre-license or post-
shipment licensing activities and whether such a practice is
advisable.
13. LPlease determine whether the agency licensing process
leaves a reliable audit trail for assessing licensing
performance.
14. LPlease describe the procedures used by agencies to
ensure compliance with conditions placed on export licenses
(e.g., no retransfers without U.S. consent, no replications,
and peaceful use assurances), and assess the adequacy and
effectiveness of such procedures.
I appreciate your prompt attention to this important project. If
you need assistance or have questions about the request, please contact
Jack Cobb or Maggie Hickey of the Majority staff at (202) 224-4751.
Sincerely,
Fred Thompson
Chairman
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