DEPARTMENT OF THE TREASURY 

EFFORTS TO PREVENT ILLICIT TRANSFERS 

OF U.S. MILITARY TECHNOLOGIES 

March 23,2000 

Office of Inspector General 

*****I* 

United States Department of the Treasury 
DEPARTMENT OF THE TREASURY 

WASHINGTON, D.C. 20220 

OFFICE OF 

INSPECTOR GENERAL 

March 23, 2000 

MEMORANDUM FOR TIMOTHY F. GEITHNER, UNDERSECRETARY FOR 

FROM : Dennis S. 

Assistant Inspector General for Audit 

SUBJECT : Audit of the Department of the Treasury 

Efforts to Prevent Illicit Transfers of U.S. 

Military Technologies (OIG-00-072) 

The attached report presents an assessment of efforts by 

Department of the Treasury bureaus and offices to prevent 

illicit transfers of U.S. military technologies to 

countries and entities of concern. The report addresses 

counterintelligence and export control measures, and the 

monitoring of foreign investments in U.S. financial 

institutions and businesses that might have national 

security implications. The report is part of a multiagency review required by the National Defense 

Authorization Act for Fiscal Year 2000, and due to Congress 

by March 30, 2000. 

The review discloses that the Department of the Treasury 

has only peripheral responsibilities with regard to 

counterintelligence program activities, but cooperates with 

and supports agencies involved in these efforts. The U.S. 

Customs Service, a Treasury Bureau, enforces export 

controls that could produce useful counterintelligence 

information, and arrangements exist for the appropriate 

sharing of this data. 

An assessment of Treasury's export control measures was 

completed in June 1999 in connection with an interagency 

review of export licensing procedures requested by the U.S. 

Senate Governmental Affairs Cormnittee. The review focused 

on export licensing procedures, but covered general export 

enforcement controls as well. Review results are contained 

in Office of Inspector General Report entitled Interagency 

Report on Export Licensing Procedures (OIG-99-090) dated 
Page 2 

June 15, 1999. The report contained 4 findings and 11 

recommendations aimed at improving the U.S. Customs 

Service's export licensing support and general export 

enforcement control procedures. Customs agreed to take 

action on all the recommendations and, as of November 

16,1999, had completed three and was in process of 

addressing the remainder. 

Treasury's Offices of the Comptroller of the Currency and 

Thrift Supervision monitor significant ownership changes in 

banks and thrifts. The Federal Reserve Board and the 

Federal Deposit Insurance Corporation share similar 

responsibilities with regard to holding company and other 

acquisitions. All banking regulators have related 

background check procedures that provide for the referral 

of foreign investor information to counterintelligence 

agencies for review. 

Treasury also chairs the Committee on Foreign Investments 

in the United States (CFIUS), which reviews foreign mergers 

and acquisitions of U.S. businesses with potential national 

security implications. CFIUS efforts have deterred some 

foreign investments involving potential national security 

implications, but notifications are voluntary and CFIUS was 

not timely notified of two significant acquisitions. 

Mandatory reporting requirements were recommended by the 

Cox Committee and included in a recent legislative proposal 

that was withdrawn. This is among issues being reviewed by 

the General Accounting Office. Absent mandatory reporting, 

CFIUS needs to take a more proactive role to identify nonfilers. We believe this could be accomplished through 

electronic file comparison efforts and recommended that 

CFIUS identify sources of available data and develop 

procedures to identify non-filers. 

Your response to our draft report indicated concurrence 

with this recommendation and that the CFIUS chairperson 

would initiate appropriate action to address our concern. 

It also included an explanation of the rationale for 

voluntary reporting and a discussion of adversities 

associated with mandatory reporting. The full text of the 

response is presented in Appendix 1 to this report. The 
proposed action, when completed, will satisfy the intent of 

our recommendation. 

We appreciate the courtesies and cooperation provided to 

our auditors during the audit. If you wish to discuss this 

report, you may call me at (202) 927-5400 or a member of 

your staff may contact Charles Mataya, Director, Program 

Audits at (713) 706-4611. 

Attachment 
EXECUTIVE DIGEST .......................................................................... 1 

BACKGROUND .................................................................................. 6 

OBJECTIVE. SCOPE. AND METHODOLOGY ................................. 10 

AUDIT RESULTS .......................................................................... 12 

Treasury Counterintelligence Responsibilities .......................................... 12 

U.S. Customs Service ................................................................... 13 

Office of Foreign Assets Control ...................................................... 16 

Financial Crimes Enforcement Network .......................................... 17 

Treasury Monitors Foreign Investments in U.S. Financial 

Institutions. Businesses and Securities .................................................. 17 

Regulators Monitor Ownership in U.S. Financial Institutions .......... 18 

CFIUS Deterred. Some Foreign Investments. 

But Needs To Do More To Identify Non-filers .................................. 19 

Other Issues ................................................................................... 24 

Conclusion ........................................................................................... 25 

Recommendation ................................................................................. 26 

Management Response and Auditor Comments ............................ 26 

APPENDIX 1 : Management Response ......................................... 27 

APPENDIX 2: Description of Technologies and 

Countries and Entities of Concern ......................... 31 

APPENDIX 3: Abbreviations ............................................................. 34 

APPENDIX 4: Major Contributors to This Report ......................... 35 

APPENDIX 5: Distribution ................................................................ 36 

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EFFORTS TO PREVENT ILLICIT TRANSFERS 

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Overview 

The purpose of this review was to assess the adequacy of 

Department of the Treasury's (Treasury) measures to prevent 

illicit transfers of U.S. military technologies to certain 

countries and entities of concern. These measures include 

counterintelligence activities, export controls, and 

monitoring offoreign investments in U.S. businesses. The 

review is reauired bv the National Defense Authorization Act 

for FY 2000: which &so required similar efforts by the 

Inspectors General (IG) of the Departments of Commerce, 

Defense, State, and the Central Intelligence Agency. 

Reporting is due to Congress by March 30, 2000. 

An assessment of Treasury's export control measures was 

completed in June 1999 in response to an interagency audit 

effort requested by the Senate Governmental Affairs 

Committee. Review efforts involved a determination of the 

adequacy of export licensing procedures applicable to dualuse commodities and munitions. Treasury's involvement 

included a review of export enforcement controls pertaining 

to these items, which also addressed the technologies 

covered in the scope of the current review and export 

controls in general. The related Treasury OIG report was 

addressed to the U.S. Customs Service (Customs) and is 

entitled Interagency Report on Export Licensing Procedures 

(OIG-99-090). It contained 4 findings and 11 

recommendations, the majority of which pertained to 

strengthening controls over export license enforcement 

efforts. Customs is in the process of taking action to address 

our recommendations. 

This report discloses that Treasury has no designated 

counterintelligence responsibilities, but coordinates with and 

supports agencies involved in these efforts. Also, all 

siacant changes in financial institution ownership are 

monitored by Treasury and other banking regulators; and 

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related background check procedures provide for the referral 

of information on foreign investors to counterintelligence 

agencies. However, improvements are needed in the 

monitoring of foreign investments in U.S. businesses with 

potential national security implications. 

Objective, Scope and Methodology 

The objective of this review was to assess the adequacy of 

Treasury's counterintelligence measures, export controls and 

foreign investment monitoring in U.S. commercial activities 

to prevent illicit transfers of U.S. military technologies to 

countries and entities of concern described in Appendix 2. 

Review results are based upon information obtained from 

Treasury Departmental and bureau officials involved in 

intelligence, export enforcement, banking oversight and 

foreign investment reporting activities. Infonnation was also 

obtained from banking regulatory officials outside of 

Treasury, and General Accounting Office (GAO) auditors. 

Review efforts were coordinated with Office of Inspector 

General (OIG) staffs kom the Departments of Commerce, 

Defense, State and the Central Intelligence Agency, and 

included contacts with some officials from these agencies. 

Infonnation was also obtained from various audit and 

congressional reports, and agency records and 

documentation. Audit work was performed from September 

1999 through February 2000. 

Audit Results 

Our review disclosed Treasury has only peripheral 

responsibilities with regard to counterintelligence efforts 

involving national security. Although a member of the 

intelligence community, Treasury has no designated national 

security counterintelligence responsibilities. However, 

Treasury cooperates with and supports agencies involved in 

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such activities. One Treasury Bureau, the U.S. Customs 

Service (Customs), enforces export requirements that could 

yield useful counterintelligence information, and 

arrangements exist for appropriate sharing of this 

information. 

Treasury also participates in the review of foreign 

investments in certain U.S. banks and thrifts, review of 

foreign acquisitions in U.S. businesses having national 

security &plications, and reporting of foreign financial 

investments in U.S. marketable securities. Banking 

regulators review sigmficant ownership changes in i5nancial 

institutions. These reviews include background checks that 

provide for the referral of information on foreign investors to 

agencies involved in counterintelligence activities. 

Treasury collects data concerning foreign investments in 

U.S. long-term securities for economic analysis, but this 

informati,on is not pertinent for national security reviews. 

Treasury also chairs the Committee on Foreign Investment in 

the United States (CFIUS)' which reviews foreign mergers 

and acquisitions of U.S. businesses with national security 

implications pursuant to Exon-Florio legislation. These - 

reviews have deterred some foreim investments that ~osed a 

potential risk to national securit;. However, repoAg to 

CFIUS is voluntary and CFIUS has limited information 

available to identi@ non-filers. In addition, during our 

review, we became aware of two signi£icant foreign 

acquisitions which were not timely notifled to CFIUS. One of 

these involved the purchase of a U.S. company that 

' CFIUS was established by Executive Order 11858 in 1975 to review acquisitions of 

U.S. businesses that might threaten national security. Initial membership included 

the Secretaries of the Treasury; Commerce, Defense and State, plus the Attorney 

General, Director of the Office of Management and Budget, the U.S. Trade 

Representative and Chairman of the Council of Economic Advisors. In 1993, the 

membership was expanded by Executive Order 12860 to include the Director of the 

Office of Science and Technology policy, and the Assistants to the President for 

National Security Affairs and Economic Policy. 

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manufactured ball bearings used in military jet aircraft 

engines by a Hong Kong firm that had dealings with the 

People's Republic of China. CFIUS was not notified of this 

transaction until about 18 months after it occurred. The 

other involved a European firm's purchase of a U.S. 

company that produced precision tooling for manufacturing 

jet engine turbine blades used in military aircraft and 

missiles. CFIUS did not become aware of this transaction 

until 10 months later when the company applied for an 

export license to ship some of this equipment to China. 

The first case was cited in the Cox Committee report, which 

recommended mandatory reporting to CFIUS. Mandatory 

reporting was considered in the last legislative session, but 

did not pass, and is among issues being assessed by the 

General Accounting Office (GAO). Treasury, on behalf of 

CFIUS, believes mandatory reporting would impose an added 

burden on foreign investors, increase CFIUS staffing 

requirements, and could negatively affect U.S. open 

investment policy. Absent mandatory reporting, CFIUS 

needs a more proactive approach to identifying non-filers. 

Electronic file comparison efforts may be a means of 

accomplishing this, and forego the need for mandatory fjling 

requirements. 

The Department of Commerce OIG also reviewed CFIUS' 

activities. Its report raises similar concerns regarding 

CFIUS' ability to iden* non-filers under the Exon-Florio 

provision. Commerce OIG also expressed concern about the 

low number of investigations that had been conducted, and 

a possible conflict of interest regarding placement of the 

CFIUS chair in Treasury's Office of International Investment. 

Accordingly, it suggested that a study be undertaken by an 

interaeencv OIG review team from the De~artments of w - 

Commerce, Defense and the Treasury to ietennine the scope 

of the foreign investment problem and CFIUS' overall 

effectiveness. However, GAO is currently performing work in 

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this area and the results of their effort may preclude the 

necessity for additional review. 

Recommendation 

We made one recommendation directed at improving the 

identification of Exon-Florio non-filers. Specifically, we 

recommend that the CFIUS chair coordinate efforts with 

other Committee members to identify and evaluate all 

sources of available data that can assist it in identifymg 

Exon-Florio non-flers. Once data sources are identified, 

CFIUS needs to develop a methodology and establish 

procedures as to how these data sources can be effectively 

used to meet its responsibilities. 

Management Response and Auditor Comments 

The Treasury Under Secretary for International A.ffairs 

concurred with the above recommendation and indicated 

that the CFIUS chairperson would initiate appropriate action 

to address this concern. The response also included an 

explanation of the rationale for voluntary reporting and 

discussed adversities associated with mandatory reporting. 

The full text of this response is presented in Appendix 1 to 

this report. When completed, the proposed action will satisfy 

the intent of our recommendation. 

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BACKGROUND 

During the past two years congressional interest has been 

raised over the illicit acquisition of U.S. military technologies 

by foreign countries. Committees of both the U.S. Senate 

and House of Representatives have initiated reviews of these 

activities, and the General Accounting Office has issued 

several reports and related products2 concerning high 

technology exports. Illicit transfers of U.S. military 

technologies threaten both U.S. national and world security. 

In January 1999, Representative Christopher Cox, Chairman 

of the House Select Committee on U.S. National Security and 

Military/Commercial Concerns with the People's Republic of 

China reported3 to Congress and the President that China 

had stolen U.S. nuclear weapons secrets, and attempted to 

illicitly acquire other U.S. military technologies. Such thefts 

have reportedly accelerated China's nuclear weapons 

development program. Public hearings were held and 

legislation was subsequently passed to in tens^ oversight in 

this area of all countries and entities of ~oncern.~ 

Specifically, the National Defense Authorization Act for Fiscal 

Year 2000 (PL 106-65) contains the following provisions: 

Section 1402(c) requires the Inspectors General (IGs) of the 

Departments of Commerce, Defense, State, the Treasury and 

the Central Intelligence Agency (CIA) to assess the adequacy 

of export control and counterintelligence measures to 

prevent illicit acquisition of U.S. military sensitive 

technologies and technical information by certain countries 

and entities of concern. 

GAO Reports T-NSIAD-98-222 (9/17/98), T-NSIAD-98-250 (9/16/98], NSIAD-98-196 

(9/16/98), T-NSIAD-208 (6/10/98), etc. (see GADS internet website 

http://www.gao.gov for more reports). 

Referred to as the Cox Report. [Available on internet website 

http://hillsource.house.gov/CoxReport) 

Appendix 2 contains a description of the countries and entities of concern, and 

technologies involved. 

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BACKGROUND 

Also, Section 1402(b)(3) requires annual audits through FY 

2007 by the Departments of Commerce, Defense, EnerB, 

and State IGs concerning the adequacy of the U.S. 

Government's export policies and procedures in preventing 

such illicit acquisitions. 

Although Treasury enforces export controls, it is not required 

to participate in the multi-year audits, but may do so in 

those years in which it has involvement in the topics being 

addres~ed.~ Interagency IG working groups were formed to 

address and coordinate the above efforts. 

Section 1402(c) above is the basis for this assessment report. 

Treasury did not participate in Section 1402(b)(3) 

requirements for FY 2000 because this year's audit effort 

focuses on "Deemed Exports at Federal Laboratories,"" an 

area in which it has no involvement. 

The Cox Report addressed various methods used by China to 

illicitly acquire U.S. military technologies. Methods 

applicable to Treasury included controlled or prohibited 

exportations and, to a more limited extent, foreign 

investment in U.S. high technology companies. 

A review of Treasury's export enforcement controls was 

completed in June i999 &-J response to a request by the 

Chairman of the Senate Governmental Affairs Committee. 

This was part of a multi-agency effort to determine the 

adequacy of export licensing policies and procedures over 

dual use commodities and munitions, and covered the 

technologies included in the scope of this review. 

Topics scheduled for review include: FY 2000 - Deemed Exports at Federal Labs: FY 

2001 Development of the U.S. Munitions List; FY 2002 - Enforcement of Export 

Controls; FY 2003 - Databases; FY 2004 - Cumulative Effect; FY 2005 Contractor and 

University Deemed Exports; FY 2006 - The Licensing Process; and FY 2007 - implementation of Working Group Recommendations. 6 A "deemed export" occurs when a foreign national has access or is exposed to 

restricted technology information. 

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BACKGROUND 

Participants included the IGs of the Departments of the 

Commerce, Defense, Energy, the Treasury, State and the 

CIA. Each IG issued individual audit reports to their 

respective agencies, and participated in the of a consolidated 

report7 to the Committee. A public hearing was held with the 

IGs on June 23, 1999 to discuss their respective audit 

findings and recommendations. Treasury's reports was 

addressed to the Commissioner of Customs and contained 4 

findings and 11 recommendations, the majority of which 

pertained to strengthening controls over export licensing 

enforcement efforts. Customs agreed to take action on all of 

the recommendations and, as oF~ovember 16, 1999, had 

completed three and was in process of addressing the 

remainder. 

The Cox Report addressed the theft of U.S. military 

technologies by China, and one of the issues raised was the 

monitoring of foreign commercial activities in the U.S. The 

Report indicated that, although U.S. capital markets could 

be used to finance military and commercial development 

projects as a means of cloaking acquisitions by front 

companies, no country specific monitoring of these activities 

was being performed. The report stated that neither the 

Departments of Commerce, the Treasury or Defense, or the 

CIA and Federal Bureau of Investigation (FBI) had a 

program, system, or effort underway to specscally monitor 

China's involvement with U.S. companies. The Report 

pointed out that Treasury played an indirect role in such 

matters. It mentioned that Customs investigated 

violations of export laws; the OfEices of the Comptroller of the 

Currency (OCC) and Thrift Supenision (OTS) reviewed 

foreign entity acquisitions of national banks and savings and 

loan institutions; and Treasury chaired CFIUS, which 

' Interagency Review ofthe Export Ltcensing Processes for Dud-Use Commodities and 

Munitions dated June 18, 1999 (DoD Report No. 99-1873 (3 volumes) 

Interagency Report on Export Licensing Procedures dated June 15, 1999 (OIG-99-090) 

(Limited Official Use) 

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BACKGROUND 

reviewed foreign acquisitions of U.S. businesses with 

national security implications. 

For the purpose of this review, Webster's Dictionary defines 

intelligence as information concerning an enemy or possible 

enemy, and also an agency engaged in obtaining such 

information. Counterintelligence refers to infonnation 

gathered and activities conducted to protect against 

espionage, sabotage, and other intelligence activities, 

conducted for or on behalf of foreign powers, organizations 

or persons, or international terrorist groups. Foreign 

intelligence means information relating to the capabilities, 

intentions and activities of foreign powers, organizations or 

persons, but not including counterintelligence except for 

information on international terrorist activities. 

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OBJECTIVE, SCOPE, AND METHODOLOGY 

The objective of this review was to assess the adequacy of 

Treasury's counterintelligence measures, export controls and 

monitoring of foreign investments in U.S. businesses to 

prevent illicit transfers of U.S. military technologies to 

countries and entities of concern described in Appendix 2. 

Contacts were made with personnel responsible for related 

activities within and outside of Treasury. Treasury offices 

and bureaus contacted included those involved with 

intelligence, export enforcement, banking oversight, and 

foreign investment monitoring and reporting. At the 

Departmental level, this consisted of the Special Assistant to 

the Secretary (National Security) for intelligence matters, and 

the Executive Assistant to the Director, Financial Crimes 

Enforcement Network (FinCEN for enforcement issues. 

Also, officials from Treasury's Offices of International 

Investment and Program Services were contacted regarding 

their role in the reporting and oversight of foreign 

investments in the U.S. 

Treasury bureau contacts included Customs and the Office 

of Foreign Asset Controls (OFAC) for intelligence and export 

enforcement matters; and the OCC and OTS for banking 

oversight activities. We also contacted the Federal Reserve 

Board (FRJ3) and Federal Deposit Insurance Corporation 

(FDIC) regulatory officials to determine the extent of their 

efforts in banking oversight matters not under Treasury 

control. Review efforts were also coordinated with the 

Departments of Commerce, Defense, Energy, State and the 

CIA IG staffs. At aJ3 locations, responsible program officials 

were interviewed and related program documentation was 

reviewed. Research was also conducted on the internet. 

Audit work was conducted in accordance with Government 

Auditing Standards issued by the Comptroller General of the 

U.S. and included such audit tests as were deemed 

necessary. The scope included a broad spectrum of related 

programs and activities since their inception through 

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OBJECTIVE, SCOPE, AND METHODOLOGY 

FY 1999. Related fieldwork was conducted from September 

1999 through February 2000. 

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Treasury Counterintelligence Responsibilities 

Treasury has only peripheral responsibilities with regard to 

counterintelligence efforts involving national security. 

Although a member of the intelligence community, Treasury 

has nodesignated national security counterintelligence 

res~onsibilities. However, Treasurv cooperates with and 

supports agencies involved in the& effoks. One Treasury 

Bureau, Customs, enforces export requirements that could 

yield useful counterintelligence information, and 

arrangements exist for appropriate sharing of this 

information. 

Federal agency responsibilities for intelligence activities are 

established primarily by Executive Order [EO).' The EO 

designated Treasury as a member of the U.S. intelligence 

community and generally limited its authorities to the 

gathering of foreign economic and financial information, and 

information pertaining to presidential security. Agency 

responsibilities for counterintelligence activities are set forth 

in a Presidential Directive,'' and Treasury was not a named 

participant in these activities. The directive provided for the 

establishment of the National Counterintelligence Policy 

Board, Operations Board and Center. Further, it designated 

the CIA, FBI, National Security Agency (NSA), the intelligence 

components of the Departments of Defense, State and 

Justice, plus certain executive level advisors as participants. 

However, in 1994 the Policy Board expanded its membership 

to include participation by all departments and agencies with 

counterintelligence components at semi-annual meetings. 

Although Treasury had no counterintelligence components, 

it was invited to participate because of its involvement in 

enforcement activities. 

~p 

' Executive Order 12333 dated December 4, 1981. 

lo Presidential Decision Directive Number PDD/NSC-24 dated May 3, 1994. 

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U.S. Customs Service 

Customs is responsible for enforcing export laws and 

regulations for passengers and goods e~ting the U.S. With 

regard to military technologies, this primarily consists of the 

Arms Export Control Act and the Export Administration 

Regulations. Intelligence activities are managed and 

coordinated by its Intelligence Division, which is within the 

Office of Investigations. The level of scrutiny brought to bear 

by the Intelligence Division on any given export is 

determined by commodity, rather than country. 

Customs also has no designated counterintelligence program 

responsibilities. However, it receives and exchanges 

intelligence information with other agencies and sources. 

This is accomplished through a variety of secure 

communication networks and direct terminal hook-ups." 

Intelligence information is also exchanged through employee 

details and participation in interagency working groups.'2 

The CJA and NSA have liaison officers assigned to Customs' 

Intelligence Division as coordinators. Customs has two 

liaison units, each comprised of a supenisory level senior 

Special Agent and senior Intelligence Research Specialist, 

assigned to both the FBI National Security Division's 

Weapons of Mass Destruction Operations Unit, and the CIA'S 

Non-Proliferation Center. The Director of Customs Strategic 

Investigations Division stated that the employee interchange 

arrangements and participation in interagency working 

groups worked well, and have been an effective means of 

sharing intelligence information with other agencies involved 

in intelligence and counterintelligence activities. 

11 Details were omitted to minimize security classification of the report. 

Missile Technology Advisory Group (MTAG), Nuclear Export Violations Working Group 

(NEVWG), Technology Transfer Working Group WG) and SHIELD (a chemical/ 

biological weapons work group). 

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Customs' export enforcement programs and outreach 

activities could potentially surface useful counterintelligence 

information. Virtually every export investigation could have 

counterintelligence implications, depending upon whether 

the perpetrator is a criminal enterprise or a hostile 

intelligence service. A brief overview of these activities is 

presented below, and any intelligence or counterintelligence 

information developed therefrom would be conveyed through 

the mechanisms previously discussed. 

Operation EXODUS was initially established by 

Customs in 1982 to stop the illegal exportation of 

controlled items, most of which involved the 

technologies in the scope of this review. Such items 

include weapons of mass destruction (nuclear and 

biological/chemical weapons), licensed munitions and 

high technology equipment having both military and 

civilian application (dual-use), plus shipments to 

sanctioned countries or entities. Historically, 

EXODUS included all related export interdiction, 

investigation and prevention efforts. Currently, it 

refers to interdiction efforts only. Since its inception, 

EXODUS efforts have resulted in more than 9,000 

seizures valued in excess of $1 billion. 

Project GEMINI is a domestic partnership outreach 

effort initiated by Customs to apprise U.S. businesses 

and exporters of export requirements, and encourage 

their reporting of attempts to illegally acquire or export 

sensitive military equipment or technologies. 

Project AMBER is a foreign outreach progra~n'~ in 

which Customs participates with the Departments of 

Defense and State to prevent the spread of weapons of 

'' Established in 1994 under the Freedom of Support Act (Section 504). 

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mass destruction and advanced conventional weapons, 

their delivery systems and related technology in 

certain Eastern European countries. l4 It involved 

Customs personnel traveling to Europe to provide 

basic and specialized training to foreign customs 

officers regarding the identification, detection, 

interdiction and investigation of the above items. 

Program funding was initially provided in the amount 

of $250,000, but was increased by $450,000 in FY 

1996 to extend the training and furnish detection 

equipment. 

DOD/Customs Counter-proliferation Program" 

extended the concept of Project AMBER to the rest of 

Eastern Europe and the newly independent states of 

the former Soviet Union.'' Up to $10 million was 

authorized for this program, which provided training 

and high technology inspection equipment1' to the 

designated countries. As of FY 1999, Customs had 

trained approximately 2,100 foreign officials from 25 

countries. These efforts have reportedly established a 

bond of trust between U.S. and foreign customs 

officials that could yield counterintelhgence 

information. 

• Operation GOLDEN TIGER was a new initiative that 

was being established by Customs to address the 

concerns raised by the Cox commission report 

regarding technology transfers to China. The effort 

would have consisted of a multi-agency task force 

approach to investigate violations of export laws by the 

'' Latvia, Lithuania. Estonia, Poland. Hungary, the Czech Republic and Slovakia. 

l5 Established under the National Defense Authorization Act of FY 1997. 16 Albania, Romania. Bulgaria, Moldova, Ukraine, Belarus, Russia, Slovenia, Georgia, 

Armenia, Azerbaijan, Turkmenistan, Uzbekistan, Tajikistan, Kyrgvzstan, Kazakhstan 

and the former Republic of Yugoslavia (Macedonia, Bosnia, Croatia, and Slovenia). I7 X-ray vans, radiation detectors, density busters, etc. 

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People's Republic of China. The task force was to be 

led by Customs, and planned participants included the 

Departments of Commerce and State's export licensing 

components, and law enforcement elements of the 

Departments of Commerce, Defense and Justice. The 

project was expected to last two years and include 

staff~ng of about 25 law enforcement, regulatory and 

support personnel. Although a site had been selected 

and a memorandum of understanding was being 

circulated, the effort had to be suspended due to 

insufficient funding. 

Customs and the FBI have also been working together 

to monitor U.S. trade with North Korea to identifv 

networks attempting to acquire and illegally export 

military equipment and technologies to that country. 

Office of Foreign Assets Control 

OFAC administers trade restrictions and economic sanctions 

imposed by statute or executive order. This is accomplished 

through publications to federal agencies, trade and fhancial 

entities, and the general public to alert them of countries 

and entities barred kom U.S. trade. OFAC sanctions existed 

for all but four of the countries of concern (China, Russia, 

India and Pakistan] included in our review, and all entities of 

concern (see Appendix 2). Although no specsc trade 

sanctions existed for China, Russia, India or Pakistan, all 

were subject to export licensing requirements by other 

agencies. In January 1999, the Department of State 

suspended all authorized exports of licensable defense 

articles and services to certain Russian entities. 

Additionally, in December 1998, the Department of 

Commerce imposed restrictions on licensable dual-use 

exports to certain entities in India and Pakistan because of 

their involvement in nuclear weapons testing. 

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Financial Crimes Enforcement Network 

FinCEN is a Departmental level office whose primary mission 

is to provide investigative support to law ekrcement 

agencies involved in drug-related money laundering 

activities. consequently, FinCEN does not routinely monitor 

foreign investments in U.S. businesses, and its efforts would 

not normally produce counterintelligence information 

concerning illicit exports of U.S. military technologies. 

However, FinCEN does provide analytical support to 

intelligence and counterintelligence activities when 

requested, but such occurrences are rare. 

Treasury Monitors Foreign Investments In U.S. 

Financial Institutions, Businesses And Securities 

Treasury's monitoring of foreign investments in commercial 

activities in the U.S. is not country specific. Although bank 

regulators monitor changes in fmancial institution 

ownership, the reviews focus on the individual investors' 

managerial competence and financial worthiness rather than 

national security issues. Related background checks also 

included referrals to agencies involved in counterintelligence 

activities. In addition, Treasury collects data on foreign 

investments in the U.S. long term securities (portfolio 

investments) for economic analysis purposes. However, this 

data is not pertinent for national security reviews. 

Treasury also chairs CFIUS, which reviews foreign direct 

investment in U.S. businesses with national security 

implications. CFIUS reviews have deterred some foreign 

acquisitions, but concerns exist whether the voluntary 

notification system assures that all foreign acquisitions of 

U.S. companies with national security implications are 

reported to CFIUS. Mandatory reporting has been 

considered. CFIUS was not timely notified of two significant 

acquisitions, indicating it needs a more proactive approach 

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to encouraging voluntary reporting. This could possibly be 

accomplished through electronic file comparison efforts with 

data maintained by various government and/or private 

industry sources, thus avoiding the need for mandatory 

reporting. 

Regulators Monitor Ownership 

in U.S. Financial Institutions 

OCC, OTS, the FRB and FDIC monitor significant changes in 

ownership of U.S. financial institutions. As a matter of 

clarity, OCC is the primary supervisor of national banks and 

reviews individual investor acquisitions thereof. The FRB 

reviews all bank holding company18 acquisitions of national 

banks and state member1' banks. The FDIC supervises and 

reviews the acquisition of all federally insured statechartered nonmember banks. OTS supervises all thrift 

acquisitions. The point of involvement by each of these 

regulators varies depending upon the degree of ownership 

involved, or other circumstances. 

None of the above regulatory agencies maintained ownership 

application records by foreign country. Although available,. 

retrieval of information in this format would reauire s~ecial 

queries. The primary purpose of the reviews isio determine 

investors' managerial competence and financial worthiness 

in order to protect the soundness of the financial 

institutions. However, associated background check 

procedures provide for the referral of foreign investors to the 

Department of State and the CIA for review. Regulatory 

officials with whom we met were not able to recall the denial 

of any past applications due to national security concerns. 

A bank holding company is generally any company, corporation, or business entity that owns stock in a 

bank or con@ols the operation of a bank through other means. '' State member banks are state-chartered banks that become members of the Federal 

Reserve System. 

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CFNS Deterred Some Foreign Investments. 

But Needs To Do More To Identify Non-Filers 

The U.S. has an open investment policy and does not screen 

foreign direct investments in domestic businesses. However, 

the Department of Commerce collects data on foreign direct 

investment in U.S. businesses for economic analysis and 

statistical purposes, including preparation of the national 

economic accounts. Treasury also collects information on 

foreign portfolio investments in support of this effort. 

Foreign investments in U.S. firms involved in classified 

defense work are monitored by the Department of Defense, 

National Industrial Security Program. For national security 

reasons, U.S. laws restrict foreign investment in certain 

sectors of the economy, such as nuclear energy, coastal and 

domestic shipping, and air transport. Foreign acquisitions of 

U.S. companies involved in leading edge or highly advanced 

technology and processes, and other activities important to 

U.S. national security are reviewed by CFIUS pursuant to 

Exon-Florio legislati~n.~~ If necessary, this statute provides 

the President with authority to prohibit or suspend a foreign 

acquisition of a U.S. company that threatens the national 

security. 

Notices of foreign mergers and acquisitions of U.S. 

companies are provided to CFIUS under a voluntary system 

and the information is propriety (business c~nfidential).~' 

Implementing regulations provide for a 30-day review to 

Section 5021 of the Omnibus Trade and Competitiveness Act of 1988 amended 

Section 721 of the Defense Production Act of 1950 (50 U.S.C. app. 2170) to provide 

the President with authority to suspend or revoke foreign acquisitions, mergers or 

takeovers of U.S. companies that threaten U.S. national security. This legislation is 

commonly referred to as the "Exon-Florio Provi'sion." The President subsequently 

delegated related review and investigative authority to CFIUS by Executive Order 

12661, but retained ha1 authority to suspend or prohibit a foreign transaction that 

threaten national security. 

32 CFR 800.401 and 800.702, respectively. 

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determine whether the transactions involve foreign control or 

national security issues that warrant further investigation. 

When CFIUS decides to investigate a transaction, it must 

provide a report and recommendation for the President 

within 45 days. The President is lawfully bound to 

announce a final decision within 15 days after completion of 

the investigation. However, he can only exercise his 

authority to suspend or prohibit the acquisition if credible 

evidence is found that the foreign entity exercising control 

might take action that threatens U.S. national security, and 

other laws other than the International Emergency Economic 

Powers Act and Exon-Florio provision do not adequately 

protect U.S. national security. 

The CFIUS program has deterred some foreign acquisitions 

that may have had national security implications. A total of 

1,232 notices were filed with CFIUS since Exon-Florio was 

implemented in 1988 through the end of FY 1999. 

Investigations were initiated on 17 of these, but 7 notices 

were withdrawn with CFIUS' concurrence after filers were 

notii5ed investigations had been initiated. Investigations of 

the remaining 10 were completed and results were forwarded 

to the President for decision. The President concurred with 

CFIUS' recornmendations in these cases, taking no action on 

nine of these, and, for the other one, ordering divestiture of a 

Chinese firm in a U.S. aircraft parts company. 

The CFIUS chairperson cautioned, however, that examining 

only the statistics on notices, investigations and blocked 

transactions does not completely depict the program's 

impact. She explained that the program's existence alerts 

potential foreign investors in U.S. companies to national 

security concerns. Although it cannot be quantified, she 

maintained that, because of Exon-Florio, anecdotal evidence 

exists that investors consider national security concerns 

when structuring mergers or acquisitions of U.S. companies. 

Moreover, she stated the program has protected U.S. 

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national security without compromising the country's open 

investment policy. 

There is some concern that the voluntary notification system 

does not assure that all foreign acquisitions of U.S. 

companies with national security implications are reported 

to CFIUS. GAO reviewed the implementation of the ExonFlorio legislation in 1995.'' It examined all transactions 

notified to CFIUS, which included companies in defenserelated and high technology industries. In order to assess 

the scope of non-notifications, GAO examined two private 

sector databasesU and found that, while many foreign 

companies notified CFIUS of their investments in U.S. 

companies, many others involved in high-technology 

industries" had not. However, GAO was unable to establish 

a national security link with the unreported transactions. 

This was due to the data's insufficiency in ident&ing 

whether the acquired companies operated in the national 

security sector (i.e., had defense contracts, produced 

products subject to U.S. export controls, or met other 

national security criteria). GAO attributed the potential nonfilings to the voluntary notii%cation system, but noted that 

Exon-Florio was not intended to provide a comprehensive 

screening mechanism for all foreign direct investments. It 

pointed out that the Government has other means of 

protecting national security, such as export controls and 

industrial security regulations that protect classified 

facilities. 

GAO Report entitled Implementation of Exon-FLorio and Related Amendments, NSIAD96-12, December 1995 

23 Economic Strategy Institute (ESI) database, which tracks foreign investments in and acquisitions of U.S. 

companies involved in high, key, or critical technologies; and Securities Data Company (SCD) database 

which tracks investments, acquisitions and mergers worldwide (but was limited to U.S. transactions). 

The high technology industries cited in the GAO report included telecommunications, 

advanced materials, biotechnology, eleckonics, semi-conductors. computers and 

aerospace. 

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Nevertheless, we believe that CFIUS needs to take a more 

proactive role in identifying potential non-filers. In 1996, a 

Hong Kong company that traded with the People's Republic 

of China acquired a U.S. company which manufactured ball 

bearings used in U.S. military aircraft. However, CFIUS was 

not notified of the transaction until a legal review by a new 

law firm hired by the company determined a filing was due, 

nearly 18 months later. CFIUS was subsequently notified of 

the transaction, which resulted in an investigation. 

However, just prior to completion of the investigation in 

December 1998, the foreign owner agreed to liquidate its 

interest in the firm. Pending divestiture, the U.S. company 

was placed under the control of a DOD-approved trustee. 

More recently, in early 1999 a European firm purchased a 

U.S. company that produced precision tooling used to 

manufacture jet engine turbine blades used in military 

aircraft and missiles. It was not until the firm recently 

applied for an export license to ship some of this equipment 

to China that it was learned CFIUS had not been notified of 

the transaction. 

Although controls prevented the above items kom being 

exported, months elapsed before CFIUS was ultimately 

notified of the transactions. This could have provided the 

foreign entities with access to information concerning the 

technologies involved. This is indicative that CFIUS needs to 

take more proactive efforts to promptly identify non-filers in 

order to limit foreign access to the technologies involved. 

A recent attempt has been made to make Exon-Florio 

reporting mandatory, apparently to expand the coverage of 

notified transactions. Legislation was introduced in the last 

legislative session to accimplish this,25 but was ultimately 

withdrawn. In response to a congressional request, GAO is 

25 Senate Bill 1059 would have amended Section 1409 of the National Defense 

Authorization Act of FY 2000 to require notification to CFIUS of all acquisitions of 

U.S. businesses involving foreign government control that affect the national security. 

However, this requirement was omitted from the final legislation. 

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currently updating its 1995 work in light of the Cox 

Committee's recommendation to change voluntary reporting 

of foreign mergers and acquisitions to mandatory. Treasury, 

on behalf of CFIUS, strongly opposed mandatory reporting 

requirements. They maintained it would impose an added 

burden on investors and could reduce foreign direct 

investments in the U.S. without providing meaningful 

additional protection to national securitv. Treasurv observed 

that congress carefully crafted current ;equiremeits over a 

decade ago to protect national security in a manner that 

preserves U.S. open investment policy. The CFIUS 

chairperson estimated that mandatory reporting 

requirements would increase filings from about 70 to 700 

per year, which would require substantial staEng. 

Our review indicated that the scope of coverage of national 

security reviews of foreign acquisitions and mergers might be 

enlarged through electronic file comparison efforts. Nonfilers could potentially be identified through comparisons of 

CFIUS data with foreign investment and other data 

maintained by various government and/or private industry 

sources. For example, the Department of Commerce's BEA 

collects comprehensive foreign direct investment data for 

economic analysis and statistical purposes, including 

preparation of the national economic acc~unts.~%owever, 

usage and disclosure of the data are restricted by statute,27 

and CFIUS officials were uncertain as to whether the data 

included sufficient information to identify transactions with 

national security concerns. GAO also identitied two private 

foreign investment databases in its 1995 Exon-Florio review, 

26 The International Investment and Trade in Services Survey Act (Public Law 94-472, 

90 Stat. 2059.22 U.S.C. 3101-31081, as amended by Public Laws 98-573 and 101- 

533) authorizes BEA to collect foreign direct investment data for statistical and 

analytical purposes. Foreign direct investments represent affiiated (foreign) 

ownership interests or conk01 (direct or indirect) by one person of 10 percent or more 

of the voting securities of an incorporated business or equivalent interest in an 

unincorporated business. '' 22 U.S.C. 3104(c) provides that the data may only be used for analytical and 

statistical purposes, and imposes penalties regarding improper disclosure. 

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but this data also lacked sufficient information to iden* 

national security concerns. The Department of Defense 

maintains information concerning defense contractors that, 

in combination with CFIUS and some of the above data, 

might provide a means of identifying foreign acquisitions 

with national security implications not reported to CFIUS. 

The Department of Commerce OIG also reviewed CFIUS 

activities as part of its assessment of counterintelligence 

measures and export controls to prevent illicit transfers of 

U.S. military technologies. In its-initial draft report, the 

Commerce OIG also raised concern regarding the adequacy 

of CFIUS' efforts in identifling non-filers, and mentioned 

electronic file comparison efforts as a possible means of 

identifying non-filers. However, it also raised concern 

regarding the CFIUS' overall effectiveness in preventing 

foreign acquisitions of U.S. high technology companies. 

Accordingly, the Commerce OIG will be suggesting that an 

interagency OIG team from the Departments of Commerce, 

Defense, and the Treasury conduct a comprehensive review 

of these activities. However, it should be noted that GAO is 

currently performing work in this area that may preclude the 

necessity of these efforts. 

The CFIUS chairperson indicated that the Committee would 

be open to considering a proposal designed to augment the 

current voluntary foreign acquisitions notification system, if 

legally and technically feasible. 

Other Issues 

In its review of CFIUS activities, the Commerce OIG also 

questioned whether Treasury's dual mission of promoting 

open investments and investigating questionable foreign 

investments, created a potential conflict of interest for 

Treasury with respect to its investigative role as chair of 

CFIUS. The Commerce OIG points to the fact that 

Treasury's Office of International Investment, whose primary 

- 

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mission is to support open investment policy, also acts as 

secretariat for CFIUS. It also points to the fact that 

Treasury, acting on behalf of CFIUS, strongly opposed 

legislation recently proposed to make reporting to CFIUS 

mandatory. It should be noted that, although Treasury 

chairs CFIUS, all members participate equally in issues 

considered by the Committee. As the chair, Treasury does 

not have the authority to undertake actions on behalf of the 

Committee without the concurrence of all participating 

agencies. 

The Commerce OIG does acknowledge that it has no 

evidence to indicate that the Treasury Ofice of International 

Investment had not handled CFIUS notifications properly. 

While we did not test for this, we also are not aware of any 

mishandled CFIUS notifications within Treasury. Therefore, 

we do not have a basis to question Treasury's capability to 

carry out its responsibilities as chair of CFIUS. 

Conclusion 

Concerns have been raised whether the voluntary system of 

notifications of foreign acquisitions of U.S. companies with 

national security implications assures all cases are notified 

to CFIUS. Mandatory reporting has been proposed and, is 

among issues being considered by GAO in its review of ExonFlorio activities. The Department of Commerce OIG has also 

reviewed CFIUS' efforts kd is planning to suggest that a 

comprehensive review of the program's overall effectiveness 

be conducted. Our review indicates that, although CFIUS' 

efforts have deterred some foreign investments with potential 

national security concerns, CFIUS needs to take a more 

proactive role to identify non-filers. Automated fle 

comparison efforts may be a means of accomplishing this 

and foregoing the need for mandatory reporting 

requirements. 

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Recommendation 

1. We recommend that the CFIUS chairperson coordinate 

efforts with other Committee members to identify and 

evaluate all sources of available data that can assist in 

identifying Exon-Florio non-aers. Once data sources are 

identified, CFIUS needs to develop a methodology and 

establish procedures as to how these data sources can be 

effectively used to meet its responsibilities. 

Management Response and OIG Comments 

The Treasury Under Secretary for International Affairs 

concurred with the above recommendation and indicated 

that the CFIUS chairperson would initiate appropriate action 

to address our concern. The response also included an 

explanation of the rationale for voluntary reporting and a 

discussion of adversities associated with mandatory 

repow. The full text of the response is presented in 

Appendix 1 to this report. When completed, the proposed 

action will satisfy the intent of our recommendation. 

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Appendix 1 

MANAGEMENT RESPONSE 

DEPARTMENT OF THE TREASURY 

WASCIINGTON. 0.C. 

UNDER SESIETA~V March 17, 2000 

MEMORANDUM FOR DENNIS S. SCHINDEL, ASSISTANT INSPECTOR GENERAL 

FOR AUDIT 

FROM: Timothy F. Geithner A@ 

Under Sccrctary (htermtional Affairs) 

Comments on the Draft Audit Report on the 

Depamnent of Trtastuy EEorts to Pmmt Ulicit Transfers 

of U.S. Miliw Technolo&s (A-NO-99-075) 

This memorandum is in response to your March 10 tmmmittal of the Dr& Audit Report 

weuared by Treasury's Office of the hsDector Gcncral C'OIG? which reauested Txasuv's 

&ition od the ~e&n's recommendad&. As drair of &e ime&mcy cdmminee on ~o;d~n 

Invesmcnt in the United States ("CFIUS"), wc circulated your Rwrt w all CRUS agcnncs w 

apprise them of your recommendation. 

CFIUS, on behalf of the Prrsidmi implements the Exo~Florio provision, which provides for a 

national secmity miew of foreign -ON Of U.S. busin-. The following commentr 

penain to the r~mmmdation and seek to clarify some of the issues raised in the Report. 

We concur with the recommendation that Treasury, as chair, soordinate a CFNS review of 

available sources of data that could assin in identifvine non-iilm ~-~~~-~p--~~~ 

under the currmt ~--~--~- svstmr .-~-- of 

-- 

voluntary notification and develop a method of utikdng tbis dam. Howem, we note that while 

the Report is critical of CRUS's implememation of Exon-Florio, which lrrovides for a vollmgrv 

system of notification, it does not fully explain the lationale for a volmt& system. Without this 

expkdon, it is di&dt to acSept the irnplicauon of the Report that the volmtxy sy;tem does 

not meet the objectives of the Exon-Florio statute. 

Whm Exon-Florio was matted, one of the major assumptions behind the legislation was that the 

President already had at his disposal a number of lam and redations desiened to mtect the 

national security. These rangeom laws that restrict foreign>rmaship ofb.~. a<carrias w 

laws that rsgulate the export of sensitive technology or that dct access w classified 

information And. in recoation of these other laws and reeulations the Exon-Florio mvision 

provided criteda for invok& its authority that would be p&wptiv~ly necessary in /&y few 

cases, is., when no other law, other than the Internatid Ehmgency Economic Po- Act 

("IEEPA") or Exon-Rorio itsel£ is deemed adequate and appropriate to protect the national 

security. 

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Many foreign acquisitions of US. businesses are not notified to CFIUS because they do not have 

national securiry implications. However, there are mong incentives for companies to file when 

there is a possible link to national security. Transactions not notified are subject to potential 

adverse Prrsidential action indejinitely. In addition, there are safe- to help assure tbat 

transactions that affect the national security are notified. Th- is a nrocedme in nlace to uncover 

non-nosed wnsacdons with national scc&fy implications, whichbcludes, as provided in the 

Exon-Florio regulations, that any CFNS member agency may notify a -on that has not 

been notified by the parries to a foreign acquisition. 

Moreover. the ~kted States receives the lerpest share of the world's foreien direct investment. 

~bis provides numerous befits to our noLomy, iduding introducing Ww capital, techn~~ogy, 

mmazaial ex~ertise, and jobs. Some of these benefits acoruc to sectors of the economv that 

enha& the US. defense &dustrial base. Therefon, we have to weigh the potential nq&ve 

impact on the U.S. climate for foreign direct investment against tbe benefit of a bore mc-active 

role to assure that voluntary reporti& is ocnuring." . - 

Gay Si as staff cbair, will coordinate a CFNS review of sources of available data that could 

be used fo idmtia uausactions in the national security axea not notified and to discuss additional 

procedures that might best utilize this data to augment the voluntary system of notification. 

Other Issues 

Examming only the statistics on notices, investigations, and blocked kmsadons does not give 

the wmnlete nicture of the imm of the imolementation of Exon-Florio. The existence of the * - - - 

process raises the awarmess of potemial foreign investors in U.S. companies to national security 

wncuns. Moreover, while it cannot be quantified there is anecdotal evidence that since the 

enactment of Exon-norio, investors wiider natiinal security when shurmring m&- or 

acquisitions of U.S. companies. 

The Committee is open to wnsideriug appropriate proposals wfiicb are legally and technically 

feasible and Wch would serve to improve the voluntary system of notification of foreign 

acquisitions of U.S. wmpanies subject to the Exon-Florio pmvision The Report recommends 

utilizine available so-s of data to auwent the voluntarv Nstem. The recommendation does 

not expiain how such data would improve the voluntary &&. OIG -has not informed us 

of any available so- of data on foreipn acquisitions of U.S. comuanies that would -vide 

suBhent information to identify effe&ely afymnsactionot notifi;d that potentially -&odd 

have been. 

In support of its recommendation for a more pro-active role for CFNS. the Report cites two 

foreign acquisitions of U.S. wmpanies reviewed by CFIUS after the transactions closed. The 

Repoa dismsed one inmsaaion that involved a small U.S. ball bearing mandimxer which was 

acquired by a Hong Kong company. In the course of undertaking its miew, CFIUS found the 

wmpany was not in compliance with U.S. export control lam. The CFNS review dted in 

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actions thar brought the wmpany into compliance with export wnml laws and, ultimately, led to 

the foreign wmpauy's establishing a uuseeship for the U.S. wmpany dl it could be sold to a 

suitable buyer. Thus, CFNS was able to protect the national dty witbout having to mgage 

tbe Prrridmt 

The other transaction mmtioned in the wn is one inv01-e: a Swiu firm omchine a U.S. 

mashine tool company. Bccavw of informafion supplied by ~-cFIUS mcmdr agency,a CrrOS 

minv will be initiated swn The Report aiticizcd the time delay in CFNS's learning of the 

eon 8nd %ggested the fordgn cntity wdd have uwd this time to gain access 

technoIomcal information thc comnanv . .. Homer. ifthe tshnol~ - - is dint to U.S. ~~~ ---~ ~ ~ - 

-n &I Lam, access by a foreign pgan would quire an aport liccnw. Ifthe company 

did not apply for a licew. it would be in violation of U.S. expan wnml tam. 

Avgmmtaliom of thc &sting voluntary system alone or mandatory notifidon alone cannot 

guaramee a timely CFNS review, if companies have an illegal or othaMw inappropriate 

pllrpow. These aamplcs show tbat CFNS on eke cffstiw action to miriaate wmtial - - national wcudN . mblrms. 

. ln the one ease. CFIUS action bmueht the U.S. corn-v . . into 

compliance with U.S. laws and quid the foreign wmpany'sce~id todivest the U.S. 

company. In the other case, a CFIUS agmcy brought anmtion to a rmn-notified transactioo ihat, 

became of CFIUS action, will soon be noliiid 

Voluntary vs. Mnnbtory Notaention 

The Roa raiss the issue of awlvntarv vs. a mandaanr svstem of miifvim fonie. 

acqrusiiiom of U.S. wmpania to CFNS. CFNS believes a "oirmtary system offc~s~&"u, 

including wmpaoii with an open U.S. investmat policy, which make it the ovnwhelming 

choice whm wmpared with a mandatory system. Moreover, thae are safe@ My 

available to identify non-am. 

CFRTS bas detiberateiy adopted a flexiile appmaeh to implemmring Exon-Florio in &to 

me the thedent's ability to mtsct the national kN in a wide -e of situations where 

itha kws and regulations may mi be adequate and appm&te. The reguladons *ch 

implcmmt Exon-Rorio do not define 'hatid wcudty" and broadly dcfroc the impomtit 

thrrshold concept of Tdgu conwol" in ihc wntsxl of an ac4uisition This mvs rhe Prcsidmt 

the llkcoary b to a- foreign acquisitions that mihaun natiod-&amity. Tbir 

flexible approach works 4 with a volumary system of norifidon, but would work poorly 

A mandm system wodd quire CFKJS to dekinc fairly precisely tbc fypes of transactiom 

subject to oo~catiop There are rwo drawbacks to this qpma& Fi clearly which 

wmpanies om in the national E+nnitr sector and/or ;ha forcien cod would 

limithe tledbility of the ~residmt's &g the donal Mlrity. compa>es dd more 

readily muenm umsmions to avoid tbe reach of the *Me. Ssond, over he budaecm and 

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~ologies evolve as do their implications for our national sdty. A mtia and precise 

delinition of the national security would fail to keep abreast oflhse changes. 

A mandamry ryn5 of mtia woulduansfm Exon-Florio hm a statute that essentially 

Npplemmts other laws to a rcrtcning dena. It would imp" an added blrrdm on foreim 

invstors and incrcsw the wst and risk for imrsrdne in the United Smes. Hieher wSD and risks 

mean that some beneficial inverrmm may not be made, resulting in a loss titbe U.S. economy. 

including the potential loss of foreign capital and technology. 

The voluntarv &tern has safcevards to maximiz. the likelihood thaf atransacfion with natiollal 

saurity imp&ions will be &bj& to Exon-Florio rcvinv. In the normal came of CFNS 

memk agmcy activities, which include govcmm~t conmdug, cxpoR ulllml activities, and 

idshy analysis, agmcies kcome aware of pro@ mugen and acquisitions of U.S. 

&es. Any CFNS member agency may notify a kmsaciion that has not bcm notified by 

the @s to a eamaction, aefarding to the Exon-Florioregulations. 

The vollmary system mes to ptst the Dational security withom imposing an due bdm 

on fomign invemncnt in the Unite3 States. Since the United Seta is the hon wunw for the 

lamest &mt of foreian inveshnent and U.S. investors arc the lare.CFf investors abroad it is 

im&t for U.S. ecn&ic well-being- maimain our tradtional-oP investment 

u,m 

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Appendix 2 

DESCRIPTION OF TECHNOLOGIES AND 

COUNTRIES AND ENTITIES OF CONCERN 

TECHNOLOGIES 

Due to large number of technologies involved, OIG staffs met 

with House Armed Services Committee staff to identify items 

deemed most critical by the Committee. As a result, the 

following technologies were identified and represent the 

focus of our review: 

Ballistic-missile technology 

Biological and chemical weapons technology 

Radar and infrared missile guidance systems 

Nuclear weapons technology 

Space systems technology 

High performance computers 

COUNTRIES AN13 ENTITIES OF CONCERN 

Section 1406(fl of the Act defines countries and entities of 

concern as: 

(1) any country the government of which the 

Secretary of State has determined, for purposes 

of Section 60) of the Export Administration Act 

of 1979 or other applicable law, to have 

repeatedly provided support to acts of 

international terrorism; 

(2) any country that (a) has detonated a nuclear 

explosive device (as defined in section 830(4) of 

the Nuclear Proliferation Prevention Act of 1994 

(22 U.S.C.3201 note)); and (b) is not a member 

of the North Atlantic Treaty Organization; and 

OIG-00-072 DEPARTMENT OF THE TREASURY Page 31 

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Appendix 2 

DESCRIPTION OF TECHNOLOGIES AND 

COUNTRIES AND ENTITIES OF CONCERN 

(3) any entity that (a) is engaged in international 

terrorism or activities in preparation thereof; or 

(b) is directed or controlled by the government of 

a country described in paragraph (1) or (2) 

above. 

In order to clarify and assure proper audit coverage, 

the Department of Defense's IG developed a listing of 

countries and entities of concern from Department of 

State advisories, Executive Orders and other statutory 

restrictions based upon the above criteria. This listing 

is as follows and serves as the scope of the related 

audit coverage: 

COUNTRIES OF CONCERN 

Afghanistan Cuba China 

India Iran Iraq 

Libya North Korea Pakistan 

Russia Sudan Syria 

OIGOO-072 DEPARTMENT OF THE TREASURY Page 32 

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OF U.S. MILITARY TECHNOLOGIES 
Appendix 2 

DESCRIPTION OF TECHNOLOGIES AND 

COUNT- AND ENTITIES OF CONCERN 

ENTITIES OF CONCERN 

Abu Nidal Organization Liberation Tigers of Tamil 

Eelam 

Majahedin-e Khalq 

Organizations 

National Liberation Army 

Palestine Islamic JihadShaqaqi Faction 

Palestine Liberation FrontAbu Abbas Faction 

Popular Front for the 

Liberation of Palestine 

Popular Front for the 

Liberation of Palestine 

General command 

Al-Qaida 

Revolutionary Armed Forces 

of Colombia FARC) 

Revolutionaxy Organization 

17 November 

Revolutionary People's 

Liberation Party/ Front, 

a.k.a. Devrimici Sol, a.k.a. 

Dev Sol 

Revolutionary People's 

Struggle 

Sender0 Leos0 

Tupac Amaru Revolutionary 

Movement 

Abu Sayyaf Group 

Armed Islamic Group 

Aum Supreme Truth, a.k.a. Aum 

Shhlkyo 

Basque Fatherland and Liberty 

Al-Gama'at al-Islamiyya 

HAMAS (Islamic Resistance 

Movement) 

Harakat ul-Mujahidin 

Hizballah 

Japanese Red Army 

Kach 

Kahane Chai 

Kurdistan Worker's Party 

- 

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Appendix 3 

ABBREVIATIONS 

- 

BEA 

BXA 

CFIUS 

EO 

FDIC 

FinCEN 

FRB 

GAO 

NSA 

OCC 

OFAC 

OTS 

Bureau of Economic Analysis (Commerce) 

Bureau of Export Administration (Commerce) 

Committee of Foreign Investments in the United 

States 

Executive Order 

Federal Deposit Insurance Corporation 

Financial Crimes Enforcement Network 

(Treasury) 

Federal Reserve Board 

General Accounting Office 

National Security Agency 

Office of Comptroller of the Currency (Treasury) 

Office of Foreign Assets Controls vreasury) 

Office of Thrift Supervision (TreasuryJ 

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Appendix 4 

MAJOR CONTRIBUTORS TO THIS REPORT 

Dennis S. Schindel, Assistant Inspector General for Audit 

Marla A. Freedman, Deputy Assistant Inspector General, 

Program Audits 

Charles Mataya, Director, Program Audits 

Harold H. Borel, Audit Manager 

Jill A. Byrd, Auditor 

Warren C. Wilson, Auditor 

Robert F. Edwards, Referencer 

OIG-00-072 DEPARTMENT OF THE TREASURY Page 35 

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Appendix 5 

DISTRIBUTION 

DEPARTMENTAL OFFICES 

Under Secretary for International Affairs 

Under Secret- for Enforcement d 

Special Assistant to the Secretary (National Security) 

Director, Office of International Investment 

Director, Office of Program Services 

Director, Office of Accounting and Internal Control 

Director, Office of Strategic Planning and Evaluations 

Director, Office of Budget 

TREASURY BUREAUS 

U.S. Customs Service 

Commissioner 

Assistant Commissioner, Office of International Affairs 

Assistant Commissioner, Office of Investigations 

Director, Office of Intelligence 

Director, Office of Strategic Investigations 

Comptroller of the Currency 

Director, Office of Thrift supenision 

Director, Office of Foreign Assets Control 

Director, Financial Crimes and Enforcement Network 

OTHER AGENCIES 

Federal Reserve Board 

Director, Federal Deposit Insurance Corporation 

Inspector General, Department of commerce 

Inspector General, Department of Defense 

Inspector General, Department of Energy 

Inspector General, Department of State 

inspector General, ~ek.ral Intelligence Agency 

OIG-00-072 DEPARTMENT OF THE TREASURY Page 36 

EFFORTS TO PREVENT ILLICIT TRANSFERS 

OF U.S. MILITARY TECHNOLOGIES