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September 13, 2000

GAO/T-ASM-00-249

ARMS CONTROL

Experience of U.S.

Industry With Chemical

Weapons Convention

Inspections

Statement of Jack L. Brock, Jr.

Managing Director, Acquisition and Sourcing Management

Testimony

Before the Subcommittee on National Security, Veterans

Affairs, and International Relations, Committee on

Government Reform, House of Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-ASM-00-249

Mr. Chairman and Members of the Subcommittee:

I am pleased to participate in your hearing on the impact of proposed

compliance regimes for the Convention on the Prohibition of the

Development, Production and Stockpiling of Bacteriological (Biological)

and Toxin Weapons and on Their Destruction (Biological Weapons

Convention). These compliance regimes would affect a number of U.S.

companies—mostly in the pharmaceutical industry but also may affect

companies in the chemical, agricultural, and brewing industries. The

pharmaceutical industry has expressed concern over the risk of

compromising trade secrets, the potential cost of facility inspections, and

the risk to corporate reputations should the public become aware that

specific facilities are undergoing inspections related to biological

weapons.

These concerns are similar to those expressed by companies affected by

the Convention on the Prohibition of the Development, Production,

Stockpiling and Use of Chemical Weapons and on Their Destruction

(Chemical Weapons Convention) prior to its ratification.1 Accordingly, you

asked us to assess the experience to date of these companies inspected

under the Convention. Specifically, you asked us to (1) determine how

companies protect proprietary information during inspections, (2) identify

any adverse publicity for companies as a result of being inspected, and

(3) identify the costs to companies of being inspected.

In brief, the experience of the first seven U.S. companies that have been

inspected under the Chemical Weapons Convention showed that

companies were generally able to protect proprietary information, in part

because of certain provisions in the Convention and U.S. law. We also did

not identify any instances in which a company was affected by adverse

publicity resulting from inspections, even though companies varied in how

much information was provided to the public concerning inspections.

Lastly, these companies reported inspection-related costs to GAO ranging

from $6,000 to $107,000. The large variation is partly attributable to

inconsistencies in components of costs included in the total cost as well as

differences in the facilities being inspected.

Nevertheless, I would like to caution that our ability to draw conclusions

based on company experiences under the Chemical Weapons Convention

is somewhat limited. While the Biological Weapons Convention protocols

1 The Chemical Weapons Convention is the first arms control treaty to directly affect a substantial

portion of U.S. industry—specifically, over 300 companies.
Page 2 GAO/T-ASM-00-249

currently under negotiation bear some similarity to the Chemical Weapons

Convention in terms of requiring companies to submit information and

provide access to facilities, the level of detail for reporting and

intrusiveness of inspections has yet to be finalized for the Biological

Weapons Convention protocols.

The United States ratified the Chemical Weapons Convention in 1997. The

Convention (1) prohibits the development, production, stockpiling, or use

of chemical weapons, (2) requires the destruction of existing chemical

weapons production facilities, as well as stockpiles of weapons, and

(3) establishes an inspection regime to monitor the production, use, and

transfer of chemicals that could be associated with chemical weapons.

The Chemical Weapons Convention established the Organization for the

Prohibition of Chemical Weapons. As part of its charter, the Organization

is responsible for the inspection of government and industrial facilities to

ensure compliance with the Convention. The Organization’s operations are

funded by contributions from countries that have ratified the Convention.

For 2001, the United States will provide the Organization with 25 percent

of its funds, or approximately $5.6 million. The Organization employs over

200 inspectors from about 60 countries. Under the Convention, countries

may reject specific individuals from conducting inspections on their

territories. Exercising this right, the United States has blocked Cuban and

Iranian nationals from participating in inspections of U.S. facilities.

The Chemical Weapons Convention, as implemented, requires companies

to provide information and access to facilities based on the type and

quantity of chemical a facility manufactures, uses, exports, or imports.

Table 1 lists the categories of chemicals subject to the Convention.

Background
Page 3 GAO/T-ASM-00-249

Table 1: Types of Chemicals Subject to the Chemical Weapons Convention

Type of chemical Description Example

Schedule 1 Toxic chemicals that have little or no commercial use and

were developed or used primarily for military purposes.

The nerve agent Sarin, which was used in the 1995

Tokyo subway attack.

Schedule 2 Chemicals that can be used to produce chemical weapons,

but have commercial uses and are not produced in large

quantities.

The chemical thiodiglycol is used to manufacture

ball-point pen ink and is also a precursor for mustard

gas, which Iraq used against Iran in the Iran-Iraq War

during the 1980s.

Schedule 3 Chemicals that can be used to make chemical weapons,

but also have significant commercial uses.

Phosphorus trichloride, which is used to make Sarin

and insecticides.

Unscheduled

discrete organic

chemicals

Certain chemicals subject to the Convention that are

not listed in a schedule and are used in a broad range

of commercial products.

Propylene glycol, which is used to make antifreeze,

and acetone, which is used in nail polish remover.

Source: GAO summary of Commerce Department and other documents.

Under the Chemical Weapons Convention, companies must provide

information annually on the quantity and location of specific types of

chemicals to the Organization for the Prohibition of Chemical Weapons

and must, when selected, submit to facility and record inspections by a

team of international inspectors. The information and inspection

requirements vary according to the risk of diversion of the chemical or

facility to producing chemical weapons. For example, facilities that use,

produce, or store Schedule 1 chemicals above a certain threshold can

expect to be inspected at least annually and are subject to the most

stringent reporting requirements. Other facilities may be inspected less

frequently, based on the risk of diversion.

There are three types of inspections: initial, routine, and challenge. Initial

and routine inspections verify the information provided to the

international body as well as the absence of Schedule 1 chemicals at

certain facilities. In the event that a signatory to the Chemical Weapons

Convention is suspected of violating the Convention, a challenge

inspection may take place. A challenge inspection may occur with very

little notice and is not limited to those facilities that have submitted

information to the Organization for the Prohibition of Chemical Weapons.

To date, no challenge inspections have occurred.
Page 4 GAO/T-ASM-00-249

There are likely to be broad similarities between the Chemical Weapons

Convention and the Biological Weapons Convention protocols. Such

similarities may include requiring companies to (1) submit information

about facility operations to an international governing body, (2) provide

international teams access to facilities, and (3) permit challenge

inspections of facilities suspected of noncompliance. However, many of

the details of the Biological Weapons Convention protocols have yet to be

agreed upon and could result in significant differences between the two

Conventions. For example, it is still unknown whether companies will be

required to submit confidential business information to a governing body

or what degree of access companies will be required to provide

international teams under the Biological Weapons Convention protocols.

The Chemical Weapons Convention requires companies to submit

confidential business information to the Organization for the Prohibition

of Chemical Weapons and requires companies to provide a level of access

necessary to verify information provided to the Organization, including the

review of production records and taking of samples for chemical analysis.

Protecting confidential business information—that is, trade secrets or

privileged commercial or financial information—has been an ongoing

concern of U.S. companies in complying with the Chemical Weapons

Convention. Similarly, protecting such information is a major concern for

the pharmaceutical industry. For example, in the pharmaceutical industry,

a sample of the product may be sufficient to reveal enough confidential

business information for a competitor to gain an advantage. Nevertheless,

we found that chemical companies believe that they have been able to

protect their proprietary information, in part because of provisions within

the Convention and U.S. law2 and through extra measures taken by

companies before and during inspections.

The Chemical Weapons Convention prohibits inspectors from disclosing

confidential information they obtain during the course of their duties to

unauthorized individuals. Furthermore, inspectors, like all employees of

the Organization for the Prohibition of Chemical Weapons, are required to

sign secrecy agreements that cover the period of their employment plus

5 years. If an allegation is made that an inspector or other Organization

employee has violated the obligation to protect confidential information,

the Organization must investigate. If the allegation is substantiated, the

Organization can impose punitive and disciplinary measures. For serious

breaches of confidentiality, the inspector’s or other employee’s immunity

2 Chemical Weapons Convention Implementation Act of 1998 (22 USC 6701 et seq.).

Similarities and

Differences Are Likely

to Exist Between the

Chemical and

Biological Weapons

Conventions

Confidential Business

Information Has Been

Protected
Page 5 GAO/T-ASM-00-249

may be waived by the Organization, which could result in that individual

being subject to criminal or civil penalties in the affected country.

The U.S. company officials that we spoke with believe that they have been

able to adequately protect confidential business information while

satisfying the inspectors that they are in compliance with the Convention.

In fact, the Convention itself affords companies some flexibility in taking

measures to protect confidential business information, provided they can

still demonstrate compliance. In particular, companies have taken specific

steps to identify what constituted confidential business information prior

to inspection and have removed or covered specific articles to prevent

revealing such information. For example:

• In one case, a company removed barrels of chemicals that were not

related to the inspection from the production area to a storage room that

the inspectors would not have access to. In the view of company officials,

identification of the chemicals in the barrels could have revealed

confidential business information to the inspectors.

• A company covered sections of pipes in the production room that

identified what chemicals were being used during the production process

but were not related to the inspection.

• Another company covered up procedures manuals that contained sensitive

information about production processes.

• Generally, companies maintained supervision of the inspectors by

ensuring that they were continuously escorted while in the facility.

In other cases, companies have had to take extra measures to protect

information while satisfying the needs of the inspectors and meeting the

provisions of the Convention. For example, to protect production

processes, one company ensured that all computer screens in the control

room of the facility showed non-sensitive information before allowing

inspectors into the room. Some companies have had to create summary

sheets of production information for the inspectors because the raw data

would reveal confidential business information.

In addition, U.S. implementing legislation provides for the protection of

confidential business information and severe penalties for violations on

the part of any current or former U.S. government employee. Section 404

of the Chemical Weapons Convention Implementation Act of 1998

exempts confidential business information from public release under the

Freedom of Information Act, but permits disclosure to the Organization

for the Prohibition of Chemical Weapons, congressional committees or
Page 6 GAO/T-ASM-00-249

subcommittees of jurisdiction, and law enforcement agencies under

special circumstances. The law also provides for fines and imprisonment

in the event of willful disclosure of confidential business information.

Federal agencies also provide assistance to help companies that are

inspected protect confidential business information. The Commerce

Department has sponsored seminars to explain the requirements of U.S.

regulations implementing the Chemical Weapons Convention and to

suggest how to protect confidential business information. Commerce and

other agencies also provide site assistance visits to help companies

prepare for inspections. Moreover, during inspections, Commerce and

Defense Department staff escort the inspectors at all times to prevent

unauthorized access to facilities and information and a Federal Bureau of

Investigation official is on site for counterintelligence purposes.

Many companies have been concerned about negative public reaction to

knowledge that a company has been inspected under the Chemical

Weapons Convention. For example, neighboring communities might be

alarmed that a chemical produced nearby could be used to create a

weapon. As one industry official said, the worst case scenario would be a

minor technical error resulting in a headline stating that the company

failed a chemical weapons inspection. To date, however, U.S. companies

we spoke with have indicated that there has been no adverse publicity

related to the inspections under the Chemical Weapons Convention.

To prevent adverse public reaction, chemical companies have chosen to

either (1) not publicize the fact that their facility is subject to inspection or

(2) initiate a dialogue with surrounding communities about inspections. In

choosing the first approach, one company stated that the local community

in the past has objected to the presence of the facility near houses, and

that it did not want any more negative publicity. In opting to inform the

public about impending inspections, one company said that hiding the

information would be more damaging than addressing the concerns of the

community. Federal agencies have accommodated company decisions in

both approaches.

We obtained cost data from the first seven companies to be inspected and

found that they identified inspection costs ranging from $6,000 to $107,000.

We were not able to audit these costs. However, we found that factors

affecting this variation include the types of costs companies are reporting,

how they calculate those costs, and differences in the facilities inspected.

No Adverse Publicity

From Inspections

Reported

Cost of Inspections

Vary
Page 7 GAO/T-ASM-00-249

The Chemical Weapons Convention Implementation Act of 1998 requires

the President to submit an annual report to the Congress on inspections

made under the Convention. The report must include such information as

the number of inspections conducted in the United States during the

preceding year, the cost to the United States for each inspection, and the

total cost borne by U.S. industry in the course of the inspections. In

implementing this Act, Commerce regulations require facilities that have

undergone an inspection to report total cost related to the inspection to

the Bureau of Export Administration within 90 days of the inspection.

Although the regulation states that the reports should identify categories

of costs if possible, Commerce has reiterated that the only mandatory

reporting is for total cost. Four companies told us that they have

submitted inspection-related cost data to the Commerce Department.3

One reason for variances and inconsistencies in costs being reported is

that Commerce did not provide detailed guidance to companies

concerning what types of costs should be included or how to calculate

inspection-related costs, which may limit the usefulness of the cost data.

As a result, companies are including different types of costs as they

prepare cost data to submit to Commerce. For example, one company

included all costs related to compliance with Commerce’s regulations on

the Chemical Weapons Convention, including the costs of preparing the

initial report to the Organization for the Prohibition of Chemical Weapons.

The company also included the cost of briefing headquarters executives

on the results of the inspection. Another company included costs related

to an internal practice inspection prior to receiving notification of the

actual inspection. Other companies limited their reported costs to those

related to the inspection from the time that Commerce notified the facility

of the impending inspection until the inspectors departed. In addition,

companies varied in the other costs identified. For example, two

companies identified only labor and travel costs, whereas other companies

included the use of conference rooms, faxes, photocopiers, and delivery

services.

The regulation also did not explain how companies should calculate costs.

For example, all companies included labor costs, but calculated them

differently. Some companies applied the number of hours employees spent

on inspection-related tasks to actual wages, while others used an average

or standard hourly rate. Further, in calculating labor rates, most

companies included the cost of employee benefits in addition to salaries

3 Of the seven companies we spoke with, the three who have yet to report costs to Commerce are still

within the 90-day period.
Page 8 GAO/T-ASM-00-249

while one did not. Some companies tried to directly track costs, while

others estimated costs for reporting purposes. Two companies established

a cost code for the inspection in order to capture costs. Another company

said that creating a separate cost code for inspection-related activities

would have been an unnecessary cost because of the infrequent nature of

the inspections.

To some degree, the variances in the costs that facilities incur as a result

of these inspections may be attributable to differences among the facilities

themselves and how the facilities prepared for inspections. For example, a

company that is involved in the production and consumption of multiple

chemicals subject to inspection may require more time and effort to

prepare for the inspection than a company that only uses one chemical

subject to inspection. For safety reasons, one company decided to

suspend its operations during the inspection, which resulted in lost

business that was estimated and included as a cost. Other companies did

not suspend operations. Two companies hired outside legal counsel to

assist in the preparation and conduct of the inspection, while other

companies relied on in-house legal services. Also, one company provided

training to facility personnel who could come in contact with inspectors to

prepare them for the inspection, which was included as a cost incurred by

that company.

In addition, the costs reported by the companies may not be representative

for the entire industry. As of September 1, 2000, only nine U.S. industry

facilities had been inspected under the Chemical Weapons Convention.

The first inspection occurred in May 2000. The facilities that have been

inspected to date use or produce Schedule 1 or Schedule 2 chemicals. As

these chemicals have the highest risk and the most stringent inspections,

the experience of these facilities may not be applicable to facilities with

Schedule 3 and unscheduled discrete organic chemicals. For example, the

Chemical Weapons Convention permits inspections related to Schedule 2

chemicals to last as long as 96 hours (4 days), but limits the inspections

related to Schedule 3 chemicals to 24 hours. As a result, the cost of hosting

a Schedule 3 or unscheduled discrete organic chemical inspection will

likely be less. The frequency of inspections may also have an impact on

future costs. For example, all Schedule 1 facilities are subject to frequent

inspections and therefore may experience cost decreases as they become

more familiar with preparing and hosting inspections. However, other

facilities will be inspected less frequently and therefore may not

experience such cost decreases.

It should be noted that in addition to the costs borne by the companies,

the U.S. government and the Convention’s governing body also incur costs.
Page 9 GAO/T-ASM-00-249

For example, for the seven inspections we reviewed, the U.S. government

paid the salaries and travel costs for federal agency personnel who went to

facilities to help companies prepare for inspections and to escort the

inspectors. The cost of inspectors’ salaries, transportation to the United

States, and accommodations during the inspection are paid by the

Convention’s governing body, which is supported by member states.

In conclusion, though there are parallels between the two conventions, the

relevance of our findings will largely depend on the specifics that are

agreed upon under the Biological Weapons Convention protocols. This is

particularly so with regard to the risk to confidential business information

since issues such as the level of detail of reporting and the level of

intrusiveness of proposed inspections have yet to be resolved. The risk to

corporate reputations from adverse publicity, on the other hand, is likely

to be similar to that experienced by chemical companies under the

Chemical Weapons Convention. Lastly, while the types of inspection costs

will most likely be similar to those incurred by the chemical industry

under the Chemical Weapons Convention, the costs may well be different

because of differences between the companies. Further, the usefulness of

reporting costs will depend on the consistency and completeness of the

data reported.

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions you or the other Subcommittee Members may have. Major

contributors to this testimony include Katherine V. Schinasi, Thomas J.

Denomme, Johana R. Ayers, Cristina Chaplain, Delores Cohen, Dianne D.

Guensberg, Paula J. Haurilesko, Stephanie J. May, David Merrill, and

William T. Woods.

(707543)
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