Audit Report

OIG-07-040

EXPORT CONTROLS: CFIUS and OFAC Implemented Prior OIG 

Recommendations 

June 12, 2007 

Office of 

Inspector General 

Department of the Treasury 

Contents 

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 OIG Recommendations (OIG-07-040) 

Audit Report.................................................................................................. 3 

 

 Results in Brief............................................................................................. 4 

 Background ................................................................................................. 5 

 Findings and Recommendations ..................................................................... 8 

 CFIUS Established and Implemented Procedures to Help Identify Nonfilers ...... 8 

 OFAC Has Taken Steps to Track Referrals to Other Agencies but Lacks 

 Written Policy ......................................................................................... 9 

 Recommendations................................................................................... 10 

 

Appendices

 Appendix 1: Objective, Scope, and Methodology........................................ 12 

 Appendix 2: Management Comments........................................................ 13 

 Appendix 3: Major Contributors To This Report .......................................... 15 

 Appendix 4: Report Distribution................................................................ 16 

Abbreviations

 CFIUS Committee on Foreign Investments in the United States 

 ICE United States Immigration and Customs Enforcement 

 NDAA National Defense Authorization Act 

 OFAC Office of Foreign Assets Control 

 OIG Office of Inspector General 

 Treasury Department of the Treasury 
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OIG Audit 

Report

The Department of the Treasury 

Office of Inspector General 

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 June 12, 2007 

 

 Clay Lowery 

 Acting Under Secretary for International Affairs 

 

 Adam J. Szubin 

 Director, Office of Foreign Assets Control 

This report presents the results of an audit we conducted to follow 

up on recommendations from two prior Office of Inspector General 

(OIG) reports on the Department of the Treasury’s enforcement of 

controls for the export of militarily sensitive technology to 

countries and entities of concern. We conducted this follow-up 

audit under the auspices of an interagency working group of OIGs 

that focused on federal agencies’ implementation of such controls.1

The working group was established to help carry out certain 

reporting requirements of the National Defense Authorization Act 

(NDAA) for Fiscal Year 2000,2 as amended by the NDAA for Fiscal 

Year 2001.3

The objective of this audit was to determine whether Treasury had 

effectively implemented recommendations in audit reports issued 

during fiscal years 2000 and 2003.4

 The fiscal year 2000 report 

contained one recommendation, addressed to the Chair of the 

Committee on Foreign Investment in the United States (CFIUS). 

The fiscal year 2003 report contained two recommendations, 

 

1

 The participating agencies for the fiscal year 2007 working group consists of the OIGs of the 

Departments of Commerce, Defense, Energy, Homeland Security, State, Treasury, the United States 

Postal Service, and the Central Intelligence Agency. 2

 Pub. L. 106-65, § 1402, 113 Stat. 798 (Oct. 5, 1999). 

3

 Pub. L. 106-398, § 1204, 114 Stat. 1654A-325 (Oct. 30, 2000). 

4 Department of the Treasury Efforts to Prevent Illicit Transfers of U.S. Military Technologies, 

OIG-00-072 (Mar. 23, 2000); Export Enforcement: Numerous Factors Impaired Treasury's Ability to 

Effectively Enforce Export Controls, OIG-03-069 (Mar. 25. 2003). 
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addressed to the Director of the Office of Foreign Assets Control 

(OFAC). The responding Treasury officials concurred with the 

recommendations and outlined actions planned in response to the 

recommendations. 

We conducted our audit fieldwork from December 2006 through 

March 2007. We met with officials of the Office of Investment 

Security, which is part of the Office of International Affairs, and 

OFAC. We also reviewed relevant CFIUS and OFAC 

documentation. Appendix 1 contains a more detailed description of 

our objective, scope, and methodology. 

Results in Brief

In our 2000 report, we recommended that the CFIUS Chair 

coordinate efforts with other committee members to identify and 

evaluate all sources of available data that could help identify ExonFlorio non-filers. After identifying data sources, CFIUS was to 

develop a methodology and establish procedures for using these 

data sources effectively. We found the procedure that CFIUS 

implemented in response to our recommendation was effective. 

In our 2003 report, we recommended that the Director of OFAC 

coordinate with State Department officials to implement an 

automated process to allow both agencies to track the status of 

license determination referrals. We also recommended that the 

Director of OFAC coordinate with Customs officials to ensure that 

OFAC investigative referrals can be linked to Customs’ cases. We 

found that OFAC had implemented procedures that fulfilled the 

intent of these two recommendations but had not formalized the 

procedures as written policy. We recommend OFAC develop 

written policy to formalize the procedures. OFAC agreed to 

implement the recommendations in its response to our report. 

We obtained written comments to a draft of this report from the 

Assistant Secretary of International Affairs and the Director of 

OFAC. The comments are provided in appendix 2. 
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Background

Reporting Under NDAA

The NDAA for Fiscal Year 2000 requires the President to submit 

annual reports to Congress through fiscal year 2007 on transfers of 

militarily sensitive technology to countries and entities of concern. 

The reports’ contents are to include audits by the Inspectors 

General of the Departments of Commerce, Defense, Energy, and 

State of policies and procedures related to the export of 

technologies and technical information to countries and entities of 

concern.5 The reporting requirement was amended in fiscal year 

2001 to require that the annual interagency report include OIG 

follow-up on the status or disposition of recommendations made in 

earlier reports.6

Although Treasury enforces export controls, Treasury OIG was not 

required to participate in the audits mandated by the 2000 and 

2001 laws. Nevertheless, we chose to participate when the 

interagency working group addressed topics specifically relevant to 

the Department’s enforcement efforts. The topics scheduled for 

review were decided by the interagency working group in 2000. 

For fiscal year 2007, the interagency working group decided that 

the report would include a review of how effectively agencies had 

addressed recommendations made in previously issued reports. The 

findings in this report represent our contribution to that effort. 

Treasury OIG issued three audit reports in support of the NDAA. 

The reports contained a total of 16 recommendations, but only 3 

remain applicable to Treasury. The other 13 recommendations were 

addressed to management of entities that are no longer part of 

Treasury – the legacy U.S. Customs Service and Bureau 

 

5 Pub. L. 106-65, § 1402(b)(3), 113 Stat. 798 (Oct. 5, 1999).

6 Pub. L. 106-65, § 1402, was amended by Pub. L. 106-398, § 1204, 114 Stat. 1654A-325 (Oct. 30, 

2000). 
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of Alcohol, Tobacco and Firearms.7 Of the 3 remaining 

recommendations, 1 was directed to CFIUS and the other 2 to 

OFAC. 

CFIUS

CFIUS was established in 1975 mainly to monitor and evaluate the 

effect of foreign investment in the United States. The Secretary of 

the Treasury was designated the Chair of CFIUS.8 In 1988, 

Congress passed the Exon-Florio amendment to the Defense 

Production Act of 1950.9

 The amendment authorized the President 

or his designee to (1) receive voluntary notices from companies 

engaged in transactions subject to Exon-Florio; (2) to determine 

whether a particular acquisition has national security issues; and 

(3) as appropriate, to undertake investigations. The President 

delegated these authorities to CFIUS. Exon-Florio also gave the 

President authority to prohibit or suspend a transaction if necessary 

to protect national security, and the President retained this 

authority. 

In our 2000 report,10 we found that although CFIUS did deter some 

foreign acquisitions that may have had national security 

implications, it needed to do more to identify nonfilers engaged in 

activities subject to Exon-Florio. Our specific recommendation was 

as follows: 

We recommend that the CFIUS Chair coordinate efforts with other 

Committee members to identify and evaluate all sources of 

available data that can assist in identifying Exon-Florio non-filers. 

Once data sources are identified, CFIUS needs to develop a 

 

7 The border security and inspection arm of the U.S. Customs Service is now part of the Bureau of 

Customs and Border Protection; the enforcement and investigation arms of the U.S. Customs Service 

and the law enforcement arm of the Immigration and Naturalization Service is now part of U.S. 

Immigration and Customs Enforcement (ICE). Both Customs and Border Protection and ICE are within 

the Department of Homeland Security. The Bureau of Alcohol, Tobacco and Firearms is now within the 

Department of Justice and is known as the Bureau of Alcohol, Tobacco, Firearms and Explosives. 8

 The other CFIUS member agencies are the Departments of State, Defense, Justice, Commerce, and 

Homeland Security; the Office of Management and Budget; the Council of Economic Advisers; the 

National Economic Council; the Office of the United States Trade Representative; the Office of Science 

and Technology Policy; and the National Security Council. 

9

 50 U.S.C. App. § 2170. 

10 OIG-00-072. 
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methodology and establish procedures as to how these data 

sources can be effectively used to meet its responsibilities. 

CFIUS concurred with our recommendation. 

OFAC

OFAC, located within Treasury’s Office of Terrorism and Financial 

Intelligence, administers and enforces economic and trade 

sanctions against targeted foreign countries, organizations that 

sponsor terrorism, and international narcotics traffickers, based on 

U.S. foreign policy and national security goals. OFAC regulations 

require exporters, importers, and others under U.S. jurisdiction to 

obtain OFAC licenses before engaging in any type of commercial 

transactions with targeted countries or nationals. 

During our 2003 audit,11 we found that OFAC sent referrals to the 

State Department for license determinations when OFAC was 

unsure whether to grant licenses to exporters. The State 

Department, however, did not routinely process these referrals 

promptly, resulting in delays in OFAC license approvals. Both State 

Department and OFAC officials attributed the State Department’s 

processing delays to (1) mandatory rotation cycles that required 

employees within the Bureau of Economic and Business Affairs, 

Office of Economic Sanctions Policy, to rotate every two years and 

(2) the State Department’s lack of an automated system to track 

OFAC referrals. 

We also found during our 2003 audit that OFAC referred 

approximately 30 cases to Customs each year for criminal 

investigation and that Customs initiated its own investigations of 

OFAC export violations. We determined that Customs did not 

always inform OFAC when Customs closed an OFAC investigative 

referral, decided not to take action on an OFAC referral, or initiated 

its own investigation of export violations. In addition, Customs and 

OFAC used different numbers to identify referrals; as a result, 

OFAC officials said they found it difficult to link their referrals to a 

Customs’ investigative case number. The failure of Customs to 

notify OFAC officials about closed referrals and investigations 

 

11 OIG-03-069. 
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hampered OFAC’s ability to assess civil penalties when it was 

determined that criminal prosecution was not warranted. 

As a result of these findings, we made the following two 

recommendations: 

1. The Director of OFAC should coordinate with State Department 

officials to implement an automated process to allow both 

agencies to track the status of license determination referrals. 

2. The Director of OFAC should coordinate with Customs officials 

to ensure OFAC investigative referrals can be linked to 

Customs’ cases. 

OFAC concurred with these recommendations. 

Findings and Recommendations 

 CFIUS Established and Implemented Procedures to Help 

Identify Nonfilers 

In response to our recommendation, the CFIUS Chair established 

procedures for coordinating with other Committee members to 

identify and evaluate data sources to help identify Exon-Florio 

nonfilers. Specifically, CFIUS members met in May 2000 to identify 

available sources of data and developed a procedure for reporting 

non-notified transactions. The procedure requires CFIUS members 

to provide the Committee Chair with information on transactions 

they believe may be appropriate for review by the Committee under 

Exon-Florio. Upon receipt of the information, the Committee Chair 

is to add public information and develop a list of non-notified 

transactions. This list is then to be circulated to member agencies 

for review. If a CFIUS member believes that the parties in the 

transaction should file, CFIUS is to take appropriate action. This 

procedure has been used by members to identify non-notified 

transactions since 2000. 
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 OIG Recommendations (OIG-07-040) 

 OFAC Has Taken Steps to Track Referrals to Other 

Agencies but Lacks Written Policy 

We found that, in response to our recommendations, OFAC took 

steps to coordinate with the State Department on license referrals 

and with ICE on investigative referrals. 

 OFAC Coordination with the State Department

OFAC established regular meetings with the State Department to 

review license determination referrals and, since 2003, monthly 

meetings have been held and attended by Licensing Officers and 

office Directors. These meetings are used to elevate licensing 

policy issues between OFAC and the State Department. However, 

OFAC did not implement an automated process that allows both 

agencies to access each other’s system to track the status of 

licensing determination referrals because it said that the cost was 

prohibitive. According to OFAC personnel, institution of the 

monthly meetings has resolved most of the timeliness issues that 

the recommendation was intended to address. 

OFAC Coordination with ICE 

OFAC has coordinated with ICE and held regular meetings to 

review the status of ICE-initiated investigations and OFAC referrals. 

During these meetings, ICE has provided its active embargo case 

reports to OFAC for review. These reports detail the status of both 

ICE-initiated investigations and OFAC referrals. To link OFAC 

referrals to ICE cases, OFAC assigns case names to their referrals 

and ICE utilizes these OFAC case names in their active embargo 

reports. 

The steps OFAC took to coordinate with the State Department on 

license referrals and with ICE on investigative referrals fulfilled the 

intent of our recommendations. However, OFAC does not have 

written policy in place that formalizes these procedures. The 

meetings with the State Department and ICE represent an 

important internal control, defined in the Government 

Accountability Office’s Standards for Internal Control in the Federal 

Government as the plans, methods, and procedures used to meet 
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missions, goals, and objectives. Further, internal control should be 

clearly documented and the documentation should be readily 

available for examination.12 Without a written policy requiring 

continued coordination with the State Department and ICE, lapses 

in coordination could occur in the future. 

Recommendations

To help ensure continuity of coordination between OFAC and the 

State Department and OFAC and ICE, we recommend the Director 

of OFAC do the following: 

1. Ensure OFAC develops written policy to formalize the procedure 

of having monthly meetings with the State Department to 

review the status of license determination referrals. 

2. Ensure OFAC develops written policy to formalize the procedure 

of having regular meetings with ICE to review the status of ICEinitiated investigations and OFAC referrals. 

Management Response 

OFAC concurred with the two recommendations. OFAC has drafted 

a policy memo to ensure continued implementation of their current 

practice of conducting monthly meetings with the Department of 

State to resolve issues relating to license applications submitted to 

OFAC that involve foreign policy issues. OFAC has also drafted a 

policy memo to ensure continued implementation of their current 

practice of coordinating with criminal law enforcement agencies, 

including ICE, concerning violations of OFAC regulations. OFAC 

was to distribute both policy memos no later than May 30, 2007. 

OIG Comment 

Management’s planned actions are responsive to the intent of our 

recommendations. 

 

12 Government Accountability Office, Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (November 1999). 
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* * * * * 

We appreciate the courtesies and cooperation provided to our staff 

during the audit. If you wish to discuss the report, you may 

contact me at (202) 927-5400 or Alain Dubois, Director of Banking 

Audits, at (202) 927-0382. Major contributors to this report are 

listed in appendix 3. 

Marla A. Freedman 

Assistant Inspector General for Audit 
Appendix 1 

Objective, Scope, and Methodology 

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Our objective was to determine whether certain prior OIG 

recommendations directed to the Chair of the Committee on 

Foreign Investments in the United States (CFIUS) and to the 

Director of the Office of Foreign Assets Control (OFAC) had been 

implemented. These recommendations are restated on pages 6 

and 8. 

To accomplish this objective, we performed the following activities: 

• Conducted interviews with Office of Investment Security 

personnel 

• Reviewed CFIUS guidance on non-notified transactions 

• Conducted interviews with current OFAC managers and one 

former OFAC manager

• Reviewed and analyzed an OFAC report on all outstanding 

referrals to the State Department 

• Reviewed OFAC documentation related to monthly meetings 

with the State Department 

• Reviewed a U.S. Immigration and Customs Enforcement 

report on Active Embargo Cases 

We performed our audit from December 2006 through March 2007 

in accordance with generally accepted government auditing 

standards. 
Appendix 2 

Management Comments 

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Appendix 2 

Management Comments 

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 OIG Recommendations (OIG-07-040) 
Appendix 3 

Major Contributors To This Report 

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Alain Dubois, Director, Banking Audits 

Jeffrey Dye, Audit Manager 

Amnoiphorn Bannavong, Program Analyst 

Bobbie Gambrill, Auditor 

Esther Tepper, Communications Analyst 

Horace Bryan, Referencer 
Appendix 4 

Report Distribution 

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The Department of the Treasury

 Office of Strategic Planning and Performance Management 

 Office of Accounting and Internal Control 

 

Office of International Affairs

 Office of International Affairs 

 Liaison Officer 

 

Office of Foreign Assets Control

 Office of Foreign Assets Control 

 Liaison Officer 

Department of Defense

 Department of Defense Office of Inspector General 

 

Office of Management and Budget

 OIG Budget Examiner