Report to the Chairman and Ranking

Member, Subcommittee on Readiness

and Management Support, Committee

on Armed Services, U.S. Senate

United States General Accounting Office

GAO

May 2001 EXPORT CONTROLS

Regulatory Change

Needed to Comply

with Missile

Technology Licensing

Requirements

GAO-01-530
Page 1 GAO-01-530 Export Controls

May 31, 2001

The Honorable James Inhofe

Chairman

The Honorable Daniel Akaka

Ranking Member

Subcommittee on Readiness and

 Management Support

Committee on Armed Services

United States Senate

Concerned about missile proliferation, the United States and several major

trading partners in 1987 created an international voluntary agreement, the

Missile Technology Control Regime, to control the spread of missiles and

their related technologies. Congress passed the National Defense

Authorization Act for Fiscal Year 1991 to fulfill the U.S. government’s

Missile Technology Control Regime commitments.1

 This act amended two

governing U.S. export control statutes: the Export Administration Act of

1979, as amended, which regulates the export of dual-use items (those

having both military and civilian applications), and the Arms Export

Control Act, as amended, which regulates the export of military items. The

Department of Commerce licenses most dual-use items, while the

Department of State licenses military items. Congress is currently

considering the passage of a new Export Administration Act because the

current statute is set to expire in August 2001.2

Given the current interest in export controls and in missile technology

proliferation, you asked us to determine whether regulations for

controlling the export of Missile Technology Control Regime items (1) are

consistent with U.S. law and (2) provide a consistent U.S. policy on the

control of missile technology.

 1

 P. L. 101-510, Nov. 5, 1990.

2

 The Export Administration Act of 2001, Senate Bill 149.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-530 Export Controls

The Department of Commerce’s export regulations are not consistent with

the National Defense Authorization Act for Fiscal Year 1991 amendment to

the Export Administration Act for missile technology controls. That

amendment requires an individual export license for all controlled dualuse missile equipment and technology to all countries. However, the

Department of Commerce’s regulations do not require licenses for the

export of controlled missile equipment and technology to Canada. The

Department of Commerce did not cite any section of this statute or its

legislative history to justify the inconsistency between its regulations and

the statutory requirement. Additionally, we found nothing in the

legislative history to indicate that Congress intended to allow controlled

missile items to be exempt from licensing requirements. According to

Department of Commerce officials, Congress is aware of this exemption

through an annual report on foreign policy export controls and, to their

knowledge, Congress never intended to end the regulatory exemption for

missile-related exports to Canada when the law was passed. The

Department of State’s export regulations are consistent with the National

Defense Authorization Act for Fiscal Year 1991 amendment to the Arms

Export Control Act. While that amendment did not mandate that the

Department of State require licenses for missile technology items, other

provisions of the Arms Export Control Act provide the Department

discretionary authority to require licenses or provide exemptions.

In implementing the acts as they relate to controlled missile technology,

both the Departments of Commerce and State were initially consistent

with each other by continuing the long-standing policy of exempting

controlled items from licensing requirements if those items were being

exported to Canada for use in Canada. This consistent policy toward

Canada changed in April 1999 when the Department of State began

requiring a license for controlled missile technology, as well as other

military items, exported to Canada. The Department of State changed its

policy because of concerns about the unauthorized re-export of certain

items from Canada to countries of concern. In addition to its concerns

about re-exported items, Department of State officials cited, among other

reasons, the provisions in the Export Administration Act as evidence that

Congress did not intend any licensing exemptions for any controlled

missile technology items and technologies.

Because of the inconsistency between the Department of Commerce’s

regulatory exemption and the Export Administration Act, we

recommended that the Department of Commerce revise its regulations or

seek a statutory change to specifically allow for licensing exemptions.

Results in Brief
Page 3 GAO-01-530 Export Controls

Since the Department of Commerce did not agree with our

recommendation, we have added a matter for congressional consideration.

In 1987, the United States and six allies founded the Missile Technology

Control Regime (MTCR).3

 The Regime seeks to limit the proliferation of

rocket and unmanned air vehicle systems capable of delivering nuclear,

biological, and chemical weapons of mass destruction and their associated

equipment and technology. The Regime is a voluntary agreement among

member countries with a shared interest in controlling missile

proliferation. Members agree to adhere to a common export policy for

items and technologies that are specified in an annex to the agreement,

which is updated periodically. These MTCR items range from complete

missile systems to missile-related components that may also have civil

applications. Member countries also agree to control these items and

technologies in accordance with their national legislation.

The United States fulfills its MTCR commitments through its existing

export control system and governing statutes. The U.S. export control

system, and therefore the U.S. implementation of the Regime’s controls, is

divided primarily between two departments. The Department of

Commerce, under the authority of the Export Administration Act of 1979

controls exports of most dual-use items and technologies.4

 The

Department of Commerce controls dual-use items through the Export

Administration Regulations and identifies those items on the Commerce

Control List.5

 The Department of State, under the authority of the Arms

Export Control Act, controls exports of munitions items and technologies,

which are those designed, developed, configured, adapted, or modified

solely for military applications.6

 The munitions items under the

Department of State’s licensing jurisdiction are controlled through the

International Traffic in Arms Regulations and identified on the U.S.

 3

 The other founding members of the Regime are Canada, France, Germany, Italy, Japan,

and the United Kingdom. Since 1987, 26 additional countries have become members of the

Regime, bringing the total number of member countries to 33.

4

 50 U.S.C. App. secs. 2401 et seq.

5

 15 C.F.R. secs. 730-774.

6

 22 U.S.C. secs. 2751 et seq.

Background
Page 4 GAO-01-530 Export Controls

Munitions List, which the Department of State develops with the

concurrence of the Department of Defense.7

The National Defense Authorization Act for Fiscal Year 1991 amended the

Export Administration Act of 1979 to require an individual validated

license for any export of dual-use MTCR goods or technology to any

country. The Department of Commerce implemented the statutory

requirements through its Export Administration Regulations by including

MTCR annex items in the Commerce Control List and generally requiring a

license to export or re-export those items and technologies related to the

design, development, production, or use of missiles. However, these

regulations provide an exemption to the statutory licensing requirement

for MTCR annex items and technologies exported to Canada.8

 Department

of Commerce officials did not cite any section of the statute or its

legislative history to justify the inconsistency between the statutory

requirements and the Department’s regulations. In addition, we found

nothing in the amended act or its legislative history to suggest that

Congress intended to exempt MTCR items exported to Canada from

licensing requirements. Department officials said the license exemption

predated the amendment and they assumed Congress did not intend to end

the licensing exemption. They told us the Department annually reports to

Congress on its foreign policy export controls, including the exemption for

missile technology exports to Canada, and Congress has not objected to

the continuation of this export exemption.

The National Defense Authorization Act for Fiscal Year 1991, as it applied

to the Arms Export Control Act, did not mandate that the Department of

State require licenses for missile technology items. The Arms Export

Control Act, however, provides the Department of State with discretionary

authority to determine which items, including missile technology items,

require a license, and to create licensing exemptions in its regulations.

Because the Department of State has authority to require licenses or to

provide exemptions, the Department’s regulations are consistent with the

National Defense Authorization Act for Fiscal Year 1991.

 7

 22 C.F.R. secs. 120-130.

8

 15 C.F.R. sec. 742.5(a)(1) and Supplement No. 1 to part 738 of the Export Administration

Regulations.

Commerce and State

Differ in Their

Regulatory

Consistency With

Export Statutes
Page 5 GAO-01-530 Export Controls

Although the Departments of Commerce and State initially had a

consistent policy toward exempting MTCR items exported to Canada from

licensing, the Departments’ policies now differ. The Department of

Commerce continues to exempt MTCR items going to Canada, whereas

the Department of State currently requires an export license for MTCR

items to Canada. According to Department of Commerce officials, the

current regulatory exemption for MTCR items exported to Canada is

consistent with the U.S. government’s long-standing policy to encourage

economic cooperation with Canada. Specifically, the Export

Administration Regulations provided an export exemption for Canada

prior to the amendment of the Export Administration Act and this

exemption has been continued as a matter of policy. Furthermore,

Department officials said that after passage of the amendment in 1990, an

interagency group discussed whether Congress intended to eliminate the

Canadian exemption but did not reach consensus.

Prior to April 1999, the Department of State’s regulations also allowed

most items on the U.S. Munitions List, including MTCR items, to be

exported to Canada for use in Canada without a license. However, the

Department of State became concerned about U.S. defense equipment and

technology being re-exported from Canada to destinations such as Iran.

The Department of State, therefore, issued new regulations in April 1999

that limited the scope of its licensing exemption for exports to Canada.9

The revised regulations required a license for all MTCR munitions items,

as well as other munitions items, to be exported to Canada.10 As part of its

justification for its regulatory revision, Department of State officials cited

the provisions in the amended Export Administration Act as evidence that

Congress did not intend any licensing exemptions for MTCR dual-use

items and technologies. Based on this statutory language, the Department

of State concluded that Congress must have intended that licenses be

required not only for dual-use items but also for the more sensitive items

falling under the Department of State’s jurisdiction.

 9

 64 Federal Register 17531, Apr. 12, 1999.

10 In October 2000, the Canadian government passed legislative changes followed by

regulatory changes in January 2001 to strengthen its defense export system. When it made

these changes, the Canadian government requested that the Department of State revise its

regulations to exempt MTCR items from U.S. export licensing requirements for Canada.

While the Department of State has issued new regulations that are effective May 30, 2001,

the Department has not restored the MTCR exemption for Canada.

Current Commerce

and State Policies on

MTCR Export

Licensing

Requirements Differ
Page 6 GAO-01-530 Export Controls

Because the Department of Commerce’s regulations are inconsistent with

the amended Export Administration Act, we recommend that the

Secretary of Commerce

• revise the Export Administration Regulations to comply with the MTCR

export licensing requirements contained in the National Defense

Authorization Act for Fiscal Year 1991 or

• seek a statutory change from Congress to specifically permit MTCR items

to be exempted from licensing requirements.

If the Secretary of Commerce decides to seek a statutory change, he

should revise the Export Administration Regulations to comply with the

current statute until such time as a statutory change occurs.

Congress may wish to instruct the Secretary of Commerce on the need to

bring the Department’s regulations into compliance with the law until such

time as Congress has determined that dual-use MTCR items may be

exempt from licensing requirements.

In written comments on a draft of this report, the Department of

Commerce said it will consult with other departments and its

congressional authorizing committees on the utility of revising its

regulations in light of pending legislation. However, neither consultation

with other departments nor the consideration of pending legislation

changes the basis for our recommendation that the current law requires

licenses for dual-use MTCR exports to all countries. Since the Department

of Commerce does not agree with our recommendation, we have added a

matter for congressional consideration. The Department of Commerce’s

comments are reprinted in appendix I, along with our evaluation of them.

The Department of State did not provide formal written comments on a

draft of this report but provided technical comments, which we

incorporated as appropriate.

To determine the consistency between statutory and regulatory language

concerning MTCR exports, we compared the MTCR provisions as

contained in the National Defense Authorization Act for Fiscal Year 1991

with the Department of Commerce’s Export Administration Regulations

and the Department of State’s International Traffic in Arms Regulations.

We also requested and received a written response from the Department

of Commerce to explain its regulatory exemption and then interviewed

lawyers and other officials about their interpretation of the statutory

Recommendation for

Executive Action

Matter for

Congressional

Consideration

Agency Comments

Scope and

Methodology
Page 7 GAO-01-530 Export Controls

requirements. In addition, we reviewed the legislative history of the MTCR

provisions in the National Defense Authorization Act for Fiscal Year 1991.

To determine whether the regulations for controlling the export of MTCR

items provide a consistent U.S. policy on the control of missile technology,

we discussed with Departments of Commerce and State officials their

regulations implementing the MTCR. We also reviewed the Department of

State’s regulatory revisions and supporting documentation.

We performed our review from November 2000 through March 2001 in

accordance with generally accepted government auditing standards.

As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution of this report until

30 days after its issuance. At that time, we will send copies to Senator Phil

Gramm, Chairman, Committee on Banking, Housing, and Urban Affairs;

Senator Paul Sarbanes, Ranking Member, Committee on Banking,

Housing, and Urban Affairs; Senator Jesse Helms, Chairman, Committee

on Foreign Relations; Senator Joseph Biden, Ranking Member, Committee

on Foreign Relations; Representative Henry Hyde, Chairman, Committee

on International Relations; and Representative Tom Lantos, Ranking

Minority Member, Committee on International Relations. We will also send

copies to the Honorable Colin L. Powell, Secretary of State; the Honorable

Donald L. Evans, Secretary of Commerce; and the Honorable Mitchell E.

Daniels, Jr., Director, Office of Management and Budget.

If you or your staff have questions concerning this report, please contact

me at (202) 512-4841 or John Van Schaik from our Office of General

Counsel at (202) 512-8184. Others making key contributions to this report

were Thomas J. Denomme, Anne-Marie Lasowski, and Johana R. Ayers.

Katherine V. Schinasi

Director

Acquisition and Sourcing Management Team
Appendix I: Comments from the Department

of Commerce

Page 8 GAO-01-530 Export Controls

Appendix I: Comments from the Department

of Commerce

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.
Appendix I: Comments from the Department

of Commerce

Page 9 GAO-01-530 Export Controls

See comment 4.

See comment 3.

See comment 2.

See comment 1.
Appendix I: Comments from the Department

of Commerce

Page 10 GAO-01-530 Export Controls
Appendix I: Comments from the Department

of Commerce

Page 11 GAO-01-530 Export Controls

The following are GAO’s comments on the Department of Commerce’s

letter dated May 15, 2001.

1. According to the Department of Commerce, its Canadian exemption is

not inconsistent with the Missile Technology Control Regime (MTCR)

Guidelines. Nevertheless, this exemption is inconsistent with the

current U.S. law governing exports of MTCR dual-use items.

2. As stated in our report, the Department said that it had not revised its

regulations when the National Defense Authorization Act for Fiscal

Year 1991 was enacted because there was no interagency consensus to

do so. However, a lack of interagency consensus does not justify the

inconsistency between the Department’s regulations and the law.

Furthermore, the Department of Commerce was unable to provide

documentation or an explanation as to why interagency consensus was

not achieved.

3. While there have been extensive discussions and multiple bills to

reauthorize the Export Administration Act over the past several years,

there have been no changes to the current governing statute that

requires export licenses for all MTCR dual-use items to all countries.

4. The question of economic impact may be an appropriate part of the

debate on requiring licenses. However, it does not affect the fact that

current law requires licenses for dual-use MTCR exports to all

countries. Furthermore, in its foreign policy report to Congress, the

Department of Commerce stated that the MTCR has limited economic

impact on the majority of U.S. exports.

GAO Comments

(120053)

The first copy of each GAO report is free. Additional copies of reports are

$2 each. A check or money order should be made out to the

Superintendent of Documents. VISA and MasterCard credit cards are also

accepted.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St., NW (corner of 4th and G Sts. NW)

Washington, DC 20013

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and testimony. To

receive facsimile copies of the daily list or any list from the past 30 days,

please call (202) 512-6000 using a touchtone phone. A recorded menu will

provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an email message with “info” in the body to:

Info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• E-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

Ordering Information

To Report Fraud,

Waste, and Abuse in

Federal Programs