Defense Exports: Foreign Military Sales Program Needs Better Controls for Exported Items and Information for Oversight
Published: 2009-05-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2008, the Foreign Military Sales (FMS) program sold over $36 billion dollars in defense articles and services to foreign governments. The Departments of State, Defense (DOD), and Homeland Security (DHS) all have a role in the FMS program. In 2003, GAO identified significant weaknesses in FMS control mechanisms for safeguarding defense articles transferred to foreign governments. In 2007, GAO designated the protection of technologies critical to U.S. national security a high-risk area. GAO was asked to (1) evaluate program changes State, DOD, and DHS have made since 2003 to ensure that unclassified defense articles transferred to foreign governments are authorized for shipment and monitored as required, and (2) determine what information DOD has to administer and oversee the FMS program. GAO conducted 16 case studies; analyzed U.S. port data and FMS agreements; reviewed program performance metrics; and interviewed cognizant officials.
section_title: What GAO Found
paragraphs: Agencies involved in the FMS program have made some changes in the program but have not corrected the weaknesses GAO previously identified in the FMS program's shipment verification process, and the expanded monitoring program lacks written guidance to select countries to visit to ensure compliance with requirements. State--which is responsible for the program and approving FMS sales--has not finalized proposed regulatory revisions to establish DOD's role in the FMS shipment verification process, although the FMS agencies reached agreement on the proposed revisions about a year ago. DHS port officials, responsible for export enforcement, also continue to lack information needed to verify that FMS shipments are properly authorized. GAO found six FMS agreements that had unauthorized shipments, including missile components. In one case, 21 shipments were made after the agreement was closed. At the same time, DOD, which administers the FMS program and FMS agreements, lacks mechanisms to fully ensure that foreign governments receive their correct FMS shipments--in part because DOD does not track most FMS shipments once they leave its supply centers and continues to rely on FMS customers to notify the department when a shipment has not been received. With regard to monitoring defense articles once in country, DOD does not have written guidance to prioritize selecting countries for compliance visits using a risk management approach and has not yet visited several countries with a high number of uninventoried defense articles. DOD lacks information needed to effectively administer and oversee the FMS program. For example, within the last 10 years DOD has twice adjusted the surcharge rate--the rate charged to FMS customers to cover program administration costs--but it does not have information on program costs to determine the balance necessary to support the program in the future. Also, while DOD has a goal to release 80 percent of FMS agreements to a foreign government within 120 days of receiving its request to purchase defense articles, DOD officials stated they do not have the information needed to determine if the goal is reasonable. In addition, DOD lacks information to oversee the program, in large part due to the fact that FMS data reside in 13 different accounting, financial, and case implementation systems. DOD is in the process of defining its requirements for FMS program information before it moves forward with improving its data systems. In the meantime, DOD is relying on systems that do not provide it with sufficient, comparable data to oversee the program's performance.

section_title: Letter
paragraphs: Each year, the U.S. government sells billions of dollars of defense articles  and services to foreign governments through the Foreign Military Sales  (FMS) program. The FMS program is an integral and growing component  of U.S. national security and foreign policy; in fiscal year 2008, the  program sold over $36 billion dollars in defense articles and services to  foreign governments, which represented a 56 percent increase over fiscal  year 2007 sales. The Departments of State (State), Defense (DOD), and  Homeland Security (DHS) all have a role in the FMS program. State has  overall responsibility for the program and approving FMS sales. DOD  administers the program, and DHS ensures that FMS shipments are  transferred in accordance with export control laws and regulations.
In 2003, we identified significant weaknesses in the control mechanisms  the FMS program uses to safeguard defense articles transferred to foreign  governments. Specifically, we found that in some cases FMS shipments  were not properly authorized and that actions were still needed to  implement statutory end-use monitoring requirements to ensure that  foreign governments adequately protect U.S.-provided defense articles.  These findings along with others prompted us to designate a new high-risk  area in 2007: ensuring the effective protection of technologies critical to  U.S. national security interests. Subsequently, in March 2008, DOD  disclosed that it had mistakenly transferred intercontinental ballistic  missile parts to Taiwan through the FMS program, raising questions about  whether previously identified weaknesses have been resolved.
Based on your interest in how agencies have addressed weaknesses in the  FMS program and how well the program is being managed, you asked us  to provide an update on the FMS program. Specifically, we (1) evaluated  the FMS program changes State, DOD, and DHS have made since 2003 to  ensure that unclassified defense articles transferred to foreign  governments are authorized for shipment and monitored as required, and  (2) determined what information DOD has to administer and oversee the  FMS program.
To conduct our work, we reviewed laws, regulations, and guidelines  related to the FMS process. We obtained data from two of the top ten U.S.  ports in terms of the dollar value of FMS shipments they process to  determine if previously identified gaps in shipment process controls still  exist and conducted 16 case studies to assess steps in the FMS process.  The cases were selected to provide variation in military service, foreign  customer, type of defense article sold, and transportation method to the  end destination. We also analyzed FMS sales agreement data from fiscal  years 2003 to 2008. In addition, we interviewed representatives from State;  the Defense Security Cooperation Agency (DSCA), the Army, Navy, Air  Force, and other DOD components; and DHS’s Customs and Border  Protection (CBP). Appendix I includes additional details about our scope  and methodology. We conducted this performance audit from May 2008  through April 2009 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The Arms Export Control Act authorizes the sale of defense articles and  services to eligible foreign customers under the FMS program. Under the  program, the purchased items must be used and secured properly by the  customer and cannot be sold to third parties. Also, the FMS program must  be administered at no cost to the U.S. government. To recover  administration costs, DOD applies a surcharge to each FMS agreement  that is a percentage of the value of each sale. Multiple organizations have a  role in the FMS program, including DSCA and the military services, State,  and CBP. DOD’s responsibilities, which are described in the Security  Assistance Management Manual, largely focus on the overall  administration of the program and FMS agreements. DSCA carries out  key functions, such as managing the FMS administrative surcharge  account and supervising end use monitoring of FMS items, and the  military services carry out the day-to-day implementation of FMS  agreements. State regulates the export of defense articles, in cluding the  implementation of the FMS program, through its International Traffic in   and CBP enforces export control laws and  Arms Regulations (ITAR), regulations at U.S. ports and monitors the dollar value and quantity of  defense articles exported under each FMS agreement.
Typically, the FMS process begins when a foreign government submits a  letter of request to State or DOD to purchase defense articles under the  FMS program. The request is then forwarded to the military service  responsible for the particular defense article, which then develops a letter  of offer and acceptance, or a sales agreement between the United States  and the foreign government. State and DOD officials approve the sale, and  Congress is notified if the proposed sale meets certain dollar thresholds  and other requirements. The military service sends the agreement to the  foreign government for its acceptance. After the foreign government  accepts the agreement, case managers within the military services can  begin carrying out agreement actions such as contracting to procure  defense articles, issuing requisition orders, providing program  management, transporting defense articles if required, and administering  financial transactions.
A single FMS sales agreement may result in hundreds or thousands of  individual shipments to a foreign government. In most cases, the military  service provides the defense article to the foreign country’s freight  forwarder, the authorized agent for the foreign customer. However, some  countries use DOD’s defense transportation system to ship defense  articles. The ITAR requires that freight forwarders register with State,  which must receive a letter from the foreign government designating the  registered freight forwarder as its authorized agent. CBP port officials rely  on a list provided by State to confirm that the freight forwarder for a  shipment is the registered freight forwarder for the foreign government.  CBP port officials also verify export documentation and subtract the value  of each shipment from the total value of exportable goods for each FMS  agreement. If the items shipped are incorrect or damaged upon receipt, the  foreign government submits a supply discrepancy report to the military  service.
Every FMS sales agreement has certain security requirements, including  end-use monitoring requirements. To provide reasonable assurance that  the foreign customer complies with these requirements, DSCA established  the Golden Sentry end-use monitoring program in 2001. As part of this  program, security assistance officers stationed in a foreign country  monitor the use and security of defense articles purchased through the  FMS program, and the officers conduct additional checks on certain  sensitive defense articles such as Stinger missiles. DSCA officials conduct  regional forums and familiarization visits where the foreign country and  DOD representatives work together to mutually develop effective end-use  monitoring compliance plans. In addition, DSCA officials conduct country  visits to review and assess compliance with the requirements of the FMS  agreement and perform investigative visits when possible end-use  violations occur.
We have previously reported on weaknesses in the FMS program,  including lack of accountability for shipments to some foreign countries,  lack of information on end use monitoring, and insufficient information on  the costs to administer the program. Table 1 outlines our previous  findings.
section_title: Weaknesses in Shipment Verification Process Continue, and Expanded Monitoring Program Lacks Guidance for Country Visits
paragraphs: Agencies responsible for the FMS program have not taken the actions  needed to correct previously identified weaknesses in the FMS shipment  verification process, and DOD’s expanded end-use monitoring program  lacks written guidance for selecting countries for compliance visits using a  risk-based approach. First, agencies are not properly verifying FMS  shipment documentation, in part because State has not finalized revisions  to the ITAR to establish DOD’s role in the verification process. Second,  DOD lacks mechanisms to fully ensure foreign governments receive their  FMS shipments—in part because DOD does not track most FMS  shipments and continues to rely on FMS customers to notify the  department when a shipment has not been received. Finally, while DOD  has visited an average of four countries each year since 2003 to assess  compliance with FMS agreement requirements, it does not have written  guidance using a risk-based approach to prioritize the countries it visits to  monitor compliance and has not yet visited several countries with a high  number of uninventoried defense articles.
subsections: section_title: Agencies Lack Adequate Export Information to Verify FMS Shipments
paragraphs: To control the export of FMS defense articles, freight forwarders are  required to provide the following information before CBP allows an FMS  shipment to leave a U.S. port: the FMS sales agreement, State’s export  authorization form (DSP-94), and evidence that shipment data was entered  in the government’s Automated Export System (see table 2). CBP port  officials review this information to confirm that the items are authorized  under the FMS agreement and that the agreement has an exportable value  remaining. The officials also subtract the shipment’s value from the total  value of the defense articles permitted under the FMS agreement.
Although we recommended in 2003 that State revise the ITAR to clearly  establish control and responsibility for all FMS shipments, it has yet to do  so. Shortly after our report, representatives from State, DSCA, and CBP  met to draft proposed ITAR revisions that would require DOD to verify  that the correct value and type of defense article is listed on the export  documentation. According to agency officials involved in the process,  agency representatives went through multiple iterations of the draft ITAR  revisions over a period of several years. However, these revisions have  been in State’s final clearance stages since May 2008. In the meantime,  weaknesses we previously identified in the verification process continue  to go unaddressed. Anticipating the ITAR updates, in 2004 DOD issued  guidance in its Security Assistance Management Manual instructing the  military services to verify that the sales value listed on the DSP-94 by the  freight forwarders includes only the value of the exportable defense  articles listed in the FMS agreement. However, because the guidance  only applies to DOD and not the freight forwarders, we found cases where  freight forwarders did not submit DSP-94 forms for DOD review. For  example, in 10 of our 16 case studies, freight forwarders—who are not  bound by DOD’s guidance—did not submit DSP-94s to the military  services for verification. In addition, in the six cases that were verified by  the military services, one listed the full FMS agreement value on the DSP- 94, including administration charges, rather than only the value of the  exportable defense articles, as DOD policy requires. Further, officials from  one military service were uncertain who within their security assistance  command was supposed to verify the documents and how they were  supposed to be verified.
CBP port officials lack key information in export documentation that is  needed to properly record the value of defense articles shipped under an  FMS sales agreement and ensure the value of the shipments made are not  more than the exportable value of the agreement. According to CBP  guidance, each FMS agreement should have one port that records the  value of the exports made against an agreement. However, freight  forwarders are not required to identify the primary port on the DSP-94  they provide to CBP at the time of the shipment. For example, freight  forwarders listed multiple ports on this form for several of the agreements  we reviewed. In one case, the DSP-94 listed seven ports. While information  from the Automated Export System is required to accompany all FMS  shipments, we found that this system only lists the port of export—not the  primary port. CBP port officials have told us that they have no way of  knowing if an FMS agreement or a DSP-94 is filed at more than one port  because CBP does not have a method to prevent these documents from  being filed at multiple ports. Without accurate and complete information  on the primary port, officials at other ports cannot notify the primary port  regarding shipments that are made through their ports so that the value of  these exports can be properly recorded. In some cases, port officials were  reducing the exportable value of FMS agreements at ports that were not  the primary port. For example, two ports contained duplicate entries for  67 FMS agreements, and, for many of these agreements, both ports were  independently recording the value of shipments made against the  agreement. In one case, the records for one port showed that the  agreement value was exhausted, while the records for the second port still  showed an exportable value of $2.9 million.
Although CBP agreed to develop guidelines for FMS shipment verification  and reduction of allowable export value after a shipment in response to  our 2003 report recommendations, the U.S. Customs Control Handbook  for Department of State Licenses has not been updated since 2002, and it  does not provide instructions to CBP port officials on tracking shipment  and agreement values. CBP issued a policy memorandum in 2004 directing  port personnel on how to record shipment values for FMS sales  agreements and coordinate with other ports to designate one primary port  to track and record shipments against each FMS agreement, but CBP port  officials we met with in July 2008 did not have the memorandum, and it  was not posted on CBP’s intranet, a resource that CBP began to use after  2004 to distribute policy information among the ports.
The list of closed agreements included 467 cases that were identified as closed for the  2003 GAO report and 2212 agreements that were closed from October 2007 to September  2008. determine if shipments are authorized. We determined that multiple  shipments were made against six of these agreements, including  agreements for the sale of technical defense publications, avionics  components, and missile components. According to DOD officials, one o these agreements was closed before any orders were placed against it;  however, we found that 21 shipments were made against this agreement  by a freight forwarder. In October 2008, DSCA officials provided a list of  recently closed FMS agreements to CBP, and they plan to meet with officials to discuss how to use the information. However, this list only  covers agreements that were closed in fiscal year 2008, which could all shipments to continue to be made against agreements that were closed  prior to that time.
section_title: DOD Lacks Mechanisms to Fully Ensure That the Correct FMS Shipments Reach the Right Foreign Customers
paragraphs: According to DOD guidance, DOD considers its responsibility for the  shipment of FMS articles complete when the title transfers from DOD to  the foreign government, which typically occurs when the item is picked up  by the freight forwarder at a DOD supply center or other point of origin.  DOD does not usually notify the foreign customer when a defense article  has been shipped. If a foreign customer has not received an FMS  shipment or it is damaged upon receipt, problems that may not be  identified until months after the article was shipped, the customer files a  supply discrepancy report. Each FMS sales agreement may have  thousands of shipments associated with it, and discrepancy reports could  be filed against each shipment. For example, in our 16 case studies, 188  supply discrepancy reports were filed. Thirty-one of these reports were  filed because an incorrect item was received. In such cases, DOD officials  may tell the foreign government to dispose of the item and give the foreign  government a credit against their account. However, if the report is not  submitted within one year, DOD is not required to take action on the  discrepancy. If a country chooses not to submit a report, DOD has no  procedures in place to identify a lost or diverted FMS shipment as it does  not generally track such shipments once they leave the DOD supply  center. According to DOD officials, DOD investigates the whereabouts of  defense articles that foreign governments claim they did not receive, or  received but never ordered, when the foreign customer notifies DOD.  Without notification from the customer, DOD may not know when defense  articles are mistakenly transferred to a foreign customer. This occurred in  2006 when DOD mistakenly transferred forward section assemblies for the  Minuteman III intercontinental ballistic missile to Taiwan instead of the  helicopter batteries the country had requested through the FMS program.  DOD only became aware of an error in 2007, when Taiwanese officials  notified U.S. officials that they did not receive the requested batteries. At  the time, DOD did not fully investigate the discrepancy and also did not  realize that it had sent missile components to Taiwan until 2008—more  than one year after being notified of the error.
In 2008, the Defense Logistics Agency (DLA) —which manages the  inventory for weapon system spare parts and other consumable items in  the DOD supply system—took action to ensure that defense articles for  shipment are properly labeled in an effort to minimize the risk that an  incorrect article is provided to a foreign customer. According to a DLA  headquarters official, DLA found it had a high inaccuracy rate for its  supply center shipments. DLA inspectors found, for example, that if a  shipping label got caught in the printer, the rest of the shipments on the  line may have incorrect shipping labels because the personnel on the line  may unknowingly skip the jammed label and affix subsequent labels on the  wrong packages. DLA’s two largest FMS supply depots have recently put  in place a double inspection process in which inspectors at the depots  ensure that the shipping documentation matches the items in the package.  A DLA official stated that this new process should address the problem of  improperly labeled defense articles leaving the supply depot—the first part  of the shipment process. However, Navy officials responsible for FMS  shipments noted that DLA needs to determine the source of the problems  to ensure that its solutions are correct. It is too early to know whether  DLA’s new process will reduce the inaccuracy rate for supply center  shipments.
According to DSCA officials, while DOD currently does not track all  shipments under FMS sales agreements, it has mechanisms intended to  improve visibility over shipments in limited circumstances. For example,  DOD established the Enhanced Freight Tracking System, which is  intended to allow DOD personnel, freight forwarders, and foreign  customers to track shipments from their point of origin to their final  destination. Currently, participation by FMS customers is voluntary. DSCA  and military service officials stated that the system was designed for  customers to track their shipments, and the officials do not plan to use the  system to track all FMS shipments. DOD also faces challenges in  successfully implementing the new system. First, the system is in the first  phase of implementation, which focuses on tracking defense articles from  the initial location in the military depot to the freight forwarder, and  subsequent phases will allow for shipment tracking to the final destination  in the foreign country. Second, in some cases the transportation control  numbers that are used to track shipments have been incomplete or  changed when shipments were consolidated and therefore are not a  reliable method to track shipments. According to DOD officials, while the  freight tracking system has multiple searchable fields, for some FMS  shipments the transportation control number is the only searchable field.  In addition, DOD officials identified another mechanism for tracking FMS  shipments that is being used for countries within the U.S. Central  Command area of responsibility, in particular Iraq and Afghanistan. All  such shipments are required to have radio frequency identification tags  that allow for electronic tracking of shipments through the Enhanced  Freight Tracking System to their destination. DSCA officials noted that  DOD developed this requirement to address the unique security situation  in those countries, and DOD does not have plans to expand it to include  shipments to other countries.
section_title: DSCA Does Not Have Guidance for Prioritizing Selection of Countries for Compliance Monitoring Visits
paragraphs: In 2003, we found that DSCA lacked the information needed to implement  and report on its Golden Sentry end-use monitoring program. Since then,  DSCA expanded this program and has been reporting annually on its  resources. According to DSCA’s fiscal year 2009 monitoring report to  Congress, the purpose of the program is to scrutinize the foreign  purchaser’s use of U.S. defense articles to ensure compliance with U.S.  security requirements. The report further notes that to conduct end-use  monitoring with available resources, DSCA uses a risk-based approach.  Countries are to secure all defense articles purchased through the FMS  program. They are also required to maintain a detailed inventory of every  item received by serial number for 16 defense articles DOD designated as  sensitive. These sensitive defense articles have been purchased by 76  countries and include night vision devices, communication security  equipment, and certain types of missiles, such as Stingers.
To ensure that foreign governments and security assistance officers are  complying with monitoring requirements, DSCA headquarters officials  lead in-country compliance visits, which DSCA has identified as an  important part of the Golden Sentry program. Specifically, the visit  objectives are to:    assess in-country security assistance officers’ overall compliance with  the end-use monitoring program;    assess the foreign government’s compliance with specific physical  security and accountability agreements through facility visits, records  reviews, and reviews of local security policies and procedures;    conduct routine or special inventories of U.S.-origin defense articles;    appraise possible violations of the U.S. laws, international agreements,  or FMS agreements.
To conduct these compliance visits, DSCA assigned three officials to  particular regions of the world. These DSCA personnel periodically lead  teams made up of several military service and overseas DOD personnel  with expertise on sensitive weapon systems or the country visited. DSCA  budgeted $1.4 million for such visits in each of the fiscal years 2006  through 2008.
Since DSCA began conducting compliance visits in 2003, it has visited 19  countries—or 25 percent—of the 76 countries that have purchased  sensitive defense articles, averaging about four visits per year. According  to DSCA policy, DSCA compliance visits should focus on the countries  that have purchased sensitive defense articles, with a particular emphasis  on visiting those with Stinger missiles. DSCA officials stated that they  determine compliance visits based in part on foreign policy  considerations, such as the need to coordinate visits with foreign  governments to respect their sovereignty. While no written guidance  exists, officials stated they consider a variety of risk-based factors in  determining countries to visit, including considering whether the country  is in a stable region of the world or if the officials have information  indicating sensitive defense articles may not be properly protected or  inventoried. Yet, out of the 19 countries they visited, about 50 percent  were in a stable region of the world. In addition, DSCA has not yet  conducted compliance visits in three countries that have a high number of  uninventoried defense articles, including Stinger missiles and related  components and night vision devices, as identified by DSCA’s data system.  According to a DSCA official responsible for the compliance visits, these  three countries are now scheduled for visits in 2009. DSCA also noted that  one of these countries needed assistance to help it meet standards before  it could have a successful compliance visit. However, as DSCA has not  created written guidance for selecting countries for compliance visits, it is  unclear how it applied a risk-based approach in prioritizing its country  selections to date.
section_title: DOD Lacks Information Needed to Effectively Administer and Oversee the FMS Program
paragraphs: While DOD has implemented initiatives aimed at improving the overall  administration of the FMS program, it lacks the information needed to  effectively administer and oversee the program. First, DOD does not have  information on the actual cost of administering FMS sales agreements and,  as a result, is not able to link the administrative surcharge DOD charges  foreign customers with actual costs. Second, DOD lacks information for  determining an improved metric to measure the timeliness with which  FMS agreements are developed. Finally, DOD does not have consistent  data from each of the military services on administering FMS agreements.
subsections: section_title: DSCA Lacks Sufficient Information to Determine Administrative Surcharge Rate
paragraphs: Over the past decade, DSCA has implemented several initiatives aimed at  improving the balance between FMS expenditures and income.  Specifically, DSCA has twice adjusted the surcharge rate—the rate  charged to FMS customers to cover program administration costs.  However, DSCA does not have sufficient information to determine the  balance necessary to support the program in the future. In 1999, DSCA  decreased the surcharge rate from 3 to 2.5 percent because the  administrative surcharge account had a surplus. Prior to this change, we  recommended that DSCA not lower the rate until it determined the cost of  implementing the FMS program. However, DSCA disagreed with this  recommendation and lowered the rate despite declining income that the  program experienced between 1995 and 2000. According to DSCA officials,  by 2005 the program experienced a decrease in income that raised  concerns about DSCA’s ability to pay FMS program expenses if sales  continued at the existing rate. Following a year-long internal study to  determine a sustainable rate, DSCA increased the surcharge rate from 2.5  to 3.8 percent in August 2006 and clarified what services are included in  the administrative surcharge and what services require additional  charges. Since then, the administrative surcharge account balance has  grown—a result of both the increased rate and higher than anticipated  sales. In fiscal year 2008 alone, FMS program sales totaled $36 billion— almost triple the amount DSCA had previously projected.
Once the customer signs the agreement and pays the required deposit,  DSCA collects 100 percent of the administrative surcharge from  agreements in support of the Global War on Terrorism and other  agreements with different funding sources and 50 percent of the  administrative surcharge for all other agreements. Expenditures from  these sales agreements continue throughout the entire life of the  agreement, which on average last 12 years. However, DSCA knows only  historical costs associated with the overall program, not the costs to  implement each FMS agreement. Identifying the costs of administering the  FMS program is a good business practice identified in federal financial  accounting standards. DSCA plans to reassess the optimal rate based on  the level of sales and estimated expenses, but without data on actual  agreement costs, the surcharge rates DSCA establishes may not be  sufficient to pay for needed administrative activities. According to a senior  DSCA official, while the fund is not currently in danger of becoming  insolvent, it is unclear how the current economic situation may affect  future sales levels and, therefore, the administrative account balance.
DSCA’s selection of its current surcharge rate has also raised issues with  FMS customers and the military services regarding which administrative  services require additional charges beyond what is included in the  standard administrative surcharge. The standard level of service includes  services such as the preparation and processing of requisitions. A country  that wants services in addition to the standard level of service, such as  additional reviews or contractor oversight, is charged separately for those  services. DSCA has provided guidance and training to help the Army,  Navy, and Air Force apply the revised standard level of service to new  cases. However, according to Navy officials, measuring one standard level  of service is unrealistic because every case is unique and may require  varying levels of service. Several FMS customer representatives to the  Foreign Procurement Group also raised questions about administrative  surcharge billing and the consistency with which the standard level of  service was applied across the services. A briefing prepared by the Foreign  Procurement Group in July 2008 noted improvement in the application of  the standard level of service but identified the need for additional  transparency in DOD’s charges for the standard level of service for FMS  agreements. For example, the group cited incidences of charging  customers for services that should be covered under the standard level of  service.
section_title: DSCA Lacks Sufficient Information to Improve Metric Regarding FMS Agreement Development Time Frame
paragraphs: In an effort to ensure FMS sales agreements are developed and presented  to customers in a timely manner, DSCA established a goal of developing  and presenting 80 percent of agreements to its customers within 120 days  of receiving a request to purchase a defense article through the FMS  program. DSCA’s 120-day time period begins with the initial receipt of the  purchase request and includes the time required to receive pricing  information for defense articles from contractors, to allow the services to  write the actual FMS agreement, and for all of the relevant agencies to  review and approve the sale of the defense articles. In 2008, DSCA began a  study to determine if the 120-day goal was reasonable or if it needed to be  revised. However, DSCA officials stated they did not have sufficient  information to make such a determination. As a result, DSCA directed  each military service to study its FMS process to assess internal FMS  processes and the time frames associated with those processes. According  to DSCA officials, they anticipate receiving the results of the studies in  early summer 2009.
A variety of factors may affect the military services’ ability to meet the 120-  day time frame for developing an FMS agreement. For all agreements  implemented from January 2003 to September 2008, DSCA developed 72  percent of FMS agreements within its stated 120-day goal. While it takes an  average of 122 days after the initial receipt of a request to develop an FMS  agreement, the number of days that it took to develop an FMS agreement  ranged from less than one to 1,622 days. While DSCA officials noted that  the creation of a central agreement writing division in 2007 has helped  improve the consistency of agreements, there are other factors affecting  the time it takes to develop an agreement. Officials responsible for  developing the FMS agreements stated that while it is possible to meet the  120-day goal on routine agreements, such as blanket order agreements, it  is difficult to meet the goal for complex agreements, such as agreements  for weapons systems. Agreements over certain dollar thresholds could  require more time if they have to go through the congressional notification  process. Similarly, for example, non-NATO cases may require more time  for the U.S. Embassy in the customer country to conduct an evaluation of  the proposed sale. Prioritization of certain agreements, such as Iraq FMS  agreements, can also delay the development of other FMS agreements.  Other factors that can extend FMS agreement development times include  slow customer response to follow-up questions about requests to purchase  defense articles, workload challenges within the military services, and  slow contractor response times for pricing information about the defense  article the foreign government wants to purchase.
section_title: Disparate Data Systems Limit Available Information for DSCA Oversight of FMS Program
paragraphs: FMS implementation, management, and financial data—which DOD uses  to track, oversee, and execute FMS sales agreements—are currently  dispersed among 13 electronic systems across the military services and  other DOD components. As a result, DSCA’s ability to obtain FMS program  information and to manage the efficiency of the FMS process is limited.  For example, one DSCA official responsible for collecting program  information noted that DSCA cannot effectively measure cost, schedule,  and performance on FMS agreements because current systems only  provide three consistent indicators that are comparable across the military  services. According to the official, while the service specific systems may  provide information for analyzing the performance of FMS agreements  within that service, the information is not comparable with data produced  by other services, thus reducing its value to DSCA for overall oversight of  the program. DSCA compiles the limited available data from the military  services for quarterly meetings that review the FMS program in an effort to  determine potential problems. In addition, as DOD does not have a  centralized system, the services have independently developed tools to  enhance the capabilities of their existing systems, one of which has been  in place since 1976. For example, the Air Force independently developed  a web-based system for processing supply discrepancy reports, but DSCA  has yet to fully fund this system to be used by the other services.
In an effort to develop more comparable, detailed, and complete data on  agreement implementation, DSCA is working to develop the Security  Cooperation Enterprise Solution. DSCA is currently defining the  requirements for this potential system and has yet to determine how it will  relate to other data systems. According to DSCA officials, recent increases  in FMS sales and the administrative surcharge rate will provide sufficient  funds to begin the development of a new data system. DSCA also uses the  Security Cooperation Information Portal—a web-based tool designed to  provide a point of access for DOD’s multiple FMS information systems,  such as the services’ requisition systems, the system used to write  agreements, and the financial systems. The portal retrieves information  from existing DOD systems and is intended to provide consolidated  information to DOD and foreign customers. However, as the portal is  based on information from 13 different systems, the data have the same  limitations in providing DSCA with comparable data to oversee the FMS  program.
section_title: Conclusions
paragraphs: The FMS program, as a part of a broader safety net of export controls  designed to protect technologies critical to national security as well as an  important foreign policy tool to advance U.S. interests, presents a set of  unique challenges to the agencies involved in the program. Previously  identified weaknesses in the FMS shipment verification process remain  unaddressed and require the immediate and collective attention of  leadership within State, DOD, and Homeland Security. While these  departments each have a distinct role to play in the FMS program, they  have failed to work collectively to ensure that FMS articles are not  vulnerable to loss, diversion, or misuse. This failure has clear national  security implications because defense articles will be at risk of falling into  the wrong hands. Consistent with our 2003 report, we still believe that  State should revise the ITAR to establish procedures for DOD verification  of FMS shipments to address weaknesses in the shipment verification  process. Also, DOD may not be maximizing its resources by fully applying  a risk-based approach to ensure that sensitive defense articles are  protected as required. In addition, DOD has made changes to its FMS  program administration without sufficient information on which to base  these changes, and it lacks information to assess how well the program is  working. Without this information, DOD’s ability to know if the program is  achieving intended results is limited.
section_title: Recommendations for Executive Action
paragraphs: To improve controls for exported items as well as administration and  oversight of the FMS program, we are reiterating a recommendation to  State from our 2003 report and making the following five  recommendations.
To establish procedures for DOD verification of FMS shipments, we  recommend that the Secretary of Defense direct the Under Secretary of  Defense for Policy to provide additional guidance to the military services  on how to verify FMS shipment documentation.
To ensure CBP port officials have the information needed to verify FMS  shipments are authorized, we recommend that the Secretary of State  direct the Assistant Secretary for Political-Military Affairs, that the  Secretary of Defense direct the Under Secretary of Defense for Policy, and  that the Secretary of Homeland Security direct the Commissioner of  Homeland Security’s U.S. Customs and Border Protection to coordinate on  establishing a process for:    ensuring the value of individual shipments does not exceed the total  value of the FMS agreement;    designating a primary port for each new and existing FMS agreement;    developing a centralized listing of these primary ports for use by CBP    providing CBP officials with information on FMS agreements that were  closed prior to fiscal year 2008.
To ensure that correct FMS shipments reach the right foreign customers,  we recommend that the Secretary of Defense direct the Under Secretary of  Defense for Policy to examine its existing mechanisms and determine if  they can be used to improve tracking of FMS shipments.
To ensure that FMS defense articles are monitored as required, we  recommend that the Secretary of Defense direct the Under Secretary of  Defense for Policy to create written guidance for selecting in-country visits  that consider a risk-based approach.
To improve the administration and oversight of the FMS program, we  recommend that the Secretary of Defense direct the Under Secretary of  Defense for Policy to better determine the administrative costs of  implementing the FMS program and develop metrics that allow DSCA to  comprehensively assess the performance of the FMS program.
section_title: Agency Comments and Our Evaluation
paragraphs: State, DHS, and DOD provided written comments on a draft of this report,  which are reprinted in appendices II through IV. DHS and DOD also  provided technical comments, which we incorporated as appropriate. In  written comments, State and DHS concurred with our recommendations  and outlined plans to implement them. DOD concurred with two of our  recommendations and partially concurred with the other three. In its  technical comments, DOD also noted that it disagreed with our  characterization of the information it uses to administer the FMS program.
In concurring with the recommendation that State should revise the ITAR,  which we reiterated from our 2003 report, State noted that the Political- Military Bureau is processing the recommended changes to the ITAR and  will publish them in the Federal Register as soon as all requirements for  doing so are met.
DOD concurred with our recommendation to provide additional guidance  on verifying FMS shipment documentation and agreed to work with the  military services to review the current guidance and revise as necessary.  DOD also concurred with our recommendation that it examine its existing  mechanisms for tracking FMS shipments and will work with agency  representatives to improve end-to-end visibility.
In response to our recommendation that State, DHS and DOD coordinate  to ensure CBP port officials have the information needed to verify that  FMS shipments are authorized, DHS and DOD agreed to work together to  provide this information. DHS identified several specific actions that it  plans to take, including reconvening an interagency working group to  address FMS-related issues, obtaining a complete list of closed FMS  agreements from DOD, and establishing a list of all primary ports for  existing and new FMS agreements. DOD also agreed to provide CBP with a  list of closed FMS agreements. While DOD agreed to work with State and  CBP to establish a process for designating a primary port for each new  FMS agreement, it noted that it will have to examine the resource impact  of designating a primary port for existing FMS agreements before taking  further action. Once DOD has made this assessment it will be important  for the agencies to determine the appropriate course of action for existing  agreements.
DOD partially concurred with our recommendation to create written  guidance for in-country visits and said that such guidelines could be  included in the Security Assistance Management Manual. DOD noted that  these guidelines would take risk into account, but would have to be broad  enough to consider other factors, such as the experience of personnel,  when scheduling in-country visits. DOD has reported to Congress that it  uses a risk based approach to conduct end-use monitoring with available  resources. While our report notes that a variety of factors play a role in the  selection of countries for compliance visits, we also found that the current  system, which lacks written guidance, may not ensure that DOD is  distributing its resources in a risk-based manner.  As DOD has identified  these visits as an important part of its monitoring program, we continue to  believe that DOD needs written guidance—whether in published guidance  or internal policy memos—that applies a risk-based approach to ensure  that sensitive defense articles are protected as required.
DOD also partially concurred with our recommendation that it improve  the administration and oversight of the FMS program. DOD agreed that  rigorous data analysis and well-defined, targeted metrics are vital for FMS  program administration. It noted that it conducted a year-long study prior  to changing the current administrative surcharge rate in August 2006 and  that it hosts a quarterly forum at which security cooperation leadership  review metrics related to the FMS program.  In its technical comments,  DOD also stated that it has sufficient information and that it is not  required to gather information on actual costs to administer the FMS  program. As we state in our report, DOD’s August 2006 study relies on  future sales estimates and historical budget data for program  administration to develop its surcharge rate, which does not provide it  with the actual costs to implement existing FMS agreements.  We also note  that identifying the costs of administering the FMS program is a good  business practice recognized in federal financial accounting standards.  In  addition, while we acknowledge that DOD officials meet at quarterly  forums to review existing metrics, they have limited consistent indicators  that are comparable across the military services. As such, we continue to  believe that DOD should obtain additional information regarding the cost  of implementing FMS agreements and to develop metrics to administer  and oversee the program.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution of it until 30 days from  the date of this report. We will then send copies to the Secretaries of State,  Defense, and Homeland Security. In addition, we will make the report  available at no charge on the GAO Web site at http://www.gao.gov.
Please contact me at (202) 512-4841 or lasowskia@gao.gov, if you or your  staff  have any questions about this report. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report were Ann Calvaresi- Barr, Director; John Neumann, Assistant Director; Heather Miller; Jean  Lee; Sarah Jones; Ann Rivlin; Noah Bleicher; John Krump; Karen Sloan; Art  James; and Rebecca Rygg.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine the changes that State, DOD, and DHS have made to the FMS  program since 2003, we reviewed the regulatory framework governing the  FMS process, including the Arms Export Control Act, the International  Traffic in Arms Regulations (ITAR), and a draft of potential revisions to  the ITAR. We also reviewed the U.S. Customs Control Handbook for  Department of State Licenses, the Defense Department’s Security  Assistance Management Manual, and other guidance from Customs and  Border Protection (CBP), the Defense Department, and the military  services. We used case studies to assess the steps in the FMS process.  Using data available to the military services and FMS officials through the  Defense Security Assistance Management System, we selected 16 FMS  agreements based on the following attributes: the military service  responsible for administering the FMS agreement, the type of defense item  sold, whether the item required enhanced end-use monitoring, the  customer country, and agreements that used both the Defense  Transportation Service and freight forwarders to transport defense articles  to their end destination. We selected similar defense articles to compare  across the military services. We obtained data from DOD systems used to  manage the FMS program. We verified that the agreements we selected  contained the traits for which they were selected. Based upon this  verification, we confirmed that the data we used were sufficiently reliable  for our purposes. We also obtained data from two major ports, one airport  and one seaport. These ports are 2 of the top 10 U.S. ports in terms of the  dollar value of FMS shipments they process. We used these data to  determine if FMS agreements were being lodged at multiple ports and to  determine if exports were occurring against FMS agreements for which  exports were no longer authorized. We reviewed copies of licenses and  shipment logs to identify when actual shipments were made against FMS  agreements that were no longer authorized to have shipments. Our  analysis of these data allowed us to determine whether gaps in controls  exist, but did not allow us to assess the state of controls at all ports. In  addition, we interviewed officials and obtained documentation at the State  Department, the Defense Security Cooperation Agency (DSCA), the Air  Force Security Assistance Center, the United States Army Security  Assistance Command, the Navy International Programs Office, the Naval  Inventory Control Point, the Defense Logistics Agency, CBP headquarters  and port personnel at two ports, and U.S. security assistance officers  stationed in one NATO and one non-NATO country.
To determine the information DOD uses to administer and oversee the  FMS program, we reviewed the Defense Department’s Security Assistance  Management Manual and other guidance from the Defense Department  and the military services. We also reviewed the Office of Management and  Budget's Managerial Cost Accounting Concepts and Standards for the  Federal Government - Statement of Federal Financial Accounting  Standards Number 4. We analyzed data the military services use to manage  FMS agreements implemented from fiscal years 2003 to 2008. We  conducted interviews with officials at DSCA and the military services. We  also met with the Foreign Procurement Group, a group composed of FMS  customer countries, to ask them about their experiences with the FMS  program and reviewed the group’s 2008 briefing for the program.  We conducted this performance audit from May 2008 to April 2009 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Comments from the Department of State
section_title: Appendix III: Comments from the Department of Homeland Security
section_title: Appendix IV: Comments from the Department of Defense