Defense Exports: Reporting on Exported Articles and Services Needs to Be Improved
Published: 2010-09-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. government exports billions of dollars of defense articles and services annually to foreign entities, generally through direct commercial sales (DCS) from U.S. companies under licenses issued by the State Department (State) or through the Department of Defense (DOD) Foreign Military Sales (FMS) program. GAO has previously reported on weaknesses in the export control system. As requested, GAO (1) identified the magnitude and nature of defense articles and services exported and (2) assessed information currently reported on defense exports and any gaps and limitations in defense export data. To conduct this work, GAO analyzed export data from DOD for FMS and the Department of Commerce's U.S. Census Bureau (Census) for DCS for 2005 through 2009; reviewed relevant laws and regulations; assessed State and DOD reports on defense exports; reviewed agency data systems documentation; and interviewed officials from State, DOD, Homeland Security, and Census.
section_title: What GAO Found
paragraphs: U.S. exports of defense articles--such as military aircraft, firearms, and explosives--ranged from about $19 billion to $22 billion annually in calendar years 2005 to 2009. Of these defense articles, about 60 percent have been exported by companies to foreign entities through DCS licenses, while the remaining 40 percent were exported under the FMS program. Aircraft and related parts constitute the largest category of such exports--about 44 percent--followed by satellites, communications, and electronics equipment and their related parts. U.S. exports of defense articles were concentrated in a few countries: about half went to Japan, the United Kingdom, Israel, South Korea, Australia, Egypt, and the United Arab Emirates. Although no data are available on the export of defense services--such as technical assistance and training--provided through DCS, exports of defense services through FMS were stable, accounting for about one-third of the value of FMS exports. Congress does not have a complete picture of defense exports under current reporting--including which method of export is used more often by individual countries or for certain types of items. State--which has overall responsibility for regulating defense exports--and DOD, report to Congress in response to various requirements. However, their annual reports on DCS and FMS exports have several information gaps and inconsistencies--in part, because of the differing purposes of the agencies' data systems and different reporting methodologies. For example, State does not obtain data from U.S. companies on the export of defense services under DCS licenses, although it authorizes several billion dollars of such exports annually. State officials noted that they do not have an operational requirement to collect such information and doing so could be burdensome on exporters. Other limitations on defense export data include differences in agencies' item and country categorizations and the inability to separate data on some permanent and temporary exports. Further, while State's report is available on its Web site, DOD's is not. These differences and limitations may inhibit congressional oversight and transparency into the entirety of U.S. defense exports. GAO suggests that Congress consider whether it needs specific data on exported defense services and is recommending that State publicly report consolidated defense export data on DCS and FMS in a consistent manner. In the absence of additional direction and resources from Congress, State did not agree. GAO believes the recommendation remains valid.

section_title: Letter
paragraphs: Each year, the U.S. government exports billions of dollars of defense  articles and services, such as military aircraft and related parts, firearms,  explosives, technical assistance, and training, that may include critical  technologies. The government views the export of these articles and  services as an integral part of safeguarding U.S. national security and  furthering U.S. foreign policy objectives. Over the last decade, we have  reported on weaknesses in the effectiveness and efficiency of government  programs designed to protect critical technologies, which were largely  attributable to poor coordination among multiple U.S. government  agencies, complex interagency processes, and a lack of information  sharing that together contributed to export enforcement challenges. These  findings, along with others, prompted us to include the U.S. arms export  control system as part of a high-risk area on ensuring the effective  protection of technologies critical to U.S. national security interests since  2007.
The Department of State (State) regulates defense exports for consistency  with national security and foreign policy interests. Eligible foreign entities  can obtain U.S. defense articles and services through the Department of  Defense (DOD) Foreign Military Sales (FMS) program or through direct  commercial sales (DCS) from U.S. defense companies under export  licenses issued by State.
To ensure that there is an accounting of what defense articles and services  are actually exported from the United States, you asked us to provide  information on the scope of U.S. defense exports. Specifically, we   (1) identified the magnitude and nature of defense exports and (2)  assessed information currently reported on these exports and limitations  and any gaps in available defense export data.
For the purpose of this report, we define “defense exports” as the  permanent transfer—including shipment or delivery of defense articles or  provision of defense services—to foreign entities either through DOD’s  FMS program or through license provided by State for a DCS export. We  excluded temporary exports—which leave from and return to the United  States without changing ownership—and articles shipped to U.S.  government end users located in foreign countries. To identify information  on the magnitude and nature of defense exports, we analyzed calendar  years 2005 through 2009 data from DOD for FMS defense articles and  services. We also analyzed data for the same period from the Department  of Commerce’s U.S. Census Bureau (Census)—which maintains data on  exports—for DCS of defense articles. Currently, no data are collected on  the export of defense services through DCS. Although our analysis focuses  on exports of defense articles, we obtained data from State on DCS  licenses primarily to assess the reliability of Census data. This report does  not include values for classified defense exports. However, we determined  that excluding classified data would not materially affect our high-level  analysis because the values of classified exports are small relative to the  overall export totals. We assessed the reliability of defense export data by  performing electronic testing, reviewing system documentation,  comparing our data to published and other available information, and  interviewing knowledgeable officials about data quality and reliability, and  determined that the data were sufficiently reliable for the purpose of this  review. For trend analysis—that is, changes in values over time—we  adjusted for the effects of inflation by converting values to 2009 constant  dollars.
To compare export data through FMS and DCS, we analyzed the different  item classification systems used by State, DOD, and Census and developed  a common classification system enabling analysis of the values of defense  articles by type of items. We also reviewed relevant laws and regulations  regarding the export of defense articles and the requirements for reporting  export information through Census’s Automated Export System (AES). To  identify information currently reported on defense exports, we obtained  and analyzed the reports issued by State’s Directorate of Defense Trade  Controls (DDTC) and DOD’s Defense Security Cooperation Agency  (DSCA). To identify any limitations and gaps in the agencies’ data  collection and reporting, we reviewed data systems and related  documentation at DDTC, DSCA, and Census. We also interviewed officials  at these agencies and at the Department of Homeland Security’s U.S.  Customs and Border Protection (CBP) on their export data collection  processes. Information on dual-use items—which can have both  commercial and military uses and are regulated by the Department of  Commerce under a separate control list—is outside the scope of this  review. For more detailed information on our scope and methodology, see  appendix I.
We conducted this performance audit from February 2010 to September  2010 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 President to control the  export and import of defense articles and defense services. The statutory  authority of the President to promulgate regulations with respect to  exports of defense articles and defense services and designate those items  to be considered defense articles and defense services for export control  purposes has been delegated to the Secretary of State. State administers  the arms export control system through requirements contained in the  International Traffic in Arms Regulations (ITAR) and designates the  articles and services deemed to be defense articles and defense services.  These designations are made by State, with the concurrence of DOD, and  constitute the United States Munitions List (USML), which comprises 21  major categories—for example Aircraft, Spacecraft, Military Electronics,  and Guns and Armament—and more detailed subcategories. The ITAR  also designates defense services subject to export controls, including  furnishing assistance, technical data, or training to foreign entities. As  defense exports are part of U.S. foreign policy, Congress requires reports  to enable its oversight, including annual reports under the Foreign  Assistance Act of 1961, as amended, Section 655 on defense exports,  commonly referred to as Section 655 reports.
U.S. defense articles and services generally can be exported to foreign  entities in two ways—by FMS or DCS. Under FMS, the U.S. government  procures defense articles and services on behalf of the foreign entity.  Countries approved to participate in this program may obtain defense  articles and services by paying with their own funds or with funds  provided through U.S. government-sponsored assistance programs. While  State has overall regulatory responsibility for the FMS program and  approves the export of defense articles and services, DOD’s DSCA directs  the execution of the program, and the individual military departments  implement the sale and export process. DOD bills foreign entities and  tracks the export of articles and services through its financial systems. For  FMS, an approved Letter of Offer and Acceptance authorizes the export.  Under DCS, U.S. companies obtain permanent export licenses generally  valid for 4 years from State’s DDTC, which authorizes the export of  defense articles and services directly to foreign entities. State also licenses  defense articles for temporary export—when the article will be exported  for a period of less than 4 years and will be returned to the United States  without transfer of title.
While most defense articles and services require a license for export, the  ITAR contains numerous exemptions from licensing requirements that  have defined conditions and limitations. For both FMS and DCS, the actual  export of defense articles or services may occur years after the  authorization—or may not take place at all.
In addition to State and DOD, other U.S. government entities are involved  with oversight of defense exports and management of export data. CBP  oversees exports of defense articles leaving the country for compliance  with export control laws and regulations and collects information on those  exports through AES. AES is jointly managed and operated by CBP and  Census, and the data it collects are used by State and other federal  agencies. It is the central point through which export data required by  multiple agencies are filed electronically to CBP. Foreign Trade  Regulations and the ITAR require AES filings for all articles on the USML  that are sent, taken, or transported out of the United States, and the  exporter must provide either a license number or a citation of the license  exemption. The data obtained through AES are maintained by Census’s  Foreign Trade Division and CBP for the purpose of developing  merchandise trade statistics and enforcement of U.S. export control laws,  but also are provided to State for reporting purposes.
DCSA information on the FMS program identifies several considerations  for foreign entities in choosing between FMS and DCS. Under FMS, DOD  procures defense articles and services for the foreign entity under the  same acquisition process used for its own military needs, and recipients  may benefit from economies of scale achieved through combining FMS  purchases with DOD’s. In addition, DOD provides contract administration  services that may not be available through the private sector. To recover  its administration costs, DOD applies a surcharge to each FMS agreement  that is a percentage of the value of each sale. Under DCS, foreign entities  may have more direct involvement during contract negotiation with U.S.  defense companies, may obtain firm-fixed pricing, and may be better able  to fulfill nonstandard requirements. However, according to State officials,  some types of defense articles, such as certain types of missiles, can only  be exported through FMS.
In addition, DOD administers other programs through which defense  articles can be exported to foreign governments. For example, the fiscal  year 2006 National Defense Authorization Act provides funding  authorities for DOD to jointly formulate and coordinate with State in the  implementation of security assistance programs, which can include the  export of U.S. defense articles and services. DOD also may export certain  defense articles deemed “excess” to our national security needs to foreign  governments or international organizations on a reduced or no-cost basis.
section_title: The Majority of U.S. Defense Articles Are Exported through Direct Commercial Sales, with About Half Going to Relatively Few Countries
paragraphs: From calendar years 2005 through 2008, the value of U.S. exports of  defense articles remained relatively stable, from about $19 billion and   $20 billion, with an increase to about $22 billion in 2009. Of the  approximately $101 billion total in U.S. defense articles exported from  2005 through 2009, about 60 percent were exported through DCS, as  shown in figure 1. This figure also shows that exports through DCS  increased from $10.6 billion to $13.3 billion during this period—an  increase of about 25 percent—while the value of FMS exports remained  relatively stable.
Although there are currently no data available on the export of defense  services through DCS, we found that the value of defense services  exported through FMS was also relatively stable over the last 5 calendar  years, ranging from about $3.8 billion to $4.2 billion annually from 2005  through 2009. Overall, services account for about one-third of the value of  all FMS exports annually.
Over the last 5 years, aircraft and their related parts and equipment  accounted for about 44 percent of the value of all defense articles  exported. The second largest category was satellites, communications, and  electronics equipment and their related parts—accounting for about 20  percent of defense articles. We also found differences in the method of  export for defense articles, with values for some types of articles higher  through FMS versus DCS and vice versa. As shown in figure 2, of the  approximately $26 billion in aircraft equipment and parts exported over  the 5-year period, almost 66 percent (about $17.2 billion) was exported  through DCS. A much larger value of other equipment and parts; satellites,  communications and electronics equipment, and related parts; and  firearms were also exported through DCS. On the other hand, a larger  value of missiles, ships, and their related parts were exported through  FMS. For two categories—aircraft and vehicles, weapons, and their  parts—export values were about evenly divided between DCS and FMS.
Although defense articles and services are exported to hundreds of  countries, we found that exports of defense articles were highly  concentrated in a few countries. Over the past 5 years, the top three  recipient countries—Japan, the United Kingdom, and Israel—accounted  for almost one-third of the value of defense article exports. The top seven  recipient countries, which include South Korea, Australia, Egypt, and the  United Arab Emirates, accounted for about half of the value of all U.S.  defense article exports. We also identified differences by the method of  export through either FMS or DCS. In general, the value of FMS exports  was higher for developing countries, while the value of DCS exports was  higher for developed countries. State officials noted that developing  countries may benefit from the FMS logistics, infrastructure, and other  support that come with the FMS program. As shown in figure 3, of the   $13 billion in defense articles that Japan imported, 85 percent   ($11.15 billion) was exported through DCS. Similarly, of the $8.3 billion  that the United Kingdom imported, 82 percent (about $6.8 billion) was  exported through DCS. On the other hand, Israel and Egypt import a  higher value of their U.S. defense articles through the FMS program. Israel  and Egypt receive annual U.S. security assistance funding that according  to DOD and State officials, generally is used to purchase U.S. defense  articles and services through the FMS program. FMS exports of defense  services were also concentrated in a relatively few countries, with Saudi  Arabia, Japan, and Egypt accounting for over one-third of the value over  the last 5 years.
subsections: section_title: Egypt
paragraphs: Although Congress requires reporting on various aspects of U.S. defense  exports, State’s and DOD’s annual reports on “military assistance and  military exports”—as required by Section 655 of the Foreign Assistance  Act of 1961, as amended—do not provide a complete picture of the  magnitude and nature of defense exports because the agencies use  different reporting methodologies and have information inconsistencies  and gaps—in part, because of the separate purposes of their data systems.  Although the data we obtained and analyzed were sufficiently reliable to  develop high-level, overall information on the magnitude and nature of  defense exports, the differences in agencies’ data—including the lack of  information for defense services exported under DCS licenses, differences  in agencies’ item and country categorizations, and the inability to separate  some permanent and temporary exports—hinder the ability to provide a  comprehensive and transparent picture of defense exports. Current export  reform discussions acknowledge that the proliferation of individual data  systems make export licensing and enforcement more difficult; however,  the FMS system has not been specifically cited in these proposals.
Because defense exports are used for furthering U.S. foreign policy  objectives, there are legislatively mandated reporting requirements to  enable congressional oversight. State has overall responsibility to report  on exports of defense articles and defense services. DOD also reports on  defense exports under FMS and other programs. The most comprehensive  reporting requirement is contained in Section 655 of the Foreign  Assistance Act of 1961, as amended, which requires annual reporting of  defense articles and services that were authorized and provided  (exported) to each foreign country and international organization for the  previous fiscal year under State export license or furnished under FMS,  including those furnished with the financial assistance of the U.S.  government. Also, for defense articles licensed for export by State, the  act requires “a specification of those defense articles that were exported  during the fiscal year covered by the report.” There is not a parallel  provision for a specification of defense services exported under licenses  issued by State. In addition, the act requires that unclassified portions of  the report be made public on the Internet through State. Although State  publishes its Section 655 reports on its Web site, DOD’s Section 655  reports are not available either through DOD’s or State’s Web site. Other  reporting requirements are focused on discrete aspects of defense exports  and, as such, are not intended to provide a complete picture of such  exports. For example, Section 36 of the Arms Export Control Act requires  advance notifications to Congress for proposed sales based on certain  dollar thresholds, as well as reports on defense exports sold. DOD also  noted numerous additional reporting requirements for defense exports  that occur under other programs, such as Excess Defense Articles and  International Military Education and Training.
While State and DOD each provide annual reports to Congress in response  to the Section 655 requirement, we identified differences in the way each  agency reports its data—in some cases based on differing interpretations  of the same requirement—that lead to an incomplete overall picture of the  magnitude and nature of such exports, as shown in table 1.
The differences in reporting also occur because the data on defense  exports are gathered and maintained by multiple government agencies for  a variety of purposes using different data systems. State and DOD officials  told us that information reported on defense exports is based on data that  are contained in existing systems developed to satisfy the operational  requirements of each organization and was not designed to integrate with  other agencies’ systems. For example, State’s system was designed to  manage the DCS licensing process, DSCA’s system was developed to  facilitate the management of the FMS program, and data collected in the  AES system are maintained by Census primarily for generating trade  statistics. Nonetheless, these systems are the principal sources of  information on defense exports. In areas where these systems differ from  each other, certain data fields need to be reconciled before data can be  aggregated. Even with these adjustments, these and other system  differences hinder the ability to perform a more detailed and in-depth  analysis of defense exports.
For example, one difference between State’s and DOD’s reporting is the  lack of data on defense services exported under DCS licenses. According  to State’s reporting to Congress, for fiscal year 2005, it licensed over   $27 billion in defense services. By fiscal year 2008, the most recent data  available, the value of approved licenses for defense services almost  tripled to over $71 billion. However, State does not report on the value of  defense services exported under license authorizations because it does not  have such information. This is in part because AES does not capture data  on the export of services to foreign entities as it was developed to track  information on the export of physical articles. Also, State officials noted  that they have no operational requirement to have information on the  value of exported defense services, and they do not require such  information to be reported to State as it could create an additional burden  on exporters. Further, these officials noted that they have not received  feedback from congressional committees on the lack of such data in prior  reports to Congress and therefore are not planning to obtain these data  from exporters. In contrast, because DOD bills FMS customers for the  export of defense services—including logistical support, repairs, training,  and technical assistance—it tracks data on the value of services exported.  As noted earlier in this report, defense services constitute about one-third  of annual FMS exports.
Further complicating efforts to combine and compare State and DOD data  reported in the Section 655 reports is that agencies involved in the  licensing, export, and collection of related data lack a unified item  categorization scheme. According to agency officials, these item  categorization schemes were developed for their specific purposes and  were not designed to integrate with other agencies’ data for reporting  defense exports. In issuing DCS licenses, State uses the categories for  defense articles and services enumerated on the USML and reports license  values by USML categories and subcategories. However, when exporters  file their export information through AES for these licensed exports, they  include the USML category that provides a high-level categorization of  articles (e.g., “Aircraft and Associated Equipment”) but does not allow for  the more detailed breakout of articles by subcategories, which State uses  to report license values. Exporters also categorize articles according the  Harmonized Tariff Schedule, based on the international “Harmonized  System,” which was developed for reporting merchandise trade statistics.  The Harmonized System and USML are not directly comparable. For  example, while the USML has a category for “tanks and military vehicles”  separate from other categories for weapons, the Harmonized System has  one combined category that includes both weapons and “weaponized”  vehicles such as tanks and armored vehicles. As a result, a more detailed  combined analysis of the types of military vehicles is not possible using  existing category schemes.
Under the FMS program, DOD reports export values based on information  used to bill foreign entities using a unique item categorization system that  also is not directly comparable to the USML. For example, the USML has  separate categories for explosives, bombs, training equipment, and  guidance equipment; DOD’s single category for “bomb” includes items in  all of those USML categories. Further, some of the articles and services  exported through the FMS program, such as fuel and construction, are not  controlled under the USML. However, since DOD bills foreign entities for  these articles and services, they are included in DOD’s reports along with  defense articles and services. DOD officials noted that there is no  requirement to report exports by USML categories.
Defense export data comparisons also are limited because DOD, Census,  and State define some countries and international organizations  differently. For example, DOD’s FMS data and State export license  authorizations include exports to international organizations such as the  United Nations. Exports documented through AES are coded for the  country of destination and not for international organizations that may be  located within those countries. Furthermore, each agency’s system uses  different codes for some countries, requiring manual analysis to enable  combining and comparing of these data. For example, the code used for a  country in one database may be used for a different country in another  database, and some country names are different. These differences  hamper efforts to make comparisons between the systems or to combine  the databases to analyze like exports to countries and international  organizations.
Another difference between State’s and DOD’s Section 655 reports is  State’s inclusion of U.S. government end users in its data. While all exports  under FMS are to foreign entities, State reports license authorization  values for exports that are used by U.S. government agencies within the  recipient country as well as articles exported for use by U.S. and allied  forces operating on foreign soil. Because the values reported for exports  of defense articles include these U.S. government end users, the value of  such articles exported to foreign entities is overstated.
In addition, obtaining precise data on DCS exports is further limited for  certain types of exports where permanent and temporary exports are  grouped together. For example, both temporary and permanent exports of  classified items are identified under a single export license type. For 2005  through 2009, this license type included a total of about $7 billion in  exports, which can include temporary exports. In addition, the ITAR  provides for a license exemption for some defense articles exported to  Canada. However, the ITAR provides a single Canadian exemption that  includes both permanent and temporary exports. As noted earlier, defense  export data for Canada are likely understated since the data do not  delineate permanent exports from temporary ones in the approximately  $4.1 billion reported under this exemption from 2005 through 2009.
DOD’s reporting of total defense exports is also limited by the lack of data  on exports of defense articles and services under certain U.S. government- funded programs. For example, until recently DSCA did not have access to  centralized data on defense exports authorized under sections 1206 and  1207 of the National Defense Authorization Act for Fiscal Year 2006. Such  exports are tracked separately from FMS cases—generally by the  appropriation that funded the export. In 2009, the DSCA system identified  a cumulative total for these exports that included multiple years with no  way to separate the data by the year of export. However, DSCA officials  told us that they now receive monthly updates on these exports and are  considering options for including these data in future reporting.  Furthermore, officials at Census, CBP, and DOD told us that reporting  through AES for FMS exports is not complete, although the U.S. Foreign  Trade Regulations and the ITAR require AES filings for all USML items  exported from the United States including those exported through FMS.  DOD officials noted that while AES filing is required, not all DOD  components fully comply. Census officials stated that they are providing  outreach and training for DOD components to encourage compliance with  this requirement. CBP officials noted that reporting of FMS exports  through AES has improved over the years, and our analysis of AES data  showed that the value of FMS exports reported in AES has increased from  2005 to 2009.
Under the U.S. export control reform effort currently under way, the  administration has noted that the myriad of U.S. government agencies  involved in export controls continue to maintain separate information  technology systems and databases that are not accessible or easily  compatible with each other. According to a recent statement by the U.S.  National Security Advisor, this proliferation of individual systems makes  export licensing and enforcement more difficult. In our High-Risk Series,  we found weaknesses in the effectiveness and efficiency of U.S.  government programs that are related to the protection of technologies  critical to national security interests, such as FMS and DCS, and  recommended that these programs be reexamined to determine how they  can collectively achieve their missions. The U.S. government is currently  considering consolidating the current export control lists and adopting a  single multiagency system for licensing with a single interface for  exporters, ultimately leading to a single enterprisewide information  technology system that can track an export from the filing of a license  application until the item leaves a U.S. port. However, the administration  has not announced plans on how defense articles and services authorized  and exported under FMS and other government-to-government programs  will be incorporated into a reformed U.S. export control system.
section_title: Conclusions
paragraphs: A complete picture of defense exports—including which method of export  is used more often by individual countries or for certain types of items—is  not available under current reporting to Congress. Although State has  overall responsibility to regulate the export of defense articles and  services, it reports separately from DOD on some aspects of defense  exports. Information from DOD and State cannot be readily combined to  provide a complete picture of defense exports. Gaps and limitations in  these data—including the lack of information on defense services  exported under DCS, which could be substantial given the high dollar  value of such services authorized by State—may inhibit congressional  oversight and transparency into the entirety of U.S. defense exports. For  example, Congress does not have complete data to determine whether  specific U.S. foreign policy objectives are being furthered through the  various export programs. While State has noted a potential burden for  exporters if they were required to report on exports of defense services  under DCS, there may be value to Congress in having such information,  especially in light of the large and growing value of license authorizations  for defense services.
As U.S. export control reform efforts move beyond the initial phase of  revising and consolidating control lists, it will be important to consider  ways to standardize and integrate data across agencies to mitigate the  gaps and limitations noted in this report. Recognizing that complete  integration and standardization across agencies’ data systems is a long- term effort that may require additional resources, State could improve  overall reporting of defense exports under the constraints of current data  systems by using a methodology similar to ours to enhance congressional  oversight and transparency of such exports. Also, as policymakers develop  and debate export control reform proposals, it is important to consider  whether other programs related to the protection of technologies critical  to U.S. national security, such as the FMS program, should be included in  the reform efforts.
section_title: Matter for Congressional Consideration
paragraphs: In order to obtain a more complete picture of defense exports, Congress  should consider whether it needs specific data on exported defense  services similar to what it currently receives on defense articles and, if so,  request that State provide such data as appropriate.
section_title: Recommendation for Executive Action
paragraphs: To improve transparency and consistency of reporting on defense exports  required by the Foreign Assistance Act, we recommend that the Secretary  of State direct the Directorate of Defense Trade Controls to coordinate  with the Departments of Defense and Commerce to identify and obtain  relevant defense export information under existing agency data systems  and provide a consolidated report to Congress on DCS and FMS that    specifies articles exported using a common category system;    separates U.S. government end users from foreign entities;    separates permanent and temporary exports;  incorporates all defense exports, including U.S. government-funded  programs; and  is made public through the Internet.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Departments of State, Homeland  Security, and Defense and to Census under the Department of Commerce  for their review and comment. Census and the Department of Homeland  Security provided technical comments, which we incorporated as  appropriate, and DOD did not comment on our draft. State provided  written comments that are reprinted in appendix II. In commenting on the  draft, State acknowledged the importance of maintaining and reporting to  Congress and the public reliable data on U.S. defense exports through  FMS and DCS, and notes that gaps and inconsistencies in current  reporting are caused by differences in accounting by agencies for transfers  of defense exports. However, State did not agree with our  recommendation to report consolidated defense export data on FMS and  DCS in a consistent manner. State reiterated that Congress has not  requested any change to the substance of its current reporting, and State  does not believe that the added resources necessary to change reporting  formats are merited. However, based on our work and analysis of defense  export data, we believe that congressional oversight and transparency into  the entirety of U.S. defense exports could be improved with existing data  and systems by utilizing more consistent reporting methodologies similar  to those that we developed. State also noted that providing consolidated  defense export data to Congress and the public was consistent with the  goals of current export control reform efforts and encouraged Congress to  provide criteria and the resources to develop appropriate information. We  agree that ongoing export control reform efforts may provide  opportunities to improve information and reporting, but recognizing that  reforms may take years to implement, we believe that congressional  oversight and transparency can be improved in the short term by  implementing our recommendation.
We are sending copies of this report to interested congressional  committees, the Secretary of State, the Secretary of Defense, the Secretary  of Commerce, and the Secretary of Homeland Security. This report also is  available at no charge on the GAO Web site at http://www.gao.gov.
If you have questions about this report or need additional information,  please contact me at (202) 512-4841 or martinb@gao.gov. 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 are listed in  appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify information on the magnitude and nature of defense exports,  we obtained data for calendar years 2005 through 2009 on direct  commercial sales (DCS) from the U.S. Census Bureau’s (Census)  Automated Export System (AES) and on the Foreign Military Sales (FMS)  program from the Department of Defense’s (DOD) Defense Security  Cooperation Agency (DSCA). For the purpose of this report, we defined  “defense exports” as articles permanently exported under a Department of  State (State) license to foreign end users. As such, we did not include  temporary exports that return to the United States without transfer of  ownership, shipments to U.S. government end users as identified in AES  by the export information code, or articles exported under a license  exemption.
For DCS, we obtained a data extract from Census for AES records for this  time frame of electronic information filings designated with a State  “license type,” a required field for all exports covered by the United States  Munitions List (USML). State has several different license types that  generally identify the nature of the export or import, including permanent  exports, temporary exports, temporary imports, agreements, articles  exported with an exemption, or articles exported through the FMS  program. For FMS data, although Foreign Trade Regulations and the  International Traffic in Arms Regulations require AES filings for all articles  on the USML, including those exported via FMS, we were told by both U.S.  Customs and Border Protection (CBP) and Census officials that AES  filings for DOD exports of FMS articles are not complete. Therefore, we  could not use AES as a single data source for exports of defense articles.
For this reason, we obtained data from DSCA for FMS exports for the  same time frame from DSCA’s 1200 Delivery Subsystem. We did not  include articles exported under Section 1206 or 1207 programs under the  National Defense Authorization Act for Fiscal Year 2006. As noted, DSCA  did not obtain export data on Section 1206 and 1207 exports until 2009. We  also did not include data on DOD’s excess defense article program.
Although most of our analysis focuses on exports of defense articles, we  obtained data from State on DCS licenses that were in effect during 2005  through 2009, primarily for the purpose of assessing the reliability of AES  data for these exports.
For each of these three data sets, we also obtained the relevant reference  tables and documentation from each agency. These reference tables  translate the codes used in the databases—such as those for country name  or commodity/item type—into their names or descriptions.
We also reviewed relevant laws and regulations regarding the export of  defense articles and requirements for reporting export information  through AES.
In order to combine and compare information from FMS and AES on the  types of articles exported, we analyzed the item categorization systems  used by each system to identify areas of commonality. We determined that  the broad categories used by DOD for grouping like items together could  be adapted to accommodate the lowest level of detail identified between  the two systems. This allowed us to develop relatively large categories, but  precluded us from further refining the analysis by breaking these out into  more detailed categories because some types of items were combined into  one category in either of the two systems.
To assess overall defense exports by country, we created a cross-reference  table to enable us to relate the data for a specific country in one data set to  information for that same country in the other data set. We also identified  groupings of countries considered developed or developing according to  the United Nations’ definition.
We did not include data on classified exports for either FMS or DCS. DOD  officials stated that classified data on FMS exports could not be used in an  unclassified report, even if aggregated with other data. We obtained and  reviewed classified data for FMS and determined that excluding the FMS  classified data from our analysis would not materially affect the high-level  trend analysis and other information we discuss in this report. For  classified DCS exports, temporary and permanent exports are grouped  together in one license type in AES, with no way to separate permanent  from temporary exports.
For trend information across the 5-year time frame, we adjusted for the  effects of inflation by converting values to 2009 dollars. We assessed the  reliability of these data by performing electronic testing; reviewing system  documentation, including system edits and validations; comparing our  data to published or other available information; and interviewing  knowledgeable officials about data quality and reliability. For the purposes  of our analyses, we determined that the data were sufficiently reliable.
To assess information reported on U.S. defense exports, we reviewed  relevant reporting requirements and reviewed State and DOD reports to  Congress on various portions of the export process, including notification  of potential sales, authorizations, and exports. Specifically, we reviewed  the reporting requirements in the Foreign Assistance Act of 1961, as  amended, Section 655, on foreign military assistance that requires an  annual report on both defense articles and services authorized and  provided/exported to foreign countries and international organizations.  We then analyzed and compared the relevant reports that State and DOD  annually submit to Congress, identifying differences in reporting  methodologies between the reports, and identified where such information  is available to the public. We also interviewed agency officials at State’s  Directorate of Defense Trade Controls (DDTC) and DOD’s DSCA  responsible for generating these reports to obtain information on  methodologies and definitions used in their respective reports. To identify  limitations and gaps in available defense export data, we reviewed  information and available system documentation for the data systems at  DSCA, DDTC, and Census and interviewed knowledgeable officials at  these agencies regarding data system purposes and functionality. We also  interviewed officials at CBP who manage the AES interface with  exporters.
We conducted this performance audit from February 2010 to September  2010 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.
section_title: Appendix II: Comments from the Department of State
paragraphs: Department of State Comments on GAO Draft Report  Reporting on Exported Articles and Services Needs to Be Improved  (GAO-10-952, GAO Code 120862)
Thank you for the opportunity to comment on your draft report entitled  “DEFENSE EXPORTS: Reporting on Exported Articles and Services Needs to Be  Improved.”  The Department of State recognizes the importance of maintaining  and reporting to the Congress and public reliable data on United States defense  exports through direct commercial sales or the Foreign Military Sales program.   The draft report identifies gaps and inconsistencies in reports of this nature by the  Executive Branch.
However, the State Department notes that gaps and inconsistencies in  reporting are inherent in accounting for transfers of defense export across agencies.   While Foreign Military sales may, for example, include items such as tanks and  weaponry on the U.S. Munitions List under the jurisdiction of the Department of  State, dual-use items under the licensing jurisdiction of Commerce will not be  included in State reports.  Likewise, the requirements of the Congress for reporting  direct commercial sales and Foreign Military Sales are also different.
The Department of State faithfully reports to Congress all data pertaining to  exported articles and services that are within its jurisdiction to collect.  To date, the  Congress has expressed no desire to change the substance of our current reporting.   The Department does not believe that devising additional reporting formats would  merit the commitment or allocation of additional resources and therefore disagrees  with the report's recommendations.
Providing consolidated defense export data to Congress and the public is  consistent with the goals of Export Control Reform and the Executive Branch task  force evaluating proposals and recommendations associated with it.  As decisions  are made on Export Control Reform, the Department of State encourages the  Congress to furnish criteria and resources to develop appropriate information  technology platforms and reporting criteria of benefit to both the Congress and the  public.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, John Neumann, Assistant  Director; Marie Ahearn; Richard Brown; Sharron Candon; Julia Kennon;  Roxanna Sun; Robert Swierczek; and Bradley Terry made key  contributions to this report.