Export-Import Bank: Dual-Use Export Monitoring Guidance Revised and Implemented
Published: 2015-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1994, Ex-Im has had the authority to facilitate the financing of dual-use exports, which include construction equipment used by foreign militaries to build roads. After a 9-year hiatus, Ex-Im financed three dual-use exports in fiscal year 2012, accounting for $1.03 billion, or just under 3 percent of Ex-Im's $35.8 billion financing for that year. The Consolidated and Further Continuing Appropriations Act, 2015, extends a provision for GAO to report annually on the end uses of dual-use exports financed by Ex-Im during the second preceding fiscal year.
In August 2014, GAO reported that monitoring-related documents from borrowers required by the financing agreements were missing or late and that Ex-Im's dual-use monitoring policy did not specify what actions Ex-Im officials should take if the bank did not receive the required documents. GAO recommended that Ex-Im establish steps staff should take in cases where borrowers do not submit required end- use documentation within the time frames specified in their financing agreements and ensure that these efforts are well documented. Ex-Im agreed with GAO's recommendation and revised its guidance.
This report (1) examines how Ex-Im addressed weaknesses in monitoring the end uses of the dual-use exports it finances and (2) identifies what dual-use exports, if any, Ex-Im reported it financed in fiscal year 2014. GAO reviewed Ex-Im documents and interviewed Ex-Im officials.
section_title: What GAO Found
paragraphs: The Export-Import Bank of the United States (Ex-Im) addressed weaknesses in monitoring the end use of exported “dual-use” items by revising and implementing its guidance for monitoring these items, as GAO recommended in August 2014. Dual-use items are defense articles and services that Ex-Im has determined are nonlethal and primarily meant for civilian use. Specifically, Ex-Im revised its 1997 memorandum on the implementation of its dual-use policy for military applications and disseminated it to relevant staff on March 11, 2015. The updated memorandum clarified the responsibilities of Ex-Im staff for monitoring end use, and GAO found that bank staff have now taken the following steps:
made determinations , in what is to be an annual process, as to whether the information received was adequate to demonstrate that the transaction complied or failed to comply with the bank's dual-use policy.
As a result, Ex-Im has received in a timely manner all documents required since GAO's last report, issued in August 2014.
Ex-Im did not finance any new exports under its dual-use authority in fiscal year 2014, according to Ex-Im authorizations data and Ex-Im officials.

section_title: Letter
paragraphs: Since 1994, the Export-Import Bank of the United States (Ex-Im) has had  the authority to facilitate the financing of U.S. exports of defense articles  and services, provided that it determines these items are nonlethal and  primarily meant for civilian use. These “dual-use” exports include  construction equipment used by foreign militaries to build roads. Ex-Im  approved financing for three dual-use exports in fiscal year 2012,  accounting for $1.03 billion in loans and guarantees. In August 2014, we  reported that Ex-Im received some reports required in its credit  agreements late or not at all, and that its efforts to obtain missing  documentation were often neither timely nor documented. As a result,  Ex-Im did not have complete and timely information about whether the  dual-use exports it was financing were being used in accordance with the  terms of its agreements and policy–-that is, whether the exports were  actually being used primarily for civilian purposes. We also reported that  Ex-Im had policies for monitoring the end use of defense articles and  services it finances, including documentation requirements that are  reflected in its financing agreements with borrowers, but these policies did  not specify what actions Ex-Im officials should take if the bank did not  receive the required dual-use-related documents.
We recommended in our August 2014 report that Ex-Im establish steps  staff should take in cases where borrowers did not submit required end-  use documentation within the time frames specified in their financing  agreements and ensure that these efforts were well documented. Ex-Im  agreed with our recommendation and stated that it would revise its  guidance by adding specific instructions about monitoring end-use  activity, documenting related communications, and actions to be taken if  reports were not received on time.
The Consolidated and Further Continuing Appropriations Act, 2015,  extends a provision for GAO to report annually on the end uses of dual- use exports financed by Ex-Im during the second preceding fiscal year.  This report (1) examines how Ex-Im addressed weaknesses in monitoring  the end uses of the dual-use exports it continued to finance in fiscal year  2013 and (2) identifies what dual-use exports, if any, Ex-Im reported it  financed in fiscal year 2014.
To examine how Ex-Im addressed weaknesses in monitoring the end  uses of the dual-use exports it continued to finance in fiscal year 2013,  and to identify what dual-use exports, if any, Ex-Im reported it financed in  fiscal year 2014, we reviewed Ex-Im documentation and interviewed Ex- Im officials in Washington, D.C. We conducted this performance audit  from February 2015 to June 2015 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. For  more information on our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: Ex-Im is an independent agency operating under the Export-Import Bank  Act of 1945, as amended. Its mission is to support the export of U.S.  goods and services overseas, through the provision of loans, loan  guarantees, and insurance, thereby supporting U.S. jobs. Ex-Im is  generally prohibited by law from financing any credit sale of defense  articles and services for any country. However, in an exception to this  rule, Ex-Im was granted authority to facilitate the financing of U.S. exports  of defense articles and services, provided that it determines that these  items are nonlethal and primarily meant for civilian end use. Such items  are known as dual-use exports.
Ex-Im’s Engineering and Environment Division, with assistance from the  General Counsel, Congressional and External Affairs Division, and the  Policy and Planning Division, is responsible for implementing the dual-use  authority. According to Ex-Im’s Military Policy, its definitions of “defense  articles” and “defense services” are based on who the end user is, and  then by the nature of the item and the use to which it will be put. In  addition, if the item is designed primarily for military use, it is presumed to  be a defense article. For example, according to Ex-Im, furniture sold to a  military organization for military use (e.g., for offices or homes occupied  by military personnel) is deemed a defense article. However, according to  Ex-Im, helicopters sold to a private firm or civilian police force are not  defense articles. According to Ex-Im policy, an export is eligible for  financing as a dual-use item if convincing evidence exists that the export  is nonlethal in nature and will be used mainly for civilian activities. The  determination of eligibility for dual-use financing may require applicants  for Ex-Im financing to provide additional information beyond the contract  and transaction data the bank normally requires for a loan or guarantee.  For example, before approving the three fiscal year 2012 dual-use export  transactions, Ex-Im obtained written certification from each borrower that  the items to be exported were nonlethal and would be primarily for civilian  use. Ex-Im may also seek to corroborate the information submitted by  applicants by contacting other U.S. government agencies, such as the  Department of State.
Eutelsat, primarily for telecommunications  (television and internet service). Ex-Im is  treating this item as dual-use because a  small portion of the satellite is being used  by the Qatari military for communications  purposes and is not being financed by Ex- Im.
3.  150 pieces of new and used construction equipment from U.S.  manufacturers exported by Hoffman International, Inc., for the  government of Cameroon.
Three satellites for the government of  Mexico: one fixed service satellite and  two mobile service satellites. Fixed  service satellites provide service to a  geographically fixed end user, such as a  television station, and mobile service  satellites provide service to mobile end  users, such as personnel in vehicles. The  satellites are for civilian communications  and for humanitarian and drug interdiction  operations by the Mexican military.
These three transactions accounted for $1.03 billion in Ex-Im financing, or  just under 3 percent of Ex-Im’s financing for fiscal year 2012 of $35.8  billion. The Mexico satellite transaction is the bank’s single largest dual- use financing transaction to date, with a loan guarantee of $922 million.  Prior to approving the fiscal year 2012 transactions, Ex-Im vetted the  Eutelsat and Cameroon transactions with the Department of State, and  vetted the Mexico transaction with the U.S. embassy military attaché in  Mexico. government of Cameroon’s military  engineering corps for civilian infrastructure  development and a small number of  military construction projects.
Ex-Im generally requires buyers of dual-use exports to submit an annual  “end-use certification and report,” which describes the civilian and military  use of the exported item(s) and includes a certification by the buyer that  the item(s) are being used primarily for civilian purposes. In addition,  credit and guarantee agreements for dual-use transactions may include  provisions for annual, semiannual, or periodic “progress reports” and  “technical operating reports” to monitor the status and usage of the items.  Such information helps inform bank officials and provides them greater  assurance about the exports’ end use. These reports are to be submitted  to Ex-Im until the loan or guarantee is repaid. According to Ex-Im officials,  the credit agreements for the three fiscal year 2012 dual-use transactions  were negotiated on a case-by-case basis to incorporate the specific  circumstances related to the buyer and the item(s) being exported. The  agreements with the governments of Mexico and Cameroon require an  annual end-use certification and report. The agreements for the two  satellite transactions require the buyer (Eutelsat and the government of  Mexico) to submit to Ex-Im (1) periodic progress reports covering the  satellite(s)’ construction, launch, and in-orbit testing, and (2) technical  operating reports that include information concerning the operation and  maintenance of the satellite(s) and related telemetry, tracking and  command stations, and transponder capacity and use.
section_title: Ex-Im Revised and Implemented Guidance to Address Weaknesses in Monitoring the End Use of Dual-Use Items
paragraphs: Ex-Im addressed weaknesses in monitoring the end use of dual-use  items by revising and implementing its guidance for monitoring these  items, consistent with our August 2014 recommendation. The revised  guidance clarified the responsibilities of Ex-Im staff for monitoring the end  use of exported dual-use items after the bank’s board of directors  authorizes an export transaction. As a result of implementing the revised  guidance, Ex-Im has received in a timely manner all documents required  through June 2015 since our last report, issued in August 2014.
subsections: section_title: Ex-Im Revised Its Guidance for Monitoring End Use
paragraphs: Ex-Im revised its 1997 memorandum on the implementation of its dual- use policy for military applications–-which had not been updated prior to  our 2014 review–-and disseminated the revised memorandum to relevant  staff on March 11, 2015. The revised memorandum adds to the  responsibilities of Ex-Im staff for monitoring the end use of exported dual- use items after the bank’s board of directors has authorized an export  transaction. Specifically, the new memorandum calls for the engineer  assigned to monitor the transaction to take the following actions:
Notify buyers. The engineer is to communicate with the bank’s Asset  Management Division–-Ex-Im’s primary contact with the buyer after  the bank approves the transaction–-to ensure that a process is  established to notify the buyer in advance of any reporting due to be  submitted to the bank. The memorandum specifies that if a dual-use  report or related document becomes overdue, the assigned engineer,  in conjunction with the asset management officer, will notify the buyer  and alert the bank’s Office of the General Counsel within 30 days of  the date when the report or related information was due so that  appropriate action can be taken to expedite the submission of the  required information.
Document monitoring activities. The engineer is to keep a record of  his or her activities in an electronic folder, which is to contain a  number of specified documents, including requirements set forth in  the bank’s loan or guarantee agreement pertaining to the scope and  frequency of post-authorization reporting, all post-authorization  reports on end use, and any correspondence between Ex-Im and the  buyer or end user relating to the end use of the exports.
Determine compliance. The engineer is to make an annual  determination as to whether information received during the previous  year was adequate to demonstrate that the transaction complied (or  failed to comply) with the requirements of the bank’s dual-use policy,  as set forth in the financing agreement and the bank’s charter. Should  the engineer determine or become concerned that the dual-use  transaction is or may be out of compliance with these requirements,  the engineer should notify the Vice President of the Engineering and  Environment Division, who oversees the monitoring of dual-use  transactions, and other Ex-Im officials; these determinations and any  such referrals and related correspondence should be documented in  the electronic files.
section_title: Ex-Im Has Implemented the Revised Guidance
paragraphs: We found that the engineers responsible for monitoring the three fiscal  year 2012 dual-use transactions financed by Ex-Im had taken the actions  called for in the revised dual-use policy memorandum.
subsections: section_title: Ex-Im Has Notified Buyers of Documentation Deadlines
paragraphs: In accordance with its revised guidance, Ex-Im has established an  internal e-mail reminder system that automatically alerts the appropriate  Ex-Im officials to notify the buyer that the annual end-use certification and  report is coming due. The engineers received an e-mail alert several  months prior to the due date and communicated with the asset  management officer, who then notified the governments of Cameroon and  Mexico that the due date for this documentation was approaching. As a  result, Ex-Im received the 2014 end-use certification and report from each  of these governments in a timely manner. Ex-Im also received on time  any applicable progress and technical operating reports for the fiscal year  2012 dual-use transactions. For a summary of the reports required in the  financing agreements, their due dates, and when they were received, see  figure 1.
While Ex-Im’s financing agreement with the government of Mexico calls  for separate progress and technical operating reports for each satellite,  Ex-Im officials decided to allow the government of Mexico to combine the  progress reports for the two Mexican satellites that are not yet operational  with the technical operating report for the one satellite already in use. The  Vice President for Engineering and Environment approved this decision,  and the engineer responsible for monitoring the transaction documented  it. The combined report adheres to the timing specified in the Mexico  financing agreement for the progress reports and exceeds the timing  specified for technical operating reports. Submitting one combined report  means that the technical operating report is submitted more frequently  than required–-twice a year instead of annually, according to Ex-Im  officials. They also stated that combining these reports is more efficient  because it allows Mexican officials to submit and Ex-Im officials to review  a single document instead of three separate documents submitted at  different times.
section_title: Ex-Im Has Begun to Systematically Document Dual-Use Monitoring Activities
paragraphs: In accordance with Ex-Im’s revised guidance, the engineers responsible  for monitoring each dual-use transaction have created an electronic folder  system to document their monitoring activities. This system contains  separate folders for each of the three fiscal year 2012 dual-use  transactions. We examined these folders and found that they contained  the required information. Each transaction folder contained, among other  things, information associated with monitoring the end use of the exported  item(s), such as annual end-use certification and reports;  the engineer’s annual determination regarding compliance with the  bank’s dual-use policy;  correspondence determined by the engineer to be key to monitoring  end use, such as an e-mail from the buyer transmitting required  reports; and any applicable progress or technical operating reports or  documentation of trips to inspect end use.
section_title: Ex-Im Has Made Determinations Regarding Compliance with Dual-Use Policy
paragraphs: In accordance with Ex-Im’s revised guidance, the engineers responsible  for monitoring the Cameroon and Mexico transactions have each made a  determination that the information received during the previous calendar  year (2014) was adequate to demonstrate that the transaction complied  with the requirements of the bank’s dual-use policy. The engineer  responsible for monitoring the Eutelsat transaction did not make such a  determination because none was required. Further details for each  transaction are described below.
Cameroon. The engineer monitoring the Cameroon transaction  conducted a detailed analysis of equipment usage data within the  2014 calendar year in Cameroon’s end-use certification and report  and determined that the use of the equipment was overwhelmingly  civilian in nature and thus met the bank’s dual-use requirement of  being used primarily for civilian purposes. After meeting with military  officials during a trip to Cameroon in early June 2015 and inspecting  their operations, visiting current projects and assessing current and  future needs, the engineer confirmed his determination that the use of  the equipment was overwhelmingly civilian in nature.
Mexico. The engineer monitoring the Mexico transaction determined  that, while all three satellites are not yet fully operational, the  government of Mexico continues to project a ground terminal  allocation of 40 percent military and 60 percent civilian as the basis for  its dual-use compliance. The Mexican government submitted an  annual end-use certification and report for 2014 listing the civilian and  military entities to which a total of 115,424 terminals would be  allocated and the number of terminals allocated to each entity; 46,324  (40 percent) were allocated to military entities. This information is  identical to that submitted by the Mexican government for 2013. Ex-Im  officials stated that any end-use monitoring the bank might conduct  would likely involve meeting with the U.S. military attaché in Mexico  and obtaining information from a small sample of terminals. The  officials acknowledged that once all the satellites are operational, it  will be very difficult to ascertain actual end use, since that would  involve monitoring over 100,000 ground terminals, obtaining logs  showing bandwidth usage, and examining the bandwidth use  associated with each terminal. They said the engineer responsible for  monitoring this transaction would instead base his annual  determination on the percentage of ground terminals allocated to  military entities, although they identified limitations with using this  percentage measure. However, the officials said that, based on pre- approval vetting with the U.S. military attaché in Mexico, the bank  determined that it is highly unlikely that the satellites would be used  for mostly military purposes. According to the bank’s board  memorandum authorizing the Mexico satellite transaction, and as we  noted in our August 2014 report, the Mexican Secretariat of  Communications and Transportation–-and not the Mexican military–-is  operating the satellites.
One of the mobile service satellites was destroyed during a failed  launch in May 2015, leaving two satellites–-the fixed service satellite  launched in 2012 and already in use, and one more mobile service  satellite with a planned launch in the fall of 2015. According to the  engineer, the three-satellite system requires only one mobile service  satellite to operate at a time, with the other functioning as a spare; the  two mobile service satellites would thus be able to exchange  operational and spare roles as needed. He said the government of  Mexico has not yet determined whether to replace the destroyed  satellite.
Eutelsat. No annual determination regarding end use is required for  the Eutelsat transaction because, as we noted in our August 2014  report, once the satellite became airborne in 2013, the number and  capacity (bandwidth) of the military transponders on the satellite could  not be modified. As we previously reported, these transponders,  which are dedicated to nonlethal military use by the government of  Qatar, were not financed by Ex-Im and represent only 6 of the  satellite’s 46 transponders and less than half its total transponder  capacity. A senior Ex-Im official stated that if Eutelsat were to sell any  of its transponders on the satellite to the Qatari government–-thereby  increasing the number of transponders that could potentially be used  by that government’s military for military purposes–-the French  company would have to report this information in its technical  operating report and in financial reports required in its credit  agreement with the bank. According to Eutelsat’s two most recent  technical operating reports, submitted in July 2014 and February  2015, there has been no change in transponder ownership.
section_title: Ex-Im Did Not Finance Any New Dual-Use Export Transactions in 2014, According to Application Data and Ex-Im Reviews
paragraphs: Ex-Im did not finance any new exports under its dual-use authority in  fiscal year 2014, according to Ex-Im officials and our review of relevant  data on Ex-Im authorizations. According to Ex-Im officials, each  application for financing requires the entry of numerous data elements for  the application record. Several of these elements relate to whether there  are any military implications in the application, and one field relates to  whether or not the application would go forward under the bank’s dual- use authority. The Engineering and Environment Division, which  administers the bank’s military policy and consequently its dual-use  policy, is responsible for filling in this data field.
section_title: Agency Comments
paragraphs: We provided Ex-Im a draft of this report and Ex-Im provided comments on  June 12, 2015 (see app. II). Ex-Im agreed with our findings and stated  that it is the bank’s understanding that it has implemented the  recommendation in our August 2014 report. This understanding is correct  and we will close that recommendation. We also received technical  comments from Ex-Im officials. The officials updated information on their  monitoring of the end use of the Cameroon equipment and clarified  information about progress and technical operating reports and the  expected use of the Mexican satellites. We made changes to our report in  response to these comments where appropriate.
We are sending copies of this report to interested congressional  committees. We are also sending copies to the President and Chairman  of Ex-Im, the Secretary of Defense, and the Secretary of State. In  addition, this report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8612 or GianopoulosK@gao.gov.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To examine how the Export-Import Bank of the United States (Ex-Im)  addressed weaknesses in monitoring the end uses of the dual-use  exports it continued to finance in fiscal year 2013, and to identify what  dual-use exports, if any, Ex-Im reported it financed in fiscal year 2014, we  reviewed Ex-Im documentation regarding its dual-use policy, including a  1997 memorandum on implementing that policy; a revised 2015  memorandum; Ex-Im documentation associated with each of the three  dual-use transactions Ex-Im financed in fiscal year 2012; and data on  dual-use determinations. In addition, we examined Ex-Im’s new electronic  filing system for dual-use transactions, including the folder and subfolder  structure and enclosed documents, so that we could determine what  documents were filed in the system, and interviewed the official who  created the system. We also observed a demonstration of the automatic  e-mail reminders that prompt the appropriate Ex-Im official to notify  buyers of upcoming due dates for end-use documents. We interviewed  Ex-Im officials in Washington, D.C., who review applications for the  financing of dual-use exports and monitor end-user compliance with dual- use requirements, including the Vice President of the Engineering and  Environment Division. We did not independently verify the information  provided to Ex-Im or assess the appropriateness of the metrics or the  effectiveness of the controls Ex-Im was using to determine end use.  Through interviews with cognizant agency officials about Ex-Im’s  procedures for identifying and categorizing dual-use transactions in its  Application Processing System, we determined that Ex-Im data were  sufficiently reliable for the purpose of identifying dual-use exports  financed under Ex-Im’s dual-use authority in fiscal year 2014.
We conducted this performance audit from February 2015 to June 2015  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 Export-Import Bank of the United States
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Kimberly Gianopoulos, (202) 512-8612 or Gianopoulosk@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Adam Cowles, Assistant Director,  and Kay Halpern made key contributions to this report. In addition, Ashley  Alley, Nabajyoti Barkakati, Tina Cheng, Debbie Chung, Martin De Alteriis,  Michael Kaeser, and Hai Tran provided technical assistance.
section_title: Related GAO Products
paragraphs: Export-Import Bank: Status of Actions to Address GAO  Recommendations since the Bank’s 2012 Reauthorization.  GAO-15-557T. Washington, D.C.: April 15, 2015.
Export-Import Bank: Monitoring of Dual-Use Exports Should Be Improved.  GAO-14-719. Washington, D.C.: August 28, 2014.
Export-Import Bank: Financing of Dual-Use Exports. GAO-13-628R.  Washington, D.C.: May 29, 2013.
Export Promotion: The Export-Import Bank’s Financing of Dual-Use  Exports. GAO-12-628R. Washington, D.C.: April 12, 2012.
Export Promotion: The Export-Import Bank’s Financing of Dual-Use  Exports. GAO-10-1052R. Washington, D.C.: September 15, 2010.
Export Promotion: The Export-Import Bank’s Financing of Dual-Use  Exports. GAO-08-1182R. Washington, D.C.: September 30, 2008.
Ex-Im Bank: The U.S. Export-Import Bank’s Financing of Dual-Use  Exports. GAO-07-1234R. Washington, D.C.: September 27, 2007.
Export-Import Bank: The U.S. Export-Import Bank’s Financing of Dual- Use Exports. GAO-01-1110R. Washington, D.C.: August 31, 2001.
Export-Import Bank: The U.S. Export-Import Bank’s Financing of Dual- Use Exports. NSIAD-00-231R. Washington, D.C.: September 1, 2000.
International Affairs: U.S. Export-Import Bank’s Financing of Dual-Use  Exports. NSIAD-99-241R. Washington, D.C.: September 1, 1999.
International Affairs: U.S. Export-Import Bank’s Financing of Dual-Use  Exports. NSIAD-98-244R. Washington, D.C.: September 1, 1998.
U.S. Export-Import Bank: Process in Place to Ensure Compliance With  Dual-Use Export Requirements. NSIAD-97-211. Washington, D.C.: July  17, 1997.