Export Controls: Post-Shipment Verification Provides Limited Assurance That Dual-Use Items Are Being Properly Used
Published: 2004-01-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The United States controls certain dual-use technologies that could be used to enhance the military capabilities of countries of concern. The Department of Commerce (Commerce) conducts post-shipment verification (PSV) checks to ensure that these technologies arrive at their intended destination and are used for the purposes stated in the export license. GAO was asked to (1) assess the number of dual-use export licenses approved and subject to postshipment verification and (2) evaluate how the PSV process ensures that sensitive exports are used as intended.
section_title: What GAO Found
paragraphs: The Department of Commerce approved 26,340 licenses for the export of dual-use items during fiscal years 2000 to 2002. Twenty-eight percent of these licenses involved dual-use exports to countries of concern such as China, India, and Russia. However, Commerce conducted PVC checks on few of these licenses. We found that, during fiscal years 2000 to 2002, Commerce completed PSV checks on 428, or about 6 percent, of the dual-use licenses it approved for countries of concern. Commerce and other departments attached conditions to nearly all (99 percent) of the licenses for countries of concern to alleviate concerns about potential diversion or misuse. We identified three key weaknesses in the PSV process that reduce the effectiveness of this important activity. First, PSVs do not confirm compliance with license conditions because U.S. officials frequently do not check license conditions, they often lack the technical training to assess compliance, and end users may not be aware of the license conditions by which they are to abide. Second, some countries of concern, most notably China, limit the U.S. government's access to facilities where dual-use items are shipped, making it difficult to conduct a PSV. Third, PSV results have only a limited impact on future licensing decisions. Companies receiving an unfavorable PSV may receive greater scrutiny in future license applications, but they can still receive an export license. In addition, according to Commerce officials, past PSV results play only a minor role in future Enforcement actions.

section_title: Letter
paragraphs: The U.S. government seeks to control the export of dual-use technologies  to prevent countries of concern and terrorists from using them to bolster  their military capabilities. The Department of Commerce (Commerce) is  responsible for licensing dual-use exports and relies on post-shipment  verification (PSV) checks to confirm that exported items are not misused  or diverted. To conduct a PSV check, Commerce personnel visit foreign  companies to verify the use and location of the item. According to  Commerce, a PSV check strengthens assurances that exporters, importers,  and end users comply with the terms of export licenses and licensing  conditions.
Because of your concerns about the current PSV process in countries of  concern such as China and India, you asked that we (1) assess the number  of dual-use export licenses approved and subject to PSV and (2) evaluate  how the PSV process ensures that sensitive exports are used as intended.
To address these objectives, we reviewed laws and procedures governing  export licensing, analyzed export licensing data, and reviewed the  enforcement outcomes of Commerce’s PSV activities, including the  penalties levied and their deterrent value. We also interviewed Commerce  officials in Washington, D.C., surveyed export enforcement personnel in  Commerce’s field offices, met with Commerce export enforcement  attachés in Russia and China, and observed a Commerce-led team  conducting PSV checks in Russia.  In addition, we met with officials from  the Department of State (State); Department of Homeland Security;  Department of Defense (Defense), including the Defense Security and  Threat Agency and Defense Intelligence Agency; Department of Justice;  Central Intelligence Agency; National Ground Intelligence Center; and  private firms in Hong Kong, India, and Russia that were the subject of  Commerce’s PSV checks. Finally, we interviewed officials from the  governments of China, Hong Kong, and India about their views on the PSV  process. For more on our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: Commerce’s authority to conduct PSV checks is established in the Export  Administration Act of 1979, which provides the legal and administrative  basis for U.S. controls on dual-use exports and is supplemented by the  Export Administration Regulations.  Commerce’s Control List, which is  included in the regulations, specifies the items and technologies to be  controlled. The United States uses export controls to prevent sensitive  items from reaching persons, entities, or countries involved in terrorism or  the proliferation of weapons of mass destruction and the vehicles to deliver  them.
Commerce seeks to ensure that exports from the United States and  reexports of U.S.-origin items to other countries are consistent with U.S.  national security and foreign policy objectives.  At the same time,  Commerce works to avoid impeding the flow of legitimate trade.  PSV  checks are Commerce’s primary method to detect and prevent illegal  transfer of controlled U.S.-origin goods and technology already shipped  overseas.  Commerce may conduct a PSV check on any controlled item it  licenses that is exported from the United States.  According to Commerce,  PSV checks strengthen assurances that exporters, shippers, importers, and  end users comply with the terms of export license and licensing conditions.
U.S. exporters submit license applications to Commerce. The applications  include information on (1) the importer who takes delivery of the item, (2)  the end user who will use the item, and (3) the item’s intended use.  The  importer and end user may or may not be the same company. An importer  may use, sell, or distribute the item to other companies for their use.  For  example, a U.S. company could export thermal imaging cameras to an  Indian company.  The Indian company, also known as the importer, might  then sell the cameras to other Indian companies, the end users.
Several agencies review license applications for the national security,  domestic, or foreign policy implications of exporting dual-use items. After  the U.S. exporter submits a license application to Commerce, an  interagency team comprised of officials from Commerce, Defense, State,  and the Department of Energy determines whether the application should  be approved for a license, denied, or returned without action. If potential  concerns are raised about the end user or the end use, a prelicense check  may be conducted to verify the legitimacy of the importing company that  seeks to purchase U.S. items or technology. If concerns about the end user  or end use persist, conditions may be added to the license application  before approval. Once approved, Commerce issues the license, including  conditions, to the U.S. exporter.
Commerce conducts PSV checks to confirm that the dual-use item arrived  at its destination and is being used as intended. Commerce special agents  or other U.S. government personnel visit companies overseas to meet with  importers or end users in an attempt to verify the use and location of these  items.  These checks are usually conducted by Commerce special agents,  Commerce export control attaché posted at select U.S. embassies  overseas, or by Foreign Commercial Service (FCS) or State officials in  country.  The majority of PSVs are conducted by Commerce’s special  agents; these U.S.-based officials conduct investigations of potential  violations of export controls. Special agents have traditional police powers,  including the authority to make arrests and execute warrants domestically.  Agents may also issue administrative subpoenas and detain and seize goods  to be illegally exported. They cannot, however, conduct investigations  while performing PSVs overseas.
Commerce guidelines for conducting PSV checks state that an on-site visit  to the company is mandatory.  These guidelines also indicate that the  agents’ most important responsibility is physically inspecting the goods or  the records that detail their disposition. The guidelines also require  Commerce officials conducting the PSV to determine if (1) the goods are  located at the facility, (2) the entire shipment can be accounted for, (3) the  equipment is being used as stated in the license, (4) indications of  impropriety exist, and (5) the company’s answers are evasive.
section_title: Few Dual-Use Exports to Countries of Concern Are Subject to PSV Checks
paragraphs: Commerce approves the majority of all export license applications.  During  fiscal years 2000 to 2002, Commerce approved 70 percent of the license  applications it received for exports of dual-use items to countries of  concern.  The vast majority—99 percent—of approved licenses had  conditions attached during the interagency license review to deter misuse  or diversion. However, only 6 percent of licenses to countries of concern  were subject to PSV checks. During fiscal years 2000 to 2002, Commerce  conducted 428 PSVs on the 7,680 dual-use export licenses it approved for  countries of concern.
subsections: section_title: Commerce Approves Most Dual-Use Export Licenses to Countries of Concern
paragraphs: Between 2000 and 2002, Commerce approved 70 percent of dual-use export  licenses to countries of concern—a total of 7,680 licenses for exports to  China, India, Israel, Russia, and others. As table 1 shows, China and India  received more dual-use licenses than all other countries of concern. These  two countries accounted for almost 62 percent of dual-use licenses  approved to countries of concern during fiscal years 2000 to 2002.
Most U.S. exports of dual-use items go to countries other than countries of  concern. Our analysis of Commerce data found that Commerce was less  likely to approve exports of dual-use items to countries of concern than to  other countries. Whereas the approval rate for countries of concern was 70  percent, the approval rate for other countries was 86 percent.
section_title: Commerce Attaches Conditions to Most Licenses
paragraphs: Between fiscal years 2000 and 2002, 99 percent of all approved dual-use  export licenses to countries of concern contained conditions requiring the  exporter to provide certain documentation and reports, such as a shipper’s  export declaration or encryption licensing information, and to restrict the  item’s use. Commerce, Defense, and State develop conditions during an  interagency licensing approval process to alleviate concerns that the items  might be misused or might contribute to proliferation activities.  According  to the Undersecretary for Commerce, in a speech at the annual Update  2002 Export Control and Policy Conference, these conditions alleviate  agency concerns that might otherwise result in a denial of the export. Once  a license is issued, the departments rely on Commerce to ensure  compliance with the conditions.
Commerce has 54 standard conditions that establish requirements  exporters and end users must follow, including how an item may be used  and who may have access to it. Conditions are placed on a license  according to the particular item’s intended use and final destination. A  standard condition might state that no wide-area network connectivity is  allowed without specific U.S. government authorization or that military end  users or end uses are prohibited. In addition to the 54 standard conditions,  Commerce sometimes uses customized conditions to restrict specific end  uses and/or end users of an item. For example, a license for semiconductor  manufacturing equipment might contain a condition stipulating the  characteristics, such as the feature size of the integrated circuits, that could  be produced using the equipment. A license for a chemical might have a  condition specifically written for that item stating that the item could only  be used in the manufacture of pharmaceutical products.
section_title: Few Licenses Are Subject to PSV
paragraphs: Although 99 percent of licenses worldwide have conditions placed on  them, few dual-use export licenses issued to countries of concern are  subjected to PSV checks. Between fiscal years 2000 and 2002, Commerce  approved 26,340 dual-use export licenses worldwide, including 7,680  licenses to countries of concern.  However, during this same time period,  Commerce conducted PSVs on approximately 6 percent (428) of approved  licenses to countries of concern (see fig. 1).
Commerce officials stated that it would be impossible to conduct checks  on every exported item because of the vast number of licenses. Because of  this, Commerce developed guidance for selecting the licenses on which to  conduct PSVs. These selection criteria are based on the destination, item,  end use, and parties to the transaction. Commerce primarily targets PSVs  on items it refers to as “choke-point” technologies. These are items and  technologies that would significantly advance the development of sought- after weapons systems or are on the “shopping lists” of terrorists or  countries seeking to develop weapons of mass destruction.  Commerce  also targets PSVs on items destined for countries it has identified as having  the potential to divert or misuse dual-use items.  Commerce also stated that  it has revised its priorities for future PSVs to focus on several countries  including Hong Kong, Russia, India, Israel, and the United Arab Emirates.   Commerce is also posting new export control attachés in Moscow, New  Delhi, and Hong Kong (in addition to the ones in Beijing and Dubai) to  conduct end-use verification visits and educate local industry on U.S.  export controls.
We reviewed 428 Commerce reports on PSV checks for countries of  concern that were completed between fiscal years 2000 and 2002. Of these  PSV checks, 72 percent checks included items identified as choke-point  technologies.  Commerce targeted the remaining 27 percent on other items  and technologies controlled for export but that are not seen to be as critical  to proliferation activities as are choke-point technologies. Commerce  conducted some of these PSV checks on items exported with no license  required or without an export control classification number.  These checks  allow Commerce to determine if exporters are appropriately classifying  items on export licenses and if the items are being used properly.
Between fiscal years 2000 and 2002, most PSV checks in countries of  concern that we reviewed were favorable. We examined trip reports and  cables of 428 PSV checks completed during this period in eight countries of  concern, including China, Egypt, India, Israel, Pakistan, Syria, Russia, and  Ukraine. Eighty-two percent of PSV checks in countries of concern were  rated favorable by the U.S. officials conducting the PSV (see fig. 2).
According to Commerce’s program guidance, a favorable PSV check  indicates that U.S. officials found (1) no discrepancies between the actual  and stated end use of the item and (2) that the item was at the location  indicated on the license.  An unfavorable PSV result indicates that U.S.  officials found discrepancies between the actual and stated end use. In one  case, special agents conducting a PSV found no business location for the  end user at the address on the license. According to Commerce officials, an  inconclusive check indicates that U.S. officials were unable to complete the  check. For example, the serial number obtained from a manufacturer might  not match the end-user’s item, the agents may have been denied access to a  facility, or the importer might not have responded to the agents’ request to  meet while they were in the country. According to Commerce officials, a  limited check indicates that U.S. officials were unable to account for the  entire shipment.  In India, for example, a computer shipped to a company  in one city had been sent to the company’s office in a different city. The  agents were thus unable to inspect the entire shipment.
section_title: PSVs Provide Limited Assurance That Dual- Use Items Are Not Diverted or Misused
paragraphs: The PSV process has several weaknesses that call into question  Commerce’s ability to ensure dual-use items are not diverted or misused.   First, PSVs do not confirm compliance with license conditions because  U.S. officials frequently do not check license conditions; they often lack the  technical training to assess compliance; and end users may not be aware of  the license conditions by which they are to abide. Second, some countries  of concern, most notably China, limit the U.S. government’s access to  facilities where dual-use items are shipped, making it difficult to verify  whether exported items are being used as intended. Third, PSV results have  only a limited impact on future licensing decisions.  Companies receiving  an unfavorable PSV will be subject to greater scrutiny in the future but can  still obtain an export license. Additionally, according to Commerce  officials, past PSV results play only a minor role in future enforcement  actions.
subsections: section_title: PSVs Do Not Always Confirm Compliance with License Conditions
paragraphs: The PSV process has several weaknesses.  U.S. officials frequently do not  check compliance with license conditions. In addition, officials conducting  PSV checks often lack the technical training necessary to verify compliance  with some license conditions.  Furthermore, foreign end users are often  unaware of the license conditions with which they are to comply.
subsections: section_title: U.S. Officials Frequently Do Not Check Compliance with Export License Conditions or Inspect Dual-Use Items
paragraphs: According to Commerce guidance, the objective of PSV checks is to ensure  that dual-use items reach the intended user and are being used properly.  Commerce’s guidelines require officials to visit the end user, and they  strongly recommend that officials physically inspect the exported items.  These guidelines help ensure that the sensitive technology is being used as  intended under the terms of the license and that the conditions of the  license are being followed. However, U.S. officials frequently do not check  compliance with license conditions.
Based on our review of PSV trip reports and our observations and  discussions with companies where PSVs were conducted, we found that  special agents frequently only asked end users if they complied with license  conditions rather than physically verifying their compliance with them. In  some instances, officials did not attempt to ask about license conditions.   For example, 36 percent of the companies (9 of 25) we visited or company  representatives we spoke with in China, Hong Kong, India, and Russia  reported that U.S. officials did not ask them about compliance or attempt  to verify compliance with license conditions.
U.S. officials also frequently do not physically inspect the dual-use item  subject to the PSV because they conduct the PSV at the company that  imported the item rather than the company using the item.  For example, an  Indian company imported thermal cameras and sold them to other Indian  companies.  Since Commerce conducted its PSV at the importing  company's headquarters, it had to rely on the statements of the company  representatives that the end users were using the cameras in compliance  with license conditions.  Our review of PSV trip reports and cables,  between fiscal years 2000 and 2002, found that 104 of 428 (24 percent) PSV  checks were performed at the importer’s rather than the end user’s office.  The agents rated 57 (55 percent) of these checks favorable; that is, the item  had arrived at its intended destination and was being used for the purposes  stated in the license, although the agents did not visit the end user.
Also, on several occasions, officials rated PSVs as favorable without  physically inspecting the item or observing its use.  Of the 428 PSV checks  we reviewed, Commerce special agents rated 62 PSV checks favorable,  although the item was not inspected or seen by an agent.  Based on PSV trip  reports, agents may not have seen an item because (1) the item was at a  location other than the one stated on the license, (2) the item had been  integrated into another product or was a consumable item, or (3) the item  was portable. For example, in January 2003, special agents visited a  company in Russia that imported thermal imaging cameras.  The company  purchased the cameras for sales promotion and demonstration purposes  across Russia.  Consequently, during the PSV check, all but one of the  cameras were in the field.  Agents were unable to physically inspect the  cameras or determine if they were being used in compliance with the  license conditions.  The agents had to rely on the company’s word rather  than personally verifying adherence to the condition.  The agents gave the  PSV a favorable rating based on discussions with company officials.
section_title: Commerce’s Special Agents Lack the Training to Help Assess Compliance with License Conditions
paragraphs: Commerce agents frequently do not have the training needed to assess an  end-user’s compliance with license conditions on a wide range of sensitive  technologies. We surveyed all 35 special agents who participated in PSV  checks between fiscal years 2000 and 2002.  Our survey focused on the  training and guidance that agents had received to conduct PSVs and the  ease or difficulty of assessing compliance with license conditions on  certain dual-use items. We received replies from 26 agents (74 percent).
According to the agents who conduct PSVs, the license conditions of some  items are easier to assess than others. About two-thirds of the agents  surveyed reported that it was very easy or generally easy for them to assess  compliance with license conditions in digital computers, general-purpose  electrical equipment, and machine tools. However, about three-fourths of  the agents reported that it was difficult or as easy as difficult for them to  assess compliance with conditions related to toxic chemicals, information  systems (including software), and biological pathogens.
The agents conducting the PSVs have limited training in many technologies  that are subject to PSVs. Although most agents responding to our survey  stated that they received Commerce training in key technologies—namely  biological, chemical, and nuclear weapons—over three-fourths reported  that they had not received any training in electronics, telecommunications  systems, information security systems, sensors and lasers, marine systems,  or propulsion systems for space vehicles.  These technologies accounted  for 89 percent of the PSVs conducted in countries of concern during fiscal  years 2000 through 2002. Our survey also found that training in these  technologies would be helpful.  Twenty-two of the 26 agents (85 percent)  reported that more training on key technologies such as computers,  telecommunications systems, and electronics would improve their ability  to conduct PSV checks.
Commerce officials recognize that special agents do not always have the  skills and training necessary to verify compliance with some license  conditions.  For example, to verify compliance with a license for  semiconductor manufacturing tools, Commerce brought together a team of  DOD and Commerce engineers for training on these tools. In February  2003, the engineers spent a day learning about the items on the license and  ways to determine if the exported equipment was being used in compliance  with the license conditions. The engineers then examined the exported  item in China and determined that the company had complied with the  license conditions.
In October 2003, Commerce released new guidelines to improve technical  training for special agents. This 1-day training is designed to provide agents  with additional technical expertise about the dual-use items they are to  check during upcoming PSVs. Commerce expects that this training will  allow agents to ensure that the items they check are the actual items in  question and that they are being used in compliance with license  conditions.  Commerce officials stated that they planned to initiate this  training in November 2003.
section_title: End Users May Not Be Aware of License Conditions
paragraphs: End users of dual-use technology may not be aware of the license  conditions by which they are to abide.  Only 5 of the 25 companies we  visited had a copy of the license conditions.  According to Commerce, it is  the U.S. exporter’s responsibility to ensure that end users are aware of the  terms of the license, including the conditions that apply to them. However,  Commerce does not require exporters to provide a copy of the export  license containing the conditions either to importers taking delivery of an  item or end users that use the item. Although Commerce requires the  exporter to convey license conditions to its “customer” or other parties to  whom the license conditions apply, the department does not specify  whether the conditions should be conveyed verbally or in writing.  Unless  there is a condition in the license that requires the exporter to inform the  end user of the conditions placed on the license, there is no guarantee that  the exporter will convey the conditions to the end user. In 24 percent of the  PSVs we reviewed, the checks were conducted at the site of the importer  rather than the end user; therefore, the end user may not have been aware  of the license conditions.
During our visits to China, Hong Kong, India, and Russia, we found that  only 5 (20 percent) of the 25 companies we visited had a copy of the  license, which included the conditions.  Representatives from 13 other  companies stated that they were aware of the conditions but did not have a  copy of the license or any document outlining the conditions.  At nine  companies we found that the agents conducting the PSV did not raise the  topic of conditions.  In at least one case in Russia, a company had signed a  document indicating that it was aware of the conditions but did not have a  copy of the license or any other documentation describing the conditions;  it was unclear how the conditions were conveyed to the company. In India  when we requested that a company produce a copy of the license  conditions that the exporter was required to provide, the company  produced a copy of the sales contract describing the terms and financial  conditions of the sale.  The company representative believed that the sales  contract listed the license conditions. Indian companies we visited were  frequently confused about the term “conditions,” associating it with the  sale of the item as opposed to the conditions imposed by Commerce on the  item’s use.
section_title: Some Countries of Concern Limit the U.S.’s Ability to Conduct PSV Checks
paragraphs: To successfully conduct a PSV, Commerce needs the cooperation of host  governments and the companies it must visit. In some countries,  Commerce can conduct PSVs without notifying the host government.  However, in other countries, Commerce’s ability to conduct PSVs is more  limited. China, India, Russia, and Hong Kong offer the United States  varying levels of access.  A discussion of the four countries follows.
The Chinese government requires that Commerce follow a set of  protocols for arranging and conducting PSVs. Commerce officials stated  that the Chinese government limits the number of checks each year.  A  Chinese Ministry of Commerce official we met with in September 2003  stated that the scope of items that can be subject to PSVs will be  expanded under the terms of an end-use arrangement currently under  negotiation with the United States.
India restricts Commerce from conducting PSVs to a limited extent.
According to our review of trip reports from India, India denied  Commerce access to some facilities and items for PSV checks through  2003; however, U.S. access to Indian facilities improved during 2003.  In  May 2003, the Indian government allowed PSVs and gave Commerce’s  special agents access to all the facilities they requested.
The Russian government does not require the United States to notify it  of plans to conduct PSVs or limit the types of items on which the United  States may conduct checks.  Based on our review of trip reports and  documentation from Russian companies, Commerce was always  allowed access to conduct PSVs, although government entities  sometimes required advanced clearance.
Hong Kong authorities allow U.S. enforcement personnel to conduct  PSVs on whatever items are of interest to the United States.  Based on a  review of safeguard trip reports and a meeting with Hong Kong officials  in September 2003, we found that Hong Kong does not require  Commerce to inform it about pending PSV checks.
Additional discussion of U.S. access to conduct PSVs in these four  countries is contained in an “Official Use Only” version of this report.
section_title: PSVs Have Limited Role in Future Licensing Decisions and Enforcement Actions
paragraphs: Commerce places all companies that receive unfavorable PSVs on its  Watch List.  Commerce placed 53 companies on its Watch List in response  to 81 unfavorable PSV checks worldwide, between fiscal years 2000 and  2002. However, the list is not public, and end users and potential U.S.  exporters would not know if a company had been placed on the list.  To  help ensure that companies that get unfavorable PSVs receive greater  scrutiny in the future, Commerce screens new license applications against  the Watch List.  Licensing officers at Commerce use this information when  making subsequent licensing decisions.
According to Commerce officials, however, the results of PSVs play a less  important role in approving a license than do other sources of information.  Commerce considers other information sources when making licensing  decisions, including industry leads, self-disclosure, visa referrals, and  information sharing from other agencies.  PSV results play a minor role  relative to these other sources.  According to a senior Commerce official,  an unfavorable PSV check is the opinion of two individuals and does not  represent a vetted and approved interagency position, which a licensing  decision does.
In addition, unfavorable PSV checks cannot be linked to enforcement  actions. Commerce views an unfavorable PSV as one of many leads in a  potential criminal case, but an unfavorable alone does not provide  sufficient evidence to take enforcement action against an end user. An  unfavorable PSV check is only an initial step in the investigation and  enforcement process. Before taking action against a criminal activity,  Commerce must review leads, open an investigation, and collect evidence.   If Commerce believes that it has enough evidence for a criminal case, it  must convince the Department of Justice to prosecute. If the criminal court  finds the defendant guilty, it can levy penalties (see app. II for additional  information on Commerce’s enforcement activities).  If Commerce lacks  sufficient evidence to prosecute the case in a criminal court, it may seek  administrative penalties.
Commerce cannot identify enforcement cases generated as the result of an  unfavorable PSV check because its database does not identify the source of  an investigation. Commerce officials stated that they would have to  conduct a manual search of the files to determine whether an enforcement  action started with a PSV. However, Commerce officials also stated that no  closed enforcement cases began as PSV leads. Commerce officials  recognized that their database had limitations and stated that they have  instituted the Investigative Management System, which will track the total  number of leads, their sources (such as a PSV), and the significant actions  resulting from them.
section_title: Conclusion
paragraphs: Commerce currently lacks an effective way to ensure that dual-use items  are being used as required under the terms of export licenses.  PSV checks  are Commerce’s primary means to verify the end use of an item after it has  been exported.  The fact that Commerce conducts PSVs may have some  deterrent value.  However, during fiscal years 2000 to 2002, Commerce only  checked 6 percent of dual-use licenses for countries of concern.  In  addition, deficiencies in Commerce’s implementation of this important  process limit its overall effectiveness in ensuring that dual-use items are  not misused or diverted.  Most significantly, although 99 percent of dual-use  exports to countries of concern have license conditions, the U.S. officials  who carry out PSVs do not always verify that these conditions are met.  Even if agents wanted to check license compliance, they may lack the  necessary technical expertise to determine whether a license condition is  being met. In addition, the foreign end users of the dual-item may not be  aware of the license conditions they are to comply with. Finally, some  countries limit Commerce’s access to conduct PSVs. As a result, Commerce  cannot ensure that dual-use items exported to countries of concern are not  misused or diverted.
section_title: Recommendations
paragraphs: To improve the PSV process, we recommend that the Secretary of  Commerce  improve technical training for enforcement personnel conducting PSV  checks to ensure they are able to verify compliance with license  conditions,  ensure that personnel conducting PSV checks assess compliance with   require that the exporter inform the end user in writing of the license  conditions.
section_title: Agency Comments and Our Evaluation
paragraphs: The Department of Commerce provided written comments on a draft of  this report, which are reproduced in appendix III.  Commerce generally  agreed with our recommendations.  However, Commerce disagreed with  our conclusion that PSVs provide limited assurances that dual-use items  are being used as intended.  Commerce stated that we assumed PSVs play a  greater role in ensuring compliance with the terms and conditions of  export licenses than they actually play.  However, Commerce’s June 2000  program guidance on how to conduct PSVs states that PSVs are the first  line of defense in preventing illegal technology transfer after dual-use items  have been exported. Commerce documents show that PSVs are  Commerce’s primary mechanism to verify that dual-use items are used as  intended after they have been exported.   Commerce also stated that we  underestimated the value of PSVs for informing future licensing decisions.   However, during the course of our review, Commerce officials stated that  PSVs played a less important role in future licensing decisions than other  sources of information, such as industry leads and information from other  agencies, that were more highly valued.  Accordingly, we have not modified  our conclusions or recommendations.
As arranged with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days after the  date of this letter.  At that time we will send copies of this report to  appropriate congressional committees and to the Secretary of Commerce.   Copies will be made available to others upon request.  In addition, this  report will be available at no charge on the GAO Web site at  http://www.gao.gov.
Please contact me at (202) 512-8979 if you or your staff has any questions  concerning this report.  A GAO contact and staff acknowledgments are  listed in appendix IV.
section_title: Scope and Methodology
paragraphs: We were asked to (1) assess the number of dual-use export licenses  approved and subject to post-shipment verification (PSV), and (2) evaluate  how the PSV process ensures that sensitive exports are used as intended.   To address these objectives, we reviewed laws and regulations governing  export licensing, analyzed export licensing data, and reviewed the activities  and outcomes of the Department of Commerce’s (Commerce) Export  Enforcement Office. We also interviewed Commerce officials in  Washington, D.C.; surveyed Commerce’s special agents who conduct PSV  reviews; met with Commerce enforcement attachés in Russia and China;  and observed a Commerce-led team conducting PSV checks in Russia.  In  addition, we met with officials from the Department of State; Department  of Homeland Security; Department of Defense, including the Defense  Technology Security Administration and Defense Intelligence Agency;  Department of Justice; Central Intelligence Agency; National Ground  Intelligence Center; and private firms in Hong Kong, India, and Russia that  were the subject of Commerce’s PSV reviews.  Finally, we interviewed  government officials from China, Hong Kong, and India about their views  on U.S. export controls.
To assess the number of dual-use export licenses approved and subject to  PSV, we reviewed Commerce documentation on how the licensing process  works and how it determines which items will be subject to PSV checks.  We interviewed knowledgeable Commerce officials about the licensing  process and the role of PSV checks in that process. Additionally, we  obtained statistical data from Commerce, including portions the Export  Control Automated Support System (ECASS), to analyze data on licenses  selected for PSVs. We assessed the reliability of the ECASS data by  performing electronic testing of required data elements and by interviewing  agency officials knowledgeable about the data. We determined that the  data were sufficiently reliable for the statistical purposes of this report. We  also obtained PSV trip reports and cables for fiscal years 2000 through 2002  for countries of concern where PSVs were conducted.
To evaluate how the PSV process ensures that sensitive exports are used as  intended, we reviewed Commerce’s Special Agent Manual, guidance on  conducting PSV checks, trip reports, and cables for countries of concern.  We identified key countries of concern by performing a content analysis of  12 lists used by U.S. government agencies to designate countries they  believe may support terrorism or contribute to proliferation of weapons of  mass destruction.  Any country that appeared on 5 or more of the 12 lists  was selected as a country of concern for the purposes of this report. The  resulting list includes Azerbaijan, Belarus, China, Egypt, India, Iran, Iraq,  Israel, Kazakhstan, North Korea, Pakistan, Russia, Syria, and Ukraine.
As part of our audit work, we traveled to Russia and observed a team  conduct a PSV check. We also traveled to China, Hong Kong, and India to  determine the host governments’ requirements for conducting PSV checks  and to conduct follow-up meetings with companies and persons subject to  previous PSV checks.  We surveyed special agents at Commerce field  offices who had participated in PSV trips during 2000, 2001, and 2002, and  from January to April in 2003. We identified 35 active agents who  conducted PSV trips during this time frame, based on reports Commerce  provided to us. We did not survey six agents who had conducted PSVs and  had left the department or had been temporarily reassigned. We developed  and pretested a questionnaire that we administered by e-mail and fax. We  received responses from 26 officers, or 74 percent of the active agents.   Finally, we interviewed Commerce officials and asked Commerce to  provide us with data to determine how the results of PSVs are used in  future licensing and enforcement actions. We initially planned to use the  ECASS data to determine if companies that had received an unfavorable  PSV obtained a subsequent license. Due to limitations in Commerce’s  database, however, this could not be done. We therefore relied on  Commerce officials’ testimony about how unfavorable PSVs are used in the  licensing process.
We conducted our review from October 2002 through October 2003 in  accordance with generally accepted government auditing standards.
section_title: Department of Commerce’s Statutory Framework and Enforcement Activities
paragraphs: Commerce undertakes a number of enforcement activities to deter  violations of export control laws and regulations, including prosecuting  both civil-administrative and criminal cases.  If U.S. exporters or foreign  importers are not following U.S. export law and regulations, they may face  penalties including fines, denial of export privileges, or imprisonment. In  accordance with the governing authority, when Commerce identifies a  potential dual-use violation, it may seek criminal or civil administrative  action, or both, against the U.S. company that exported the product,  employees at the U.S. exporting company, or foreign companies and  persons involved in importing the product.
When Commerce obtains an unfavorable PSV or other indication that a  dual-use export control violation may have occurred, Commerce may  engage in an investigation. After an investigation, if Commerce determines  the violator acted with full knowledge and willful intent of breaking the  law, Commerce develops a criminal case and seeks an attorney in the  Department of Justice (Justice) to prosecute the violation. If Justice  accepts the case, they assign an assistant U.S. attorney for criminal  prosecution. If the criminal court finds a defendant guilty of dual-use  violations, then sanctions for criminal conduct are imposed; companies  may be fined while individuals may be fined and or imprisoned.  In addition  to or in lieu of criminal penalties, Commerce may pursue civil  administrative action. Civil-administrative penalties are issued directly by  Commerce. Attorneys working at Commerce handle these cases, which are  heard by an administrative law judge. Civil-administrative penalties may be  issued to either an individual or to companies and may include:  Denial of export privileges – This denies the violator the right to export  or to participate in the export of goods from the United States.
Civil-administrative fines – Commerce charges the violator(s) monetary  penalties.
In addition to civil-administrative penalties, Commerce may use the  following as preventative measures in response to export control law  violations:   Warning letter - A warning letter is an informal notification Commerce  issues to a company or person who may have violated the law. It  describes the alleged violations and possible sanctions, but does not  impose fines or restrictions on export privileges due to a lack of  evidence. Commerce considers any future violations in light of the  warning.
Placement of an entity or individual on the Watch List – The Watch List  lists individuals and companies that Commerce has determined warrant  increased scrutiny for export licensing purposes.
In fiscal year 2001 and 2002, Commerce closed 9 cases yielding criminal  convictions and issued 340 warning letters.  During that same time period,  Commerce approved 17,500 licenses for dual-use exports.
Commerce’s authority to enforce dual-use export controls was originally  authorized by the Export Administration Act (EAA) of 1979.  Since August  20, 1994, when the EAA first expired, temporary statutory extensions and  executive orders continued the application of this act.  Most recently, the  application of the act has been extended under an executive order issued  pursuant to the International Emergency Economic Powers Act (IEEPA).
While the executive order gives Commerce authority to enforce dual-use  export controls, IEEPA provides for maximum penalties that are  significantly lower than those permitted under the EAA, both for criminal  and civil administrative fines.  For example, criminal penalties for  companies that willfully violate dual-use export control laws under IEEPA  are limited to a $50,000-per-violation fine. Under the EAA, offenders were  subject to a fine of either $1 million per violation or five times the value of  the exports, whichever was greater. A violation is constituted as the  intentional export of a good in violation of export control law. For a  comparison of fines under the EAA and IEEPA, see table 3.
section_title: Comments from the Department of Commerce
subsections: section_title: GAO Comments
paragraphs: The following are GAO’s comments on the Department of Commerce letter,  dated December 3, 2003. 1. Commerce states that we overemphasized the use of PSVs as a method  for ensuring license compliance and underestimated their value for  informing future licensing decisions.  We disagree.  Commerce’s June  2000 guidance on how to conduct PSVs states that PSVs are the first  line of defense in preventing illegal technology transfer after dual-use  items have been exported.  We also found that PSVs play a less  important role in future licensing decisions than other sources of  information.  As noted in the report, Commerce officials stated that  industry leads, information from other agencies, self-disclosures, and  visa referrals are more highly valued in licensing decisions than  information gathered during a PSV.   2. Commerce stated that the effectiveness of PSVs cannot be assessed in  isolation from other enforcement and compliance efforts of Commerce.   We agree.  Our report includes discussions of several of these  mechanisms, including prelicense checks (p. 4), screening against its  Watch List (p. 15), and using information on export transactions from  industry and other agencies (p. 16).  We also discuss the deterrent  effect of prosecuting criminal and administrative enforcement cases  (pp. 21-23, app. II).   3. Commerce notes that its new safeguards protocol requires training for  all safeguards trip team members prior to their departure.  However, as  of December 2003, two agents had received this training. 4. Commerce noted that it had undertaken to revise the priority of license  checks in countries of concern, by focusing on Hong Kong, Russia,  India, Israel, and the United Arab Emirates.  We have added information  in the report to reflect the new efforts.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition, Julie Hirshen, Eugene Beye, Joseph Brown, Lynn Cothern,  Jeanine Lavender, Steve Lord, and Minette Richardson made significant  contributions to this report.
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