Export Controls: Department of Commerce Controls over Transfers of Technology to Foreign Nationals Need Improvement
Released: 2002-09-06T00:00:00

Letter

Background

Under the Export Administration Act of 1979 as amended and the implementing Export Administration Regulations, Commerce is authorized to require firms to seek licenses for exports of dual-use technologies that pose national security or foreign policy concerns. Such technologies could be used by countries of concern to upgrade their military capabilities. The Commerce Control List identifies technologies that must be licensed before they can be exported to specific countries, including technologies associated with certain nuclear materials, facilities, and equipment; chemicals, “microorganisms” and toxins; materials processing; electronics; computers; telecommunications and information security; lasers and sensors; navigation and avionics; marine systems; and propulsion systems and space vehicles. Violators may face administrative or criminal penalties, including fines, denial of export privileges, and imprisonment. The act defines exports to include transfers of technology within the United States to (1) affiliates of controlled countries or (2) persons with the knowledge or intent to transfer the technology to unauthorized parties. According to Commerce regulations, a transfer of technology within the United States to a foreign national who is not a permanent resident of the United States is deemed to be an export. Such a “deemed export” may occur when a foreign national visits or works in the United States and accesses controlled dual-use technology. Access can include opportunities to review written materials or discussions about controlled technologies.

In 2000, Commerce’s Inspector General concluded that compliance with deemed export licensing regulations appeared lax. The Inspector General pointed out that the number of foreign workers authorized to enter the United States using certain specialty employment visas was far larger than the number of deemed export license applications received by Commerce in fiscal year 1999.

Export Administration Regulations, part 734.2(b)(1). Part 772 of the Export Administration Regulations defines “technology” as specific information necessary for the “development,” “production,” or “use” of a product. Congress is currently considering legislation that would, among other things, (1) define an export to be the release of an item—i.e., any good, technology, or service--to a foreign national within or outside the United States and (2) require the Secretary of Commerce, in concurrence with the Secretaries of State and Defense to issue regulations governing such exports (H.R. 2581, section 2(9)(iii) and 601(c)(3)).

Export Licensing and Visa Regulations Impose Requirements on Foreign Nationals Working in the United States

To work with controlled dual-use technology in the United States, foreign nationals and the firms that employ or sponsor them must comply with U.S. export control and visa regulations. Commerce, in consultation with other departments, is responsible for issuing deemed export licenses to firms that employ or host foreign nationals. While the Department of State is responsible for issuing visas to foreign nationals outside the United States, INS is responsible for approving requests from foreign nationals in the United States seeking to change their immigration status.

Deemed Export Licensing Regulations Govern a Foreign National’s Access to Controlled Technology

The review process for a deemed export license application parallels the review process for an application for a license to export commodities or technologies overseas. Under U.S. export control regulations, a firm is required to seek a deemed export license if the export of the technology to the foreign national’s country of citizenship would require a license. If a license is required, the exporter must submit a license application to Commerce identifying the technology, the reason it is controlled, the proposed destination, and the intended end user. In the case of deemed export license applications, firms must also provide the foreign national’s resume, visa type, and a list of his or her publications. An application for a deemed export license may list more than one foreign national.

Under Executive Order 12981, the departments of State, Defense, and Energy have the authority to review license applications (unless they decline) to help Commerce determine whether a license would be in the best interests of the United States. Based on their review, an application may be rejected, approved, approved with conditions, or returned without action. Commerce officials stated that they consider evidence of the foreign national’s intent to remain in the United States in assessing deemed export license applications. For example, they asserted that they consider the presence of family members in the United States or a stated intention to apply for permanent residency in the United States as a factor in granting a license. Deemed export licenses are generally valid for 2 years. Almost 10 percent of all export licenses approved by Commerce authorize deemed exports.

Visa and Immigration Process Managed by the Department of State and the Immigration and Naturalization Service

The U.S. government requires foreign nationals from most countries to obtain visas before entering the country. Requirements for obtaining a visa vary, depending on the purpose of the trip and the nationality of the person seeking the visa. Typically, a foreign national begins the process by submitting a visa application to the Department of State, generally through a U.S. overseas post. The application requires, among other items, information regarding his or her nationality, education, employment history, purpose of visit, and if seeking employment, the sponsor. The Department of State is responsible for determining the applicant’s eligibility and issuing the visa. State personnel at U.S. embassies and consulates overseas may interview applicants to determine their eligibility to enter the United States. According to the Department of State, in fiscal year 2001, it adjudicated 10.6 million nonimmigrant visa applications at 196 posts and issued 7.6 million visas.

Many foreign nationals seeking to work in the United States apply for H-1B specialty employment visas. An H-1B visa allows a U.S. employer to temporarily fill specialty occupations (such as those requiring electrical or software engineers) with foreign workers. A foreign national overseas may obtain an H-1B visa from the Department of State, if INS determines that an employer may import the foreign national as a temporary worker (see fig. 1). A foreign national already in the United States may have his or her immigration status changed to H-1B by INS. For example, an employer seeking to hire a foreign student who has graduated from a U.S. college or university could petition INS to change the foreign national’s immigration status from student to H-1B. INS is solely responsible for approving and issuing such changes in status.

Commerce Approves Most Deemed Export License Applications

In fiscal year 2001, Commerce approved 822 deemed export license applications and rejected 3. Each license authorized one or more foreign nationals to access controlled dual-use technology. Our analysis of Commerce’s licensing data found that most licenses approved in fiscal year 2001 involved countries of concern. As shown in figure 2, China accounted for 73 percent of licenses approved in fiscal year 2001. Seven other countries of concern--Russia, Iran, India, Syria, Israel, Iraq, and Pakistan—accounted for another 14 percent. The remaining 13 percent involved 29 other countries, including the United Kingdom, Germany, Bulgaria, Romania, and Ukraine.

About 90 percent of the licenses approved in fiscal year 2001 authorized foreign nationals to work with advanced electronics, computer, or telecommunications and information security technologies (see fig. 3). Electronics technologies constituted the largest single share at 46 percent. Telecommunications and information security technologies accounted for another 24 percent. Computer technologies were included in 20 percent of the licenses approved.

The most common country-technology combination for deemed export licenses involved China and electronics technologies. About 44 percent of all licenses approved in fiscal year 2001 authorized citizens of China to work with electronics technologies, including semiconductor technology.

Not all domestic transfers of technology to foreign nationals require a deemed export license. For example, one exception allows technology and software controlled only for national security purposes to be accessed without a license by foreign nationals from countries of concern such as India, Pakistan, and Israel. Under this exception, a firm employing an Indian software engineer would not need a deemed export license to allow him or her access to controlled dual-use technology. The exception does not apply to technology and software that are also controlled for other reasons, such as antiterrorism or nuclear nonproliferation. Also, foreign nationals who engage in research that is or will be publicly available are exempted from export controls. For example, a U.S. university would not need a deemed export license to allow a Chinese graduate student to engage in technological research if the results of that research are to be published in a professional journal. A U.S. firm that hired the same Chinese national to engage in proprietary research to develop a new commercial product would not qualify for this exception.

Commerce’s Efforts to Detect Unlicensed Deemed Exports Do Not Use All Available Sources of Data

To better direct its efforts to detect possible unlicensed deemed exports, Commerce screens applications for H-1B and other types of visas submitted overseas and develops potential cases for enforcement staff in the field. However, it does not screen H-1B change-of-status applications submitted domestically to INS for foreign nationals already in the United States. Also, Commerce cannot readily track the disposition of potential cases referred to the field.

Commerce Screens Visa Data from the Department of State but Does Not Screen Potentially Useful INS Data

To identify potential unlicensed deemed exports and opportunities to educate firms about deemed export licensing requirements, Commerce screens visa applications it receives from U.S. posts overseas. In fiscal year 2001, Commerce analysts reviewed about 54,000 such applications for various visa types. According to Commerce guidance, the analysts consulted Commerce’s enforcement database, DOD comments on rejected license applications, and other sources of information to detect linkages between foreign entities of concern and visa applicants.

Commerce does not screen data on foreign nationals already in the United States who change their immigration status to H-1B specialty employment. Commerce and INS officials stated that Commerce does not obtain information on foreign nationals who seek a change in immigration status.

INS has data available on foreign nationals who change their status to H- 1B. Our analysis of INS’s H-1B data indicates that during fiscal year 2001 at least 15,000 foreign nationals from countries of concern potentially subject to deemed export licensing requirements changed their immigration status to H-1B specialty employment. Our estimation of 15,000 individuals only includes foreign nationals who sought H-1B status for employment related to science and technology. It does not include other nonsensitive H-1B fields, such as fashion modeling, architecture, and accounting.

Commerce Analysts Cannot Assess the Impact of Their Screening Efforts

In fiscal year 2001, Commerce analysts screened about 54,000 visa applications received from overseas posts. Their efforts resulted in the referral of 160 potential cases to Commerce’s eight enforcement field offices. Commerce staff stated that field offices conduct some limited follow-up enforcement and outreach activities in response to such referrals. These activities include meetings with firms and individuals to determine if the firms should have applied for a deemed export license. Commerce enforcement officials could not provide us with complete information regarding the disposition of these 160 potential cases. Commerce does not have a mechanism for its field enforcement staff to report the results of their reviews of these cases back to headquarters. As a result, its analysts in headquarters cannot determine if their screening methods are effective in targeting potential deemed export cases. Commerce plans to install a new computerized database by the end of 2002 that would correct this problem by allowing headquarters staff to track the disposition of cases referred to field enforcement staff.

Commerce Does Not Ensure Compliance with License Conditions

Commerce does not determine whether firms comply with license conditions intended to limit transfers of controlled dual-use technology to foreign nationals. Commerce officials stated that ensuring such compliance is a low priority and that they cannot readily enforce conditions included in licenses.

Deemed Export Licenses Are Generally Approved with Security Conditions

Almost all deemed export licenses include security conditions. According to DOD officials, these conditions are needed to mitigate the risk to U.S. national security posed by providing controlled dual-use technology to a foreign national. These officials stated that the conditions are crucial to DOD’s willingness to agree to many deemed export license applications. Without these conditions, DOD would recommend that Commerce reject many deemed export license applications.

Commerce uses several of these conditions to limit the level of technology to which foreign nationals may be exposed. For example, standard conditions bar foreign nationals from unmonitored use of high-performance computers, involvement in the design of computers that exceed a specified accessing technical data on advanced microprocessors or certain types of lithography equipment, or accessing classified data or munitions data licensed by the Department of State.

The licensing conditions were first formulated in 1997 by an interagency group that included representatives of the departments of Commerce, Defense, State, and Energy. The departments of Commerce and Defense currently maintain updated lists of 12 standard conditions for deemed exports involving (1) semiconductors (electronics) and computers and (2) telecommunications. According to Commerce officials, the departments may add conditions or adjust the standard conditions to accommodate specific circumstances.

A firm may also be required to monitor the immigration status of the foreign employee and to document whether the foreign national leaves the firm before becoming a permanent resident of the United States. The firm is also required to develop security procedures for ensuring compliance with conditions in the approved license and to provide copies of these procedures to Commerce.

Other executive branch agencies rely on Commerce to ensure that firms comply with these conditions. DOD’s copy of the standard license conditions specifies that Commerce “will monitor to ensure that the applicant’s compliance is effective.” Identical language is included in many deemed export licenses. Officials from the departments of Defense and State stated that they presumed that Commerce is acting to ensure compliance with the security conditions.

Commerce Does Not Monitor Compliance with License Conditions

Commerce does not have an effective monitoring system in place to ensure compliance with key deemed export license conditions, such as a program of regular visits to firms. Staff at the department’s enforcement field offices stated that they rarely visit firms to ensure compliance with deemed export license conditions. In addition, officials at the private sector firms we visited confirmed that Commerce officials rarely conduct on-site verifications of their compliance with licensing conditions. Commerce officials agreed that they do not have an effective monitoring system in place and that their compliance efforts are limited to checking if firms have submitted their security procedures to the department.

Commerce officials stated that they consider ensuring compliance with deemed licensing conditions to be a relatively low priority for their resources compared to other demands, including activities to combat terrorism. They stated that the export licensing system is based on the assumption that firms are honest. These officials also asserted that almost all of the foreign nationals covered by deemed export licenses have indicated that they plan to remain in the United States, although they could not provide us with data on repatriations to support this assertion. Commerce officials also stated that prosecutors are reluctant to pursue criminal cases based on technical violations of license conditions. However, they acknowledged that Commerce could use the results of on- site visits as the basis for imposing administrative sanctions and denying future license applications.

Commerce officials also asserted that some conditions are not readily enforceable. They maintained that some involve highly technical matters that do not fall within the training provided to Commerce enforcement personnel. For example, Commerce officials stated that enforcement staff would be unable to determine whether the feature size of a semiconductor is smaller than the micron limit specified in one license condition. Similarly, Commerce officials asserted that enforcement personnel would be unable to verify compliance with conditions that proscribe intangible transfers of technology, such as conversations between foreign nationals and their coworkers.

Conclusions

Commerce’s deemed export licensing system does not provide adequate assurance that U.S. national security interests are properly protected. Key vulnerabilities in the licensing process could help countries of concern advance their military capabilities by obtaining sensitive dual-use technology. Because Commerce does not review all relevant visa and immigration data, it may overlook foreign nationals potentially subject to deemed export licensing requirements. Because Commerce rejects very few deemed export license applications, executive branch agencies must therefore rely on security conditions to help ensure that the licenses approved—more than 90 percent of which involve China and other countries of concern—do not allow foreign nationals unauthorized access to controlled technologies. However, Commerce does not have a monitoring process in place to ensure compliance, thus undermining the value of the conditions. These weaknesses call for a reexamination of the current approach to limiting foreign national access to controlled technology in the United States.

Recommendations

We recommend that the Secretary of Commerce work with INS to use all existing U.S. government data in its efforts to identify all foreign nationals potentially subject to deemed export licensing requirements. We also recommend that the Secretary of Commerce—in consultation with the Secretaries of Defense, State, and Energy—establish a risk-based program to monitor compliance with deemed export license conditions. In doing so, the Secretary of Commerce should draw upon the full range of technical expertise available to him, including that within the department or elsewhere in the federal government. If the secretaries of these agencies conclude that certain security conditions are impractical to enforce, we recommend that they jointly develop enforceable conditions or alternative methods to ensure that deemed exports do not place U.S. national security interests at risk while promoting U.S. commercial interests.

Agency Comments

We provided a draft of this report to the Secretaries of Commerce, Defense, and State, and to the INS Commissioner for their review and comment. We received written comments from the departments of Commerce and Defense that are reprinted in appendixes II and III.

DOD concurred with our recommendations, and Commerce said it would consult with other relevant departments on the practicality of implementing our recommendations. More specifically, Commerce stated that it would contact INS to discuss the possibility of establishing a procedure for referring to Commerce H-1B change-of-status applications involving employment that might result in access to sensitive technology. It also stated that it is in the process of developing a more extensive monitoring program for firms that have been issued deemed export licenses. Commerce said it is currently impossible to fully monitor all of the conditions placed on these licenses and agreed that more realistic conditions need to be developed. It also said that it has initiated an interagency dialogue to develop a new set of standard conditions for deemed export licenses. In response to a recommendation in the draft report, Commerce stated that its new Investigation Management System would establish a system for tracking referrals to its enforcement field offices once it becomes operational at the end of calendar year 2002. It subsequently provided us with documentation on the new tracking system.

However, Commerce disagreed with our assessment that it lacks an effective monitoring process. It stated that Commerce staff monitor the submission of required internal control plans by firms and contact firms who fail to submit these documents. Commerce also stated that it would continue to visit select firms to monitor compliance with license conditions. In addition, it stated that the vast majority of individuals applying for H-1B visas would not be employed in jobs that would give them access to technology controlled under U.S. export control laws. Commerce stated that INS regulations permit the issuance of H-1B visas to foreign nationals seeking employment in such fields as fashion modeling, architecture, and accounting. It said that the likelihood of foreign nationals working in such fields requiring deemed export licenses is remote. Given Commerce’s limited resources, and the large number of H-1B applications filed annually, it questioned whether it was feasible for Commerce analysts to perform a second comprehensive review (in addition to INS’s own review) of each such INS file.

We disagree with Commerce’s assertions regarding the effectiveness of its monitoring process. As noted in our report, Commerce’s monitoring process is essentially limited to administrative checks by headquarters staff to determine whether firms have submitted required paperwork. We found no evidence that it selects and visits certain firms to verify compliance with deemed export license conditions. As a result, our recommendation that Commerce develop a risk-based program to monitor compliance is still appropriate.

We agree with Commerce’s concern that it should not review immigration change-of-status applications of foreign nationals who are seeking employment in fields that are unlikely to involve controlled technology. Anticipating such concerns, we had specifically targeted technology- related occupations—and excluded nonsensitive fields, such as modeling, architecture, and accounting—in developing our estimate of 15,000 foreign nationals. We have included language in this report describing how we developed this estimate.

We are sending copies of this report to appropriate congressional committees and to the Secretary of Commerce, the Secretary of Defense, the Secretary of State, and the Commissioner of the Immigration and Naturalization Service. 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.

If you or your staff have any questions about this report, please contact me on (202) 512-8979. Another GAO contact and staff acknowledgments are listed in appendix IV.

Scope and Methodology

To describe the deemed export license process, we reviewed laws and procedures governing export controls; attended Department of Commerce export licensing workshops in Boise, Idaho and Los Angeles, California; and interviewed Commerce officials. To learn about the process for reviewing and approving visa applications overseas, we reviewed Department of State documents that describe the process for issuing visas and provide guidance for referring applications. We also interviewed State officials. To understand the specialty employment (H-1B) and change-of- status processes, we met with officials from the Immigration and Naturalization Service (INS). They described the process and procedures for obtaining an H-1B petition and for changing immigration status while in the United States.

To determine the number and nature of deemed export license applications approved by Commerce, we obtained and analyzed information included in Commerce’s licensing database for fiscal year 2001. The data were extracted based on the date of final action on each license. We analyzed the data to determine the number of applications that Commerce approved, rejected, or returned without action. We also determined which countries and technologies were included in the approved applications. All of our analyses were dependent on the reliability of Commerce’s licensing database. We did not attempt to independently verify the accuracy of the database or the data that it contains.

To review Commerce’s efforts to detect unlicensed deemed exports, we relied on INS data on H-1B applications granted in fiscal year 2001. We developed this data by asking INS to determine the number of changes-of- status to H-1B that involved (1) occupational codes related to science and technology and (2) countries of concern. We did not independently confirm the accuracy of INS data. Although we recognize that foreign nationals with immigration classifications other than H-1B may be subject to the deemed export licensing requirements, we did not attempt to incorporate other classifications into our analysis. We also identified and interviewed 15 firms that employed foreign nationals but did not have a deemed export license. To better understand the Commerce program for detecting unlicensed deemed exports, we reviewed Commerce program guidance. We also interviewed Commerce officials associated with the review effort.

To evaluate Commerce’s efforts to ensure compliance with approved licenses, we obtained copies of the standard conditions from both Commerce and the Department of Defense (DOD) and reviewed license conditions as recorded in Commerce’s licensing database. We also interviewed officials of 11 firms that have received deemed export licenses and met with Commerce licensing and enforcement officials. To obtain detailed information on enforcement activities, we interviewed special agents of all eight Commerce enforcement field offices. To better understand the rationale for the conditions, we spoke with officials at DOD and the Department of State, including analysts at the Defense Intelligence Agency and policy officials from the Defense Technology Security Agency.

We conducted our review from November 2001 through August 2002 in accordance with generally accepted government auditing standards.

Comments from the Department of Commerce

The following are GAO’s comments on the Department of Commerce’s letter dated August 19, 2002.

GAO Comments

1. We have modified our report to reflect Commerce’s comment. Our draft report’s statement that a deemed export license typically covers one to five individuals was based on an estimate provided to us by the head of Commerce’s deemed export licensing unit. As noted in our draft report, Commerce could not readily determine the total number of individuals included in all deemed export licenses due to limitations in its automated database. 2. We agree that the countries depicted in the chart may represent different levels of concern from a foreign policy and national security standpoint. However, we used the Department of State’s guidance for screening technology-related visa applications to develop a list of countries of concern. According to guidance sent to all diplomatic and consular posts, particular attention is given to cases involving nationals of countries designated as state sponsors of terrorism—Cuba, Libya, Iran, Iraq, North Korea, Sudan, and Syria—or a region subject to the Nonproliferation Export Control regulations—China, India, Israel, Pakistan, and Russia.

We have added information in this report to note Commerce’s observation that most deemed export licenses involve countries of concern, given that U.S. export controls focus on such countries. 3. We do not agree that Commerce has an effective process in place to monitor compliance with license conditions. We found Commerce’s current process to be inadequate for two reasons: (1) it is essentially limited to administrative checks by headquarters staff to determine whether firms have submitted the required paperwork; and (2) it does not include a program for conducting on-site visits to confirm that firms are complying with license conditions. Accordingly, we have maintained our draft recommendation that Commerce develop a risk-based monitoring program. 4. Our estimate of 15,000 H-1B change-of-status applications only represents individuals seeking employment in technology-related occupations. It does not include nonsensitive fields, such as modeling, architecture, and accounting, as Commerce notes in its comments. We therefore targeted our analysis to applications involving employment that might result in access to sensitive technology that Commerce should control through its deemed export process. We have modified the language of our report to clarify how we developed this estimate. 5. In response to our recommendation in the draft report that Commerce establish a system for tracking visa cases referred to the field offices, Commerce provided us with documentation of the new case management system’s capabilities. Based on our review of documents describing the case-tracking capability of the new system, we have not included this recommendation in our final report.

Comments from the Department of Defense

GAO Contact and Staff Acknowledgments

GAO Contact

GAO Acknowledgments

In addition to the individual named above, Pierre Toureille, Lynn Cothern, Julie Hirshen, Richard Slade, and Jennifer Li Wong made key contributions to this report.

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