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

Letter

Background

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.

Ex-Im Revised and Implemented Guidance to Address Weaknesses in Monitoring the End Use of Dual-Use Items

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.

Ex-Im Revised Its Guidance for Monitoring End Use

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.

Ex-Im Has Implemented the Revised Guidance

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.

Ex-Im Has Notified Buyers of Documentation Deadlines

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.

Ex-Im Has Begun to Systematically Document Dual-Use Monitoring Activities

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.

Ex-Im Has Made Determinations Regarding Compliance with Dual-Use Policy

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.

Ex-Im Did Not Finance Any New Dual-Use Export Transactions in 2014, According to Application Data and Ex-Im Reviews

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.

Agency Comments

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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: Comments from the Export-Import Bank of the United States

Appendix III: GAO Contacts and Staff Acknowledgments

GAO Contact

Kimberly Gianopoulos, (202) 512-8612 or Gianopoulosk@gao.gov.

Staff Acknowledgments

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.

Related GAO Products

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.