Defense Trade: Clarification and More Comprehensive Oversight of Export Exemptions Certified by DOD Are Needed
Released: 2007-10-19T00:00:00

Letter

Background

Authority for controlling the export of defense items is provided through the Arms Export Control Act, and these exports are regulated through the ITAR by State Department’s Directorate of Defense Trade Controls. While most defense items require a license for export, the ITAR contains numerous exemptions from licensing requirements that have defined conditions and limitations. For exports that directly support DOD activities, such as exports related to defense cooperative programs, exporters may claim an exemption from licensing requirements pursuant to the written request, directive, or approval of DOD. In doing so, DOD certifies that the export appropriately qualifies for one or more of a limited number of applicable ITAR license exemptions. As with all exemptions, the exporter decides whether to export using an exemption and bears ultimate responsibility for complying with requirements in the ITAR.

In May 2000, the Administration announced 17 proposals as part of its Defense Trade Security Initiative—an effort to facilitate cross-border defense cooperation and streamline U.S. export controls. One proposal was that DOD make more effective use of ITAR exemptions to facilitate exports that further U.S. government interests in defense cooperation with allies and friendly nations. To clarify exemption use, DOD’s Defense Technology Security Administration (DTSA)—which is responsible for developing and implementing DOD security policies on international transfers of defense-related goods, services, and technologies—issued guidelines in March 2004 for certifying U.S. exporters’ use of certain ITAR exemptions. These guidelines were provided to the military services, given that they are primarily responsible for managing and implementing international defense cooperative programs.

Guidelines for DOD’s Certification of Exemption Use Have Raised Some Concerns by State

In support of defense activities, DOD components prepare letters certifying the use of certain exemptions by exporters under State’s export control regulations. The approach used by the military services for certifying the use of ITAR exemptions is set forth in DOD guidelines. Nonservice DOD components also certify the use of exemptions but are not subject to the guidelines, which were not issued departmentwide. Some of these nonservice components had created or were creating their own guidelines, which could lead to confusion regarding certain certification practices. State, as the regulator of defense exports, has raised concerns about the guidelines not clearly explaining the purpose and scope of the exemptions available to DOD, and State and DOD disagree on contractors’ use of one exemption that has been certified by DOD components.

Military Services’ Approach for Certifying ITAR Export Exemptions Is Set Forth in DOD Guidelines, but These Guidelines Were Not Issued DOD-wide

Some ITAR exemptions apply to exports that directly benefit DOD activities, ranging from support of defense cooperative programs, such as the Joint Strike Fighter, to providing equipment and technical services necessary to support U.S. forces in foreign locations. For such exemptions, DOD confirms whether the export activity appropriately qualifies for the use of an exemption and typically documents this confirmation in a written letter directly to the exporter or sometimes to the cognizant DOD program office that the exemption will benefit.

Typically, the letters identify the ITAR sections that pertain to the exemption, the type and purpose of the export, the destination country, and a time frame for the export to occur (see fig. 1).

In March 2004, DOD issued guidelines to the military services that were intended to provide a level of oversight for the exemption certification process, such as establishing elements of authority and record-keeping requirements. The guidelines included the following procedures for certifying exporters’ use of ITAR exemptions in support of DOD’s activities: Established authorized exemption officials within each service to certify the use of ITAR exemptions. These designated general officers or senior executive service personnel in the military services are responsible for overall management and oversight of the exemption certification process.

Provided elements for the certification, to include (1) a tracking number for the certification; (2) ITAR exemption citation number; (3) name of the exporter for whom use of the exemption is certified; (4) the reason/purpose for certifying use of the exemption and benefit to the U.S. government; (5) description of the specific defense article, service, or technical data exempted; (6) conditions and limitations as necessary to establish a clearly defined scope for defense articles, services, and technical data authorized for export and any handling, control, or accountability measures deemed necessary; (7) the foreign end users; and (8) the expiration date—not more than 1 year from date of issue.

Required the military services to enter data on exemptions into a centralized DOD database.

Stated that DTSA would annually report on the services’ exemption certification data to State.

Restated requirements in the ITAR that exemptions may only be certified for use by eligible U.S. persons registered with the Department of State, Director of Defense Trade Controls; and that U.S. persons must comply with ITAR requirements for use of exemptions, including applicable criteria and limitations. DOD certifications do not supersede other ITAR requirements for use of exemptions.

Listed five exemptions that relate to exports of defense items—such as technical data pursuant to a written DOD request, shipments of defense items by or for U.S. government agencies, or plant visits (classified or unclassified) (see table 1).

DTSA officials stated that DOD has not determined the need for a departmentwide directive or instruction on certifying the use of ITAR exemptions. Because all nonservice DOD components currently are not subject to existing DOD guidelines, officials at some nonservice components that we spoke with had created or were in the process of creating their own exemption guidelines. A lack of common guidelines could lead to inconsistent certification practices. In addition, some confusion exists regarding certain certification practices. For example, an official from one of the four nonservice components questioned whether the component could provide certifications for exporters with which it had contracts or whether the cognizant military service that maintained the overall contract would need to provide the certification. This official continues to certify exemptions for such exporters with which it contracts.

State and DOD Disagree on the Use of Certain Exemptions by Contractors and the Comprehensiveness of DOD’s Exemption Guidelines

State officials, who regulate and control the export of defense items, have raised concerns about DOD’s exemption certification guidelines. Specifically, DTSA provided State with proposed revisions to its guidelines in April 2006, and in response, State provided DTSA with written comments raising concerns with the guidelines. According to senior-level export control officials at both State and DOD, they met to discuss areas of disagreement but were unable to reach resolution. To date, State and DOD have not resolved fundamental areas of concern.

First, State disagreed with DOD’s certification of exporters’ use of the exemption under ITAR section 126.4(a). According to State officials, language in this section indicates that the exemption is only designed for use by U.S. government personnel for U.S. government end-use and is not designed to be used by contractors. DTSA disagreed on this point and stated that the section’s phrase “by or for any agency of the U.S. government” indicates that the exemption can be used by contractors when their work is directed by DOD for its own benefit. In the most recent draft iteration of the guidelines, DTSA now plans to further define responsibility for certifying this ITAR exemption, removing some certification responsibility from the military services in an attempt to provide greater control over its use. However, DTSA officials stated that DOD plans to continue to certify the use of this exemption.

Second, State indicated that the guidelines to the military services are not clear on the purpose and scope of the exemptions available to DOD. State suggested that DOD revise its guidelines to include (1) ITAR sections 126.6(a) and 126.6(c) on foreign military sales to provide further context, citing that their inclusion would inform the military services that other ITAR exemptions are provided for the exclusive use of DOD in the conduct of its official business, and (2) ITAR section 125.4(b)(3)—the provision of technical data in furtherance of a contract between the exporter and the U.S. government if the contract provides for the export of data—which State identified as one that may be certified by DOD for use by exporters when conducting DOD’s mission. State also noted that the use of each exemption is pursuant to the conditions and terms specified in the ITAR and that the exporter should be directed to the relevant ITAR sections. DTSA officials stated that its guidelines only include those ITAR sections that specifically provide for exemption use for exports at the direction or approval of DOD. DTSA officials further stated that the foreign military sales process is defined separately in the ITAR and that DOD has its own system and process for reporting to State on foreign military sales. (The complete text of cited ITAR sections under discussion can be found in app. II.)

Finally, State suggested that DTSA be the certifying entity for all other DOD components outside of the military services and that all certifying organizations be trained in the evaluation of certification requests and the application of DOD guidelines. DTSA officials plan to include in the revised guidelines a provision that nonservice DOD components seek guidance from their respective general counsel, as is the current practice.

DOD is in the process of revising its guidelines, which are set to expire in December 2007. These revisions are partially in response to State’s concerns, and DOD is planning to submit them to State for its review. However, to date, State and DOD officials have not reached agreement on these issues, and the lack of common understanding of regulatory exemption use could result in inconsistent application of the regulations.

DOD Components Certified the Use of Exemptions for a Variety of Programs and Foreign Recipients

On the basis of over 1,100 certification letters that DOD components provided to us and our review of them, DOD components certified the use of over 1,900 exemptions for multiple companies and various programs from 2004 through 2006. Most of the exemptions were for exports of technical data or services for Air Force or missile defense programs and for exports to long-standing allies.

We identified a number of DOD components that certified the use of ITAR exemptions by exporters. These components varied widely in the number of certifications they issued—ranging from 24 to more than 1,040. Table 2 summarizes highlights of our analysis of export exemptions certified by various DOD components.

Of the components we identified, the Missile Defense Agency and the Air Force provided us about 80 percent of the exemption certification letters that we reviewed. Almost all of the certifications were for the export of technical data or for the temporary export of defense items “by or for any agency of the U.S. government for official use by such an agency.” About half of the certifications were for the use of ITAR section 125.4(b)(1) for the export of technical data, including classified information, typically related to a particular program, such as Joint Strike Fighter or Upgraded Early Warning Radar, with allies during discussions at scheduled meetings or participation in technical conferences in foreign locations. In addition, almost 30 percent of the certifications were for ITAR section 126.4(a), such as exports of technical data, defense services, or hardware in support of joint military exercises. ITAR section 126.4(a) is the one that State and DOD disagree on its use by contractors. An additional 19 percent of the certifications cited both of these ITAR sections. Less than 3 percent of the ITAR exemptions identified were for transfers of software and hardware— primarily for use by U.S. forces outside of the United States, sometimes in support of operations in Iraq. Twenty-one of the certifications issued by two nonservice components cited ITAR section 125.4(b)(3)—technical data in furtherance of a contract between the exporter and the U.S. government if the contract provides for the export of data.

More than 270 exporters, including prime contractors and subcontractors, were identified in exemption certification letters we reviewed. The most frequently identified exporters were defense contractors, but university laboratories and federally funded research and development centers were also identified. Four major defense contractors represented one-fourth of the exemption certifications, with one receiving over 200 certifications. However, more than 80 percent of the exporters were identified five or fewer times in the certifications we reviewed from DOD components. A total of 266 different programs and activities were identified in the certifications, with the Missile Defense Agency having the largest number. Over 90 foreign destinations, including NATO, were identified on DOD certifications. The most frequently cited destination country was the United Kingdom—identified 900 times. Thirteen countries were only identified once as exempted export destinations—some of which were situations in which U.S. entities located in the countries were the recipients, not the foreign government or industry of that country. Some certifications were for exports to multiple countries within one geographic region, such as Latin America.

State and DOD Lack Complete Data to Oversee Exemptions Certified by DOD

State and DOD lack comprehensive data to oversee the use of DOD- certified exemptions, limiting their knowledge of defense activities under this process. DOD’s annual report to State on the use of exemptions captures data from the military services but not from other DOD components. In addition, the data may not capture the magnitude of transfers certified for exemption use. Specifically, we found that one DOD component used one letter to certify multiple companies’ use of an ITAR exemption during a 1-year period. This information was not included in the DOD component’s reporting on exemption certification use. In addition, we found that some of the certification letters that we reviewed lacked key information that could be helpful in overseeing exemptions certified by DOD components.

The DOD exemption guidelines state that the military services must record the exemption in a centralized DOD database. However, nonservice components, such as the Missile Defense Agency—which had the largest number of certifications from 2004 through 2006—do not record their exemption certification data in the centralized DOD database, known as USXPORTS. Instead, the nonservice components retain their own records on certified exemptions. In addition, DOD guidelines provide that DOD submit a report to State on exemptions certified for use on an annual basis. In July 2007, DOD submitted its 2006 report to State based on the data contained in USXPORTS. However, the utility of DOD’s report to State on exemption use is limited in several areas. First, since DOD collects data for only the military services, its exemption report to State does not provide total exemption data for all DOD components. Specifically, DOD’s report to State contained data on 161 certification letters issued by the military services in 2006; for the same year, we collected an additional 271 letters from nonservice components. Second, for each certification letter, the report contains (1) a certification tracking number, (2) certification date, (3) certifying organization, (4) destination country or countries, (5) description of export, and (6) exporter name. However, it does not contain other information that the DOD guidelines specify for inclusion in the certification letters and maintenance in the military services’ records on exemption certifications, such as which ITAR exemption is being certified and the expiration date for each exemption.

Therefore, State does not have a complete report for the exemptions certified for use by all of DOD’s components.

While the certification letters we reviewed frequently contained the information as called for in the DOD exemption guidelines, some differences existed that resulted in DOD not having insight into the magnitude of transfers certified for exemption use. For example, for its Joint Strike Fighter program, the Air Force issues an annual certification letter—to more than 50 companies—that certifies their use of one ITAR exemption for the purposes of responding to written requests from DOD for a quote or bid proposal. These letters are broad in scope and do not specify what technical data would be released for the program. When these companies listed on the certification letter cite a specific need for using this exemption throughout the year for an export, they submit their request directly to the program office. However, because the Air Force does not require the program office to report these specific data on these program office approvals for transfers, it is likely that the Air Force lacks comprehensive knowledge on exports transferred under the use of this ITAR exemption. From 2004 through 2006, we found that the Joint Strike Fighter program had authorized the release of more than 600 transfers of technical data under the quote or bid proposal exemption containing specific information—such as the types of technical data and related drawings exported and the frequency of these exports—which the Air Force lacks in its central record keeping on exemptions. Further, DOD’s 2006 report to State includes only the certification letter that was broad in scope, but it does not include the magnitude of transfers under this certification.

We found some variations in the type of information contained in the certification letters provided by the military services and non-service components, which can lessen DOD’s insight into the specific export activities that DOD is certifying. For example, 163 did not specify whether the foreign export destination entity was a foreign government, foreign industry, or U.S. entity. Over 70 certifications—about 4 percent of the total certifications we reviewed—did not contain an expiration date for the exemption; for the remainder, the length of coverage from certification date to expiration date ranged from less than 1 day to more than 4.5 years. The scope of the letters ranged from covering one exporter to covering multiple exporters, and about 30 percent of the certifications that we reviewed included subcontractors. While covering more than one exporter under one certification letter may create some workforce efficiencies, it could limit DOD’s insight into exporters receiving exemption certifications. In addition, this practice, while not specifically addressed in the DOD guidelines, has raised concern among some contractors that doing so could blur transparency and create some liability issues. Export control officials from each of the four companies we spoke with said they would prefer that each subcontractor have a separate certification letter from DOD to provide a clearer record of, and decrease their liability for, subcontractors’ exports.

Conclusions

While the exemption certification process is one way to facilitate defense cooperation with friendly nations and allies, the U.S. government needs a consistent approach to and knowledge of defense export activities certified through this process. However, State and DOD have disparate understandings of regulatory exemption use and guidance, and efforts to resolve these differences have proven unsuccessful. Further, neither State nor DOD has complete and accurate data to obtain sufficient knowledge of the extent to which all DOD components are certifying the use of exemptions for the export of defense items. Therefore, State and DOD cannot readily identify in total and on a program-by-program basis the defense items that DOD has certified for exemption use in support of DOD’s activities.

Recommendations for Executive Action

To ensure a common understanding of the use of ITAR exemptions available for DOD’s activities, we recommend that the Secretary of State direct the Deputy Assistant Secretary for the Directorate of Defense Trade Controls and the Secretary of Defense direct the Director of the Defense Technology Security Administration to establish a work group to define and resolve disagreements on exemption use and guidelines and to document decisions reached. If the work group cannot reach agreement before the existing DOD exemption guidelines expire, then it should elevate the matter for resolution within its appropriate chain of command. If needed, the Secretary of State should direct the Deputy Assistant Secretary for the Directorate of Defense Trade Controls to revise the ITAR to incorporate any necessary changes. Once agreement is reached, the Secretary of Defense, with concurrence from the Secretary of State, should direct that the guidelines be revised and made applicable to all DOD components.

We are also recommending that the Secretary of Defense should direct the Director of the Defense Technology Security Administration to ensure that the revised exemption certification guidelines provide the appropriate mechanisms for overseeing the exemption certification process, such as the collection of data from all DOD components on exemptions they certified.

Agency Comments

The Departments of Defense and State provided comments on a draft of this report. DOD also provided technical comments, which we incorporated as appropriate. In commenting on our first recommendation, Defense and State both concurred with the need to establish a work group to define and resolve disagreements on exemption use and guidelines, and to document decisions reached. State indicated that initial discussions with DOD have begun, and DOD stated that it plans to codify the understandings in a clear set of guidelines to be issued to DOD components.

In its comments on our second recommendation, DOD did not agree, stating that there is no existing mechanism whereby the U.S. government can collect data from exporters to monitor exports of defense items made under exemptions. DOD further stated that such a mechanism would exceed DOD’s existing statutory and regulatory authority because the ultimate responsibility for obtaining appropriate authorization to export defense items rests with the exporter. Our intent was not for DOD to collect information directly from exporters. Instead, our recommendation is intended for DOD to expand its existing data collection of exemptions certified by the military services to include those from all DOD components. To clarify this intent, we modified the language in the recommendation.

Formal written comments provided by DOD and State are reprinted in appendixes III and IV, respectively.

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Please contact me at (202) 512-4841 or calvaresibarra@gao.gov if you or your staff have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Others making key contributions to this report are listed in appendix V.

Appendix I: Scope and Methodology

To describe the approach used by the Department of Defense (DOD) for certifying the use of export exemptions for exporters, we reviewed export control regulations and discussed with the Department of State and DOD their interpretation of when DOD can certify that a specific export activity qualifies for the use of certain export exemptions. We reviewed DOD’s exemption certification guidelines, State’s response to the guidelines, DOD components’ internal guidance on exemption certifications, and DOD components’ practices. We also interviewed officials from State’s Directorate of Defense Trade Controls—from the Licensing, Compliance, Management, and Policy offices, and DOD’s Defense Technology Security Administration about their views on the International Traffic in Arms Regulations (ITAR) allowances for exemption use by exporters, requirements for DOD to direct the use of certain ITAR exemptions, and practices by DOD components that certify the use of exemptions by exporters in support of DOD activities.

We collected and summarized DOD export exemption certification letters for calendar years 2004 through 2006 to summarize the use of DOD- certified exemptions. We selected 2004 because the Defense Technology Security Administration (DTSA) issued guidelines on the certification process to the military services in that year. Prior to 2004, no formal procedures existed for designating senior-level personnel in the military departments for the authorization of ITAR exemption certifications. Through interviews with knowledgeable State and DOD officials, we created a list of DOD components potentially certifying the use of exemptions. While this coordination helped identify the DOD components certifying the use of exemptions, there may be other components that were not included in this list and additional exemption letters might exist. We then contacted the DOD components on our list to ask if they certified exemptions between 2004 and 2006. While some components on our list stated that they did not certify export exemptions, we collected certification letters from those DOD components that did certify the use of exemptions—the Air Force, Army, Navy, Missile Defense Agency, National Geospatial-Intelligence Agency, National Security Agency, and the Office of Acquisition, Technology, and Logistics. We created a database to summarize information provided in these certification letters, such as the exemptions certified, types of exports, and foreign recipients. In some cases, DOD components provided separate letters for each exporter receiving an exemption certification for an activity, while other components combined all exporters onto one exemption certification letter for an activity. Therefore, to get an equitable count, we separated individual companies from exemption certifications granted for multiple companies on one letter. The total number of exemption certification letters provided by the DOD components to us was 1,142. After separating out the individual companies from the certification letters, the total number of ITAR exemptions certified by the DOD components for the calendar years 2004 through 2006 totaled 1,960.

To examine the extent to which State and DOD oversee the use of export exemptions certified by DOD, we reviewed DOD’s 2006 report on certified exemptions provided to State in July 2007. We also interviewed DTSA officials about the USXPORTS automation system and what it contains. To gain a DOD acquisition program office perspective, we interviewed the Joint Strike Fighter Program Office about its exemption certification processes and practices. We compared the data of the program office with the data from the cognizant military service. We also interviewed officials from four of the companies—Boeing, Lockheed Martin, Northrop Grumman, and Raytheon—who most often received certification letters to gain their perspective on DOD components’ processes for and guidance to exporters on DOD-certified exemptions. We examined the certification letters we obtained from DOD components and identified differences among information contained in the letters.

Appendix II: ITAR Sections Discussed in This Report

We discussed in this report a number of ITAR subparts and sections that are cited in DOD certification letters, identified in DOD’s exemption certification guidelines, or are under discussion between State and DOD. These ITAR sections are cited below in their entirety.

Appendix III: Comments from the Department of Defense

Appendix IV: Comments from the Department of State

Appendix V: GAO Contact and Staff Acknowledgments

Acknowledgments

In addition to the contact name above, Anne-Marie Lasowski, Assistant Director; Lisa Gardner; Sharron Candon; Peter Grana; Arthur James, Jr.; Karen Sloan; and Marie Ahearn made key contributions to this report.

Related GAO Products

Export Controls: Vulnerabilities and Inefficiencies Undermine System’s Ability to Protect U.S. Interests. GAO-07-1135T. Washington, D.C.: July 26, 2007.

High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007.

Export Controls: Challenges Exist in Enforcement of an Inherently Complex System. GAO-07-265. Washington, D.C.: December 20, 2006.

Defense Technologies: DOD’s Critical Technologies List Rarely Informs Export Control and Other Policy Decisions. GAO-06-793. Washington, D.C.: July 28, 2006.

Export Controls: Improvements to Commerce’s Dual-Use System Needed to Ensure Protection of U.S. Interests in the Post-9/11 Environment. GAO-06-638. Washington, D.C.: June 26, 2006.

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