STATEMENT FOR THE RECORD
MR. ARTHUR SHULMAN
GENERAL COUNSEL
WISCONSIN PROJECT ON NUCLEAR ARMS CONTROL
Hearing on Export Compliance: Ensuring Safety, Increasing Efficiency
House Committee on Foreign Affairs
Subcommittee on Terrorism, Nonproliferation, and Trade
May 20, 2008
I am pleased to appear before this distinguished Subcommittee to discuss the importance of strong export controls in stemming the spread of mass destruction weapons.
I will cover four topics. First, the dangers posed by the administration’s present effort to weaken the export licensing process; second, the need to improve industry's ability to police itself; third, the difficulties that will be created for verification and enforcement as the government continues to reduce licensing requirements; and fourth, the risks of transshipment and diversion posed by places like Dubai.
A nuclear sub-prime
crisis?
For over a decade, we have seen a
consistent push by industry to weaken U.S. controls on the export of militarily
sensitive technologies. Though tasked with protecting
There are a number of ways in which the administration has chosen to reduce controls. I will discuss two of them here today. First, there is the “Validated End-User” (VEU) program initiated last year by the Commerce Department. That program allows select companies to receive controlled dual-use goods without export licenses. Second, there are the defense trade cooperation treaties with the United Kingdom and Australia, now awaiting approval by the Senate. These treaties would create new "communities" of buyers in those two countries who could receive munitions items from the United States license-free.
Making sure the
"trusted" are trustworthy
Both the VEU program and the treaties depend on identifying "trusted" customers abroad. Yet, it is far from clear whether the government agencies seeking to rely on such "trusted" buyers are able and willing to screen carefully and to verify sufficiently. In January, my organization published a report on the VEU program. The report revealed that the "trusted" customers being chosen were not necessarily trustworthy.
The Commerce Department’s Bureau of
Industry and Security (BIS) claims to select each Validated End-User based on
"the entity's record of exclusive engagement in civil end-use activities,”
and on “the entity's relationships with U.S. and foreign companies," among
other factors. BIS also requires VEU applicants to supply an "overview of
any business activity or corporate relationship that the entity has with either
government or military organizations." All of this information is supposed
to be vetted by BIS and by an interagency committee, which must approve each
candidate unanimously. But our report on the program reveals that two of the
first five Chinese companies designated as VEUs are closely linked to
Part of the problem is that Commerce’s
procedures are not well-defined and appear to be getting weaker. For example,
BIS intended to rely on mandatory end-use visits in
The defense trade cooperation treaties with the United Kingdom and Australia are heading down the same dangerous path. The treaties establish new exemptions from export license requirements for arms trade with each of those countries. But the treaties, as well as their implementing arrangements, leave many important questions unanswered.
The treaties allow license-free arms exports to foreign buyers in "approved communities" and for an as-yet undisclosed list of “operations, programs and projects.” But as with the VEU program, details are unclear about which companies will be deemed "trusted," and how our government will ensure that they continue to be trustworthy. For example, it is unclear whether the government will screen freight forwarders and other intermediaries involved in arms sales under the treaties. The treaties and their implementing arrangements are also vague about verification, site visits and inspections.
Both the VEU program and the treaty exemptions serve to decrease our government's role in controlling sensitive exports. This creeping abrogation of a key national security function is highly risky. By eliminating the pre-shipment checks performed by licensing officers, the responsibility for spotting and preventing diversion attempts shifts to the exporter - who may lack the necessary training and resources - and to customs officials, who may lack the ability to screen license-free exports adequately before they leave U.S. ports.
Greater reliance on
industry – with little help from
government
Although greater reliance is being placed on industry to screen its own transactions, industry has never received enough guidance from the government. An example is the Entity List maintained by BIS. The List is supposed to be a primary means for informing exporters about foreign entities that pose a risk of diversion. An exporter usually must apply to BIS for a license before selling to an entity on the List. The List, however, is incomplete and out of date, especially its China section. For example, an organization listed seven years ago as "13 Institute, China Academy of Launch Vehicle Technology, (CALT), a.k.a. 713 Institute or Beijing Institute of Control Devices" is no longer part of CALT. It is now subordinate to the China Aerospace Times Electronics Corporation (CATEC). Another entry is a mystery: "Xiangdong Machinery Factory." There are several entities in China with current or former names that can be translated in full or in part as "Xiangdong Machinery Factory," yet the List supplies no other identifying information about the entity it means to designate.
The Entity List is wholly insufficient to help exporters identify the risky companies and organizations of which they should be wary. Despite criticism from auditors and requests from industry and national security advocates, little has been done to ensure the currency and usefulness of information now on the List.
For several years, the Wisconsin
Project has tried through various channels to convince BIS that the Entity List
must be updated and made more useful. This spring, we grew tired of waiting and
decided to do the work ourselves. In April, we posted on our website (at www.wisconsinproject.org) an
annotated version of the Entity List's
Revising the Automated
Export System: H.R. 5828
The automated export compliance screening proposed for the Automated Export System (AES) by H.R. 5828 also has great potential for helping exporters. It would make classification decisions for exporters, and would screen their transactions against the restricted party lists. Such services are now available commercially, but are not affordable for some exporters.
Although H.R. 5828 contains sound ideas, it does not go far enough to make AES what it must become in light of the current trend toward reduced licensing. The following changes would improve the bill:
Verification and enforcement
are more difficult without export licenses
The GAO has noted concerns from the Justice Department and from Customs about investigating and prosecuting violations when exemptions from licensing requirements apply. The GAO found that "it is particularly difficult to obtain evidence of criminal intent since the government does not have license applications and related documents that can be used as proof that the violation was committed intentionally." In addition, the Justice Department itself has pointed to the importance of the “domestic evidentiary trail” created by the licensing process, and warned that licensing exemptions for countries (like those created by the munitions treaties) could “greatly impede the ability of the law enforcement community to detect, prevent and prosecute criminal violations." In the absence of export licenses, it appears that the Automated Export System will be the only record the U.S. government has of exports under "trusted" customer programs. Further, the House International Relations Committee has noted the inclination of the courts to “view the licensing requirement as highly relevant to the establishment of a person’s legal duty under U.S. law” and the tendency of federal prosecutors to “regard the absence of a license requirement as signifying an activity of lesser importance to the U.S. government…”
As fewer exports of sensitive goods are screened by licensing officials, export control must also rely more on Customs to review outgoing shipments and verify the self-policing activities of industry. But there is evidence that Customs may not be up to the task. Customs and Border Protection (CBP) of the Department of Homeland Security (DHS) is charged with inspecting outbound shipments. But in September 2007, the DHS Inspector General reported that "outbound shipments are not consistently targeted and inspected by CBP Officers at the ports for compliance with federal export laws and regulations … because CBP does not devote sufficient resources to the function [and] does not have the information necessary to effectively monitor the program." Immigration and Customs Enforcement (ICE), also at DHS, is responsible for investigating export violations. But ICE is also responsible for immigration enforcement. The rapidly growing demands of this competing function may well diminish the resources available for export control.
Oversight remains
necessary
Until last year, the Inspectors General of the Departments of Commerce, Defense, Energy, and State, in consultation with the Director of Central Intelligence and the Director of the Federal Bureau of Investigation, were required by statute to assess whether export controls and counterintelligence measures are adequate for preventing the acquisition of sensitive U.S. technology and technical information by countries and entities of concern. The Inspector General at the Department of Homeland Security also participated in these reviews. The Inspectors General identified numerous shortcomings, prompting improvements. These reviews should be re-instituted and made permanent.
Transshipment and Diversion – the case of the United Arab Emirates
The subcommittee has asked me to
discuss the risks of transshipment and diversion. I would like to offer for
inclusion in the record an article listing transshipments of dangerous items
through
My organization has documented how
Dubai and other points in the United Arab Emirates have served for decades as the
main hubs in the world for nuclear and other smuggling. In the 1980's, several
shipments of heavy water, a nuclear reactor component, were smuggled from
China, Norway and the Soviet Union through Dubai to India, so India could use
its reactors to create plutonium for nuclear weapons. In the 1990's, companies
in Dubai willingly coordinated the notorious smuggling network of Pakistani
scientist A. Q. Khan. Through Dubai to Iran were shipped two containers of gas
centrifuge parts from Mr. Khan’s laboratories for about three million dollars
worth of U.A.E. currency. Also in the 1990's, a
Even more recently, American-made computer circuits received by Mayrow General Trading in Dubai were diverted to Iran, and eventually turned up in unexploded roadside bombs in Iraq. Other dual-use goods - including specialized metals, aircraft parts and gas detectors - have also continued to move through Dubai to Iran, Syria and Pakistan. Until the Mayrow discovery, the U.S. government had quietly pressed Emirates officials (with little success) to monitor U.S.-origin dual-use goods in the UAE, and to do more to prevent their diversion. After Mayrow, the administration issued what was widely viewed as a public threat to the Emirates. The Commerce Department proposed in February 2007 to designate "Destinations of Diversion Concern," and to impose additional restrictions on exports to such places.
But the proposal stalled after UAE
officials promised to adopt an export control law. The law was adopted last
year, and Emirates officials point to a handful of enforcement actions since
then. Nevertheless, export control experts and even
My organization supported the "Destinations of Diversion Concern" proposal when it was issued, and recommended that the United Arab Emirates be so designated immediately. I recommend now that Congress take this step through legislation. Such a designation would send a strong public signal that there are consequences for choosing profit over international security. The UAE should be treated the same way for export control purposes as countries like Pakistan that are using it as a diversion point.