	Background

		Export Control System

The current U.S. export control system seeks to limit sensitive items from  falling into the wrong hands and, at the same time, allow legitimate trade  to occur. When  compliance activities, such as end-use checks, result in unfavorable  determinations, Commerce or State may take further action, such as  denying a license or referring involved entities to enforcement agencies  for investigation and possible penalties. These activities include (1)  vetting transactions prior to export by screening applications against four  categories of lists of parties of concern, among other steps, (2) analyzing  shipping data and monitoring end use of items, and (3) educating  companies and foreign governments about the risks of illicit  transshipment, although State’s outreach efforts have been largely  inactive since 2008. To confirm that the results of  end-use checks are incorporated into the license application review  process, we analyzed a random, nongeneralizable sample of 21 State  end-use checks and 56 Commerce end-use checks during our site  visits in Hong Kong, Singapore, and the UAE. The VEU is an export  licensing framework that allows validated end users to receive eligible  items on the Commerce Control List without a license. Commerce and State address illicit transshipment risk by verifying the  end use of controlled items. For example, agencies discovered that U.S. electronics  components and devices were used to build improvised explosive devices  that were deployed against Coalition forces in Iraq after they were illicitly  transshipped to Iran through Hong Kong. Exporters and Foreign Governments about Illicit Transshipment Risks, but One Program Is Largely Inactive

To educate companies and foreign governments about illicit  transshipment risks, agencies have programs to review the internal  controls of U.S. companies’ compliance programs, conduct outreach to  U.S. companies and universities, and provide training to foreign  governments. In contrast,  several compliance officials stated that risks could include the burden on  Commerce’s and State’s capacity to monitor the end use of an increased  number of items and the loss of information prior to export resulting from  fewer license requirements. However, the agencies did not evaluate the  implications of these risks on their resource needs. Agencies Propose to Move Items from State to Commerce and to Introduce a New License Exception

As an interim step to creating a single control list, the administration  proposed revising the list of items controlled by Commerce and State. Agencies Have Not Fully Assessed Potential Impact of Control List Reforms on All Compliance Activities but Have Assessed the Estimated Resource Impact on License Review

U.S. agencies have not fully assessed the potential impact that export  control reform of control lists might pose for the resource needs of the  range of compliance activities agencies undertake, as suggested by  federal internal control standards and executive branch requirements. State also has not  assessed the risks of reform proposals on its compliance activities. Agencies have stated some potential benefits for national security and for  exporters as a result of reform. In  fact, Commerce has focused more end-use checks on unlicensed items. Requiring this information, according to BIS, would  allow it to determine more quickly the accuracy of a claimed use of  authority to ship without a license or pursuant to a license exception, in  some transactions. Appendix I: Scope and Methodology

In this review, we (1) examined how U.S. agencies use compliance  activities to address the risk of illicit transshipment and (2) analyzed the  extent to which U.S. agencies assessed the impact of the export control  reform on the resource needs of compliance activities. We also analyzed available data, including licensing  statistics, numbers of end-use checks for 13 transshipment countries,  numbers of designations on various lists for entities from the 13 GAO- designated transshipment countries, numbers of 13 transshipment  countries that are partner countries for Export Control and Related Border  Security program training, Department of Commerce correspondence to  Validated End-User designees, and agency outreach materials for  companies. To analyze the extent to which agencies assessed the potential impact of  the export control reform initiative for the resource needs of compliance  activities, we reviewed the proposed export control reform initiatives,  White House press releases on the export reform initiatives, relevant  executive orders, Federal Register notices, comments from the public,  relevant laws and regulations, and agency documentation and studies on  the proposed impact of the reform initiative on their compliance activities. We identified eight export control compliance activities that the  Departments of Commerce, State, and Treasury conduct to encourage  compliance with export control laws and to prevent the diversion or  misuse of exported items against U.S. allies or interests. Export Controls: Improvements Needed to Prevent Unauthorized  Technology Releases to Foreign Nationals in the United States.
Why GAO Did This Study

To protect its national security and commercial interests, the United States has implemented an export control system to limit sensitive technologies from falling into the wrong hands. The Department of State regulates U.S. defense exports and the Department of Commerce regulates dual-use exports that have commercial and military applications. Each agency uses a separate control list of items that may require a license to export. Agencies use compliance activities to prevent the diversion or misuse of exported items against U.S. interests or allies. Misuse can occur through illicit transshipment, the diversion of items from their origin through an intermediary country to an unauthorized destination. In 2010, the President announced reforms to the export control system.
This review examines (1) agencies compliance activities to address transshipment risk and (2) the extent to which U.S. agencies assessed the impact of export control reforms on the resource needs for compliance activities. GAO analyzed U.S. licensing data for 13 transshipment countries and visited Hong Kong, Singapore, and the United Arab Emirates.

What GAO Found

U.S. agencies engaged in export controls use various compliance activities to prevent the diversion or misuse of exported items against U.S. interests or allies and reduce illicit transshipment risk. Compliance activities include (1) vetting transactions prior to export, (2) analyzing shipping data and monitoring the end use of items, and (3) educating companies and foreign governments about illicit transshipment risks. To vet transactions, agencies review license applications for the export of controlled items, consult multiple lists of entities known or suspected of violating export control laws or regulations, and screen foreign end users to determine their eligibility to receive items without a license. Agencies also review shipping records to identify patterns of abuse and to plan end-use checksvisiting foreign companies to verify the approved use and location of exported items on both licensed items and those eligible for export without a license. From 2008 to 2010, Commerce conducted 56 percent of its end-use checks on unlicensed exports. In the 13 transshipment countries, unlicensed exports accounted for about 94 percent of unfavorable end-use check determinations, which indicates that the end use or end user of an export were not appropriate. For example, some unlicensed items transshipped illicitly to Iran through Hong Kong were used to build improvised explosive devices used against Coalition troops in Iraq. When an unfavorable determination is made, the Department of Commerce (Commerce) or Department of State (State) may take further action, such as denying a license or referring involved entities to enforcement agencies for investigation and possible penalties. To educate U.S. companies and foreign governments about illicit transshipment risks, Commerce and State review the internal controls of companies compliance programs; conduct outreach to U.S. companies to inform exporters of their responsibilities to comply with export control laws and regulations; and provide training to foreign governments.
Agencies have not fully assessed the potential impact that control list reforms may pose for the resource needs of their compliance activities. Agencies estimate that Commerce will receive between 16,000 and 30,000 additional license applications as a result of proposed reforms to move less sensitive items from State to Commerce. Agency documents state that this step would allow them to focus resources on items most critical to national security and may make compliance easier for exporters because Commerce imposes fewer requirements than States controls. However, Commerce has not assessed the impact this added responsibility would have on its end-use check resource needs. Also, under the reforms, fewer items may require export licenses, thereby reducing uncertainty as to whether export sales will be approved. Some agency officials suggested potential risks, such as an increased need for more end-use checks and the loss of information from reviewing exports through the licensing process prior to export. The agencies have not yet assessed the impact of these potential risks on their resource needs.

What GAO Recommends

GAO recommends that Commerce and State should assess the potential impact of control list reforms on the resource needs of their compliance activities. Commerce and State concurred with GAOs recommendation.