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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

April 2012: 

Export Controls: 

U.S. Agencies Need to Assess Control List Reform’s Impact on 
Compliance Activities: 

GAO-12-613: 

GAO Highlights: 

Highlights of GAO-12-613, a report to congressional requesters. 

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 checks-—visiting 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 State’s 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 GAO’s 
recommendation. 

View [hyperlink, http://www.gao.gov/products/GAO-12-613]. For more 
information, contact Thomas Melito at (202) 512-9601 or 
melitot@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Compliance Activities Address Illicit Transshipment Risk in Three 
Areas: 

Agencies Have Not Fully Assessed Potential Impact of Control List 
Reforms on Resource Needs for Compliance Activities: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Descriptions of Compliance Activities: 

Appendix III: License Application Review: 

Appendix IV: List Maintenance: 

Appendix V: End-Use Monitoring: 

Appendix VI: Comments from the Department of Commerce: 

Appendix VII: Comments from the Department of State: 

Appendix VIII GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Categories and Lists of Entities of Concern: 

Table 2: Descriptions of Compliance Activities: 

Table 3: Number of License Applications for Commerce and State for 13 
Transshipment Countries, Fiscal Years 2008–2010: 

Table 4: Commerce and State End-Use Checks, Fiscal Years 2008–2010: 

Figures: 

Figure 1: Total Commerce PSVs Conducted on Exports Shipped Without 
Prior U.S. Government Review Worldwide and in 13 Transshipment 
Countries, Fiscal Years 2008–2010: 

Figure 2: Unfavorable PSVs for Transshipment Countries, Fiscal Years 
2008-2010: 

Figure 3: Numbers of Parties on State and Commerce Watch List by 
Transshipment Country for 2011: 

Figure 4: Commerce’s End-Use Checks in 13 Transshipment Countries, 
Fiscal Years 2008–2010: 

Figure 5: State’s Blue Lantern End-Use Checks in 13 Transshipment 
Countries, Fiscal Years 2008–2010: 

Abbreviations: 

BIS: Bureau of Industry and Security: 

CCL: Commerce Control List: 

DDTC: Directorate of Defense Trade Controls: 

DOD: Department of Defense: 

EAR: Export Administration Regulations: 

ECO: Export Control Officer: 

EXBS: Export Controls and Border Security: 

OFAC: Office of Foreign Assets Control: 

PSV: post-shipment verification: 

SDN Specially Designated Nationals: 

STA: Strategic Trade Authorization: 

UAE: United Arab Emirates: 

USML: U.S. Munitions List: 

VEU: Validated End-User: 

WMD: weapons of mass destruction: 

[End of section] 

April 23, 2012 

The Honorable Susan M. Collins: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Jon Kyl: 
Ranking Member: 
Subcommittee on Crime and Terrorism: 
Committee on the Judiciary: 
United States Senate: 

To further its national security and economic interests, the United 
States controls the export of sensitive defense and dual-use items 
(having both commercial and military applications) to foreign 
governments and commercial entities. Such items can range from 
sophisticated technology designed for military use, such as F-15 
aircraft, to unsophisticated and commonly available electronic 
switches that have ultimately been used in improvised explosive 
devices by terrorists in Iraq and Afghanistan. The U.S. government 
seeks to limit the risk of sensitive items falling into the wrong 
hands, while allowing legitimate trade to occur and uses the export 
control system to balance these U.S. interests. Multiple federal 
agencies administer the laws, regulations, and processes that make up 
the regulatory compliance and enforcement framework governing the 
export control system. Primarily, the Department of State (State) 
regulates defense exports, and the Department of Commerce (Commerce) 
regulates dual-use exports.[Footnote 1] Each agency maintains a 
separate list of items to be controlled and exported with a license 
after government review, or without a license under designated 
exceptions. 

The U.S. government also conducts activities to encourage compliance 
with its export control laws and to prevent the diversion or misuse of 
exported items against U.S. interests or allies.[Footnote 2] 
Compliance activities include reviewing export license applications to 
decide whether to approve or deny them, visiting foreign companies to 
verify the approved use and location of exported items--referred to as 
end-use checks--and conducting courses for exporters--called outreach--
to inform them of their responsibilities to comply with export control 
laws and regulations. Of particular concern to the agencies conducting 
compliance efforts is illicit transshipment of items--the transfer of 
merchandise from its place of origin through an intermediary country--
to an unauthorized final destination such as Iran.[Footnote 3] Illicit 
transshipment challenges compliance efforts because it poses a 
significant risk to the safe transfer of sensitive U.S. technologies 
to authorized end users. 

Our reports to Congress and testimony at congressional hearings have 
highlighted the need for export control reform. We have called for, 
among other things, a strategic reexamination of existing programs 
within the U.S. export control system to identify needed changes and 
ensure the advancement of U.S. interests. In 2010, the United States 
announced a fundamental reform of its export control system, by 
proposing, among other things, to reduce the numbers and types of 
items requiring government review and licensing before export. Members 
of Congress raised concerns that, absent efforts to first address 
compliance and enforcement shortfalls, reform of the system could 
exacerbate current weaknesses, including the risk of illicit 
transshipment. 

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. 
This is the fourth in a series of four reports we have issued on this 
subject since November 2010. Our first report identified the extent to 
which agencies' actions and the proposed export control framework 
addressed findings in our previous reports in the areas of export 
control lists, licensing, enforcement, and information technology. 
[Footnote 4] Our second report, issued on March 14, 2012, was a 
version of this report containing information designated "For Official 
Use Only." Our third report, issued on March 27, 2012, covered the 
enforcement of U.S. export controls in light of the Export Control 
Reform Initiative.[Footnote 5] 

To address the two objectives of this review, we analyzed licensing, 
end-use monitoring, and other data from Commerce, State, and the 
Department of the Treasury (Treasury) for 13 transshipment countries 
and locations.[Footnote 6] We also drew a random, nongeneralizable 
sample of 56 Commerce end-use checks and 21 State end-use checks to 
determine how results from those activities were incorporated into 
other compliance activities. We identified export control compliance 
activities that 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. We 
identified these compliance activities through interviews with agency 
officials and review of documentation. Appendix II lists and describes 
the eight compliance activities that we reviewed. We met with U.S. 
officials of Commerce, the DOD, State, and Treasury, and 
representatives of companies in Washington, D.C., and with U.S. 
embassy and foreign government officials in Hong Kong, Singapore, and 
the United Arab Emirates (UAE). We reviewed documentation on agency 
actions taken to encourage compliance actions and interviewed U.S. 
government officials, including representatives of Commerce's Bureau 
of Industry and Security (BIS); DOD's Defense Technology Security 
Administration; State's Directorate of Defense Trade Controls (DDTC); 
and Treasury's Office of Foreign Assets Control (OFAC). We also spoke 
with export control reform task force members and reviewed recent 
White House press releases on the export reform initiatives. U.S. 
agencies engage in a variety of activities intended to foster 
compliance with U.S. export control law and regulations, and other 
activities to enforce these laws and exact penalties for violating 
them. We did not review enforcement activities that address 
investigations, civil and criminal penalties, seizures, indictments, 
prosecutions, or convictions as our third report addressed these 
activities. Commerce provided us with transshipment-related 
information that it controls as being "For Official Use Only." We have 
not included that information in this report but have instead 
incorporated it into a "For Official Use Only" report that is not 
publicly available. Appendix I discusses our scope and methodology in 
more detail. 

We conducted this performance audit from August 2010 to April 2012 in 
accordance with generally accepted government auditing standards. 
These 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. 

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. The export control system is governed by a 
complex set of laws, regulations, and processes and multiple federal 
agencies administer its regulatory framework and ensure compliance. 
State and Commerce each have a role in U.S. export licensing. 
Generally, exporters may submit a license application to State if 
their items are controlled on the U.S. Munitions List (USML) or to 
Commerce if their items are controlled on the Commerce Control List 
(CCL) to receive export approval. Exemptions are permitted under 
various circumstances, such as allowing for the export of certain 
items to Canada without a license. Even though many dual-use items do 
not require a license for export to most destinations, they are still 
subject to U.S. export control laws. All items subject to the Export 
Administration Regulations (EAR), whether or not on the CCL, require 
exporters to comply with the EAR.[Footnote 7] As part of the 
application review process, State and Commerce consult with other 
agencies, including DOD. Exporters require a license for most arms 
exports. In 2010, Commerce processed 21,660 export licenses, and State 
processed 82,937 export licenses.[Footnote 8] Additionally, offices 
within State, Commerce, Treasury, and the Departments of Homeland 
Security and Justice conduct compliance activities to identify 
potential violations or prevent them before they occur; they also 
conduct export control enforcement activities to identify and penalize 
violations after they 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. Enforcement also strives to prevent or deter the 
illegal export of defense and dual-use items, such as controlled 
components that were shipped to countries like Iran, which were later 
found in weapons and devices used against U.S. forces in Iraq. Export 
control enforcement activities include inspecting items to be 
exported, investigating potential export control violations, and 
pursuing and imposing criminal and administrative penalties against 
violators. 

The imposition of economic sanctions has been a long-standing tool for 
addressing a range of national security threats. As of February 2012, 
OFAC maintains primary responsibility for administering more than 20 
separate sanctions programs. These sanctions programs include (1) 
country-based programs that apply sanctions to an entire country--such 
as Iran, or Sudan; and (2) targeted, list-based programs that address 
individuals or entities engaged in specific types of activities such 
as terrorism, proliferation of weapons of mass destruction (WMD), or 
narcotics trafficking. For example, according to Treasury officials, 
they use the authorities under the International Emergency Economic 
Powers Act and Executive Order 13224 to designate those who provide 
support to terrorists, freezing any assets they have under U.S. 
jurisdiction and preventing U.S. persons from doing business with 
them.[Footnote 9] 

Export Control Reform Initiative: 

In August 2009, the President announced that he was directing a 
comprehensive review of the U.S. export control system. This review 
found that the U.S. export control system has a complicated structure 
with multiple agencies and control lists, which has led to 
jurisdictional confusion and hindered the ability of allies to 
cooperate with U.S. forces. In April 2010, the administration 
announced a reform framework that would create an export control 
system that is more effective, transparent, and predictable by 
creating a single control list, licensing agency, enforcement agency, 
and information technology system for licensing. The administration 
also found that licensing procedures and conditions are not 
consolidated or uniform across agencies, with various agencies 
monitoring and enforcing export controls.[Footnote 10] The current 
process relies on separate information systems, some of which are 
paper-based, which are not accessible to all agencies involved. 

Our past work has highlighted the need for export control reform 
through reports to Congress and testimony at congressional hearings. 
Over the last decade, GAO has made a number of key findings and 
recommendations directed to State, Commerce, DOD, Homeland Security, 
Justice, and Treasury, to improve the U.S. export control system. 
[Footnote 11] Some of the issues we identified include a lack of 
systematic assessments, poor interagency coordination, and 
inefficiencies in the license application process. 

The administration plans to begin implementing export control reforms 
through interim changes that can be carried out by regulation or 
executive order. Reforms requiring legislative action--creation of a 
single licensing agency, control list, and enforcement agency--will 
come last and had not been proposed as of March 2012. As of February 
2012, the administration has taken steps to implement export control 
reform including proposing regulations to move controlled export items 
from the USML to the CCL, and clarifying which items pertain to each 
list, and establishing an Export Enforcement Coordination Center by 
executive order.[Footnote 12] 

Transshipment and Diversion: 

In July 2010, a senior State official testified that transshipment 
hubs (i.e., countries or areas that function as major hubs for the 
legitimate trading and shipment of cargo) with weak controls on 
imports, exports, and reexports represent an important vulnerability 
to efforts to prevent illicit proliferation-related trade. Our 
previous work identified cases of illicit transshipment involving 
parties in UAE, Singapore, and Malaysia.[Footnote 13] As congressional 
attention focused on transshipment, members also raised concerns about 
the resources needed for compliance activities, domestically and 
overseas. For example, in the same July 2010 hearing, a member 
expressed concern that only one Commerce individual was stationed in 
the UAE to conduct end-use checks for dual-use exports.[Footnote 14] 
According to U.S. officials, Iran has obtained U.S. military and dual-
use goods that have been illegally transshipped by firms and 
individuals through locations in numerous countries, including the 
UAE, Malaysia, and Singapore. The goods included components for U.S.-
built fighter aircraft, electronics, and specialized metals. To 
address the problem, U.S. agencies have conducted undercover 
investigations to detect Iranian procurement networks, prosecuted 
criminal cases against at least 30 firms and individuals for 
transshipping or attempting to transship goods to Iran, and provided 
export control training and support to the UAE and other countries. 

Compliance Activities Address Illicit Transshipment Risk in Three 
Areas: 

U.S. agencies engaged in export controls use multiple compliance 
activities to reduce illicit transshipment risk. 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. 

U.S. Agencies Vet Transactions Prior to Export: 

To address illicit transshipment risks, agencies vet parties to 
transactions prior to export in three ways. First, agencies examine 
license applications to assess the transaction. Second, they vet 
individual parties to the transaction by, for example, confirming 
their credentials before issuing a license (a prelicense check). 
Third, agencies screen applicants to identify trusted end users for 
the Validated End-User (VEU) program. 

License Application Review Vets Transactions Prior to Export: 

When deciding to approve or deny an export license application, 
Commerce and State evaluate it against several factors, including an 
assessment of all parties to the transaction and how the recipient 
plans to use the item. Commerce factors the risk of illicit 
transshipment into the license application review process through a 
risk assessment tool that assigns a weighted score to an application, 
based on the level of concern associated with the listed party, 
country, product, and exporter. A high score may prompt further 
investigation and an end-use check by Commerce or embassy officials. 
In technical comments on a draft of this report, Commerce stated that 
the risk assessment tool would affect the license review process only 
when Commerce determined that a prelicense check would be necessary. 
In those cases, Commerce incorporates transshipment risk in the 
license application review process by dividing countries into three 
categories of risk, with the third category including countries 
identified as transshipment points. Commerce's list of highest risk 
countries includes 7 of the 13 transshipment countries in our review. 
For fiscal years 2008 through 2010, Commerce reviewed 63,304 license 
applications worldwide, 19,693 (31 percent) of which were for exports 
to the 13 transshipment countries we identified. It approved 84 
percent of license applications for these transshipment countries, 
denied 1 percent, and returned 15 percent of the applications to 
exporters without taking action on them.[Footnote 15] Appendix III 
contains additional information on the number of license applications 
that Commerce and State reviewed for the 13 transshipment countries 
between fiscal years 2008 and 2010. 

State conducts a case-by-case review of export license applications 
against established criteria or "warning flags" for determining 
potential risk of exporting USML items to foreign recipients. As part 
of the license review process, State may conduct a prelicense end-use 
check to provide more information on the transaction before it acts on 
the license application. State's guidance on conducting end-use checks 
(known as Blue Lantern monitoring) identifies three broad categories 
that may trigger an end-use check, including whether there are 
indicators for transshipment through multiple countries or companies. 
[Footnote 16] For fiscal years 2008 through 2010, State reviewed 
164,998 license applications worldwide and 28,550 for exports to the 
13 transshipment countries (17 percent of all applications).[Footnote 
17] It approved 86 percent of license applications for these 
countries,[Footnote 18] denied 1 percent, returned without action 13 
percent, and suspended or revoked 1 percent of preexisting licenses. 
[Footnote 19] 

Treasury does not review licenses for the 13 transshipment countries 
because none of these countries is an embargoed or sanctioned country. 
However, it assesses illicit transshipment risk when it licenses goods 
to several destinations, such as Iran and Sudan, in its administration 
of U.S. embargoes and sanctions. According to Treasury officials, OFAC 
screens end users in the license review process against the sanctions 
lists it administers because it assesses the risk of illicit 
transshipment or of reexport when placing individuals on these lists. 

Agencies Screen Applications against Four Categories of Lists of 
Parties of Concern: 

Commerce, State, and Treasury each maintain several screening lists 
that inform the licensing process by providing information on entities 
of concern to licensing officers and the public. These lists encompass 
a range of designations including those related to proliferation of 
WMD, terrorism, and actions contrary to U.S. national security and 
foreign policy interests. We reviewed four categories of lists 
outlined in table 1 below.[Footnote 20] 

Table 1: Categories and Lists of Entities of Concern: 

Category: Additional Licensing Requirements; 
List: Entity List; 
Agency: Commerce; 
Description: List of parties that are subject to specific license 
requirements for the export, reexport, and/or in country transfer of 
specified items. Parties on this list are subject to licensing 
requirements. 

Category: Unverified Parties; 
List: Unverified List; 
Agency: Commerce; 
Description: List of persons in foreign countries who were parties to 
past export transactions where prelicense checks or postshipment 
verifications could not be conducted for reasons outside the control 
of the U.S. government. 

Category: Prohibited and Sanctioned Parties; 
List: Specially Designated Nationals List; 
Agency: Treasury; 
Description: List of blocked persons, blocked vessels, specially 
designated nationals, specially designated terrorists, specially 
designated global terrorists, foreign terrorist organizations, and 
specially designated narcotics traffickers whose assets are blocked 
and U.S. persons are generally prohibited from dealing with them. 

Category: Prohibited and Sanctioned Parties; 
List: Nonproliferation Sanctions List; 
Agency: State; 
Description: List of parties that have been sanctioned under various 
statutes, designed to combat the proliferation of WMD. 

Category: Internal Watch Lists; 
List: Watch List - State; 
Agency: State; 
Description: List of parties whose association with an export license 
application indicates a need for closer examination by licensing 
officers. 

Category: Internal Watch Lists; 
List: Watch List - Commerce; 
Agency: Commerce; 
Description: List of individuals and companies that Commerce has 
determined warrant increased scrutiny for export licensing purposes, 
including those companies that receive unfavorable end-use checks. 

Source: GAO analysis of agency documents. 

[End of table] 

* Entity List: Commerce's considerations for additions to the Entity 
List include the end use of allegedly transshipped items. For example, 
on October 31, 2011, the End-User Review Committee added a firm 
located in Hong Kong and Singapore for diverting U.S.-origin items 
from Hong Kong to Iran.[Footnote 21] The diversion was part of the 
efforts of a larger procurement network that arranged for the 
transshipment of radio frequency modules from Singapore to Iran for 
use in improvised explosive devices found in Iraq. Placement of an 
individual's name on the Entity List notifies exporters of a potential 
licensing requirement or a ban on exports. In August 2008, Commerce 
expanded criteria for addition to the Entity List to allow an entity 
to be placed on the list if there is reasonable cause to believe, 
based on specific and articulable facts, that the entity has been 
involved, is involved, or poses a significant risk of becoming 
involved in activities that are contrary to the national security or 
foreign policy interests of the United States. As of December 2010, at 
least 56 percent of the 359 entities on the Entity List[Footnote 22] 
were from the 13 transshipment countries in our review. 

* Unverified List: The Commerce Unverified List is a public list that 
includes the names and countries of foreign entities that were parties 
to transactions for which Commerce could not conduct a prelicense 
check or postshipment verification (PSV) due to factors outside of 
U.S. government control. The list informs the licensing process by 
providing exporters with information about entities of concern. For 
example, we determined that, of the 36 persons or entities currently 
on the Unverified List, 78 percent are from the 13 transshipment 
countries we reviewed. When Commerce established the Unverified List 
in 2002, it advised exporters that the participation of a person on 
this list in any proposed transaction would raise a ''red flag'' for 
exporters under established guidance. Commerce stopped updating the 
Unverified List after it expanded the scope of the Entity List in 
August 2008 and is considering eliminating the Unverified List in 
2012. Commerce officials said that they will review the Unverified 
List and assess the 36 entities currently on it against criteria for 
inclusion on the Entity List, transferring them, if warranted, on a 
case-by-case basis. Commerce will monitor the entities that are not 
transferred through its internal Watch List. 

* State and Treasury Sanctions Lists: State and Treasury publish lists 
of individuals sanctioned under various statutes for activities 
relating to concerns ranging from nonproliferation to drug 
enforcement. Treasury officials indicated that both direct exports and 
transshipments from the United States to a sanctioned entity or to an 
embargoed country without authorization constitute diversion and are 
thus violations. For example, in December 2008, Treasury sanctioned an 
Iranian shipping line for facilitating the transport of cargo and 
employing deceptive shipping practices to advance Iran's nuclear and 
missile programs. Additionally, Treasury designated the company's 
subsidiaries in four transshipment countries--China, Malta, Singapore, 
and UAE. Of the 4,929 designations on the Specially Designated 
Nationals (SDN) list, 167 were from the 13 transshipment countries. 
[Footnote 23] 

* State and Commerce Watch Lists: State and Commerce screen parties 
named in a license application against internal Watch Lists, which 
include participants added because of illicit transshipment risk. 
Specifically, Commerce and State both add names of entities identified 
through unfavorable end-use checks, including names of entities from 
transshipment countries, to the Watch Lists.[Footnote 24] According to 
State and Commerce, officials check all names on every export license 
application against their Watch Lists. As of September 2011, State's 
Watch List contained 100,248 entities, of which 8,731 (about 9 
percent) were from the 13 transshipment countries we reviewed. As of 
November 2011, the Commerce Watch List contained 36,849 active 
entities, of which 8,309 (about 23 percent) were from the 13 
transshipment countries we reviewed. Appendix IV details the numbers 
of entities from each transshipment country listed on State and 
Commerce Watch Lists for 2011. 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.[Footnote 25] We submitted 11 unfavorable 
checks to State to determine the actions in response to the 
unfavorable determinations. State placed or updated the placement of 9 
of the 11 entities identified in these unfavorable end-use checks on 
agency watch lists and referred 6 to State's enforcement division for 
possible investigation. For Commerce, according to its Watch List 
guidance, all companies that receive unfavorable prelicense checks or 
PSVs are placed on the Watch List. However, for the 26 end-use checks 
with unfavorable results that we submitted to Commerce, we could not 
confirm that Commerce placed the names of the associated entities on 
its Watch List. 

Agencies may also conduct a prelicense check to verify the credentials 
of a party in advance of approving a license. A prelicense check may 
include a site visit to the proposed end user or consignee. Commerce 
and State may also seek the input of other agencies, particularly DOD, 
to vet transactions by reviewing end-user history and other factors. 

Commerce Screens Applicants to Identify Trusted End Users for the VEU 
Program: 

Commerce screens applicants for a variety of factors, including 
reexport, to identify trusted end users for the VEU program.[Footnote 
26] The VEU is an export licensing framework that allows validated end 
users to receive eligible items on the Commerce Control List without a 
license. As of November 2011, Commerce conferred VEU status on 11 
companies from 2 countries, China--one of the 13 GAO-designated 
transshipment countries--and India. The End-User Review Committee 
considers factors such as the entity's record of compliance with U.S. 
export controls and its willingness to host on-site reviews by U.S. 
government personnel to ensure program compliance.[Footnote 27] 
Commerce also vets potential recipients of VEU authorizations with the 
law enforcement and intelligence communities. In addressing illicit 
transshipment risk, Commerce requires VEU applicants to adhere to 
conditions on diversion, retransfer, and reexport of specified items. 

Agencies Address Illicit Transshipment Risk by Analyzing Shipping Data 
and Monitoring End Use of Items: 

To confirm exporters' and recipients' adherence to U.S. export control 
requirements, Commerce and State analyze shipping data and conduct end-
use checks of items exported overseas. They use these activities to 
confirm compliance with export control requirements by verifying the 
end use of controlled items and by reviewing export documentation for 
potential violations. 

Two Agencies Analyze Shipping Information to Identify Illicit 
Transshipments and Other Potential Violations: 

Both Commerce and State analyze shipping information to identify 
illicit transshipments and other potential violations of export 
control laws. The Census Bureau maintains shipping information on U.S. 
exports in the Automated Export System, the primary instrument for 
collecting export trade data. The U.S. government requires exporters 
to file shipping information with the system for any items subject to 
Commerce or State control, whether they need licenses or are eligible 
for exceptions. 

Commerce uses data from the Automated Export System to determine 
exporter's compliance with the EAR on items subject to licensing 
requirements, select candidates for end-use checks, and target other 
compliance and enforcement activities. In addition, Commerce used 
available Automated Export System and international Customs data to 
develop a methodology that assesses the potential risk of illicit 
diversion of items on the Commerce Control List. This methodology is 
part of a Commerce developed Transshipment Identification Strategy 
that also included the publication of seven best practices for 
preventing diversion through transshipment points. U.S. agencies have 
assessed a risk of illicit transshipment from Hong Kong to mainland 
China, from UAE to Iran, and from China to Iran. 

State also uses shipping information as part of its end-use monitoring 
program to identify illicit transshipments and other forms of 
diversion. Specifically, State officials said that they check shipping 
information against approved license applications for discrepancies 
when considering whether to initiate an end-use check and use such 
information to verify the exporter's use of license exemptions. For 
example, in fiscal year 2009, State reported reviewing 35,000 
shipments to Canada made under an exemption specific to that country. 
As a result of that review, State reported initiating eight end-use 
checks to verify the credentials of end users who were listed on 
State's Watch List. State determined that the export in question did 
not result in a diversion. Like Commerce, State obtains shipping data 
from the Automated Export System maintained by the Census Bureau, 
pursuant to a Memorandum of Understanding with that organization. As 
the Memorandum of Understanding expired in November 2011, State and 
Census must complete a new Memorandum of Understanding for State to 
continue receiving this shipping data, according to a senior Census 
Bureau official. A State official stated that they continued to 
receive the shipping data between November 2011 and February 2012, but 
Census stopped providing this data, pending completion of a new 
Memorandum of Understanding, according to the Census Bureau official. 

Commerce and State Verify End Use of Controlled Items: 

Commerce and State address illicit transshipment risk by verifying the 
end use of controlled items. Guidance for both agencies identifies 
illicit transshipment as a factor to consider in assessing the need 
for end-use checks. 

Commerce's End-Use Checks for Transshipment Countries: 

Commerce may conduct an end-use check on any item subject to the EAR 
that is exported. Commerce's authority to conduct PSV checks is 
established in the Export Administration Act of 1979, which provides 
the legal and administrative basis for U.S. controls on dual-use 
exports and is supplemented by the EAR. According to Commerce, PSV 
checks strengthen assurances that exporters, shippers, importers, and 
end users comply with the terms of export license and licensing 
conditions. Commerce conducts PSV checks to confirm that the dual-use 
item arrived at its destination and is being used as intended. 
Commerce Export Control Officers (ECO), special agents, or other U.S. 
government personnel visit companies overseas to meet with importers 
or end users in an attempt to verify the use and location of these 
items. 

Our analysis of end-use checks, where Commerce made a favorable or 
unfavorable determination, indicated that Commerce focused its efforts 
on transshipment countries; it conducted 57 percent of 1,412 end-use 
checks for fiscal years 2008 to 2010 in the 13 transshipment countries 
we reviewed. Of these checks, 33 percent were unfavorable. Appendix V 
provides additional data on end-use checks for the 13 transshipment 
countries. The three locations where we conducted site visits--Hong 
Kong, Singapore, and UAE--represented about 36 percent of Commerce end-
use checks conducted globally for this period and nearly 62 percent of 
unfavorable determinations worldwide. 

To address transshipment concerns in Southeast Asia, Commerce 
stationed an ECO in Singapore, with regional responsibilities in 
Malaysia, Indonesia, Thailand, and the Philippines to conduct end-use 
checks, among other duties.[Footnote 28] Commerce end-use check 
guidance indicates that ECOs should be aware of warning signals, 
including whether a consignee is aware of relevant restrictions to the 
reexport or retransfer of the item. For fiscal years 2008 through 
2010, Commerce conducted 49 percent of all its end-use checks in five 
locations: UAE, Hong Kong, Singapore, Taiwan, and China. Moreover, 
Commerce determined that 62 percent of all unfavorable end-use checks 
for this period occurred in three of these locations: Hong Kong, the 
UAE, and Singapore. 

Commerce also conducts a significant number of its PSVs on unlicensed 
exports.[Footnote 29] Specifically, Commerce conducted 913, or about 
56 percent, of the 1,619 checks on such transactions. Moreover, 
Commerce checks on unlicensed exports shipped in the 13 transshipment 
countries accounted for 70 percent of all such checks worldwide. 
Figure 1 shows the numbers of Commerce PSVs conducted on unlicensed 
exports in the 13 transshipment countries. 

Figure 1: Total Commerce PSVs Conducted on Exports Shipped Without 
Prior U.S. Government Review Worldwide and in 13 Transshipment 
Countries, Fiscal Years 2008-2010: 

[Refer to PDF for image: pie-chart and sub-chart] 

PSVs conducted on licensed exports worldwide: 44% (706); 
PSVs conducted on unlicensed exports worldwide: 56% (913): 
* PSVs on licensed exports in transshipment countries: 70% (636); 
* PSVs on licensed exports in nontransshipment countries: 30% (277). 

Source: GAO analysis of Commerce data. 

[End of figure] 

Commerce can conduct a PSV on any exported item for any reason related 
to a compliance concern, such as an enforcement investigation, 
intelligence information, or other information that analysts have 
available to them. Additionally, in technical comments on a draft of 
this report, Commerce stated that PSVs on licensed exports are more 
likely to result from commodity or regional concerns, including 
transshipment, which will prompt further scrutiny to ultimate or 
intermediate consignees even though they are known not to be the end 
user. 

Between 2008 and 2010, 223 (94 percent) of the 238 Commerce 
unfavorable postshipment checks in transshipment countries were on 
unlicensed exports. Unfavorable postshipment checks on unlicensed 
exports in the 13 transshipment countries accounted for 88 percent of 
all unfavorable postshipment checks in these countries in 2008 and 
rose to 97 percent in 2010. (See figure 2.) 

Figure 2: Unfavorable PSVs for Transshipment Countries, Fiscal Years 
2008-2010: 

[Refer to PDF for image: stacked vertical bar graph] 

Fiscal year: 2008; 
Licensed: 13%; 
Unlicensed: 88%. 

Fiscal year: 2009; 
Licensed: 6%; 
Unlicensed: 94%. 

Fiscal year: 2010; 
Licensed: 3%; 
Unlicensed: 97%. 

Source: GAO analysis of Commerce data. 

Note: Numbers may not add due to rounding. 

[End of figure] 

Items exported without a license may pose risks to U.S. national 
security, according to U.S. government officials. These items include 
those not on the CCL and those on the CCL that do not require a 
license to certain destinations. 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. 
According to Commerce officials, the U.S. government established an 
interagency task force consisting of several defense intelligence 
units, and Treasury's Financial Crimes Enforcement Network, to address 
the threat posed by these devices. 

EAR items subject to license requirements have also been transferred 
without a license to unauthorized destinations through transshipment 
points. It is the policy of the U.S. government to facilitate U.S. 
exports to legitimate civilian end users in the People's Republic of 
China (China), while preventing exports that would enhance the 
military capability of that country. Commerce officials stated that 
integrated electronic circuits have been diverted to China (a 
destination requiring a license for these items) through Hong Kong 
(where no license is required). A senior Commerce official stated that 
certain types of integrated electronic circuits contribute to China's 
military advancement. 

State's End-Use Checks for Transshipment Countries: 

The Arms Control Export Act, as amended in 1996, requires, to the 
extent practicable, that end-use monitoring programs provide 
reasonable assurance that recipients comply with the requirements 
imposed by the U.S. government in the use, transfer, and security of 
defense articles and services.[Footnote 30] In addition, end-use 
monitoring programs are to provide assurances that defense articles 
and services are used for the purposes for which they are provided. 
Accordingly, under State's monitoring effort known as the Blue Lantern 
program, State conducts end-use monitoring of direct commercial sales 
of defense articles and services and related technology. Specifically, 
a PSV is used (1) to confirm whether licensed defense goods or 
services exported from the United States have been received by the 
party named on the license and (2) to determine whether those goods 
have been or are being used in accordance with the provisions of that 
license. 

Our analysis of State end-use checks under its Blue Lantern program 
showed that State focused a smaller portion of its end-use checks on 
transshipment countries than did Commerce. According to U.S. and Hong 
Kong government officials, the risk of illicit transshipment of dual-
use exports is higher than for military exports, in part because 
proliferators hide their relatively small number of proliferation-
related transactions--most of which involve dual-use items--within a 
large volume of fast-moving commercial goods. For fiscal years 2008 
through 2010, State conducted 26 percent of the total number of end-
use checks in the 13 transshipment countries we reviewed; 22 percent 
of these checks were unfavorable. In conducting end-use checks, State 
guidance indicates that end-use check officers are required to 
determine that the proposed end user appears to be a reliable 
recipient of sensitive U.S. defense articles, technology, or services, 
and that the end user is familiar with U.S. restrictions with respect 
to use, transfer, or reexport. See appendix V for more detailed 
information on Commerce and State end-use checks. 

Agencies Educate U.S. 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. 

Commerce helps firms address illicit transshipment risk by conducting 
an informal review of firms' compliance programs at the firms' 
request. Commerce reviews the written procedures and internal controls 
for a company's compliance program against Commerce's Export 
Management Compliance Program guidelines to help it develop an 
internal control program that can thwart diversion of technologies to 
countries of concern. The Export Management Compliance Program 
guidance identifies indicators of risks posed by transshipment, such 
as insufficient compliance safeguards throughout the shipping process 
and unverified end destination addresses. In fiscal year 2010, 
Commerce conducted 18 reviews of corporate written compliance programs 
and conducted two 2-day and three 1-day seminars on developing an 
export management and compliance program in various U.S. cities. 

Commerce and State officially have outreach programs to educate 
industry on issues, including illicit transshipment risks. Commerce's 
outreach program expanded in 2011 to increase its focus on illicit 
transshipment, but State's program is largely inactive. Between 
January and November 2011, Commerce has conducted approximately 24 
outreach events across the United States. Commerce has added a 
training session on its Best Practices for Preventing Unlawful 
Diversion of U.S. Dual-Use Items Subject to the Export Administration 
Regulations, Particularly through Transshipment Trade, published in 
August 2011, which identifies seven best practices that guard against 
diversion risk, particularly through transshipment. A Commerce 
official stated that, due to the ongoing risk of illicit diversion of 
controlled items subject to the EAR, Commerce has added the best 
practices component to outreach events. 

State's program to visit companies has been largely inactive since 
2008. This program had considered transshipment risks and was in place 
to determine whether companies were properly exercising their 
regulatory responsibility in licensing and compliance. State also used 
the information gathered from visits to adjust or revise U.S. 
regulations and practices. State visited more than 60 companies 
between October 2005 and September 2008. While State has made two such 
visits since 2008, the visits were made to companies due to ongoing 
enforcement actions, rather than mainly for outreach. 

State also addresses illicit transshipment risk by conducting export 
control training of foreign governments through its Export Controls 
and Border Security (EXBS) program. In determining the countries of 
focus for EXBS, State conducts country-by-country threat assessments 
to determine the points of greatest risk, assessing risk factors in a 
given country, including the risks of diversion, production, and 
proliferation. EXBS categorized as a diversion risk 9 of the 13 
transshipment countries we examined; 7 of those countries are 
currently EXBS partner countries.[Footnote 31] In fiscal years 2009 
and 2010, EXBS conducted training in the UAE, which included a seminar 
on how to investigate, survey, detect, and interdict unauthorized 
transfers of items. EXBS announced in its 2011 Strategic Plan that 
transit and transshipment trade will be a priority, and EXBS will work 
with each shipment hub to build its capacity to target transit and 
transshipment cargo efficiently, without negatively affecting 
legitimate trade and competitiveness. 

Agencies Have Not Fully Assessed Potential Impact of Control List 
Reforms on Resource Needs for Compliance Activities: 

State and Commerce have not fully assessed the potential impact of 
reforming the agency control lists and transferring items from State 
to Commerce on the resource needs of their compliance activities. 
Assessing impact includes analyzing the potential benefits and risks 
of the control list reforms, but the agencies lack information on how 
control list changes will impact their resource needs for conducting 
compliance activities. They expressed the view that some benefits 
would likely include a reduced compliance burden for industry and 
enhanced national security for the United States by focusing on items, 
destinations, and end users of concern. In the one assessment that it 
performed, Commerce estimated financial benefits of one regulatory 
change but did not assess any potential risks to compliance activities 
beyond licensing. 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. Thus, Commerce proposed a rule in July 2011 
establishing a structure to move items from the USML to the CCL that 
the President has determined no longer need to be controlled on that 
list.[Footnote 32] As we previously reported, an interagency task 
force created export control criteria to determine the items and 
technologies that should be controlled by Commerce or State.[Footnote 
33] A DOD-led interagency team is currently revising the lists so 
controlled items will be identified using objective criteria such as 
horsepower, speed, and accuracy rather than maintaining an item on the 
USML simply because, historically, its form and fit has associated it 
with a military item. Those items that do not remain on the USML after 
this review will move to Commerce's jurisdiction. As of January 2012, 
State has proposed revisions to 5 of 20 categories of military items. 
The 5 categories include items such as tanks, aircraft, and 
submersible vessels. Proposed revisions to 4 of the 5 USML categories 
would change the USML controls on generic parts, components, 
accessories, and attachments that are specifically designed or 
modified for a defense article to control specific types of parts, 
components, accessories, and attachments.[Footnote 34] Items whose 
functions provide immediate tactical utility without modification will 
remain on the USML, while all other items would move to the CCL. 

Those items moved to the CCL may also become eligible for export for 
ultimate government end use to the destinations identified on a new 
license exception known as the Strategic Trade Authorization (STA). In 
June 2011, Commerce finalized this new license exception to allow 
exports of certain items without a license to countries determined to 
be low risk.[Footnote 35] These items would be subject to certain 
notification requirements. Specifically, the STA authorizes certain 
exports that Commerce now controls for multiple reasons to 36 
destinations, many of which are NATO allies or export control regime 
participants.[Footnote 36] Further, the exception authorizes certain 
exports to an additional eight countries but limits the exception for 
items that Commerce now controls for national security reasons only. 
[Footnote 37] These countries include four transshipment countries 
that we reviewed, Hong Kong, Singapore, Malta, and Taiwan. The 
licensing exception imposes additional requirements, such as directing 
the exporter, reexporter, or transferor to exchange information with 
the recipient regarding the applicable control list category number, 
and stating that the export occurs under the STA exception to mitigate 
the risk of reexport to an unauthorized destination or end user. 

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. 
[Footnote 38] State and Treasury officials confirmed that they have 
not conducted such an assessment. In technical comments on a draft of 
this report, Commerce stated that it had conducted an assessment of 
compliance activities and that it is hiring eight dedicated compliance 
officers. However, Commerce provided no evidence of such an 
assessment. Moreover, Commerce's fiscal year 2013 Congressional Budget 
Justification did not identify the need for compliance officers in its 
request for 24 additional licensing officers. Although the 
administration intends to move up to 30,000 license applications from 
State's to Commerce's jurisdiction, Commerce is targeting only 850 end-
use checks in each of fiscal years 2013 and 2014, the same number it 
targeted for fiscal year 2012. Federal standards call for, among other 
things, a regulatory analysis to include the following three basic 
elements: (1) a statement of the need for the proposed action, (2) an 
examination of alternative approaches, and (3) an evaluation of the 
benefits and costs--quantitative and qualitative--of the proposed 
action and the main alternatives identified by the action. The 
evaluation of benefits and costs is to be informed by a risk 
assessment. In November 2011, Commerce' s Inspector General identified 
Commerce's need to ensure adequate resources to monitor compliance and 
to detect and prevent diversions of controlled technology in the 
context of export control reform as among its top management 
challenges for fiscal year 2012.[Footnote 39] 

Risk assessment is one of five standards for an internal control 
system that provides reasonable assurance that an organization will 
achieve effective and efficient operations, reliable financial 
reporting, and compliance with applicable laws and regulations. 
Commerce has not analyzed the impact of the reform on its compliance 
activities beyond estimating the number of State licenses that will 
move to its jurisdiction and potential resources needed to address 
them. State also has not assessed the risks of reform proposals on its 
compliance activities. According to a State official, current export 
control reform efforts are focused on revising the USML. The State 
official noted that, as items are moved from the USML to the CCL, the 
department will have better insight into potential impacts and will be 
able to assess resource needs. 

Agencies have stated some potential benefits for national security and 
for exporters as a result of reform. However, agencies did not provide 
an analysis supporting the expected benefits. According to agencies' 
statements, the U.S. government would: 

* have greater interoperability with NATO and other allies; 

* be able to focus its resources on sensitive technologies, 
destinations, and end users of higher risk than those found in NATO 
counterparts or other allies; and: 

* benefit from an enhanced defense industrial base by reducing the 
current incentives for foreign companies to avoid U.S. parts and 
components. 

State and Commerce documents identify the following four potential 
advantages to industry of moving items from the USML to the CCL: 

* relief from more stringent USML requirements, such as registration 
fees and the need to obtain manufacturing and technical assistance 
agreements; 

* reduction of license requirements; 

* simplification of license application procedures; and: 

* increased availability of exceptions.[Footnote 40] 

Commerce assessed the potential impact of control list reform on its 
resources only for the compliance activity of license application 
review. Commerce documents indicate that, as of July 2011, it did not 
have the workforce in place to accommodate the 16,000 to 30,000 
additional license applications estimated to result from the move of a 
significant number of items from the USML to the CCL without causing 
backlogs and delays. In March 2012, Commerce established a new office 
to adjudicate license applications and conduct other actions for items 
moved from the USML, and it has begun to solicit applicants to staff 
the office.[Footnote 41] Furthermore, according to a Commerce cost 
benefit analysis, the new STA license exception would help remove the 
burdens associated with applying for a license and reduce the 
uncertainty associated with the license application review process. 
Commerce's Bureau of Industry and Security (BIS) estimated that 
approximately 2,300 licensed transactions would have been eligible for 
the STA exception in 2010. Therefore, BIS estimated that the public 
benefit to foregoing the license application review for those 
transactions eligible for the STA exception could result in a savings 
ranging from $1.5 million to $5.1 million per year.[Footnote 42] BIS 
also stated that the license exception would reduce uncertainty by 
removing the need for U.S. exporters to inform prospective buyers of 
U.S. technology that sales are contingent upon government approval for 
each transaction. BIS also estimated that the license exception would 
benefit the government by allowing Commerce to focus its licensing 
resources on transactions of greater risk than those eligible for the 
STA exception. BIS officials stated that the STA exception would not 
increase costs to the government. 

Agency Officials Identified Two Potential Risks of Reform for 
Compliance Activities, but Agencies Have Not Assessed Implications of 
These Risks on Resource Needs: 

Although U.S. agencies have not fully assessed the risks and resource 
implications that reform of export control lists may present in 
implementing compliance activities, agency officials conducting those 
activities identified two potential risks. These include an increased 
workload at Commerce from the transfer of thousands of license 
applications from State's to Commerce's jurisdiction, as well as the 
loss of information from the licensing process prior to export. 
Neither Commerce nor State has conducted a detailed risk assessment of 
the impact of the reforms on any of the compliance activities they 
undertake besides licensing and their associated workforce needs. 
Standards for Internal Control in the Federal Government indicates 
that internal controls should provide for an assessment of the 
external and internal risks the agency faces and that management needs 
to address. 

A Commerce official also stated that a reduction in exports needing 
licenses would likely make compliance activities, such as end-use 
monitoring, more difficult because officials use export licenses for 
some of the information they rely on. Without such information, U.S. 
officials conducting end-use checks might need to expend more time and 
resources obtaining the needed information, according to the official. 
In fact, Commerce has focused more end-use checks on unlicensed items. 
We found that unlicensed exports may also pose resource implications 
for compliance activities concerning specific transshipment countries--
Hong Kong, Singapore, and Taiwan. Items exported to these countries 
might be eligible to use a license exception for certain controlled 
items. Thus, some exports would avoid the need for prior government 
approval for each transaction. Commerce officials said that they might 
mitigate any risks that this might pose by shifting resources to 
target and increase compliance actions, such as outreach and shipping 
data analysis. In technical comments on a draft of this report, 
Commerce stated that it conducts end-use checks on unlicensed items 
now without significant difficulty and does not understand the basis 
for the conclusion that unlicensed exports may also pose resource 
implications for compliance activities concerning specific 
transshipment countries. However, BIS reported as recently as 2011 
that it is considering requiring exporters to include additional 
information in the Automated Export System for unlicensed exports. 
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. In addition, this information would enable BIS to target 
its end use checks of exports more effectively because it could select 
items of the greatest significance without extensive follow-up 
information from the exporter. By taking advantage of the additional 
information, BIS indicated that it could make more effective use of 
its enforcement resources. 

A State compliance official said that losing the information generated 
by license applications would make tracking entities and commodities 
that are at risk more difficult and resource intensive. State 
officials also noted that, if reform resulted in the removal of some 
license requirements for certain goods, then State would need to shift 
its emphasis on reviewing license application data to reviewing 
shipping data. Currently, most defense items require a license for 
export. However, in certain instances, arms may be exported without a 
license (i.e., under an exemption) but are still subject to the Arms 
Export Control Act. Fewer license requirements would mean that more 
compliance verification would need to be conducted after the item has 
shipped, thereby increasing the need for PSVs, according to the 
official. 

Conclusions: 

U.S. export control agencies generally address illicit transshipment 
risk in implementing their compliance activities, and Commerce, in 
particular, has focused on this risk by performing increased end-use 
checks in transshipment countries and on excepted or unlicensed items. 
Moreover, several of the agencies' compliance activities are 
interdependent. For example, the results of unfavorable postshipment 
verifications provide entity names for agencies to add to the 
sanctions and Watch Lists, and Watch Lists provide names that should 
be flagged for further scrutiny during the license review process. 
Therefore, changes that affect one compliance activity may also affect 
others. Despite this interdependence of compliance activities, 
agencies have not fully assessed the potential impact of the reform 
initiative that licensing and control list reforms may pose for 
resource needs. The administration's framework to reform U.S. export 
controls, with initial changes to Commerce and State control lists, 
may significantly affect the entire export control system. Moving 
numbers of items from State's control list to Commerce's list will 
shift the licensing burden for addressing concerns over misuse or 
diversion of these items in such countries from one agency to another. 
Moreover, control list reform may also shift the burden among various 
compliance activities in ways that cannot be anticipated without 
assessing the impact on resources of such changes for each activity. 

Recommendations for Executive Action: 

As the administration moves forward with its control list reforms, we 
recommend that the Secretaries of Commerce and State, in consultation 
with other relevant agencies, assess and report on the potential 
impact, including the benefits and risks of proposed export control 
list reforms, on the resource needs of their compliance activities, 
particularly end-use monitoring. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to Commerce, DOD, State, and 
Treasury for their review and comment. Both Commerce and State 
provided written comments, which we have reprinted in appendixes VI 
and VII, respectively.[Footnote 43] DOD and Treasury did not provide 
comments on the draft. Commerce and State also provided technical 
comments, which we incorporated in this report, as appropriate. 

Commerce and State agreed with our recommendation to assess and report 
on the potential impact of export control list reforms on the resource 
needs of their compliance activities. State said that it will be in a 
better position to evaluate the resource needs for compliance 
activities, to include end-use monitoring, as decisions are made on 
moving items from the USML to the CCL. It stated that its intent to 
dedicate all necessary resources to compliance activities commensurate 
with the requirements of a revised USML remains unchanged. 

Commerce stated that, to the extent that information is available, BIS 
has used licensing data, public comments, and interagency expertise to 
address both benefits and risks of moving items from the USML to CCL. 
However, Commerce provided no evidence that it completed such an 
assessment or that it assessed the benefits and risks of control list 
reform changes on the range of other compliance activities discussed 
in this report. Nonetheless, the availability of such information 
shows that such an assessment can be done. 

Commerce also stated that several references throughout this report 
refer to the USML as "more stringent" and state that the CCL "imposes 
fewer requirements than State's controls." Commerce said it would be 
more accurate to say that the CCL's flexibility provides more options 
in protecting national security interests. However, State reported in 
its August 2011 Final Plan for Retrospective Analysis of Existing 
Rules that defense articles that do not require the stringent controls 
of the Arms Export Control Act will be moved to the jurisdiction of 
Commerce, where the licensing burden on exports can be dramatically 
reduced. Also, we reported in 2008 that, in most cases, Commerce's 
controls over dual-use items are less restrictive than State's 
controls over arms.[Footnote 44] Many items controlled by Commerce do 
not require licenses for export to most destinations, while State-
controlled items generally require licenses for most destinations. 
Also, some sanctions and embargoes only apply to items on State's U.S. 
Munitions List and not to those on the CCL. 

We are sending copies of this report to the appropriate congressional 
committees; the Secretaries of Commerce, Defense, State, and the 
Treasury; and other interested parties. In addition, the report is 
available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff members have any questions about this report, 
please contact me at (202) 512-9601 or at melitot@gao.gov. Contact 
points for our offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff who made key 
contributions to this report are listed in appendix VIII. 

Signed by: 

Thomas Melito: 
Director, International Affairs and Trade: 

[End of section] 

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. 
Commerce provided us with transshipment-related information that it 
controls as being "For Official Use Only." We have not included that 
sensitive information in this report but have instead incorporated it 
into a "For Official Use Only" report that is not publicly available. 
To examine how U.S. agencies use compliance activities to address the 
risk of illicit transshipment, we reviewed documents from the 
Departments of Commerce, State, the Treasury, and Defense, including 
guidance, staffing information, and Congressional Budget 
Justifications. We also interviewed officials at each agency. We then 
identified examples of cases for each compliance activity where agency 
documents or officials indicated that they implemented the compliance 
activity to address illicit transshipment risk. 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. We also 
reviewed relevant laws and regulations, interviewed U.S. and host 
country officials, and analyzed end-use monitoring and licensing data. 
To identify 13 transshipment countries, we examined prior GAO work on 
transshipment and external diversion; congressional testimony; 
countries with a Commerce Export Control Officer in place; input from 
the Departments of State, Commerce, Justice, and Homeland Security; 
countries with entities on either the Entity List or Unverified List; 
and a listing of the world's busiest transshipment ports. We 
interviewed host government officials in Hong Kong and Singapore to 
obtain information on joint efforts with the U.S. government to 
mitigate illicit transshipment risks. 

In examining the end-use monitoring compliance activity, we reviewed 
Departments of State and Commerce end-use monitoring activities 
through reviewing relevant program guidance, including State's Blue 
Lantern Guidebook, and cables associated with selected end-use checks. 
We interviewed officials in State's Directorate of Defense Trade 
Controls who administer the Blue Lantern program and reviewed export 
licenses. We also traveled to Singapore, Hong Kong, and the United 
Arab Emirates (UAE) to interview Blue Lantern points of contact and 
Commerce Export Control Officers. In examining State and Commerce end-
use checks, we conducted an analysis of global end-use check data for 
fiscal years 2008-2010 and data on those checks conducted in 
transshipment countries. We also reviewed a random, nongeneralizable 
sample of end-use checks records during our overseas visits to Hong 
Kong, Singapore, and UAE, during which we obtained information from 
State and Commerce officials on how they conduct end-use checks. We 
reviewed 21 State Blue Lantern end-use checks from fiscal year 2009 
and 2010 in Hong Kong and Singapore. Twelve of these 21 checks 
resulted in unfavorable determinations, and we confirmed that actions 
had been taken in 11 of those cases. For State end-use checks in UAE, 
we relied on a related GAO engagement (GAO-12-89) that reviewed State 
end-use monitoring in the UAE among other countries.[Footnote 45] We 
reviewed 56 Commerce end-use checks from fiscal year 2009 through the 
third quarter of 2011 in Hong Kong, Singapore, and UAE.[Footnote 46] 
We also examined the parties on the State and Commerce Watch Lists 
that were from the 13 transshipment countries we reviewed. 

We determined that the licensing data, end-use check data, and Watch 
List data were sufficiently reliable for the purpose of describing how 
U.S. agencies use compliance activities to address the risk of illicit 
transshipment. For the Departments of State and Commerce licensing 
data, we interviewed knowledgeable agency officials in coordination 
with other ongoing GAO reviews of export controls. We also reviewed 
technical manuals related to both departments' licensing databases and 
determined that they were both sufficiently reliable for us to report 
overall statistics for how many licenses were issued for fiscal years 
2009 and 2010, around the world, and for the number of licenses issued 
in this time period for transshipment countries. For end-use 
monitoring data, we also interviewed agency officials, consulted 
agency manuals, and compared the number of checks we received with 
data published by the agency. We determined that the end-use check 
information provided by the agency was reliable for the purposes of 
describing how agencies monitor the end-use of items to address the 
risk of illicit transshipment. For State and Commerce Watch List data, 
we interviewed agency officials about the sources of information they 
incorporate into the Watch List and reviewed the guidance agencies use 
in updating the Watch List. We determined that the data was 
sufficiently reliable for the purpose of describing how agencies 
monitor the end-use of items to address the risk of illicit 
transshipment. 

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 interviewed agency 
officials and interagency and export control reform task force members 
to gather information on the proposed reform initiatives and agency 
assessments of the benefits and risks posed by those initiatives. To 
gather industry input into the potential impact of proposed Export 
Control Reform initiatives, we met with industry representatives from: 
(1) The Aerospace Industry Association, (2) The National Council on 
International Trade Development, (3) The National Association of 
Manufacturers, and (4) the American Chamber of Commerce in Singapore. 

We conducted this performance audit from August 2010 to April 2012 in 
accordance with generally accepted government auditing standards. 
These 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. 

[End of section] 

Appendix II: Descriptions of Compliance Activities: 

Compliance activities provide information for exporters, licensing 
officials, and enforcement agencies to assess the validity of 
particular export transactions or to identify potential violations or 
prevent them before they occur. 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. Table 2 identifies and describes those eight 
compliance activities that are relevant to transshipment. 

Table 2: Descriptions of Compliance Activities: 

Compliance activity: License application review; 
Description: When deciding whether to approve or deny an export 
license application, State and Commerce evaluate it against several 
factors, including an assessment of all parties to the transaction and 
how the recipient plans to use the item. 

Compliance activity: End-use monitoring; 
Description: Prelicense or postshipment checks, including visits, to 
verify the bona fides of entities and appropriate receipt and use of 
controlled items. 

Compliance activity: Shipping data analysis; 
Description: Review of selected Shippers Export Declarations to 
identify Export Administration Regulation violations and refer them to 
the Office of Export Enforcement for further investigation. 

Compliance activity: Training; 
Description: A program of education, seminars, and workshops designed 
to help countries develop and improve their strategic trade and 
related border control systems. 

Compliance activity: Compliance program reviews; 
Description: Reviews and critiques of companies' programs to manage 
export-related decisions and transactions to ensure compliance with 
the Export Administration Regulations and license conditions. 

Compliance activity: List maintenance; 
Description: Lists that inform the licensing process by providing key 
information on entities of concern to licensing officers and the 
public. 

Compliance activity: Outreach; 
Description: Courses, workshops, seminars, visits for exporters to 
inform them of their responsibilities to comply with export control 
laws and regulations. 

Compliance activity: Validated end-user assessments; 
Description: Licensing framework that allows select screened end users 
to receive controlled items without a license. 

Sources: GAO analysis of Commerce, State, and Treasury data. 

[End of table] 

[End of section] 

Appendix III: License Application Review: 

When deciding whether to approve or deny an export license 
application, the Departments of State and Commerce evaluate it against 
several factors, including an assessment of all parties to the 
transaction and how the recipient plans to use the item. Table 3 shows 
the total number of Commerce and State license applications for fiscal 
years 2008 through 2010 worldwide and for the 13 transshipment 
countries that we reviewed, as well as their status for this period. 

Table 3: Number of License Applications for Commerce and State for 13 
Transshipment Countries, Fiscal Years 2008-2010: 

Agency: Commerce; 
Location: Worldwide; 
Number of license applications: 63,304; 
Number approved: 53,051; 
Number denied: 435; 
Number returned without action: 9,818. 

Agency: Commerce; 
Location: Transshipment; 
Number of license applications: 19,693; 
Number approved: 16,596; 
Number denied: 170; 
Number returned without action: 2,927. 

Agency: State; 
Location: Worldwide; 
Number of license applications: 164,998; 
Number approved: 82,902; 
Number denied: 865; 
Number returned without action: 20,319. 

Agency: State; 
Location: Transshipment; 
Number of license applications: 28,550; 
Number approved: 10,127; 
Number denied: 232; 
Number returned without action: 3,767. 

Sources: GAO analysis of Commerce and State data. 

[End of table] 

[End of section] 

Appendix IV: List Maintenance: 

U.S. export control agencies maintain lists that inform the licensing 
process by providing key information on entities of concern to 
licensing officers and the public. The top three locations with the 
most entities of concern, in order, were China, the UAE, and Hong Kong 
for the State Watch List and China, Hong Kong, and UAE for the 
Commerce Watch List. Figure 3 shows the numbers of parties on State's 
and Commerce's Watch Lists from the 13 transshipment countries that we 
reviewed. As of September 2011, State's Watch List contained 100,248 
parties, of which 8,731 (about 9 percent) were from the 13 
transshipment countries we reviewed. As of December 2011, the Commerce 
Watch List contained 36,849 active entities, of which 8,309 (about 23 
percent) were from the 13 transshipment countries we reviewed. 

Appendix V: End-Use Monitoring: 

Figure 3: Numbers of Parties on State and Commerce Watch List by 
Transshipment Country for 2011: 

[Refer to PDF for image: 2 vertical bar graphs] 

State Watch List: Number of parties: 
China: 2,972; 
UAE: 1,608; 
Hong Kong: 1,075; 
Singapore: 535; 
Malaysia: 460; 
Cyprus: 437; 
Taiwan: 419; 
Canada: 341; 
Jordan: 330; 
Thailand: 220; 
Malta: 184; 
Philippines: 78; 
Indonesia: 72. 

Commerce Watch List: Number of parties: 
China: 4,088; 
Hong Kong: 1,053; 
UAE: 875; 
Singapore: 555; 
Taiwan: 409; 
Canada: 343; 
Jordan: 217; 
Malaysia: 184; 
Cyprus: 170; 
Indonesia: 156; 
Thailand: 102; 
Malta: 88; 
Philippines: 69. 

Source: GAO analysis of State and Commerce data. 

[End of figure] 

[End of section] 

Our analysis of the Department of Commerce's end-use checks shows that 
Commerce focused its efforts on transshipment countries; it conducted 
57 percent of all end-use checks for fiscal years 2008 to 2010 in the 
13 transshipment countries we reviewed. Of these checks, 33 percent 
were unfavorable. In contrast, the Department of State conducted 26 
percent of all end-use checks for fiscal years 2008 to 2010 in the 13 
transshipment countries we reviewed. Table 4 shows end-use checks for 
Commerce and State for the 13 transshipment countries and worldwide 
for fiscal years 2008-2010. 

Table 4: Commerce and State End-Use Checks, Fiscal Years 2008-2010: 

Fiscal year: 2008; 
Total-worldwide: Commerce: 376; 
Total-worldwide: State: 543; 
Checks-transshipment countries: Commerce: 197; 
Checks-transshipment countries: State: 158; 
Percentage of checks in transshipment countries: Commerce: 52%; 
Percentage of checks in transshipment countries: State: 29%. 

Fiscal year: 2009; 
Total-worldwide: Commerce: 547; 
Total-worldwide: State: 649; 
Checks-transshipment countries: Commerce: 317; 
Checks-transshipment countries: State: 156; 
Percentage of checks in transshipment countries: Commerce: 58%; 
Percentage of checks in transshipment countries: State: 24%. 

Fiscal year: 2010; 
Total-worldwide: Commerce: 489; 
Total-worldwide: State: 723; 
Checks-transshipment countries: Commerce: 290; 
Checks-transshipment countries: State: 178; 
Percentage of checks in transshipment countries: Commerce: 59%; 
Percentage of checks in transshipment countries: State: 25%. 

Fiscal year: Total; 
Total-worldwide: Commerce: 1,412; 
Total-worldwide: State: 1,915; 
Checks-transshipment countries: Commerce: 804; 
Checks-transshipment countries: State: 492; 
Percentage of checks in transshipment countries: Commerce: 57%; 
Percentage of checks in transshipment countries: State: 26%. 

Source: GAO analysis of Commerce and State data. 

[End of table] 

For fiscal years 2008 through 2010, Commerce conducted about 57 
percent of the total number of end-use checks in the 13 transshipment 
countries we reviewed. (See figure 4.) 

Figure 4: Commerce's End-Use Checks in 13 Transshipment Countries, 
Fiscal Years 2008-2010: 

[Refer to PDF for image: pie-chart] 

13 transshipment countries: 57%: 
Other transshipment countries[A]: 116; 
Taiwan: 86; 
China: 88; 
Singapore: 125; 
Hong Kong: 179; 
UAE: 210
Others: 43% (608). 

Source: GAO analysis of Commerce end-use check data. 

Note: This figure represents only completed prelicense and 
postshipment verifications for 2008 through 2010. 

[A] Other transshipment countries include: Malta, Canada, Cyprus, 
Philippines, Jordan, Indonesia, Thailand, Malaysia. 

[End of figure] 

For fiscal years 2008 through 2010, State conducted about 26 percent 
of the total number of end-use checks in the 13 transshipment 
countries we reviewed; 22 percent of these checks were unfavorable 
(see figure 5). 

Figure 5: State's Blue Lantern End-Use Checks in 13 Transshipment 
Countries, Fiscal Years 2008-2010: 

[Refer to PDF for image: pie-chart] 

Transshipment countries: 26%; 
Other countries: 74%. 

Source: GAO analysis of State data. 

[End of figure] 

[End of section] 

Appendix V: Comments from the Department of Commerce: 

Note: GAO comments supplementing those in the report text appear at 
the end of this appendix. 

United States Department of Commerce: 
The Secretary of Commerce: 
Washington, D.C. 20230: 

March 9, 2012: 

Mr. Thomas Melito: 
Director, International Affairs and Trade: 
Government Accountability Office: 
441 0 Street, NW: 
Washington, DC 20548:  

Dear Mr. Melito: 

Thank you for the opportunity to comment on the draft report entitled, 
"Agencies Need to Assess Reform's Impact on Compliance Activities" GAO-
12-394SU.  

The Department of Commerce concurs with the recommendation made to the 
Secretaries of Commerce and State. As noted in more detail in the 
attached comments, the Bureau of Industry and Security continues to 
update assessments of both potential licensing volume and resources 
needed to help ensure exporter compliance with the proposed controls on 
items to be moved from the United States Munitions List to the 
Commerce Control List.  

If you have any questions, please contact Mark Crace in the Office of 
Administration at (202) 482-8093 or via e-mail at 
mark.crace@bis.doc.gov.  

Sincerely,  

Signed by: 
John E. Bryson: 

[End of letter] 

GAO-12-394SU: 

Export Control: Agencies Need to Assess Reform's Impact on Compliance 
Activities: 

Recommendation: 

1) Secretaries of Commerce and State, in consultation with other 
relevant agencies, assess and report on the potential impact, 
including the benefits and risks of proposed export control list 
reforms on the resource needs of their compliance activities, 
particularly end-use monitoring. 

The Bureau of Industry and Security (BIS) General Comments: 

* To address the increased volume, BIS has created a Munitions Control 
Division (MCD) within the Office of Strategic Industries and Economic 
Security to process license applications, and conduct compliance 
activities, for items proposed to be moved to the
Commerce Control List's (CCL) new "600 series" from the United States 
Munitions List (USML). MCD will have a staff of 24. 

* MCD will have eight compliance specialists who will work within the 
organization to monitor items shipped. These compliance specialists 
will work side-by-side with enforcement analysts to identify entities 
at which to conduct both end-use checks overseas and U.S. company 
onsite audits. 

* In addition, BIS is developing a new outreach and education model to 
address the new control structure. This model will go beyond existing 
outreach strategies to attract a large number of stakeholders who have 
traditionally received licenses from the Department of
State, including defense contractors and exporters, manufacturers, 
distributors, logistics and related transporters, and small and medium 
sized corporations who have had limited involvement in dual-use 
exporting. 

* To the extent that information is available, BIS has used licensing 
data, public comments and interagency expertise to address both 
benefits and risks of moving items from the USML to CCL. The benefits 
include moving less sensitive munitions items, mostly parts and 
components, to a more flexible licensing regime, thus treating the 
export of tanks differently than the tank wheel-nut. 

* There are several references throughout the document, including on 
the first page and on page 22, in which the GAO refers to the USML as 
"more stringent" and states that the CCL "imposes fewer requirements 
than State's controls." It would be more accurate to say that the CCL 
provides more flexibility than the USML because it provides more 
options in protecting national security interests. 

Following are GAO's comments on the Department of Commerce's letter 
dated March 9, 2012. 

GAO Comments: 

1. Commerce stated that its new Munitions Control Division will 
include 24 personnel; eight of these 24 will be compliance specialists 
who will work within the organization to monitor items shipped. These 
compliance specialists will work with enforcement analysts to identify 
entities to conduct both end-use checks overseas and U.S. company 
onsite audits. However, the rationale for these eight compliance 
specialists is unclear. Commerce's fiscal year 2013 budget request 
listed only 24 licensing officers and Commerce did not provide us with 
any analysis to show that these would include specifically 8 
compliance specialists. In addition, while the administration intends 
to move up to 30,000 license applications from State to Commerce's 
jurisdiction, Commerce is targeting only 850 end-use checks for each 
fiscal year 2013 and 2014, which is the same number as for fiscal year 
2012. 

2. Commerce stated that, to the extent that information is available, 
BIS has used licensing data, public comments, and interagency 
expertise to address both benefits and risks of moving items from the 
USML to CCL. It stated that the benefits include moving less sensitive 
munitions items, mostly parts and components, to a more flexible 
licensing regime. However, Commerce provided no evidence that it 
completed an assessment of benefits and risks, nor that it assessed 
the benefits and risks of control list reform changes on the range of 
other compliance activities this report discussed. Nonetheless, the 
availability of such information shows that such an assessment can be 
done. 

3. Commerce stated that our report makes several references to the 
USML as "more stringent" and that the CCL "imposes fewer requirements 
than State's controls." Commerce said it would be more accurate to say 
that the CCL's flexibility provides more options in protecting 
national security interests. However, State reported in its August 
2011 Final Plan for Retrospective Analysis of Existing Rules that 
defense articles that do not require the stringent controls of the 
Arms Export Control Act will be moved to Commerce's jurisdiction, 
where the licensing burden on exports can be dramatically reduced. In 
addition, we reported in 2008 that, in most cases, Commerce's controls 
over dual-use items are less restrictive than State's controls over 
arms.[Footnote 47] Many items that Commerce controls do not require 
licenses for export to most destinations, while State-controlled items 
generally require licenses for most destinations. Also, some sanctions 
and embargoes only apply to items on State's USML and not to those on 
the CCL. 

[End of section] 

Appendix VI: Comments from the Department of State: 

United States Department of State: 
Chief Financial Officer: 
Washington, D.C. 20520: 

March 2, 2012: 

Mr. Loren Yager: 
Managing Director: 
International Affairs and Trade: 
Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548-0001: 

Dear Mr. Yager: 

We appreciate the opportunity to review your draft report,
"Export Controls: Agencies Need to Assess Reform's Impact on
Compliance Activities," GAO Job Code 320806. 

The enclosed Department of State comments are provided for 
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact
Steven Rice, Deputy Director, Bureau of Political-Military Affairs at 
(202) 663-2803. 

Sincerely, 

Signed by: 

James L. Millette: 

cc: GAO — Thomas Melito. 
PM — Andrew J. Shapiro. 
State/OIG — Evelyn Klemstine. 

[End of letter] 

Department of State Comments on GAO Draft Report: 
Export Controls: Agencies Need to Assess Reform's Impact on
Compliance Activities (GAO-12-394SU, GAO Code 320806): 

Thank you for the opportunity to comment on your draft report entitled 
"Export Controls: Agencies Need to Assess Reform's Impact on 
Compliance Activities." GAO's report recommends that the Secretaries 
of Commerce and State, in consultation with other relevant agencies, 
assess and report on the potential impact, including the benefits and 
risks of proposed export control list reforms, on the resource needs 
of their compliance activities, particularly end-use monitoring. 

The Department of State agrees with GAO's recommendation. As GAO 
points out on page 23 of its draft report, the Department will be in a 
better position to evaluate the resource needs for compliance 
activities, to include end-use monitoring, as decisions are made on 
moving items from the U.S. Munitions List (USML) to the Commerce 
Control List (CCL). Thus, our intent to dedicate all necessary 
resources to compliance activities commensurate with the requirements 
of a revised USML remains unchanged. 

[End of section] 

Appendix VII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Thomas Melito, (202) 512-9601 or melitot@gao.gov. 

Staff Acknowledgments: 

In addition to the individual named above, key contributors to this 
report were Joseph A. Christoff, Director (ret.); Jeff Phillips, 
Assistant Director; Richard G. Howland, Analyst-in-Charge; Mason 
Thorpe Calhoun; Alberto Leff; Elena McGovern; and Lynn Cothern. Martin 
de Alteriis, Justin Fisher, Mitchell Karpman, and Hai Tran provided 
assistance with design and methodology, statistics, data analysis, and 
technical expertise, respectively. Grace Lui provided legal support, 
Etana Finkler provided graphics support, and Joyce Evans, Jeremy 
Sebest, and Cynthia S. Taylor provided assistance in editing and 
report preparation. 

[End of section] 

Related GAO Products: 

Export Controls: Proposed Reforms Create Opportunities to Address 
Enforcement Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-12-246]. Washington, D.C.: March 27, 
2012. 

Persian Gulf: Implementation Gaps Limit the Effectiveness of End-Use 
Monitoring and Human Rights Vetting for U.S. Military Equipment, 
[hyperlink, http://www.gao.gov/products/GAO-12-89]. Washington, D.C.: 
November 17, 2011. 

Export Controls: Improvements Needed to Prevent Unauthorized 
Technology Releases to Foreign Nationals in the United States. 
[hyperlink, http://www.gao.gov/products/GAO-11-354]. Washington, D.C.: 
February 2, 2011. 

Defense Exports: Reporting on Exported Articles and Services Needs to 
Be Improved. [hyperlink, http://www.gao.gov/products/GAO-10-952]. 
Washington, D.C.: September 21, 2010. 

Persian Gulf: U.S. Agencies Need to Improve Licensing Data and to 
Document Reviews of Arms Transfers for U.S. Foreign Policy and 
National Security Goals. [hyperlink, 
http://www.gao.gov/products/GAO-10-918]. Washington, D.C.: September 
28, 2010. 

Export Controls: Observations on Selected Countries' Systems and 
Proposed Treaties. [hyperlink, http://www.gao.gov/products/GAO-10-
557]. Washington, D.C.: June 28, 2010. 

Iran Sanctions: Complete and Timely Licensing Data Needed to 
Strengthen Enforcement of Export Restrictions. [hyperlink, 
http://www.gao.gov/products/GAO-10-375]. Washington, D.C.: March 4, 
2010. 

Export Controls: Challenges with Commerce's Validated End-User Program 
May Limit its Ability to Ensure That Semiconductor Equipment Exported 
to China is Used as Intended. [hyperlink, 
http://www.gao.gov/products/GAO-08-1095]. Washington, D.C.: October 
27, 2008. 

Defense Trade: State Department Needs to Conduct Assessments to 
Identify and Address Inefficiencies and Challenges in the Arms Export 
Process. [hyperlink, http://www.gao.gov/products/GAO-08-89]. 
Washington, D.C.: January 8, 2008. 

Nonproliferation: U.S. Efforts to Combat Nuclear Networks Need Better 
Data on Proliferation Risks and Program Results. [hyperlink, 
http://www.gao.gov/products/GAO-08-21]. Washington, D.C.: October 31, 
2007. 

Defense Trade: Clarification and More Comprehensive Oversight of 
Export Exemptions Certified by DOD Are Needed. [hyperlink, 
http://www.gao.gov/products/GAO-07-1103]. Washington, D.C.: October 
19, 2007. 

Export Controls: Challenges Exist in Enforcement of an Inherently 
Complex System. [hyperlink, http://www.gao.gov/products/GAO-07-265]. 
Washington, D.C.: December 20, 2006. 

Export Controls: Agencies Should Assess Vulnerabilities and Improve 
Guidance for Protecting Export-Controlled Information at Universities. 
[hyperlink, http://www.gao.gov/products/GAO-07-70]. Washington, D.C.: 
December 5, 2006. 

Export Controls: Improvements to Commerce's Dual-Use System Needed to 
Ensure Protection of U.S. Interests in the Post-9/11 Environment. 
[hyperlink, http://www.gao.gov/products/GAO-06-638]. Washington, D.C.: 
June 26, 2006. 

Defense Trade: Arms Export Control System in the Post-9/11 
Environment. [hyperlink, http://www.gao.gov/products/GAO-05-234]. 
Washington, D.C.: February 16, 2005. 

Nonproliferation: Improvements Needed To Better Control Technology 
Exports For Cruise Missiles And Unmanned Aerial Vehicles. [hyperlink, 
http://www.gao.gov/products/GAO-04-175]. Washington, D.C.: January 23, 
2004. 

Export Controls: Post-Shipment Verification Provides Limited Assurance 
That Dual-Use Items Are Being Properly Used. [hyperlink, 
http://www.gao.gov/products/GAO-04-357]. Washington, D.C.: January 12, 
2004. 

Defense Trade: Better Information Needed To Support Decisions 
Affecting Proposed Weapons Transfers. [hyperlink, 
http://www.gao.gov/products/GAO-03-694]. Washington, D.C.: July 11, 
2003. 

Nonproliferation: Strategy Needed To Strengthen Multilateral Export 
Control Regimes. [hyperlink, http://www.gao.gov/products/GAO-03-43]. 
Washington, D.C.: October 25, 2002. 

Export Controls: Processes for Determining Proper Control of Defense-
Related Items Needs Improvement. [hyperlink, 
http://www.gao.gov/products/GAO-02-996]. Washington, D.C.: September 
20, 2002. 

Export Controls: Department of Commerce Controls over Transfers of 
Technology to Foreign Nationals Need Improvement. [hyperlink, 
http://www.gao.gov/products/GAO-02-972]. Washington, D.C.: September 
6, 2002. 

Lessons to Be Learned From the Country Export Exemption. [hyperlink, 
http://www.gao.gov/products/GAO-02-63]. Washington, D.C.: March 29, 
2002. 

Export Controls: Clarification of Jurisdiction for Missile Technology 
Items Needed. [hyperlink, http://www.gao.gov/products/GAO-02-120]. 
Washington, D.C.: October 9, 2001. 

[End of section] 

Footnotes: 

[1] In addition, the Department of Defense (DOD) provides input on 
which items should be controlled by either State or Commerce and 
conducts technical and national security reviews of export license 
applications submitted by exporters to either State or Commerce. 

[2] "Diversion" refers to the transfer or release, directly or 
indirectly, of a good, service, or technology to an end user or an 
intermediary that is not an authorized recipient of the good, service, 
or technology. 

[3] The U.S. government has no agreed-upon definition of 
transshipment. However, the Census Bureau proposed a definition 
stating that "transshipment" refers to the transfer of merchandise 
from the country or countries of origin through an intermediary 
country or countries to the country of destination. We use that 
definition for the purposes of this report. Transshipment is one type 
of reexport, according to Commerce, whose regulations define reexport 
as the shipment or transmission of an item subject to the Export 
Administration Regulations from one foreign country to another. 
According to Commerce, diversion can occur through transshipment. 

[4] GAO, Export Controls: Agency Actions and Proposed Reform 
Initiatives May Address Previously Identified Weaknesses, but 
Challenges Remain, [hyperlink, 
http://www.gao.gov/products/GAO-11-135R] (Washington, D.C.: Nov. 16, 
2010). 

[5] GAO, Export Controls: Proposed Reforms Create Opportunities to 
Address Enforcement Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-12-246] (Washington, D.C.: Mar. 27, 
2012). 

[6] For the purpose of this report, we designated as transshipment 
countries Canada, China, Cyprus, Hong Kong (a special administrative 
region of China), Indonesia, Jordan, Malaysia, Malta, Philippines, 
Singapore, Taiwan, Thailand, and UAE. We generated this list of 13 
transshipment countries by reviewing prior GAO work on transshipment 
and diversion; congressional testimony; countries with entities on the 
Entity List or Unverified List; input from State and Commerce; lists 
of the busiest transshipment ports worldwide; and those countries 
where a Commerce Export Control Officer has been stationed. We refer 
to Hong Kong and Taiwan as transshipment "countries" only for the 
purposes of this report. None of the agencies we contacted maintains a 
comparable list of transshipment countries. 

[7] For items controlled by Commerce, exporters are to determine 
whether a license is required or one of the licensing exceptions 
permissible under the EAR is applicable. Commerce may require a 
license for an export based on a variety of reasons, including 
limiting the proliferation of chemical, biological weapons and the 
country of destination. A license exception, as opposed to a license 
requirement, is an authorization that allows an exporter to export or 
reexport without a license, under stated conditions, items subject to 
the EAR, which would otherwise require a license. If an item is not 
listed on the control list but is subject to the EAR, it falls into a 
category known as EAR99. State refers to the eligibility of exports of 
items on the USML without a license under certain conditions as 
exemptions. 

[8] This State number represents all arms export license processed by 
DDTC, which include applications for the export of arms and agreements 
between U.S. industry and foreign entities to provide technical 
assistance or manufacturing capability. 

[9] Under the authority provided by the International Emergency 
Economic Powers Act (50 U.S.C. §§1701 et seq.), the President has 
continued the EAR in effect through Executive Order No. 13222 of 
August 17, 2001 (3 C.F.R., 2001 Comp. p. 738 (2002)), as extended most 
recently by Notice of August 12, 2011, 76 Fed. Reg, 50661. 

[10] In 2007, GAO designated the programs that identify and protect 
technologies critical to U.S. national security interests as a high-
risk area. GAO has maintained its designation. See GAO, High-Risk 
Series: An Update, [hyperlink, http://www.gao.gov/products/GAO-07-310] 
(Washington, D.C.: January 2007); and High Risk Series: An Update, 
[hyperlink, http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: 
February 2011). 

[11] A list of Related GAO Products appears at the end of this report. 

[12] See Exec. Order No. 13558, 75 Fed. Reg. 69, 573 (Nov. 15, 2010). 

[13] GAO, Iran Sanctions: Complete and Timely Licensing Data Needed to 
Strengthen Enforcement of Export Restrictions, [hyperlink, 
http://www.gao.gov/products/GAO-10-375] (Washington, D.C.: Mar. 4, 
2010). 

[14] End-use checks are conducted to determine the bona fides of the 
transaction and the end user, and to ensure that an exported item is 
being used in accordance with U.S. export control regulations and the 
terms of the export license. Commerce determines that end-use checks 
had favorable, unfavorable, or limited and nonconclusive results. A 
check is favorable when it can confirm the end use and end user of an 
export are appropriate. An unfavorable determination means that 
Commerce considers the end user to be unreliable. Nonconclusive 
determinations result when Commerce cannot determine the reliability 
of the end user. For example, if Commerce is unable to conduct a site 
visit. A limited result means that the individual conducting the check 
provided incomplete information or did not follow Commerce guidance in 
carrying out the check. 

[15] A licensing agency may return an export license application 
without action because the application lacked needed information or 
the applicant withdrew the application, among other reasons. 

[16] Blue Lantern end-use monitoring entails the prelicense, 
postlicense, or postshipment inquiries or "checks" undertaken to 
verify the legitimacy of a transaction and to provide "reasonable 
assurance" that the recipient complies with the requirements imposed 
by the U.S. government with respect to use, transfers, and security of 
defense articles and defense services; and that such articles and 
services are being used for the purposes for which they were provided. 

[17] For the purpose of this report, we reviewed licenses for 
permanent export. State also authorizes temporary exports and 
technical data. 

[18] Approved license applications include those that were approved 
with provisos, such as those specifying how items can be used and by 
whom. 

[19] Suspending a license temporarily removes the privilege of 
exporting, while revoking a license annuls it and rescinds the 
authority to export. 

[20] Commerce officials also suggested that the public screen parties 
against the Denied Persons List and the AECA Debarred List. For the 
purposes of this report, we have classified these activities as 
enforcement rather than compliance activities. 

[21] The End-User Review Committee, composed of representatives of the 
Departments of State, Defense, Energy, and Commerce, and other 
agencies, as appropriate, is responsible for placing entities on the 
Entity List based on evidence that the entities pose a significant 
risk of involvement in activities contrary to U.S. national security 
or foreign policy interests. Commerce chairs the End-User Review 
Committee. 

[22] In our analysis of the Entity List, we included entities and 
their subordinates and aliases in our calculations. 

[23] The 167 entities designated on the SDN list from the 13 
transshipment countries represent designations that trigger a license 
requirement under the EAR, such as Specially Designated Global 
Terrorist and Nonproliferation and Weapons of Mass Destruction. 

[24] Commerce and State end-use checks may have favorable, 
unfavorable, or inconclusive results. A check is favorable when it can 
confirm that the end use and end user of an export are appropriate, 
unfavorable when it confirms that they are not, and inconclusive when 
it cannot confirm them, usually through an inability to conduct the 
check. Due to an unfavorable result, Commerce or State may take 
further action, such as denying a license or referring involved 
entities to enforcement agencies for investigation and possible 
penalties. 

[25] GAO reviewed UAE-specific State end-use data collected for and 
reported in our report, Persian Gulf: Implementation Gaps Limit the 
Effectiveness of End-Use Monitoring and Human Rights Vetting for U.S. 
Military Equipment, [hyperlink, http://www.gao.gov/products/GAO-12-89] 
(Washington, D.C.: Nov. 17, 2011). 

[26] Transshipment is one form of reexport, according to Commerce 
regulations. 

[27] In addition to administering the Entity List, the End-User Review 
Committee also is responsible for determining whether to add to, 
remove from, or otherwise amend the list of validated end users and 
associated eligible items set forth in the EAR. 

[28] In total, BIS has ECOs with areas of operation covering 12 of the 
13 transshipment countries that we designated. Commerce has five ECOs 
stationed in 4 of the 13 transshipment countries that we designated--
China (2), Hong Kong, Singapore, and the UAE. The ECOs in Hong Kong, 
Singapore, and the UAE also have regional responsibilities. 

[29] For the purposes of this report, unlicensed exports include 
exports requiring no prior government review, including items subject 
to the EAR eligible for license exceptions. 

[30] 22 U.S.C. § 2785. 

[31] The seven transshipment countries that are EXBS partner countries 
are Indonesia, Malaysia, Philippines, Singapore, Taiwan, Thailand, and 
UAE. 

[32] 76 Fed. Reg. 41,958 (July 15, 2011). Before the President may 
make such jurisdictional changes, however, he must report the results 
of the review to Congress. 22 U.S.C. § 2778(f)(1). The President must 
describe how items moved from the ITAR will be controlled under other 
provisions of law. The purpose of the proposed rule is to describe how 
items that no longer warrant control on the USML will be controlled on 
the CCL. 76 Fed. Reg. 76,072 (Dec. 6, 2011). 

[33] [hyperlink, http://www.gao.gov/products/GAO-11-135R]. 

[34] These categories include Category VII, Tanks and Military 
Vehicles; Category VIII, Aircraft and Associated Equipment; Category 
XX, Submersible Vessels Oceanographic, and Associated Equipment; 
Category VI, Surface Vessels of War and Special Naval Equipment. See 
76 Fed. Reg. 41,958 (July 15, 2011); 76 Fed. Reg. 68,675 (Nov. 7, 
2011); 76 Fed. Reg. 80,291 (Dec. 23, 2011); 76 Fed. Reg. 80,282 (Dec. 
23, 2011); 76 Fed. Reg. 76,085 (Dec. 6, 2011); 76 Fed. Reg. 76,072. 
The administration also proposed the creation of a new category for 
gas turbine engines that would combine parts of multiple categories. 
76 Fed.Reg.76, 072 (Dec. 6, 2011). For submersible vessels, the 
administration determined that most parts and components would remain 
on the USML because they provide a critical military and technological 
advantage to the United States. 

[35] 76 Fed. Reg. 35,276 (June 16, 2011). A license exception is an 
authorization that allows a company to export, under stated 
conditions, items subject to the EAR that would otherwise require a 
license. 

[36] 15 C.F.R. § 740.20. Commerce authorizes exports that are 
controlled for specific reasons to 36 countries: Argentina, Australia, 
Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, 
Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, 
Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, 
Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, 
Spain, Sweden, Switzerland, Turkey, and the United Kingdom. 

[37] The eight destinations to which the license exception authorizes 
exports controlled for National Security reasons are Albania, Hong 
Kong, India, Israel, Malta, Singapore, South Africa, and Taiwan. 
According to technical comments provided by Commerce, the use of the 
exception is limited to those items that the Wassenaar Arrangement, a 
multilateral export control regime that aims to restrict trade in dual-
use technologies, considers less sensitive. 

[38] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 
(Washington, D.C.: November 1999). The five standards for internal 
control are: control environment, risk assessment, control activities, 
information and communications, and monitoring. Also see GAO, 
Transportation Worker Identification Credential: Internal Control 
Weaknesses Need to Be Corrected to Help Achieve Security Objectives, 
[hyperlink, http://www.gao.gov/products/GAO-11-657] (Washington, D.C.: 
May 10, 2011); OMB, Circular No. A-94,Guidelines and Discount Rates 
for Benefit-Cost Analysis of Federal Programs (Washington, D.C.: 
October 1992); OMB, Circular No. A-4, Regulatory Analysis (Washington, 
D.C.: September 2003). 

[39] See Department of Commerce: Fiscal Year 2011 Performance and 
Accountability Report, Appendix E. 

[40] According to Commerce, the USML, with few exceptions, allows 
exemptions from licensing requirements only to Canada. Under the rule 
proposed on November 7, 2011, many exports and reexports of the USML 
Category VII parts and components that would be moved to the CCL would 
become eligible for license exceptions that apply to shipments to U.S. 
government agencies, shipments valued at less than $1,500, parts and 
components being exported for use as replacement parts, temporary 
exports, and License Exception STA, reducing the number of licenses 
that exporters of these items would need. 

[41] Commerce also reprogrammed funds from both within BIS and from 
the Census Bureau to staff the new office. 

[42] BIS calculated a range of $1.5 million to $5.2 million in 
potential savings to exporters by estimating several scenarios that 
made different assumptions about key factors such as interest rates 
and the face value of the licenses. The benefits of the STA exception 
might be even greater if Commerce included in its estimates the 
approximately 20,000 transactions that would be eligible for the 
exception once items moved from the USML to the CCL. 

[43] These written comments apply to both the earlier report issued 
March 14, 2012, which contained information designated "For Official 
Use Only" and to this report. 

[44] GAO, Export Controls: State and Commerce Have Not Taken Basic 
Steps to Better Ensure U.S. Interests Are Protected, [hyperlink, 
http://www.gao.gov/products/GAO-08-710T] (Washington, D.C.: Apr. 24, 
2008). 

[45] [hyperlink, http://www.gao.gov/products/GAO-12-89]. 

[46] In drawing our sample of Commerce end-use checks, we considered 
an additional fiscal year, fiscal year 2011, as two Commerce officials 
responsible for conducting end-use checks in Singapore and UAE had 
arrived during that time, and we wanted to learn about the checks they 
conducted. Our sample of Commerce checks reflects a range of fiscal 
years, the type of checks that were conducted, and the actions that 
resulted from the checks. 

[47] [hyperlink, http://www.gao.gov/products/GAO-08-710T]. 

[End of section] 

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