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GAO-13-119R; 

United States Government Accountability Office: 
Washington, DC 20548: 

November 16, 2012: 

The Honorable Ileana Ros-Lehtinen: 
Chairman: 
The Honorable Howard Berman: 
Ranking Member: 
Committee on Foreign Affairs: 
House of Representatives: 

Subject: Export Controls: Compliance and Enforcement Activities and 
Congressional Notification Requirements under Country-Based License 
Exemptions: 

In 2010, the United States announced a reform of its export control 
systems that proposed, among other things, to reduce the numbers and 
types of items requiring government review and licensing before 
export. The U.S. government uses the export control system to limit 
the risk of sensitive items falling into the wrong hands, while at the 
same time allow legitimate trade of these items to occur. In 
particular, the United States controls the export of sensitive defense 
and dual-use items (items with both commercial and military, 
proliferation or terrorist applications) to foreign governments and 
commercial entities and non-governmental organizations. As part of the 
export control reform effort, the Department of State (State), the 
Department of Commerce (Commerce), and other agencies are reassessing 
the level of control warranted for certain defense items they consider 
to be less sensitive. 

The U.S. government generally requires each export of defense 
articles, services, and dual-use items to undergo a government review 
and receive a license before export. However, State and Commerce 
provide certain exemptions[Footnote 1]--commonly referred to as 
country-based license exemptions--for the export of selected items to 
particular destinations that present a lower risk of misuse or 
diversion.[Footnote 2] In April 2012, State began implementing a 
bilateral defense cooperation treaty between the United Kingdom (UK) 
and the United States to allow certain defense articles and services 
to be exported without a license.[Footnote 3] A similar treaty with 
Australia is expected to enter into force in 2013. In addition, State 
implements a long-established country-based license exemption for: 

Canada for the export of specific items without a license.[Footnote 4] 
In 2011, Commerce established the Strategic Trade Authorization (STA) 
license exemption, which allows the export, without a license, of 
items controlled for multiple reasons, including national security and 
nuclear nonproliferation, to 36 destinations judged to be of low risk 
of diversion.[Footnote 5] The STA also allows the export of items 
controlled only for national security reasons to eight additional 
destinations judged to be of low risk of diversion for such items. 
[Footnote 6] 

Additionally, as part of the export control reform, the administration 
is working to establish a framework to transfer control of thousands 
of defense items from State's U.S. Munitions List to Commerce's 
Commerce Control List.[Footnote 7] In comments on a draft of this 
report, Commerce stated that the President's Export Control Reform 
Initiative will enhance national security by (1) allowing greater 
interoperability with NATO and our other allies while still 
maintaining and expanding robust controls and, in some cases, 
prohibitions on exports or reexports to other countries and for 
proscribed end users and end uses; (2) enhancing the U.S. defense 
industrial base by reducing the current incentives for foreign 
companies to design out or avoid U.S.-origin content that is 
controlled by the International Traffic in Arms Regulations (ITAR) 
particularly with respect to generic, unspecified parts and 
components; and (3) permitting the U.S. government to focus its 
resources on controlling, monitoring, investigating, analyzing, and, 
if need be, prohibiting exports and reexports of more significant 
items to destinations, end uses, and end users of greater concern than 
our NATO allies and other multiregime partners. 

Historically, State has controlled defense items, while Commerce 
controlled dual-use items. According to the Acting Secretary of 
Commerce, items that will be transferred from State's list to the more 
flexible Commerce list are those that do not perform an inherently 
military function and do not provide the United States with a military 
or intelligence advantage. This would allow the United States to put 
in place more logical controls on trade with close allies while 
maintaining strict controls over exports and re-exports to others, 
according to the Acting Secretary. According to documents obtained 
from Commerce, most of the defense articles being considered for 
transfer to Commerce are those determined to no longer warrant 
stricter controls under State, and include largely generic parts and 
components of military equipment.[Footnote 8] As part of the process, 
Commerce has proposed to establish a new classification category 
called the "600 series" to control the export of defense articles 
transferred to Commerce.[Footnote 9] Under the proposed rules, certain 
defense items placed in the 600 series will be subject to additional 
export restrictions when using an STA license exemption in comparison 
to those in place for dual-use items. Under the proposed rules, 
certain defense items placed under Commerce control will be eligible 
for an STA license exemption.[Footnote 10] 

In your request, you raised concerns about compliance and enforcement 
activities[Footnote 11] for items exported without a license, such as 
those under the country-based license exemptions. Of particular 
concern are those defense items proposed to be transferred from 
State's to Commerce's control, which may include items such as certain 
firearms and satellite technology. You also raised concerns about 
potentially diminishing congressional notification requirements. U.S. 
law requires State to notify Congress of certain defense exports and 
to report to Congress certain statutory violations and has different 
requirements for Commerce to do so for dual-use Items.[Footnote 12] 
Finally, you raised concerns about whether notifications to Congress 
for the export of certain defense articles and services and for 
statutory violations related to those exports would continue if such 
articles and services move to Commerce for control. 

As such, in response to your request, we analyzed State's and 
Commerce's compliance and enforcement activities for items exported 
with a license and those that could be exported under four existing or 
proposed country-based license exemptions: the Defense Trade 
Cooperation Treaties with the UK and Australia (hereafter referred to 
as "the treaties"), the Canadian exemption, and the STA.[Footnote 13] 
Specifically, this report describes existing and proposed (1) 
compliance and enforcement activities for exports under both licenses 
and country-based license exemptions and (2) requirements for State 
and Commerce to notify Congress of certain defense exports and of 
violations of export control laws. 

To address these objectives, we reviewed relevant statutory 
authorities that guide State's and Commerce's export controls 
processes. We identified the existing country-based license exemptions 
and interviewed State and Commerce officials to determine the 
compliance and enforcement activities each agency implements with 
respect to these exemptions.[Footnote 14] We also identified and 
compared the various congressional notification requirements for the 
three country-based license exemptions to the requirements for 
licensed items. We conducted this performance audit from March 2012 to 
November 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. 

Summary: 

Some compliance activities for the export of controlled items under 
State and Commerce licenses differ from compliance activities under 
country-based license exemptions, but enforcement activities are 
generally the same. Compliance activities provide information for 
exporters, licensing officials, and enforcement agencies to help 
assess the validity of export transactions, identify potential 
violations, or prevent violations before they occur. Of the seven 
compliance activities we identified, three differ for licensed exports 
compared with country-based license exemptions. These activities are 
(1) license application review, (2) vetting parties to transactions, 
and (3) compliance program reviews (recordkeeping).[Footnote 15] In 
contrast to these compliance activities, the other four compliance and 
three enforcement activities, such as inspection of exports, 
investigations, and punitive actions for violations, are generally the 
same for both licensed exports and country-based, license-exempt 
exports. 

The congressional notification requirements for State and Commerce to 
report proposed exports and statutory violations vary because each 
agency's authority stems from different legislative statutes.[Footnote 
16] Specifically, each agency's export control regulations derive from 
different legislative authorities and aim to control articles that 
have different levels of concern for diversion or unintended use. 
State is required by law to notify Congress of proposed exports of 
major defense equipment, articles, and services that meet specific 
dollar thresholds under a license or treaty.[Footnote 17] Commerce is 
required to notify Congress of proposed exports that are destined for 
a designated state sponsor of terrorism or could make a significant 
contribution to the military potential of the government of a country 
that has repeatedly provided support for acts of international 
terrorism.[Footnote 18] However, in June 2012, Commerce issued a 
proposed rule that would add a new requirement to notify Congress of 
pending exports of major defense equipment, such as articles under the 
proposed 600 series, including those exported under the STA, that meet 
the same dollar thresholds as those required of State.[Footnote 19] As 
of November 2012, Commerce was considering how to implement its 
proposal. In terms of enforcement actions, State is required to notify 
Congress of certain violations of export laws.[Footnote 20] Commerce 
is required to provide an annual report to Congress that includes 
statutory violations resulting in administrative and criminal 
penalties.[Footnote 21] 

Background: 

The U.S. export control system seeks to prevent defense and dual-use 
items from falling into the wrong hands and, at the same time, allow 
legitimate trade to occur. Defense items can include sophisticated 
technology designed for military use--such as tanks, fighter aircraft, 
submarines, firearms, satellites, missiles--and training. Dual-use 
items can include less-sensitive, commonly available items such as 
computers, radars, and telecommunication equipment. Historically, 
State regulates defense exports, and Commerce regulates dual-use 
exports.Defense items controlled by State are identified in the United 
States Munitions List, which is implemented under the ITAR.[Footnote 
22] Dual-use Items controlled by Commerce are identified in the 
Commerce Control List, which is implemented under the Export 
Administration Regulations (EAR).[Footnote 23] Table 1 identifies the 
U.S. agencies and offices that regulate, enforce, or participate in 
the defense and dual-use export control systems. 

Table 1: Roles and Responsibilities in the U.S. Defense and Dual-Use 
Export Control Systems: 

Principal regulatory agency/office: State Department's Directorate of 
Defense Trade Controls; 
Mission: Regulates and enforces controls on the export of defense 
articles and services; 
Statutory authority: Arms Export Control Act (AECA), as amended; 
Implementing regulations: International Traffic in Arms Regulations 
(ITAR); 
Control list:United States Munitions List. 

Principal regulatory agency/office: Commerce Department's Bureau of 
Industry and Security[A]; 
Mission: Regulates and enforces controls on the export of dual-use 
items; 
Statutory authority: Export Administration Act (EAA) of 1979, as 
amended[B]; 
Implementing regulations: Export Administration Regulations (EAR); 
Control list:Commerce Control List. 

Other federal agencies: 

Principal regulatory agency/office: Department of Defense; 
Mission: Provides input on which items should be controlled by either 
State or Commerce and conducts technical and national security reviews 
of export licenses submitted by exporters to either State or Commerce. 

Principal regulatory agency/office: Department of Homeland Security; 
Mission: Enforces defense and dual-use export control laws and 
regulations through border inspections and investigations. 

Principal regulatory agency/office: Department of Justice; 
Mission: Investigates suspected criminal violations in certain areas 
of counterintelligence, including potential export control violations, 
and prosecutes suspected violators of arms and dual-use export control 
laws. 

Principal regulatory agency/office: Department of Energy; 
Mission: Participates in the review of export license applications 
submitted to State and Commerce and provides input on which items 
should be subject to control under the ITAR and EAR, respectively. 

Source: GAO. 

Notes: Data are from GAO, Export Controls: Observations on Selected 
Countries' Systems and Proposed Treaties, GAO-10-557 (Washington, 
D.C.: May 27, 2010). 

[A] Commerce's Bureau of the Census implements the Foreign Trade 
Regulations which require, with some exceptions, that exporters 
provide shipping data through the Automated Export System (AES).The 
AES is the central point through which exporters must electronically 
file the export shipment data required by multiple agencies. 15 C.F.R. 
part 30. 

[B] 50 U.S.C. app. §§ 2401-2420. The Export Administration Act (EAA) 
of 1979, as amended, lapsed on August 20, 2001. However, the President 
has, to the extent permitted by law, kept in effect the provisions of 
the EAA and its implementing regulations through Executive Order 13222 
of August 17, 2001 (66 Fed. Reg. 44,025). Executive Order 13222 was 
issued under the authority provided by the International Emergency 
Economic Powers Act (50 U.S.C. §§ 1701 et seq.) and most recently was 
extended by Presidential Notice of August 15, 2012. See 77 Fed. Reg. 
49,699 (Aug. 16, 2012). 

[End of table] 

Generally, to receive approval to export certain items, exporters must 
submit a license application to State if their export is a defense 
item or to Commerce if their export is a controlled dual-use item that 
requires a license. However, both State and Commerce provide 
exemptions that allow the export of controlled items without a license 
if certain conditions are met. State implements three country-based 
license exemptions: the Defense Trade Cooperation Treaty with the 
United Kingdom (UK), the Defense Trade Cooperation Treaty with 
Australia, and a license exemption for Canada. Although Commerce 
implements several license exemptions, the STA is the only exemption 
based primarily on the destination of the export.[Footnote 24] 
According to Commerce, license exemptions reduce uncertainty and 
delays faced by exporters of items in the licensing process. 

State-Implemented Treaties and the Canada Exemption: 

In 2007, the United States signed separate Defense Trade Cooperation 
Treaties with the UK and Australia to provide for the license-free 
export or transfer of selected defense items under certain 
circumstances. The treaty with the UK entered into force in April 
2012, while the treaty with Australia is expected to enter into force 
in 2013. State's implementation of the UK treaty and future 
implementation of the Australia treaty fall under the authority of the 
AECA. The stated goals of the treaties include achieving fully 
interoperable forces, establishing a closer framework for security and 
defense cooperation, and leveraging strengths of the security and 
defense industries. Only authorized governmental and nongovernmental 
entities, facilities, departments, agencies, and personnel in each 
country party to the treaties are eligible to export, acquire, or 
transfer applicable items under the treaties. The treaties establish 
the process for certain defense articles to be exported into and 
within these "approved communities" without a license as long as 
exports are in support of certain (1) combined military and 
counterterrorism operations; (2) cooperative security and defense 
research, development, production, and support programs; (3) mutually 
agreed-upon security and defense projects in which the end user is the 
UK or Australian government; or (4) U.S. government end-uses. 
According to State, as of September 2012, there were no reported 
exports of U.S. Munitions List hardware made pursuant to the UK Treaty 
exemption in the ITAR.[Footnote 25] 

Established in 1954, State's Canadian exemption grew out of the U.S. 
and Canadian geographic relationship, economic partnership, and mutual 
interest in the defense of North America. As with the treaties, State 
implements the Canadian exemption through the ITAR.[Footnote 26] The 
scope of the Canadian exemption has evolved since its inception. 
Earlier versions allowed, without a license, the export and import of 
arms, ammunition, and implements of war, and the export of 
unclassified technical data. Later revisions expanded the items 
eligible for the exemption to include defense services and increased 
the types of items requiring a license.[Footnote 27] According to 
State, between October 1, 2007, and September 30, 2008--the latest 
data available from State--exporters conducted roughly 35,000 
transactions, worth an estimated $1.7 billion, using the Canadian 
exemption.[Footnote 28] 

Commerce-Implemented Strategic Trade Authorization License Exemption: 

Under the STA license exemption, the export, reexport, and in-country 
transfer of dual-use items may be made without a license to 
destinations that pose a relatively low risk of misuse or diversion. 
The STA, implemented through the EAR, authorizes the export, reexport, 
and in-country transfer of items subject to controls for reasons of 
national security, chemical or biological weapons, nuclear 
nonproliferation, regional stability, crime control, or significant 
items to 36 destinations.[Footnote 29] It also enables the export of 
certain items controlled for national security reasons to another 
eight destinations. According to Commerce, from July 2011 to July 
2012--the 12 months after the STA exemption entered into effect--74 
exporters used the STA exemption to conduct 604 transactions worth 
$33.9 million. 

Under the rules proposed by Commerce in June 2012, certain defense 
items and services transferred to Commerce control, such as those to 
be placed in the 600 series, will be eligible for an STA license 
exemption.[Footnote 30] However, for these eligible defense items, the 
use of the STA is limited to ultimate government end use by one of the 
36 authorized destinations and requires a previously issued State or 
Commerce license.[Footnote 31] 

Export Processes for Defense and Dual-Use Articles: 

Generally, exporters are responsible for determining if State or 
Commerce controls the article they seek to export and if a license is 
required or an exemption may be used. If the item requires an export 
license, the exporter must submit a license application to State or 
Commerce, depending on which agency controls the item, and then follow 
the designated export control process. Exporters seeking to export 
items controlled by State must register with the department regardless 
if the item is exported under a license or a license exemption; 
however, exporters are not required to register with 
Commerce.[Footnote 32] If the item is eligible for a license 
exemption--such as under the treaties, the Canadian exemption, or the 
STA--the exporter may choose not to submit a license and follow the 
streamlined export control process under the respective exemption. 
[Footnote 33] Figure 1 outlines the U.S. export control processes when 
items are exported under a license or a country-based license 
exemption. A full description of these processes is included in 
enclosure II. 

Figure 1: Export Control Process under a License and Selected Country-
Based License Exemption: 

[Refer to PDF for image: process illustration] 

Exporter determines under which authority (ITAR or EAR) its item or 
service is controlled, if at all: If defense (ITAR): 

State: 

Exporter determines if item requires a license or is eligible for 
country-based license exemption: 

If license required: 
Exporter files license application; 
State reviews application for approval; 
If approved: 
State determines if congressional notification required; 
Exporter files data in AES; 
CBP and other agencies may review export documentation and AES 
information and may inspect goods prior to shipment; 
Item is exported. 

If eligible for exemption: United Kingdom or Australia: 
Exporter verifies recipients eligibility under treaty's rules; 
Exporter determines if congressional notification required; 
Exporter files data in AES; 
CBP and other agencies may review export documentation and AES 
information and may inspect goods prior to shipment; 
Item is exported. 

If eligible for exemption: Canada: 
Exporter verifies recipient's eligibility under Canada exemption's
rules: 
Exporter files data in AES; 
CBP and other agencies may review export documentation and AES 
information and may inspect goods prior to shipment; 
Item is exported. 

Exporter determines under which authority (ITAR or EAR) its item or 
service is controlled, if at all: Id dual-use of "600 series" (EAR): 

Commerce: 

Exporter determines if item requires a license or is eligible for STA: 

If license required: 
Exporter files license application; 
Commerce reviews application for approval; 
If approved: 
If export is a "600 series" item, Commerce determines if congressional
notification required (proposed step); 
Exporter files data in AES; 
CBP and other agencies may review export documentation and AES 
information and may inspect goods prior to shipment; 
Item is exported. 

If eligible for STA: 
Exporter obtains consignee statement; 
Exporter files data in AES; 
CBP and other agencies may review export documentation and AES 
information and may inspect goods prior to shipment; 
Item is exported. 

Key: 
AES: Automated Export System; 
CBP: Customs and Border Protection; 
EAR: Export Administration Regulations; 
ITAR: International Traffic in Arms Regulations; 
600 series: Defense items proposed to be transferred to EAR; 
STA: Strategic Trade Authorization. 

Source: GAO analysis of State and Commerce information. 

Notes: Other agencies may review license applications referred to them 
by State or Commerce. 

Under Commerce's proposed rules, certain defense items to be placed in 
the proposed 600 series would be eligible for the STA, but 600 series 
items that would require a congressional notification would not be 
eligible for the STA. 

[End of figure] 

Congressional Notifications: 

Items controlled under State's jurisdiction have different controls 
from those under Commerce's jurisdiction, including different 
requirements to notify Congress of defense transfers and statutory 
violations. State implements export controls of defense items, 
including country-based license exemptions, pursuant to the Arms 
Export Control Act (AECA), which requires that State notify Congress 
of certain defense transfers and export statutory violations.[Footnote 
34] Commerce implements controls of dual-use exports, including the 
STA and other license exemptions, under the Export Administration Act 
(EAA), which requires Commerce to notify Congress of proposed exports 
which are destined for designated state sponsors of terrorism or could 
make a significant contribution to the military potential of a 
government of a country that has repeatedly provided support for acts 
of international terrorism.[Footnote 35] However, Commerce is also 
required to provide an annual report to Congress with information on 
the number of administrative cases and criminal convictions as a 
result of export control statutory violations by individuals and 
companies.[Footnote 36] Since Commerce is expected under export 
control reform to have jurisdiction over certain defense items, 
members of Congress have raised concerns about whether notifications 
to Congress for the exports currently controlled by State will 
continue after they are transferred to Commerce. 

Certain Compliance Activities for Exempted Exports Differ from 
Activities for Licensed Exports, but Enforcement Activities Are 
Generally the Same: 

Certain compliance activities for the export of controlled items under 
State and Commerce licenses differ from compliance activities under 
country-based license exemptions, but enforcement activities are 
generally the same. The three compliance activities that differ are 
(1) license application review, (2) vetting parties to transactions, 
and (3) compliance program reviews (recordkeeping). In contrast to 
these compliance activities, the other four compliance and three 
enforcement activities, such as inspection of exports, and 
investigations and punitive actions for violations, are generally the 
same for both licensed exports and country-based license-exempt 
exports. 

Compliance and Enforcement Activities Aim at Preventing Export Control 
Violations: 

Compliance activities provide information for exporters, licensing 
officials, and enforcement agencies to assess the validity of 
particular export transactions, identify potential violations, or 
prevent violations before they occur. Enforcement activities strive to 
prevent or deter the illegal export or transshipment of defense and 
dual-use items. We identified seven export control compliance 
activities and three enforcement activities that the Departments of 
Commerce, Homeland Security (DHS), Justice, State, and the Treasury 
conduct to encourage compliance with export control laws and prevent 
the diversion or misuse of exported items against U.S. allies or 
interests.[Footnote 37] Within each compliance and enforcement 
activity, State, Commerce, or other agencies perform specific tasks. 
Table 2 describes the seven compliance and three enforcement 
activities, along with selected tasks associated with the export of 
defense and dual-use items. 

Table 2: Description of Compliance and Enforcement Activities and 
Selected Tasks for Export of Defense and Dual-Use Items: 

Compliance activities: 

Activity: License application review; 
Activity description: When deciding whether to approve or deny an 
export license application, State and Commerce, among other agencies, 
evaluate it against several factors, including how the recipient plans 
to use the item; 
Selected tasks associated with activity: 
* Agencies review transaction prior to export to identify parties to 
transaction, proposed export's end use, and destination. 

Activity: Vet parties to the transaction; 
Activity description: Review and assess all parties to the transaction; 
Selected tasks associated with activity: 
* Reviewing agencies vet license applicant, end-user, and any other 
parties to the transaction against internal lists, as well as export 
and licensing histories, intelligence, law enforcement, and public 
information; 
* State or Commerce vets parties to country-based exemption export 
prior to the first transaction or after shipment of selected exports. 

Activity: End-use monitoring; 
Activity description: Conduct checks, as needed, including site 
visits, to verify the bona fides of entities and appropriate receipt 
and use of controlled items; 
Selected tasks associated with activity: 
* State and Commerce conduct prelicense checks of applicant, end-user, 
or other parties to transaction to verify bona fides; 
* State and Commerce conduct postshipment verification checks to 
determine appropriate receipt and use of export. 

Activity: Shipping data analysis; 
Activity description: Review selected export declarations to identify 
potential violations and select exports for postshipment verification 
check; 
Selected tasks associated with activity: 
* Commerce conducts real-time analysis of information input into the 
Automated Export System (AES); 
* State and Commerce conduct regular postshipment analysis of AES data. 

Activity: Compliance program reviews; 
Activity description: Review and critique companies' programs to 
manage export-related decisions and transactions to ensure compliance 
with regulations and license conditions; 
Selected tasks associated with activity: 
* State and Commerce review exporter's records to ensure the exporter 
meets requirements; 
* State and Commerce conduct on-site review of exporters' compliance 
programs. 

Activity: List maintenance; 
Activity description: Update and maintain lists that inform the 
licensing process by providing key information on entities of concern 
to licensing officers and the public; 
Selected tasks associated with activity: 
* State and Commerce update and maintain internal "watch lists," among 
other lists; 
* State, Commerce, and Treasury maintain prohibited and sanctioned 
parties' lists. 

Activity: Outreach; 
Activity description: Provide courses, workshops, and seminars for 
exporters to inform them of their responsibilities to comply with 
export control laws and regulations. Provide training to foreign 
government officials; 
Selected tasks associated with activity: 
* State and Commerce provide information to exporters to assist in 
compliance efforts; 
* State, Commerce, DHS, and Justice provide training and seminars to 
foreign government officials on how to investigate, detect, and 
interdict unauthorized transfers of items. 

Enforcement activities: 

Activity: Inspection of goods; 
Activity description: Inspect items, including review and validation 
of documentation, scheduled for export at U.S. air, sea, and land 
ports; 
Selected tasks associated with activity: 
* DHS's Customs and Border Protection primarily inspects exports at 
U.S. ports. 

Activity: Investigation of violations; 
Activity description: Investigate potential violations of export 
control laws for dual-use and defense items; 
Selected tasks associated with activity: 
* Commerce, DHS's Immigration and Customs Enforcement, and the Justice 
Department's Federal Bureau of Investigations may investigate 
potential violations. 

Activity: Punitive actions for violations; 
Activity description: Pursue punitive actions, either criminal or 
administrative, taken against individuals or companies for violations 
of export control laws and regulations. Penalties include 
imprisonment, fines, suspension of an export license, denial, or 
debarment from exporting, among others; 
Selected tasks associated with activity: 
* State, Commerce, DHS, and the Departments of Justice and the 
Treasury may all take punitive actions for violations; 
* Punitive actions taken against violators may be criminal or 
administrative. 

Source: GAO analysis of State, Commerce, DHS, and Departments of 
Justice and the Treasury information. 

[End of table] 

Vetting and Compliance Program Reviews for Country-Based License-
Exempt Exports Are Different from Those Followed for Licensed Exports: 

We identified three compliance activities that differ for licensed 
exports compared with country-based license-exempt exports. The 
compliance activities that differ are (1) license application reviews 
(2) vetting parties to transactions and (3) compliance program reviews 
(recordkeeping). The other four compliance and three enforcement 
activities are generally the same. 

License Application Reviews: 

Because country-based license exemptions do not require a license, 
neither State nor Commerce conducts license application reviews for 
items exported under an exemption. For transactions requiring a 
license, the exporter submits an application that State or Commerce 
officials review. As part of the application review process, State and 
Commerce may consult with other agencies. When deciding whether to 
approve or deny an export license application, State and Commerce 
evaluate it against several factors, including how the recipient plans 
to use the item. 

Vetting Parties to a Transaction: 

The process for compliance activities undertaken to vet parties to a 
transaction for licensed exports is different from the process for 
those activities undertaken to vet parties for country-based license-
exempt exports. Generally, for items exported under a State or 
Commerce license, U.S. agency officials review the license application 
and screen all entities that are party to each transaction against 
various agency lists, as well as export and licensing histories, and 
public, law enforcement, and intelligence information. These lists 
include State's internal Watch List; Commerce's internal Watch List; 
Commerce's Denied Persons List, Entity List, and Unverified List; 
State's Nonproliferation Sanctions List and the AECA Debarred List; 
and the Department of the Treasury's Specially Designated Nationals 
List.[Footnote 38] State and Commerce may also conduct a prelicense 
check to verify the credentials of a party before approving a license. 
[Footnote 39] Such prelicense checks may include a site visit to the 
proposed end-user or foreign consignee.[Footnote 40] Both State and 
Commerce may request input or a review of the license application by 
another agency, such as the Departments of Defense and Energy, as part 
of the vetting process.[Footnote 41] 

The vetting process for State-licensed exports differs from the 
process for exports under the UK and Australia treaties. Although the 
treaties do not require a license, they do require prior vetting and 
membership into an "approved community." Approved communities include 
exporters and end users that both treaty members (the United States 
and the UK, or the United States and Australia) have vetted and 
approved. UK officials vet UK applicants for approved community 
membership; applicants must have "List-X" approved facilities, an 
indication that the facility is approved to hold classified 
information. Once the UK approves applicants, State and other 
agencies, such as the Departments of Defense and Justice, vet the 
member applicants. Once applicants become members of the approved 
community, State does not vet exporters or end-users before each 
transaction. According to State officials, State can limit the 
eligibility of or remove members from the approved community. State 
officials explained that the vetting process will be similar for 
Australia once the treaty enters into force. 

In contrast to the process for State-licensed exports and for the 
treaties, State does not vet parties to transactions under the 
Canadian exemption before the transaction. The Canadian Controlled 
Goods Directorate vets end users and approves them to receive U.S. 
exports. State officials said that Canadian government officials have 
briefed them on the vetting and registration process. State officials 
expressed confidence in the vetting process because, according to 
them, Canada wants to protect U.S. defense articles and be seen as a 
reliable trading partner. Table 3 summarizes the differences in the 
compliance activities for State-licensed exports and State's country-
based license exemptions. 

Table 3: Differences among Compliance Activities for State-Licensed 
Exports, Exports under the UK and Australia Treaties, and Exports 
under the Canadian Exemption: 

Activity: License application review; 
State-licensed export: State reviews the license application and 
proposed transaction before a license is issued; 
UK and pending Australia treaty exemptions[A]: Members of the approved 
community may export to other members of the approved community 
without prior State approval; 
Canadian exemption: State does not review the transaction prior to 
export. 

Activity: Vet parties to the transaction; 
State-licensed export: State vets all entities party to the export 
transaction before a license is issued; 
UK and pending Australia treaty exemptions[A]: State vets all 
exporters applying for membership in "approved communities." Only 
members of the approved communities are allowed to export items under 
the treaty; 
Canadian exemption: State does not vet entities party to a transaction 
under the Canadian exemption.[B] 

Activity: Compliance program review; 
State-licensed export: State reviews exporter's compliance program and 
records; in accordance with ITAR, exporters are required to maintain 
specific records of their transactions for inspection upon request; 
UK and pending Australia treaty exemptions[A]: State reviews 
exporter's compliance program and records. In addition to the standard 
ITAR requirements, exporters must apply treaty markings to the items 
exported; 
Canadian exemption: State reviews exporter's compliance program and 
records. In addition to the ITAR requirements, exporters must provide 
an annual report to State on transactions conducted under the Canadian 
exemption. 

Source: GAO analysis of State and Commerce information. 

[A] Although signed and ratified by the United States, the treaty with 
Australia had not entered into force as of the date of this report. 
The information in this column is based on the regulations for the 
treaty with the UK, which State officials said would be similar. 

[B] The Canadian Controlled Goods Directorate vets end users and 
approves them to receive U.S. exports. 

[End of table] 

For transactions using the STA for current dual-use items, Commerce 
does not vet parties to the transaction before export. Commerce 
officials said that after the shipment has occurred, they identify and 
vet parties to the transaction and subsequently review new exporters 
to ensure compliance with STA requirements. However, Commerce has 
proposed that in order to use the STA for the export of defense items 
that may be placed under its control, the item must be destined for 
the end use of a government of one of the 36 authorized destinations. 
In addition, certain parties to the transaction would be required to 
have a previously issued State or Commerce license, or have been 
listed on a previous license, indicating that those parties had been 
previously vetted.[Footnote 42] Table 4 summarizes the differences 
among the compliance activities for Commerce-licensed items and 
Commerce's STA exemption. 

Table 4: Differences among Compliance Activities for Commerce-Licensed 
Exports and STA License Exemption Exports: 

Activity: License application review; 
Licensed export: Commerce reviews the license application and proposed 
transaction before a license is issued; 
STA license exemption: Commerce does not review the transaction prior 
to export; 
STA license exemption for defense items (proposed 600 series)[A]: 
Commerce does not plan to review the transaction prior to export 
unless certain parties to the transaction were not previously 
authorized on a State or Commerce license. 

Activity: Vet parties to the export transaction; 
Licensed export: Commerce vets entities party to the export 
transaction before a license is issued; 
STA license exemption: Commerce identifies and vets parties to the 
transaction postshipment; 
STA license exemption for defense items (proposed 600 series)[A]: 
Specified parties will be required to have a previous State or 
Commerce license to use the STA for defense items. 

Activity: Compliance program review; 
Licensed export: Commerce reviews exporter's records. In accordance 
with the EAR, exporters are required to maintain specific records of 
their transactions and produce them for inspection upon request; 
STA license exemption: Commerce reviews exporter's records. In 
addition to the requirements for licensed exports, exporters are 
required to obtain and maintain consignee statements; 
STA license exemption for defense items (proposed 600 series)[A]: 
Commerce will review exporter's records. In addition to the 
requirements for licensed exports, exporters will be required to 
obtain and maintain enhanced consignee statements. 

Source: GAO analysis of State and Commerce information. 

[A] On June 21, 2012, Commerce proposed limitations on the export of 
items to be placed in the 600 series, including those eligible for 
export under the STA. The information in this column represents the 
proposed regulations in the June 21, 2012, Federal Register notice. 77 
Fed. Reg. 37,524. 

[End of table] 

Compliance Program Review: 

If there are compliance concerns, State and Commerce each review and 
critique companies' compliance programs and records to manage export-
related decisions and transactions to help ensure they conform with 
regulations and license conditions. Both the ITAR and the EAR require 
exporters to maintain specific documentation for licensed exports, 
including a description of the item, transaction date, and 
destination, which helps facilitate such reviews and ensure compliance 
with laws and regulations.[Footnote 43] In addition to the 
requirements outlined in the ITAR and EAR, each of the three country-
based license exemptions has one additional requirement: 

* Under the treaties, exporters are required to apply and maintain 
appropriate treaty markings or other identification on the items to 
help ensure that future approved community members understand 
compliance requirements. 

* Exporters using State's Canadian exemption must also submit 
semiannual reports to State on their use of the defense service 
provisions of the Canadian exemption. 

* Exporters using Commerce's STA exemption must obtain and maintain 
consignee statements. The statement, which the exporter obtains from 
the consignee, serves as an acknowledgment of an agreement to the STA 
requirements. The statement must include, among other things, (1) an 
indication that the consignee receiving the shipment acknowledges it 
was shipped pursuant to the STA exemption; (2) an indication that the 
consignee receiving the shipment agrees not to transfer or reexport 
the items to any destination, use, or user prohibited by the EAR; and 
(3) the export control classification numbers of the specific items 
exported.[Footnote 44] If an item exported using the STA is re-
exported or retransferred, the re-exporter or transferor must furnish 
the export control classification number for the item shipped to the 
subsequent consignee, according to Commerce. 

According to Commerce officials, although the STA exemption is the 
only Commerce license exemption that requires the specific STA 
consignee statement, other Commerce exemptions require written 
assurances from foreign parties and also serve as a compliance 
mechanism.[Footnote 45] Commerce officials noted that, in enforcement 
cases, the STA consignee statements would be useful if a violation of 
export laws and regulations occurs because the statement would help 
prove intent to violate the regulation. Commerce recently proposed 
that the STA consignee statement for the export of the defense items 
that may be placed under its control would be enhanced to include a 
specific provision that would permit end-use checks by the U.S. 
government.[Footnote 46] 

Other Compliance and Enforcement Activities Are Generally the Same: 

Other compliance activities are generally the same for licensed 
exports and country-based exempted exports. According to State and 
Commerce officials, all exports, whether under a license or a license 
exemption, may be subject to end-use monitoring checks, which helps 
ensure that parties to the transaction comply with export license 
terms, licensing conditions, exemption terms, and export regulations. 
Both State and Commerce analyze shipping data to determine which 
exports should receive postshipment verification checks (part of end-
use monitoring) for licensed exports, for country-based license-exempt 
exports, and for any other exports subject to the ITAR and EAR. In 
addition to selecting exports for postshipment verification checks, 
Commerce also analyzes STA shipping data to verify that the item-
country relationship is correct and to identify exporters using the 
STA exemption for the first time. According to Commerce officials, all 
first-time users of the STA exemption for current dual-use items are 
subject to a Commerce Compliance Review to verify compliance with the 
license exemption regulations (such as obtaining the consignee 
statement). In addition, Commerce officials conduct real-time analysis 
of shipping data in order to verify compliance with laws and 
regulations, and to detect and prevent illegal transactions. According 
to State and Commerce officials, country-based license exemptions do 
not influence the process the agencies use for updating and 
maintaining lists of parties against which applicants or end-users are 
screened during the vetting process. As part of their ongoing outreach 
efforts, both State and Commerce officials said they have conducted 
outreach to exporters and foreign government officials to educate them 
about the country-based license exemptions. 

Enforcement activities are generally the same for licensed exports and 
country-based exempted exports. According to State and Commerce 
officials, all exports, regardless of how they are exported, are 
subject to inspection and possible seizure at the border, 
investigation for potential violations, and punitive actions for 
actual violations. Further, State officials said that all exports 
under ITAR, including exports under a license, the treaties, and the 
Canadian exemption are subject to retransfer or reexport restrictions 
in accordance with ITAR regulations. Items exported under the treaties 
may only be retransferred or reexported to another member of the 
approved community in accordance with the requirements outlined in the 
exemption. Items exported under STA cannot be transferred or 
reexported in violation of the EAR. In addition, items exported under 
the STA are not eligible to use certain parts of the license exemption 
"Additional Permissive Re-exports," which allows for reexport without 
a license and may be used under certain circumstances with licensed 
exports.[Footnote 47] 

State and Commerce Have Different Requirements for Notifying Congress 
of Proposed Controlled Exports and Statutory Violations; Commerce Has 
Proposed Harmonizing Certain Notification Requirements: 

State is required by statute to notify Congress of certain proposed 
defense exports and statutory violations; Commerce is required to 
notify Congress of exports of dual-use items in specific cases and is 
not required to provide notification of statutory violations 
generally.[Footnote 48] The congressional notification requirements 
for exports and statutory violations vary because State and Commerce 
export control regulations derive from different authorities and aim 
to control articles that have different levels of concern for 
diversion or unintended use. State is required to notify Congress of 
proposed exports of major defense equipment, articles, and services 
that meet specific dollar thresholds under a license or treaty. 
[Footnote 49] Commerce is required to notify Congress in cases in 
which proposed exports are destined for a designated state sponsor of 
terrorism or could make a significant contribution to the military 
potential of a government of a country that has repeatedly provided 
support for acts of international terrorism.[Footnote 50] However, in 
June 2012, Commerce issued a proposed rule that would require 
congressional notification of pending exports of major defense 
equipment, such as articles under the 600 series, including those 
exported under the STA, that meet the same dollar thresholds as those 
required of State.[Footnote 51] As of November 2012, Commerce was 
considering how to implement its proposal. In terms of enforcement 
actions, State is required to notify Congress of certain violations of 
export laws that exceed specified statutory dollar thresholds. 
[Footnote 52] Commerce reports statutory violations that result in 
administrative and criminal cases as part of its annual report to 
Congress. 

State Is Required to Notify Congress of Proposed Exports for Certain 
Defense Items and of Statutory Violations: 

The AECA requires State to notify Congress of proposed exports for 
major defense equipment on the basis of set thresholds that vary among 
items requiring a license and those under the treaties.[Footnote 53] 
According to State officials, exporters are responsible for informing 
State when controlled items exported with a license or under any of 
the country-based license exemptions will reach the congressional 
notification threshold. When State obtains this information, it is 
required to submit a notification to Congress. Since export of major 
defense equipment, articles, and services are not included under the 
Canadian exemption and continue to require a license, AECA 
congressional notification requirements do not apply.[Footnote 54] 

State must notify Congress of planned exports of controlled items that 
required a license within certain parameters. Specifically: 

* State must notify Congress at least 30 days before the export of any 
major defense equipment requiring an export license in the amount of 
$14 million or more, of defense articles or defense services sold 
under a contract in the amount of $50 million or more, and firearms in 
an amount of $1 million or more to countries outside of the North 
Atlantic Treaty Organization (NATO), Japan, Australia, New Zealand, 
South Korea, and Israel.[Footnote 55] 

* State must notify Congress at least 15 days before the export of any 
major defense equipment requiring an export license in the amount of 
$25 million or more, of defense articles or defense services sold 
under a contract in the amount of $100 million or more, or of firearms 
in an amount of $1 million or more to NATO, Japan, Australia, New 
Zealand, South Korea, and Israel.[Footnote 56] 

State is also required in the notification to identify the foreign 
country or international organization to which such export will be 
made, the dollar amount of the items to be exported, and a description 
of the items to be exported.[Footnote 57] 

Regulations for the implementation of the UK treaty require similar 
congressional notification for proposed exports.[Footnote 58] The 
specific thresholds for congressional notification for exports of 
major defense equipment under the UK treaty are the same as those 
required under licensed exports to NATO countries listed above. 
Approved community members are required to notify State of a proposed 
export that meets the above thresholds.[Footnote 59] State then has 30 
days to respond to the exporter. An exporter may not export the item 
until an official response from State has been received. In addition, 
State is required to submit an annual report to Congress on the 
treaties. This report should include a summary of the amount of 
exports under the treaty and the defense articles transitioned into 
the treaty, with an analysis of how the treaty is being used. 

In addition, the AECA requires State to notify Congress of certain 
violations of export laws.[Footnote 60] According to State officials, 
Section 3 of the AECA mandates State to notify Congress of certain 
violations concerning transfers of defense articles, training, and 
services under Foreign Military Sales, Excess Defense Articles, and 
Military Assistance Programs, and in some cases defense articles under 
Direct Commercial Sales. State officials noted that State provides 
notifications of violations of Direct Commercial Sales for cases where 
exports exceed certain statutory thresholds.[Footnote 61] According to 
State officials, if there is such a violation, State notifies Congress 
in writing or through a briefing to the Speaker of the House of 
Representatives and to the Chairperson of the Senate Foreign Relations 
Committee. In addition, State issues an annual report to Congress on 
its Blue Lantern end-use monitoring program,[Footnote 62] which 
includes, among other things, information on the number of unfavorable 
determinations from end-use checks conducted during the fiscal year. 
[Footnote 63] According to State officials, all defense exports under 
State's control, regardless of license requirements, may be subject to 
Blue Lantern inquiries. In addition to the Blue Lantern annual report, 
Congress also requires a separate annual report on end-use monitoring 
and compliance activities specifically related to the treaties. 

Commerce Is Proposing to Notify Congress Voluntarily of Certain 
Controlled Exports and Currently Reports on Some Statutory Violations: 

The Export Administration Act (EAA) requires Commerce to notify 
Congress of certain proposed dual-use exports, but no general 
requirement to notify Congress of statutory violations. The EAA 
requires Commerce to notify Congress of proposed exports which are 
destined for a designated state sponsor of terrorism or could make a 
significant contribution to the military potential of a government of 
a country that has repeatedly provided support for acts of 
international terrorism.[Footnote 64] According to Commerce officials, 
the absence of a broader congressional notification requirement under 
the EAA raised concerns that Congress would no longer have oversight 
of exports of certain defense items that might be transferred from 
State control to Commerce control. Subsequently, in June 2012, 
Commerce issued a proposed rule that includes notifying Congress of 
planned exports of major defense equipment to be placed under Commerce 
control that meet the same dollar thresholds as those required of 
State.[Footnote 65] Commerce officials also said that the requirement 
would apply to major defense equipment that might be eligible for the 
STA exemption. As of September 2012, Commerce was reviewing comments 
on and considering how to implement the proposed rule. 

The EAA also does not contain specific requirements for Commerce to 
notify Congress of export controls violations. However, it requires 
Commerce to submit an annual report to Congress that includes 
information on export control violations.[Footnote 66] The report 
includes information on the number of administrative cases and 
criminal convictions as a result of export control violations by 
individuals and companies. For example, in 2011 Commerce reported its 
investigations resulted in the criminal conviction of 39 individuals 
and businesses for export violations and that penalties for these 
convictions came to $20,214,000 in criminal fines and more than 572 
months of imprisonment.[Footnote 67] Cases include violations such as 
attempting to export controlled goods without a license and making 
false statements in a license to export firearms. The report provides 
information on the amount collected in fines resulting from 
convictions and administrative cases each year. According to Commerce 
officials, any violations related to the STA that result in criminal 
or administrative penalties will also be included in the report. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Departments of Commerce and 
State for their review and comment. In written comments (which are 
reproduced in enclosure III), Commerce stated that our report could be 
improved by describing the rationale for making less-sensitive items 
moved from the United States Munitions List to the "600 series" in the 
Commerce Control List eligible for the STA license exemption. We have 
incorporated the suggested language as provided. Commerce also 
provided additional technical comments, which we incorporated as 
appropriate. State did not provide written comments on the draft of 
this report but provided technical comments, which we incorporated 
into the report, as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to interested 
congressional committees, the Secretary of State, and the Secretary of 
Commerce. In addition, the report will be available at no charge on 
the GAO website at [hyperlink, http://www.gao.gov]. If you or your 
staffs have any questions about this report, please contact me at 
(202) 512-9601 or 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 contributed to this report are 
listed in Enclosure IV. 

Signed by: 

Thomas Melito:
Director:
International Affairs and Trade: 

Enclosures (4): 

[End of section] 

Enclosure I: Objectives, Scope, and Methodology: 

In this review, we analyzed the Departments of State's (State) and 
Commerce's (Commerce) compliance and enforcement activities and 
congressional notification requirements for controlled items exported 
with a license and those exported under four country-based license 
exemptions: the Defense Trade Cooperation Treaties with the United 
Kingdom (UK) and Australia (hereafter referred to as "the treaties"), 
the Canadian exemption, and the Strategic Trade Authorization (STA). 
Specifically, we compared existing and proposed (1) compliance and 
enforcement activities for exports under both licenses and country-
based license exemptions, and (2) requirements for State and Commerce 
to notify Congress of certain defense exports and of violations of 
export control laws or regulations. 

To address the first objective, we first identified and reviewed 
statutory authorities, their implementing regulations, and proposed 
changes to these regulations that guide State and Commerce's defense 
and dual-use export control processes. Specifically, we reviewed the 
Arms Export Control Act (AECA) and the International Traffic in Arms 
Regulations (ITAR), as well as the Export Administration Act (EAA) and 
the Export Administration Regulations (EAR), and selected Federal 
Register notices. To identify and describe the country-based license 
exemptions, we interviewed officials from State and Commerce and 
reviewed related regulatory and statutory authorities noted above, as 
well as the U.S.-U.K Treaty on Defense Trade Cooperation, the U.S.-
Australia Treaty on Defense Trade Cooperation, each treaty's 
Implementing Arrangements, and applicable Federal Register notices. To 
identify the compliance and enforcement activities for State and 
Commerce's licensed exports and for the agencies' country-based 
license exemptions, we interviewed State and Commerce officials, and 
reviewed agency documents and reports, as well as past GAO reports. 
Specifically, we interviewed officials from State's Directorate of 
Defense Trade Controls (DDTC), which manages the license and license 
exemption process for defense exports; and Commerce's Bureau of 
Industry and Security (BIS), which manages the licensing and license 
exemption process for dual-use items. We reviewed agency documents 
related to the compliance and enforcement activities for both the 
licensing process and country-based license exemption process, 
including State's standard operating procedures for admitting members 
to the UK treaty's approved community, State's standard operating 
procedures for providing annual reports on the UK treaty, Commerce's 
compliance plan for the STA exemption, State's annual Blue Lantern 
program reports, BIS's annual reports to Congress, and previous GAO 
reports. To determine and compare proposed compliance and enforcement 
activities for items moving from the United States Munitions List to 
the Commerce Control List, we reviewed selected Federal Register 
notices and interviewed State and Commerce officials. 

To compare the existing and proposed congressional notification 
requirements for transfers and export violations for State's and 
Commerce's licensed exports and these requirements for State and 
Commerce's country-based license exemptions, we reviewed statutory 
regulations and proposed changes to these regulations, including the 
Arms Export Control Act, International Traffic in Arms Regulations, 
Export Administration Act, Export Administration Regulations, the U.S.-
U.K Treaty on Defense Trade Cooperation, the U.S.-Australia Treaty on 
Defense Trade Cooperation, the treaties' Implementing Arrangements, 
and applicable Federal Register notices. In addition, we interviewed 
officials from State and Commerce, including officials from State's 
DDTC and: 

Commerce's BIS, which manage the licensing and license exempt 
processes for defense and dual-use items, respectively. 

We conducted this performance audit from March 2012 to November 2012 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Enclosure II: Export Process for Defense and Dual-Use Items and 
Services under Licenses and Country-Based Exemptions: 

The Departments of State (State) and Commerce (Commerce) administer 
the regulatory frameworks for the export of defense and dual-use 
items. State administers controls for defense items and services, and 
Commerce does so for dual-use items, which have both military and 
civilian applications. 

Generally, exporters are responsible for determining which agency 
(State or Commerce) controls the item or service they seek to export 
and which regulatory requirements apply, if any. Generally, unless an 
exemption applies, exporters submit a license application to the 
requisite agency if their item or service is controlled by either 
State or Commerce to receive approval to export. Once a license 
application is submitted by the exporter, the agency reviews the 
application and may approve, approve with conditions, deny, or return 
the license to the exporter without action.[Footnote 68] When deciding 
whether to approve or deny an application, State or Commerce evaluates 
it against several factors, including an assessment of all parties to 
the transaction and how the recipient plans to use the item. As part 
of the application review process, State and Commerce may consult with 
other agencies such as the Departments of Defense or Energy.[Footnote 
69] If the application for export meets certain thresholds, the 
agencies may provide notification to Congress of the pending 
export.[Footnote 70] If the export license application is approved, 
the exporter files data into the Automated Export System (AES), the 
central point through which exporters are required to electronically 
file shipment data required by multiple agencies. 

The initial export process differs for country-based license exempt 
exports because a license application is not required. For State's 
Canadian exemption and the United Kingdom and Australia treaties, 
exporters first must verify the recipient's eligibility to receive the 
export, either through verifying their registration with the Canadian 
Controlled Goods Directorate or as a member in the "approved 
community" for the treaties.[Footnote 71] For the treaties, the 
exporter must also determine if the export reaches a threshold that 
requires notification to Congress of the proposed sale. Once 
registration or membership has been verified and notification provided 
to Congress, if needed for the treaties, the exporter files data into 
the AES. 

For all exporters utilizing the Strategic Trade Authorization (STA) 
exemption, exporters must obtain a consignee statement prior to 
export.[Footnote 72] As proposed, for 600 series items the exporter 
must also verify that a previous State or Commerce license has been 
issued and that the ultimate end-user is the government of one of the 
36 destinations, and determine if the proposed export reaches a 
threshold that requires notification to Congress.[Footnote 73] Once 
the consignee statement has been obtained, the exporter files data 
into the Automated Export System. 

Once the exporter files data into the Automated Export System for 
either licensed exports or country-based license exempt exports, the 
Department of Homeland Security's Customs and Border Protection and 
other agencies may review and validate the export documentation, 
inspect outbound cargo and detain questionable shipments. In addition, 
Commerce and State may conduct end-use monitoring checks to verify the 
receipt and use of the item or service exported. Exporters are 
required to maintain STA-related documentation, such as the consignee 
statement. In addition, Commerce officials said new users of the STA 
are identified and undergo an export compliance review. 

[End of section] 

Enclosure III: Comments of the Department of Commerce: 

United States Department of Commerce: 
Under Secretary for Industry and Security: 
Washington, D.C. 20230: 

November 7, 2012: 
                
Mr. Thomas Melito: 
Director, International Affairs and Trade: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Melito, 

Thank you for the opportunity to comment on the draft GAO report 
"Export Controls: Compliance and Enforcement Activities and 
Congressional Notification Requirements under Country-based License 
Exemptions" (GAO-12-119R). 

The Department of Commerce appreciates the work that went into the 
report. We believe the report would be improved by describing the 
rationale for making less sensitive items moved from the United States 
Munitions List to the "600" series in the Commerce Control List 
eligible for License Exception Strategic Trade Authorization (STA). 
The President's Export Control Reform initiative will enhance national 
security by: (i) allowing for greater interoperability with our NATO 
and other allies while still maintaining and expanding robust controls 
and, in some cases, prohibitions on exports or reexports to other 
countries and for proscribed end users and end uses; (ii) enhancing 
the U.S. defense industrial base by reducing the current incentives 
for foreign companies to design out or avoid U.S.-origin ITAR-
controlled content, particularly with respect to generic, unspecified 
parts and components; and (iii) permitting the U.S. Government to 
focus its resources on controlling, monitoring, investigating, 
analyzing, and, if need be, prohibiting exports and reexports of more 
significant items to destinations, end uses, and end users of greater 
concern than our NATO allies and other multi-regime partners. This is 
the rationale for making 600 series items eligible for the STA license 
exception. Please see attached document for additional more specific 
comments. 

If you need further assistance, please contact Mark Crace in the 
Office of Administration. Mr. Crace may be reached at (202) 482-8093 
or via e-mail at mark.crace@bis.doe.gov. 

Signed by: 

Eric L. Hirschhorn: 

[End of section] 

Enclosure IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

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

Staff Acknowledgments: 

GAO staff who contributed to this report includes Jeff Phillips, 
Assistant Director; Jenna Beveridge; Francisco M. Enriquez; and Grace 
Lui. 

[End of section] 

Related GAO Products: 

Export Controls: U.S. Agencies Need to Assess Control List Reform's 
Impact on Compliance Activities. [hyperlink, 
http://www.gao.gov/products/GAO-12-613]. Washington, D.C.: April 23, 
2012. 

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. 

Defense Trade: 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 this report, we use the term "exemption" to refer to both 
State's license exemptions and Commerce's license exceptions. 

[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] Announcement of Entry Into Force of the Defense Trade Cooperation 
Treaty Between the United States and the United Kingdom, 77 Fed. Reg. 
23,538 (Apr. 19, 2012). 

[4] 22 C.F.R. § 126.5. 

[5] 15 C.F.R. § 740.20. The complete list of reasons for control 
include national security, chemical or biological weapons, nuclear 
nonproliferation, regional stability, crime control, or significant 
items. The 36 destinations are 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. 

[6] The eight destinations are Albania, Hong Kong, India, Israel, 
Malta, Singapore, South Africa, and Taiwan. 

[7] The United States Munitions List identifies defense items 
controlled by State, and the Commerce Control List identifies dual-use 
and commercial items controlled by Commerce. According to § 730.3 of 
the Export Administration Regulations (EAR), the convenient term dual 
use is sometimes used to distinguish the types of items covered by the 
EAR from those that are covered by the regulations of certain other 
U.S. government departments and agencies with export licensing 
responsibilities. In general, the term dual use serves to distinguish 
EAR-controlled items that can be used for both military and other 
strategic uses (e.g., nuclear) and commercial applications. Although 
the short-hand term "dual use" may be employed to refer to the entire 
scope of the EAR, the EAR also applies to some items that have solely 
civil uses. For the purposes of this report, we refer to items under 
Commerce jurisdiction as "dual-use" items. 

[8] We did not assess the level of controls warranted for items being 
considered for transfer to Commerce for control. 

[9] 76 Fed. Reg. 41,958 (July 15, 2011). 

[10] 77 Fed. Reg. 37,524 (June 21, 2012). 

[11] Compliance activities, such as vetting parties to a transaction 
and review of recordkeeping, are intended to encourage compliance with 
export control laws and regulations, while enforcement activities, 
such as investigations of potential violations of export control laws 
and regulations, are intended to apply penalties for violating them. 

[12] 22 U.S.C. §§ 2776(c)(6) and 2753 and 50 U.S.C. app. §§ 2405, 2413. 

[13] Although Commerce implements several license exemptions that take 
into account destination and item or technology, we limited our review 
to the STA. 

[14] We did not assess the potential effectiveness of the compliance 
and enforcement activities conducted by State and Commerce. 

[15] For the purposes of this report, we characterize the license 
application review as a compliance activity to be consistent with 
Commerce's own usage in its annual report and congressional testimony 
as well as our past reports. 

[16] State's authority stems from the Arms Export Control Act (AECA). 
22 U.S.C. §§ 2751-2799aa-2. Commerce's authority stems from the Export 
Administration Act (EAA). 50 U.S.C. app. §§ 2401-2420. 

[17] 22 U.S.C. § 2776(c)(6). 

[18] 50 U.S.C. app. § 2405(j). 

[19] 77 Fed. Reg. 37,524 (June 21, 2012). 

[20] 22 U.S.C. § 2753. 

[21] 50 U.S.C. app. § 2413. 

[22] State implements the ITAR and regulates the export of defense 
items pursuant to the Arms Export Control Act (AECA). 22 U.S.C. § 
§2751-2799aa-2. 

[23] Commerce implements the EAR and regulates the export of items 
subject to the EAR, including dual-use items, pursuant to the Export 
Administration Act (EAA). 50 U.S.C. app. §§ 2401-2420. The Export 
Administration Act (EAA) of 1979, as amended lapsed on August 20, 
2001. However, the President has, to the extent permitted by law, kept 
in effect the provisions of the EAA and its implementing regulations 
through Executive Order 13222 of August 17, 2001 (66 Fed. Reg. 
44,025). Executive Order 13222 was issued under the authority provided 
by the International Emergency Economic Powers Act (50 U.S.C. §§ 1701 
et seq.) and most recently was extended by Presidential Notice of 
August 15, 2012. 77 Fed. Reg. 49,699 (Aug. 16, 2012). 

[24] Commerce implements other license exemptions. For example, the 
exemption "Servicing and Replacement of Parts and Equipment" allows 
for the export and reexport of one-for-one replacement of parts or 
servicing and replacement of previously exported equipment without a 
license. 

[25] State can verify only exports of hardware technology transfers 
for which exporters are required to file export shipment data 
electronically. This requirement does not apply to technology exports; 
as such, technology exports may have occurred under the treaty without 
State's knowledge. 

[26] 22 C.F.R. § 126.5. 

[27] In April 1999, State revised its regulations to clarify when the 
exemption could be used, and limited the defense items that could be 
exported under the exemption. State took this action on the basis of 
its analysis that exports were being reexported from Canada to 
countries of concern without U.S. government approval and that 
controls over defense and ammunition transfers needed strengthening. 
For additional information see GAO, Defense Trade: Lessons to Be 
Learned from the Country Export Exemption, [hyperlink, 
http://www.gao.gov/products/GAO-02-63] (Washington D.C.: Mar. 29, 
2002). 

[28] State's End-use Monitoring of Defense Articles and Defense 
Services, Commercial Exports FY 2009, contains a review of the 
Canadian exemption and determined the number of transactions and 
dollar value associated with the Canadian exemption for fiscal years 
2007 and 2008. In this report, State erroneously reported to Congress 
that $17 billion in exports were conducted under the Canadian 
exemption during this period; the correct amount is $1.7 billion; 
State officials told GAO they plan to report the correct amount to 
Congress. 

[29] 15 C.F.R. § 740.20. See 15 C.F.R. § 742.14 for the regulatory 
explanation of significant item as a reason for control. 

[30] 77 Fed. Reg. 37,524 (June 21, 2012). 

[31] The proposed rule states that the purchaser, intermediate 
consignee, ultimate consignee and end user must have been previously 
approved on a State or Commerce export license. 

[32] 22 C.F.R. § 122.1. 

[33] 

The items that Commerce controls may be eligible for other license 
exemptions. 

[34] 22 U.S.C. §§ 2776, 2753. 

[35] 50 U.S.C. app. § 2405. 

[36] 50 U.S.C. app. § 2413. 

[37] See GAO, Export Controls: U.S. Agencies Need to Assess Control 
List Reform's Impact on Compliance Activities, [hyperlink, 
http://www.gao.gov/products/GAO-12-613] (Washington, D.C.: Apr. 23, 
2012); and 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). 

[38] The Denied Persons List includes individuals and entities that 
have been denied export privileges. Any dealings with a party on this 
list that would violate the terms of its denial order are prohibited. 
The Entity List includes parties whose presence in a transaction can 
trigger a license requirement supplemental to those elsewhere in the 
EAR. The list specifies the license requirements and policy that apply 
to each listed party. The Unverified List includes end users whom 
Commerce's Bureau of Industry and Security has been unable to verify 
in prior transactions. The presence of a party on this list in a 
transaction is a "red flag" that should be resolved before proceeding 
with the transaction. The Nonproliferation Sanctions List includes 
parties that have been sanctioned under various statutes. The AECA 
Debarred List includes entities and individuals prohibited from 
participating directly or indirectly in the export of defense 
articles, including technical data and defense services. The AECA 
Debarred List includes persons convicted in court of violating or 
conspiring to violate the AECA and subject to "statutory debarment" or 
persons established to have violated the AECA in an administrative 
proceeding and subject to "administrative debarment." The Specially 
Designated Nationals List includes parties who may be prohibited from 
export transactions on the basis of the Department of the Treasury's 
Office of Foreign Assets Control regulations. The EAR requires a 
license for exports or reexports to any party in any entry on this 
list. 

[39] According to Commerce guidance on end-use checks, an on-site 
visit is a requirement for all prelicense checks except under unusual 
circumstances that must be reported. State, however, does not require 
an on-site visit for all prelicense checks. 

[40] Consignee refers to a recipient of the exported item during any 
phase of the export transaction. 

[41] As provided for under Executive Order 12981, State and the 
Departments of Defense and Energy have the authority to review any 
export license application submitted to Commerce, and Commerce may 
refer export license applications to other departments or agencies as 
appropriate. Exec. Order No. 12,981, 60 Fed. Reg. 62,981 (Dec. 5, 
1995). If there is disagreement among the agencies on the disposition 
of the application, the application goes through an interagency 
dispute resolution process. 

[42] The proposed rule states that the STA may be used for 600 series 
items only if the purchaser, intermediate consignee, ultimate 
consignee, and end user have been previously approved on a State or 
Commerce export license. 77 Fed. Reg. 37,524 (June 21, 2012). 

[43] Specifically, the ITAR requires maintenance of records concerning 
the manufacture, acquisition, and disposition (to include copies of 
all documentation on exports using exemptions and applications and 
licenses and their related documentation) of defense articles; 
technical data; defense services; brokering activities; and 
information on political contributions, fees, or commissions furnished 
or obtained (22 C.F.R. § 122.5). Additionally, requirements specific 
to the EAR include contracts, financial records, and export control 
documents such as the license and AES filing (15 C.F.R. § 762.2). 

[44] 15 C.F.R. § 740.20. 

[45] In previous discussions with Commerce officials, we were told 
that the STA exemption is the only Commerce license exemption that 
requires a consignee statement. 

[46] 77 Fed. Reg. 37,524 (June 21, 2012). 

[47] 15 C.F.R. § 740.20. Items exported under the STA are not eligible 
for paragraphs (a) or (b) of the license exemption Additional 
Permissive Re-exports. 

[48] 22 U.S.C. §§ 2776, 2753 and 50 U.S.C. app. §§ 2405, 2413. 

[49] 22 U.S.C. §§ 2776 and 2753; see also 22 C.F.R. § 126.17. 

[50] 50 U.S.C. app. § 2405. 

[51] 77 Fed. Reg. 37,524. 

[52] 22 U.S.C. § 2753. 

[53] 22 U.S.C. §§ 2753 and 2776. 

[54] Specifically, the Canadian exemption does not cover firearms and 
ammunition, generation III (or more sophisticated) night vision 
equipment, launch vehicles, most spacecraft, missiles, USML items, and 
related technical data identified on the Missile Technology Control 
Regime Annex, as well as other sensitive military technologies, 
including those that require congressional notification. 

[55] 22 U.S.C. § 2776. Pursuant to the AECA, major defense equipment 
means any item of significant military equipment on the USML having a 
nonrecurring research and development cost of more than $50 million or 
a total production cost of more than $200 million (22 U.S.C. § 
2794(6)). 

[56] 22 U.S.C. § 2776. 

[57] 22 U.S.C. § 2776(c). 

[58] Implemented in 22 CFR C.F.R. § 126.17(o). The regulations for the 
implementation of the Australia treaty have not been developed because 
the treaty is not yet in effect. 

[59] 22 C.F.R. § 126.17(o). 

[60] 22 U.S.C. § 2753. 

[61] According to State, the set threshold to report Defense 
Commercial Sales is $14 million in major defense equipment or $50 
million of other defense articles. 

[62] The Blue Lantern program is operated in accordance with section 
40A of the AECA (22 U.S.C. § 2778). 

[63] An unfavorable determination means that the Blue Lantern's 
findings of fact are not consistent with the information contained in 
the application or license. 

[64] 50 U.S.C. app. § 2405. 

[65] 77 Fed. Reg. 37,524. 

[66] 50 U.S.C. app. § 2413(a)(19). 

[67] Department of Commerce, Bureau of Industry and Security, Annual 
Report to Congress for Fiscal Year 2011 (Washington, DC: Department of 
Commerce), accessed July 2, 2012, [hyperlink, 
http://www.bis.doc.gov/news/2012/bis_annual_report_2011.pdf]. 

[68] An agency may return a license application without action if, for 
example, the agency needs additional information. 

[69] As provided for under Executive Order 12981, State and the 
Departments of Defense and Energy have the authority to review any 
export license application submitted to Commerce, and Commerce may 
refer export license applications to other departments or agencies as 
appropriate. Exec. Order No. 12,981, 60 Fed. Reg. 62,981 (Dec. 5, 
1995). 

[70] State is required by statute to notify Congress of pending 
exports that meet specific dollar thresholds. 22 U.S.C. § 2776. 
Commerce is required to notify Congress of pending exports where the 
item is destined for a designated state sponsor of terrorism or could 
make a significant contribution to the military potential of a 
government of a country that has repeatedly provided support for acts 
of international terrorism. 50 U.S.C. app. 2405. Commerce recently 
proposed notifying Congress of pending exports of 600 series items 
that meet the same dollar thresholds required for State. 

[71] Although signed and ratified by the United States, the treaty 
with Australia had not entered into force as of the date of this 
report. The information in this enclosure is based on the regulations 
for the treaty with the UK, which State officials said would be 
similar. 

[72] 15 C.F.R. § 740.20. 

[73] On June 21, 2012, Commerce proposed restrictions on the export of 
600 series items, including those that would be eligible for export 
under the STA. As part of this proposed rule, Commerce proposed 
notifying Congress of planned exports of major defense equipment to be 
placed under the 600 series of the Commerce Control List that meet the 
same dollar thresholds as those required of State. However, for 
exports of 600 series items that meet congressional thresholds, 
exporters would not be able to use the STA. 77 Fed. Reg. 37,524. 

[End of section] 

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