Licensing Exemptions, Round Two: The Defense Trade Cooperation Treaty

At a press briefing on Monday, Assistant Secretary of State John Rood elaborated on the Bush Administration’s latest attempt to secure license-free defense exports to the UK, a contentious issue that sparked a bruising battle between the administration and House Republicans three years ago. This time the exemptions are packaged in the form of a Defense Trade Cooperation Treaty (DTCT), the stated goal of which is to “improve transatlantic defence information sharing by reducing the barriers to exchanges of defence goods, services and information between the US and UK.” By pursuing a treaty, the administration avoids another confrontation with the House, but it remains to be seen whether the Democrat-controlled Senate will tolerate what appears to be an end-run around their colleagues, especially given the administration’s apparent failure to adequately consult either chamber before negotiating the treaty.

While the text of the treaty is still under wraps, Assistant Secretary Rood’s briefing provided some clarification on the treaty’s contents and the motivations behind it. According to Rood, a major factor in the decision to pursue this treaty was the special relationship between the UK and the US, which has led to close cooperation on key national security and foreign policy issues. The treaty will “eliminate unnecessary barriers to cooperation” in these areas by permitting the transfer of most defense articles, technology and services on the US Munitions List (USML)* to a pre-approved “community” of UK-based companies without a license. It would also permit the retransfer of these items within the “approved community,” but retransfers to recipients outside of this group would still require British government authorization and approval by the US government. Qualifying transfers would have a British security classification and would be subject to the Official Secrets Act. As a result, penalties for violations of US retransfer and end-use restrictions would be much stiffer, claimed Rood. The Assistant Secretary refused to speculate on the anticipated size of the approved community, but did say that he believes it will be large enough to eliminate “a substantial majority” of the 13,000 licenses issued for exports to the UK in 2005 and 2006.

The treaty is, in part, a response to long-standing British complaints about delays associated with the issuance of licenses for commercial arms exports. To eliminate these delays, the Bush Administration first attempted to secure licensing exemptions for the UK and Australia in 2003. That attempt was stymied by several influential Congressmen, who objected to the proposed exemptions for several reasons. While it is still unclear which of these objections apply to the treaty, they shed light on the export control issues associated with exemptions and are therefore worth revisiting.

A Little Background…
With few exceptions, U.S. companies that sell defense articles and services through the Direct Commercial Sales program must receive an export license from the State Department. Applications for export licenses are reviewed on a case-by-case basis by trained licensing officers at the State Department’s Directorate of Defense Trade Controls. Over the past several years, the number of license requests processed by the State Department has jumped from around 44,000 in FY1999 to 66,000 for FY2006 without a proportionate increase in licensing officers. This may explain, in part, application processing times of around 20 days for cases that are not sent to other agencies for review (“nonstaffed” cases) and 38 days for those cases sent out for inter-agency review (“staffed” cases).

The defense industry claims that long delays in the application process hurt their competitiveness. In response, industry lobbyists and their allies have repeatedly pushed for the elimination of licensing requirements for certain items and for items bound for certain countries. The quest for the country-specific licensing exemptions dates back at least to President Bill Clinton’s Defense Trade Security Initiative, a 17-point agenda for relaxing and restructuring arms export controls unveiled in 2000. Point ten authorized license-free exports to “governments of treaty allies and qualified companies within those countries that have export controls comparable in scope and effectiveness to those of the U.S.” Some analysts and government officials were leery of the exemptions, fearing that they would make it easier for rogue regimes, criminals and other bad actors to acquire weapons and military equipment, and more difficult for law enforcement to catch and prosecute traffickers.** Congress eventually amended U.S. law to allow for the exemptions, but also added specific end-use, retransfer, handling and law enforcement requirements that the country in question had to meet first.

Several years of negotiations with the UK and Australian governments followed, during which they agreed to meet some – but not all – of the exemption agreement requirements. That was good enough for the Bush Administration, which promptly requested “legislative relief” from the remaining requirements. The Senate responded by adding amendment language to the FY05 Foreign Affairs Authorization Act that would have exempted the UK and Australia from these requirements. Passing the amendment would require the consent of their counterparts in the House, however, and after several months of back-and-forth with the administration over the specifics of the exemptions, House International Relations Committee (HIRC) Chairman Henry Hyde (R-IL) demurred. In a rare instance of intra-party defiance, the senior Republican lawmaker refused to grant the “legislative relief,” sparking a bitter, public feud that ultimately led to the demise of the exemption amendment and an embarrassing defeat for the Bush Administration.

The House’s Concerns
At the height of this feud in 2004, the chairmen of the House International Relations and Armed Services Committees teamed up to write a scathing report on the exemption agreements. The report, “U.S. Weapons Technology at Risk,” warned that the exemptions would “eliminate nearly all critical elements of prior U.S. Government scrutiny and control that would otherwise precede the export of weapons and defense commodities…” This would “almost certainly enlarge the risks of diversion …,” claimed the chairmen. As explained in the report, many of the up-front checks performed by the State Department would not be performed on defense articles exported under the waivers. Trained licensing officers would no longer screen parties to the proposed transfer or review documentation for telltale signs of diversion to “rogue governments, criminal organizations, and terrorist factions” which have “become increasingly effective at exploiting weaknesses in export controls…”

Supporters of the exemption were quick to point out that only British and Australian firms vetted by the US government would be eligible for license-free transfers, and that the State Department retained the right to disqualify firms that failed to follow US rules and restrictions. This was an important safeguard, but it was hardly a substitute for pre-license checks performed by trained personnel. Under the exemptions, shippers, freight forwarders, and other parties to the transaction would not be screened against watch lists of known arms traffickers, and the responsibility for spotting sophisticated diversion attempts by, inter alia, criminals “masquerading as legitimate firms using false addresses” would presumably shift from professional licensing officers to company executives.

In response to these concerns, then-Secretary of State Colin Powell pointed out that exporters would be required to deposit an electronic record of parties to the export with DHS 24 hours before the shipment. Again, this was a prudent step but does not appear to substitute for checks performed by specialists as part of the licensing process. A recent GAO report, for example, suggest that busy Customs officials may not have the time and resources to consistently review the electronic records, check relevant watch lists, and halt problematic shipments before they leave U.S. shores.

The House leaders also feared that the licensing exemption would negatively affect law enforcement efforts. Prosecuting violations of arms export laws (which would still apply to exempted items) would be made more difficult, claimed the House, by “the elimination of most documentary requirements – sworn applications, signed end user certificates and the like – related to the license application process…” This concern is echoed in a letter to the State Department written by former Deputy Assistant Attorney General Bruce Swartz several years earlier. In the letter, Swartz called attention to the importance of the “domestic evidentiary trail” created by the licensing process, which is used by the Justice Department to prosecute violators of US arms export controls. By making US investigators dependent upon foreign law enforcement organizations for evidence, “our first line of defense against diversions would be moved across the oceans to England and Australia,” warned Swartz.

More recently, several Assistant US Attorneys interviewed for a 2006 report by the Government Accountability Office expressed similar concerns about licensing exemptions. The attorneys confirmed that “it can be challenging to secure sufficient evidence that an exporter intentionally violated export control laws.” This is particularly true, they claimed, “when the items to be exported are exempted from licensing requirements.”

In November 2003, Assistant Attorney General William E. Moschella wrote a letter to Hyde endorsing the exemptions. “We believe,” wrote Moschella, “that this set of agreements could, if appropriately, implemented adequately protect U.S. law enforcement interests.” As Moschella points out, qualifying foreign companies would be required, upon request by the UK government, to provide documents of relevance to an investigation into US arms export violations. Failure to do so might result in the loss of that company’s “qualified” status. Yet Moschella never indicates whether the documentation that foreign companies would be required to provide would fully substitute for the documents associated with the licensing process. The House committee chairmen didn’t think so. In their 2004 report, they note that the “impediments to prosecution, detection and prevention” of arms export control violations resulting from the elimination of documentation related to the licensing process “remain even if there is the kind of full investigative cooperation on the part of the UK and Australia that is need to facilitate U.S. law enforcement in an unlicensed environment.”

A third concern expressed by the House was that the exemptions would place an undue strain on America’s already over-stretched border security resources. Below is an exerpt from the House report:

Since the attacks of September 11th, 2001, U.S. customs and border protection officials have been required to shift resources and priority away from outbound inspections and targeting of shipments leaving the United States to closely monitoring inbound cargo that could present immediate risks to U.S. internal security. The absence of detailed license information from State on exempt munitions exports and the absence of licenses to be lodged at U.S. ports of exit – both being inevitable by-products of the proposed arrangements – can only further complicate screening and targeting of commercial arms exports.

In November 2003, Undersecretary for Border and Transportation Security Asa Hutchinson wrote a letter to Hyde endorsing the exemption agreements on behalf of DHS. At the same time, he also acknowledged that “[d]epending on the volume of license exempt cargo moving through each port, these proposed ITAR country exemptions could increase or significantly increase the workloads [of border inspectors] and require additional inspectors.” Hutchinson added that changes to DHS’ Automated Export System would help customs officials “verify those exports against the proposed ITAR country exemptions, and to target potential shipments in violation of the exemptions.” However, he did not explain how the changes would help identify possible export control violations, whether they would affect anticipated increases in workloads for border inspectors, or what the changes would cost.

Until the treaty’s implementing arrangements are completed, it will be difficult to determine which of these concerns apply to the DTCT. Yet based on what is already known about the Treaty, some tentative observations can be made. Careful vetting of UK companies, combined with the threat of stiff penalties under the Official Secrets Act, could help deter violations of US end-use and retransfer restrictions. Similarly, limiting membership in the “approved community” to companies with strong export control compliance systems and track records may help prevent diversions. That said, it is not at all clear that these steps are adequate substitutes for the current system of pre-license checks performed by trained licensing personnel. Also unclear are the likely effects of the treaty on US efforts to prosecute export control violations and on border security resources. These concerns need to be thoroughly addressed by the administration before the treaty is taken up by the Senate.

Additional Concerns
To this list of Congress’ concerns I will add a couple more. First and foremost, the treaty sets a dangerous precedent that could weaken the established framework for country-specific licensing exemptions laid out in the Arms Export Control Act. As explained above, Congress agreed to allow country exemptions only on the condition that the countries in question meet specific end-use, retransfer, handling and law enforcement requirements. These requirements help to ensure that licensing exemptions are granted only to those countries with export control regimes that are “at least comparable to United States law, regulation, and policy.” By bypassing this framework, the Bush Administration has established an alternative path to country exemptions that lacks the explicit export control requirements mandated by Congress.

The pressure on future administrations to negotiate similar opt-outs for other countries will be immense, and each additional exemption – whether pursued by treaty or amendments to the Arms Export Control Act – will weaken the current framework. Other allies have similar complaints about the U.S. export control system and some of them are contributing significantly to the advancement of key US foreign policy goals. Why is their investment and sacrifice less deserving of this type of special treatment? Indeed, the State Department has already “received “some expressions of interest” from other countries in signing similar defense trade pacts,” according to Defense News. Given the importance of strong arms export control regimes to our own security, this would be a mistake.

Secondly, pursuit of the exemptions as a treaty effectively bypasses half of Congress, whose role it is to oversee US arms exports and export controls. The treaty also appears to have caught not only the House off-guard but also key members of the Senate. By pursuing a treaty of this nature before adequately consulting Congress, the administration puts lawmakers with reservations about the exemptions in a difficult bind. Should members of the Senate Foreign Relations Committee ultimately decide against the treaty, they face the catch-22 of setting it aside (or worse, voting against it) and alienating one of the US’ most important allies, or voting to ratify a treaty that they believe weakens America’s critically important arms export control system.

Defense trade cooperation is an important part of our relationship with the United Kingdom. As demonstrated by their strong support for our policies on Iraq, Afghanistan and other fronts in the struggle against terrorism, they are loyal and likeminded allies and, as such, deserve our support. But bypassing key elements of our export control system is a potentially dangerous way to provide that support.

* For an explanation of the criteria and process used to determine if an item belongs on the USML, see 120.4 of the International Traffic in Arms Regulations.

** A 2002 report from the Government Accountability Office that documented the exploitation of a decades-old licensing exemption on arms exports to Canada lent credence to these concerns. In one notable case, a Chinese entity requested infrared equipment from a US company, which replied that the item was controlled and could not be shipped to China. According to the GAO, the Chinese buyer then attempted to skirt the restriction by “suggest[ing] that the export could take place through a Canadian company under the Canadian exemption and then be re-exported to China.”

Sources
Demetri Sevastopulo, “Bush to back deal on defence sales to UK,” Financial Times, 15 June 2007.

E. Krauland, M. Lieberman & D. Lorello, “Update Regarding US and UK Defense Trade Cooperation Treaty and ITAR License Requirements for Exports to UK,” Steptoe & Johnson International Law Advisory, 13 July 2007.

House International Relations Committee, U.S. Weapons Technology at Risk: The State Department’s Proposal to Relax Arms Export Controls to Other Countries, 1 May 2004.

UK Ministry of Defense, “US, UK Sign Treaty on Defense Cooperation,” 21 June 2007.

US Government Accountability Office, Arms Export Control System in the Post-9/11 Environment, February 2005.

US Government Accountability Office, Challenges Exist in Enforcement of an Inherently Complex System, December 2006.

US Government Accountability Office, Lessons to Be Learned from the Country Export Exemption, March 2002.

US State Department, “Defense Trade Controls Overview,” January 2007.

US State Department, “License Processing Times,” last updated 14 June 2007.

William Matthews, “U.S.: Proposed Treaty Would Not Skirt Congress,” Defense News, 16 July 2007.

William Matthews, “U.S.-U.K. Pact Faces Senate Scrutiny,” Defense News, 25 June 2007.

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