[106 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:60283.wais]

                                                        S. Hrg. 106-350




                               BEFORE THE

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                             JUNE 23, 1999


      Printed for the use of the Committee on Governmental Affairs


                      U.S. GOVERNMENT PRINTING OFFICE
 60-283 cc                   WASHINGTON : 2000
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402


                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania          JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
             Hannah S. Sistare, Staff Director and Counsel
            Christopher A. Ford, Chief Investigative Counsel
              Curtis M. Silvers, Professional Staff Member
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
               Laurie Rubenstein, Minority Chief Counsel
                 Darla D. Cassell, Administrative Clerk

                            C O N T E N T S

Opening statements:
    Senator Thompson.............................................     1
    Senator Lieberman............................................     4
    Senator Akaka................................................    33


Donald Mancuso, Acting Inspector General, Department of Defense..     6
Johnnie E. Frazier, Acting Inspector General, Department of 
  Commerce.......................................................    11
John C. Payne, Deputy Inspector General, Department of State.....    13
Gregory H. Friedman, Inspector General, Department of Energy.....    15
Lawrence W. Rogers, Acting Inspector General, Department of 
  Treasury.......................................................    15
L. Britt Snider, Inspector General, Central Intelligence Agency..    16

                     Alphabetical List of Witnesses

Frazier, Johnnie E.:
    Testimony....................................................    11
    Prepared statement...........................................    73
Friedman, Gregory H.:
    Testimony....................................................    15
    Prepared statement...........................................   104
Mancuso, Donald:
    Testimony....................................................     6
    Prepared statement...........................................    50
Payne, John C.:
    Testimony....................................................    13
    Prepared statement...........................................    94
Rogers, Lawrence W.:
    Testimony....................................................    15
    Prepared statement...........................................   119
Snider, L. Britt:
    Testimony....................................................    16
    Prepared statement...........................................   127


Chart entitled ``Referrals of Dual-Use Cases''...................    47
Letter from Senator Thompson, dated Aug. 26, 1998, to six 
  agencies.......................................................    47
Information submitted by Senator Akaka entitled ``Dual-Use 
  License Process''..............................................   132
Letter from R. Andrew German, Managing Counsel, Legal Policy 
  Section, Law Department, U.S. Postal Service, dated June 30, 
  1993, to William A. Reinsch, Under Secretary for Export 
  Administration, U.S. Department of Commerce concerning the 
  letter report of June 15, 1999.................................   137



                        WEDNESDAY, JUNE 23, 1999

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:06 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Fred 
Thompson, Chairman of the Committee, presiding.
    Present: Senators Thompson, Collins, Specter, Lieberman, 
and Akaka.


    Chairman Thompson. Good morning. Let us come to order, 
    During the Cold War, export control rules were a major 
plank in our national security strategy. Things have changed a 
lot since then. Back in those days, we elevated it to such 
importance that we had an international regime called COCOM, 
where we got together with other countries to try to make sure 
that we all kept the wrong kinds of materials out of the wrong 
    Since the Cold War, we have taken a different attitude. We 
have relaxed our controls considerably as a matter of national 
policy. There are far fewer items that even require a license, 
and that is reflected in the numbers, some of which we will see 
    COCOM is gone now. It has been replaced by other regimes 
that are not nearly as stringent and that basically depend upon 
the voluntary compliance of the members nation. So that has 
been going on for some time now.
    Recently, our attention has been grabbed again and we have 
been hearing things at an ever-increasing rate that should 
cause us all great concern with regard to matters of national 
security and whether or not we are losing items, elements, 
information, and technology that will turn out to be dangerous 
to this country. We certainly are very much aware of the 
espionage issues that we have seen.
    But while that is a back-door problem, we have also got a 
substantial front-door problem, and that has to do with our own 
policies and the way that we treat our exports in this country. 
While we have been relaxing our standards, we know that we are 
targeted in this country. Our technology is targeted. As 
Senator Rudman has pointed out, not only do we do the Nation's 
best work in these laboratories of ours, but we do world class 
work in terms of our technology there. They are certainly 
    The Cox report has pointed out that with regard to 
satellite technology, supercomputers, and machine tools, all 
these things, we are targeted. People want this stuff, and if 
it is proper and legitimate, then we want them to have it. We 
are interested in sales. But I think there is a growing 
concern, and I think properly so in this country, that we have 
tilted the balance too far in favor of sales and away from 
national security at a time when we should know better. If we 
did not know better even a few months ago, we know better now.
    We know that some of this dual-use technology is being 
diverted. We put these conditions on these licenses and say you 
cannot do this and cannot do that and then people proceed to do 
this and do that and we have few ways of checking up on them. 
Indeed, the ways that we do have, we do not utilize.
    We stumble across things like the McDonnell Douglas machine 
tool case a while back, where the Chinese said that they were 
buying all these tools for commercial airline purposes. The 
only problem was, it was for military purposes, as we only 
accidentally found out.
    We know, by the same token, that many of these countries 
that we are dealing with proliferate weapons as a matter of 
policy. The world's greatest proliferators, with whom we are 
trading, send weapons of mass destruction, biological and 
chemical capabilities, to these rogue nations. Yet we expect 
them to honor their word concerning what they are going to do 
with the products that we send them. I think we have been very 
naive and I think that what has been going on recently surely 
will be a wake-up call to us.
    In August 1998, I wrote to the Inspectors General at six 
Federal agencies, the Departments of Commerce, Defense, State, 
Treasury, and Energy, and the Central Intelligence Agency. I 
requested that they undertake a review of U.S. export control 
policy and report their findings to this Committee. Several of 
these IGs had undertaken a review of the export-control 
processes in 1993, but in the world of export control rules, 
that was a very long time ago. The statute governing export 
controls, the Export Administration Act, lapsed in 1994 and has 
been continued and amended since then only through Executive 
    I requested that the IGs give us an assessment of how the 
post-Cold War export control system works and how it does not. 
The interagency report that we have before us today is the 
fruit of their labors, and I think it is particularly timely. 
It is no less important today than ever before that we strike a 
sensible balance between promoting commerce and protecting 
national security.
    The Senate is presently working on the reauthorization of 
the Export Administration Act and it is our hope that this IG 
review will help inform and educate members on the complexities 
of the major export control system, thus equipping us to meet 
the challenges of adapting the Export Administration Act to 
today's world of rapidly-changing technologies and new security 
    This is the second hearing the Governmental Affairs 
Committee has had as a result of the IG's export control 
review. We held a hearing on June 10 with the Department of 
Energy Inspector General that helped illuminate Energy's role 
in the export-control process and highlighted the problem of 
uncontrolled ``deemed exports'' which occur when foreign 
nationals visiting DOE weapons labs come into contact with 
sensitive dual-use and munitions technologies. We will have a 
chance to explore that a little bit further today.
    I want to thank all of you for your hard work in this area 
over a long period of time. I think that we are going to learn 
some important things today. Many of us have had a chance to go 
through the reports that you have filed, and they speak for 
themselves. Hopefully, we can use this forum to highlight and 
elucidate the points you make in the reports.
    I think that what we are going to see is that these matters 
are becoming more and more complex, and licensing officers are 
required to do more and more all the time. But we are giving 
them less time in which to do it. We are giving them 
practically no formal training. We are not making any 
assessment of the cumulative effect of this technology that we 
are giving to these various nations. We examine this little 
hole in the dike and say, that is no big problem, and nobody 
has any idea how many holes there are in the dike.
    We have got a process where, by law, the Department of 
Commerce, primarily concerned with selling things, is given 
responsibility in this area. They are supposed to bring in, 
when appropriate, these other agencies to take a look. The 
President's Executive Order allows any agency now to take a 
look at what they feel like they ought to take a look at.
    But it does not take a rocket scientist, which is perhaps 
an appropriate reference, to come away with the notion that 
this process is designed basically for Commerce to get its way, 
and that this is a process that is designed to basically 
discourage appeal. If you are an agency out there and have a 
problem with a proposed export license, you do not have time, 
for one thing, to do much with it. We will examine some of 
these things today.
    CIA is supposed to do end-user checks within 9 days, for 
example. That is ridiculous. I do not care what your analysis 
is on that. On its face, knowing what we know, with the 
problems we have--we are dealing with China and we are dealing 
with all these other countries, India, former Soviet Bloc 
countries--the CIA is given 9 days to check on the end-user 
situation and to what they are supposed to be doing with that. 
That is just one example.
    We place conditions on these licenses that look real good 
on paper. They are all there, right there. They are conditions. 
We are not going to let them do this, we are not going to let 
them do that. But then we do not follow up to see whether or 
not they are doing it anyway. There are time constraints, 
pressures to get the stuff out the door and get on to the next 
one, and in some cases, just clear violations of the law.
    The law requires, for example, that there be training 
programs for licensing officers. Statutory law requires that. 
The Department of Defense, I know, and I assume these other 
agencies, also have regulations requiring that, they set this 
up. I am sure that, many times, the representatives of these 
departments come up here and say, we have got these programs, 
requirements and so forth, but, in fact, there is no formal 
training that I can detect.
    They say it is on-the-job training, which is basically what 
you call it when you do not have a training program. When you 
are not doing any training, that is what you call it, which is 
fine if you are a plumber's helper, but it is not fine if you 
are an airline pilot, and we have got to decide whether or not 
we are dealing with stuff here that more likely relates to one 
or the other.
    The Department of Defense is supposed to assess defense-
related export licenses. The Department of Defense is also 
supposed to analyze the cumulative effect of what we are doing 
here. You would think somebody might be doing that. The 
Department of Defense is supposed to be doing it. They do not 
do it. Nobody does it. They just do not do it.
    That reminds me of some testimony we heard yesterday from 
Senator Rudman when he was talking about the Department of 
Energy. He was talking about the culture at the Department of 
Energy, the problems that they have--arrogant, dysfunctional, 
and not even paying any attention to the President of the 
United States. When he puts down an Executive Order, it takes 
forever to get it done. You get a few people scurrying around 
at the top, but down within the bowels of the organization, 
they think, ``we were here when you got here, we are going to 
be here when you are gone.'' What makes us think that is just 
applicable to the Department of Energy?
    So I think your assessment seems to be that the railroad is 
running on time, there is no real indication that there is any 
breakdown, apparently, it is working, and so on. But we do not 
know whether it is working or not. All we know are these things 
that pop up every once in a while that show that we have 
serious diversion problems, we have got serious end-user 
problems, and we have got serious espionage problems. What we 
need to concentrate on is not necessarily trying to get to the 
bottom line of whether or not you can prove that our lunch has 
been stolen in any particular instance, which is almost 
impossible to prove anyway. We have got to look at the 
procedures that we have got and whether or not they are decent 
procedures and whether or not they are being followed and 
carried out. I think that is what you have done here.
    Thank you for your work and I look forward to getting into 
it with you. Senator Lieberman.


    Senator Lieberman. Thanks, Mr. Chairman. Thanks to the IGs. 
As you have indicated, Mr. Chairman, for the second time in 
recent weeks, we will be taking up an issue this morning of 
vital interest, which is the export-control process. In many 
ways, it is the other expression of the concern that has 
generated a lot of controversy and attention on the Hill right 
now, and that is the extent to which we are maintaining 
security at our national laboratories. The export-control 
process deals with some of the same questions through a 
different window.
    I do want to say that I am again very impressed by the 
reports put together by the IGs. This critical area of national 
concern has been given in these reports the kind of careful 
attention that it merits, and I truly thank the IGs for that. 
Their work will be particularly helpful in light of the 
imminent debate over reenactment of the Export Administration 
    An export-control process that works well is critical both 
to our national security and to our national economic well-
being. These reports, more than any other material that I have 
seen on the subject, offer not only insight into the way the 
system works now, but also some very helpful guidance on how to 
make the system work better in the future.
    I was very heartened to read that, on the whole, the IGs 
conclude that the current control process is working pretty 
well, and, in fact, has, ``greatly improved'' since the 1993 IG 
report. I was specifically reassured to note that the IGs found 
no evidence of political pressure on licensing officers to 
change recommendations on applications.
    Nevertheless, the reports do point out that significant 
improvements are still needed. Some of these matters, such as 
better training and records management, fall to the individual 
agencies to address. Others may require interagency 
cooperation. In fact, they do require interagency cooperation.
    For example, I was surprised to learn of the absence of an 
overall mechanism to address the question of the cumulative 
effect of multiple exports to a particular country. Various 
licensing officers at different places in our government, each 
focusing on the sale of one commodity, if I can call it that, 
at a time, might consider each purchase to be benign, but if 
all the acquisitions were considered together, they might well 
paint a more ominous picture of a country or purchaser seeking 
to obtain components necessary to design, for instance, a 
weapon of mass destruction.
    So drawing the agencies together to consider cross-cutting 
issues like this should be one of the most important outcomes 
of this effort. We should strongly encourage interagency 
cooperation to look at this question of cumulative analysis.
    We in Congress also need to take steps to strengthen the 
export-control process. All of the IGs have endorsed 
legislative action to revive the Export Administration Act, 
which, hopefully, will be coming up for consideration this 
session, and this, too, is an area where I think we will want 
to explore and respond to the problem of cumulative effects.
    On the whole, I am encouraged that the relevant agencies 
seem to agree with the recommendations put forth by these IG 
reports and are apparently working to implement responses. 
However, in some cases, progress may be hampered by resource 
    Commerce, for example, is currently using an export control 
database that was designed in 1984. The Department is seeking 
funding, $2.5 million, which in a budget the size that we have 
is really not much at all, to create a state-of-the-art system 
that would be compatible with the other agencies and, I think, 
would pay for itself, certainly in increased security, many 
times over.
    Finally, Mr. Chairman, with the agencies generally 
expressing support for the IG recommendations, I hope that our 
Committee will consider holding a follow-up hearing to take 
stock of their progress in implementing these recommendations 
several months down the road so that our continued oversight 
here will, hopefully, help keep the momentum of improvement and 
reform going.
    But the bottom line is I thank the IGs. I thank you for 
requesting these reports. I thank the IGs for their very 
carefully considered and constructive responses and I look 
forward to their testimony this morning.
    Chairman Thompson. Thank you very much.
    I would ask that each of you give a short summary of what 
we are dealing with here. We will have ample opportunity for 
everyone to express their views. Mr. Mancuso, I think you might 
have an overview of the entire situation yourself, so we will 
just start with you.

                     DEPARTMENT OF DEFENSE

    Mr. Mancuso. Mr. Chairman and Members of the Committee, I 
appreciate the opportunity to discuss the Federal Government's 
export licensing process for dual-use commodities and 
munitions. In response to the Chairman's letter of August 26, 
1998,\2\ Inspector General teams from the Departments of 
Commerce, Defense, Energy, State, Treasury, and the CIA 
conducted an extensive review. Our efforts were coordinated by 
a working group, thus avoiding duplication and enabling us to 
track individual export license application cases across agency 
lines and to address interagency issues. The results are 
contained in an interagency report and six individual agency 
    \1\ The prepared statement of Mr. Mancuso appears in the Appendix 
on page 50.
    \2\ The letter referred to appears in the Appendix on page 47.
    I have Evelyn Klemstine with me today, who is on my staff 
and who acted as the facilitator for the team and who will also 
be available to answer any questions.
    Inasmuch as my office assembled and published the 
interagency report, I will begin my testimony by summarizing 
its main points in this joint endeavor.
    Dual-use commodities are goods and technologies with both 
military and commercial applications. The dual-use export 
licensing process is governed by the Export Administration Act 
of 1979, as amended. Although the Act expired in 1994, its 
provisions are continued by Executive Order 12981, under the 
authority of the International Emergency Economics Powers Act. 
Munitions exports are controlled under the provisions of the 
Arms Export Control Act.
    The dual-use export licensing process is managed and 
enforced by the Department of Commerce, although the Department 
of State manages munitions export licensing. The Departments of 
Defense and Energy review the applications and make 
recommendations to Commerce and State. The Central Intelligence 
Agency and Customs Service provide relevant information to 
Commerce and State, while Customs also enforces licensing 
agreements for all export shipments except outbound mail, which 
is handled by the Postal Service. In 1998, the Department of 
Commerce received 10,696 dual-use export license applications, 
while State received 44,212 munitions export license 
    The overall objective of the interagency review was to 
determine whether current practices and procedures are 
consistent with established national security and foreign 
policy objectives. To accomplish this objective, we reviewed 
various random samples of licensing cases to determine if 
prescribed processing procedures were followed within each 
agency and in multi-agency groups.
    To a considerable extent, our June 1999 report is an update 
of a similar report that was issued jointly by Commerce, 
Defense, Energy, and State IGs in 1993. The previous report 
covered the pertinent issues under seven headings, and this 
current report is structured along similar lines.
    The first area relates to the adequacy of export control 
statutes and Executive Orders. We concluded that, in general, 
the Arms Export Control Act and the provisions of the Export 
Administration Act, as clarified by Executive Order 12981, are 
consistent and unambiguous. However, the Commerce and Defense 
IG teams stressed that the dual-use licensing process would be 
best served if the Export Administration Act were reenacted 
rather than continue to operate under a patchwork of laws and 
Executive Orders.
    Executive Order 12981 is generally consistent with the 
Export Administration Act. However, the order requires 
modification to reflect the merger of the Arms Control and 
Disarmament Agency with the Department of State and to clarify 
representation at the Advisory Committee on Export Policy. In 
addition, policy and regulations regarding the export licensing 
requirements for items and information deemed to be exports 
needs clarification and the exporter appeals process should be 
    The second area pertains to procedures used in the export 
license review processes. Commerce, Defense, Energy, and State 
IG teams concluded that processes for the referral of dual-use 
license applications and interagency dispute resolution were 
adequate. Officials from those Departments were generally 
satisfied with the 30-day limit for agency reviews under the 
Executive Order. However, not every agency could meet that 
limit. Several defense components and the CIA indicated they 
would benefit from additional time to review dual-use license 
    Defense and State IG teams were satisfied with the referral 
of munitions license cases for review. However, the Commerce IG 
believed that the inclusion of the Department of Commerce in 
the munitions case referral process should be considered. The 
Commerce commodity classification process could also benefit 
from additional input on munitions-related items from the 
Departments of Defense and State. Also, Energy officials 
believe that a more formal review process for munitions was 
needed, as the officials there were unclear on their role in 
the current process.
    The third area pertains to the cumulative effect of 
multiple exports to individual foreign countries. The U.S. 
Government lacks an overall mechanism of conducting cumulative 
effect analysis. However, some of the agencies involved in the 
licensing process perform limited cumulative effect analysis, 
but to varying degrees. Commerce, Defense, Energy, and State IG 
teams concluded that additional effect analysis would benefit 
the license application review process.
    The fourth area relates to information management. 
Commerce, Defense, and State teams questioned the adequacy of 
automated information systems their Departments use to support 
license applications reviews. Specifically, there were 
shortfalls in data quality, systems interface, and 
modernization efforts. The audit trails provided by most of the 
respective export licensing automated databases was adequate, 
but Defense procedures did not ensure that final Defense 
positions were accurately recorded. The CIA reported 
unsatisfactory documentation of end-user checks on munitions 
license applications.
    The fifth set of issues concern guidance, training, and 
undue pressure on case analysis. A review indicated that 
Defense, Energy, and State licensing officials had adequate 
guidance to perform their mission. However, the Department of 
Commerce licensing officers and CIA licensing analysts could 
benefit from additional guidance. On-the-job training was the 
primary training available at Commerce, Defense, Energy, and 
State for licensing officers. The Commerce, Defense, and State 
teams identified a need for standardized training in their 
agencies. With very few exceptions, Commerce and Defense 
licensing officers reported they were not pressured to change 
recommendations on license applications. No Energy or State 
licensing officials indicated that they had been pressured.
    The sixth area regards monitoring and compliance and end-
use checks. Commerce did not adequate monitor exports from 
exporters on shipments made against licenses and the Department 
of State's end-use checking program could be improved. Commerce 
and State still use foreign nationals to conduct an unknown 
number of end-use checks. The Commerce IG team found that most 
end-use checks were being conducted by U.S. and foreign 
commercial service officers or Commerce enforcement agents. The 
State IG team concluded it may be appropriate to use foreign 
nationals to do the checks under certain conditions.
    The seventh area pertains to export controls enforcement. 
The Treasury IG team determined that although Customs Service 
export enforcement efforts have produced results, the Customs 
Service is hindered by current statutory and regulatory 
reporting provisions for exporters and carriers. The Treasury 
IG team also identified classified operational weaknesses in 
Customs export enforcement efforts. The IG teams made specific 
recommendations relevant to their own agencies. Those 
recommendations and management comments are included in the 
separate reports issued by each office.
    Now, I would like to change focus from the interagency 
report to the report issued by my office. Again, I emphasize 
that our objective was to review the export licensing process 
and not to assess the appropriateness of individual license 
applications. To summarize the results of the Defense team's 
review, I will address each of the 14 issues in the Chairman's 
letter, as posed in his 1998 letter. The full text of each 
issue in the letter is posted to my right on the board.
    Issue 1 asked that we examine relevant legislative 
authority. We found that the general nature of the Export 
Administration Act and the Arms Export Control Act creates a 
broad framework, but we found no inconsistencies or ambiguities 
in either law. We concluded that the dual-use licensing process 
would be best served through the reenactment of the Export 
Administration Act.
    Issue 2 requested our review of the Executive Order. We 
found that the Executive Order, as implemented, is generally 
consistent with the objectives of the Export Administration 
Act, but inasmuch as the Executive Order decreased from 40 to 
30 days the time that the Department has to review license 
applications, this has resulted in a potential inability to 
locate information necessary to inject into the review process.
    Issue 3 questioned whether Commerce is properly referring 
export license applications out for review by other agencies. 
Our review indicated that Defense officials expressed general 
satisfaction with referrals from Commerce but disagreed with 
Commerce's decision not to refer 5 of 60 sampled applications. 
They also expressed concern that Commerce referred too few 
commodity classification requests for review. As a result, in 
some cases, decisions on licensing applications with national 
security implications were made without the benefit of Defense 
Department input.
    Issue 4 concerns the interagency dispute resolution 
process. With one exception, we found that the interagency 
escalation process provides Defense a meaningful opportunity to 
appeal disputed dual-use license applications, although the 
outcome of the process often favors the Commerce position. 
Defense elected not to escalate some disputed dual-use 
applications after weighing such considerations as the 
substance of the case, the viewpoints expressed by Department 
principals, and the likelihood of prevailing at the Committee 
appeal process. Disputes over munitions applications were 
resolved successfully between office chiefs of Defense and 
    Issues 5 and 6, I will address concurrently, since the 
conclusions are the same and the issues relate to whether 
current licensing processes adequately take into account 
cumulative effect. We found that the license process at the 
Defense Threat Reduction Agency occasionally takes into account 
cumulative effect, but that participants in the licensing 
process do not routinely analyze the cumulative effect of 
proposed exports or receive assessments to use during license 
reviews. In addition, Defense did not conduct required annual 
assessments that could provide information on the cumulative 
effect of proposed exports.
    As of March of this year, the Defense Threat Reduction 
Agency had initiated action designed to increase the degree to 
which cumulative effect analysis was incorporated into the 
licensing process. We recognize that organizing and resourcing 
a meaningful cumulative effect analysis process poses a 
significant challenge, but this is clearly an area that needs 
more emphasis.
    Issue 7 questions whether license applications are being 
properly referred for comment to the military services, the 
intelligence community, and other related groups. We determined 
that Defense components, except Defense Intelligence Agency, 
received about the same number of case referrals over the past 
8 years. However, the Defense Threat Reduction Agency did not 
always appropriately refer applications to other Defense 
components for review. Of the applications we reviewed, various 
components considered that 12 percent of the dual-use and 24 
percent of the munitions license applications had not been 
properly referred.
    Issue 8 questions whether license review officials are 
provided sufficient training and guidance. We concluded that 
Defense organizations involved in the review process receive 
appropriate guidance. Nearly all licensing officials told us 
that the guidance was adequate for performing their duties. 
Licensing officers also stated that they generally had 
sufficient training. However, some officials believe that a 
classroom training program and training for personnel reviewing 
export licensing applications should be established. We 
concluded that putting more emphasis on training would be 
    Issue 9 questions the adequacy of the databases used in the 
licensing process, such as Defense Foreign Disclosure and 
Technical Information System, FORDTIS. We found that FORDTIS 
provides a useful communication and coordination mechanism for 
the Department on export control matters, although limitations 
exist in the system that reduce support to decision makers. In 
addition, inadequacies exist in the use of FORDTIS to provide 
an audit trail for export licensing decisions.
    Issue 10 notes that a Defense licensing official has 
described instances wherein licensing recommendations he 
entered into FORDTIS were later changed without his consent or 
knowledge. We found that instances have, in fact, occurred in 
which recommended positions entered in FORDTIS by a licensing 
officer were changed without the consent or knowledge of that 
officer, although the number of such occurrences could not be 
determined. These changes are, however, permissible under 
existing Department policy and appear to have been based on 
supervisors' disagreements with licensing officers' 
conclusions. We note, however, that the documentation related 
to the changes was not always complete.
    Issue 11 questioned whether license review officials are 
being pressured improperly by their superiors to issue or 
change specific recommendations. We interviewed all Defense 
Threat Reduction Agency licensing officers, and with one 
exception, they indicated that they had not been subjected to 
any improper pressure to change specific recommendations on 
license applications. However, several staff members stated 
that management applied indirect pressure and encouraged 
certain viewpoints.
    Issue 12 asked whether our government still uses foreign 
nationals to conduct pre-license or post-shipment licensing 
activities and whether such a practice is advisable. In 
general, Commerce and State conduct these activities. Defense 
provides limited support to them through our Defense attache 
offices, and we also monitor certain foreign space launch 
activities under the provisions of munitions licenses. Defense 
has not used and does not plan to use foreign nationals to 
support these efforts.
    Issue 13 questions whether the licensing process leaves a 
reliable audit trail for assessing license performance. We 
concluded that FORDTIS provides a long-term audit trail but 
does not always contain complete and accurate records of 
Defense and U.S. Government positions. As a result, the audit 
trail cannot be used as a reliable means of assessing the 
degree to which Defense positions are in agreement with 
positions taken by the U.S. Government.
    Finally, issue 14 asks that we examine the procedures used 
to ensure compliance with conditions placed on export licenses. 
The Defense Threat Reduction Agency has adequate procedures for 
monitoring foreign space launch activities. An informal process 
for reporting potential violations of license conditions and 
technology assessment control plans was also adequate. However, 
we found that the expected increases in the number of launch 
monitoring missions, coupled with a programmed increase in 
staff to support these missions, dictate that the Department 
move to a more formal approach for reporting violations.
    As a result of our overall review, we made numerous 
recommendations to the Department to improve the effectiveness 
and efficiency of the export licensing review efforts. In this 
regard, we recommended that the Department take measures to 
clarify responsibility for cumulative effect analysis and to 
improve both FORDTIS and internal procedures so as to ensure 
that better data is available for licensing officials. 
Additional recommendations involve such things as improved 
training and enhanced coordination with State and Commerce.
    The Department was generally responsive to our findings and 
recommendations. We will be tracking progress on the agreed-
upon actions for our audit follow-up process.
    In conclusion, Mr. Chairman, we hope that this extensive 
multi-agency review will be useful to both the involved 
agencies and the Congress as efforts to update and improve U.S. 
export licensing practices continue. That concludes my 
    Chairman Thompson. Thank you very much.
    Mr. Mancuso covered the waterfront here, so feel perfectly 
free to be extremely brief. [Laughter.]
    If you feel moved to add or subtract from what Mr. Mancuso 
said, feel free to do so, but do not feel that you are going to 
be compelled to.
    Mr. Frazier.

                     DEPARTMENT OF COMMERCE

    Mr. Frazier. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the Committee, I, too, am very pleased to appear 
before you today to discuss our review of the Department of 
Commerce's export licensing process for dual-use commodities.
    \1\ The prepared statement of Mr. Frazier appears in the Appendix 
on page 73.
    Commerce's Bureau of Export Administration administers the 
Nation's dual-use export control licensing and export system 
for national security, foreign policy, and nonproliferation 
reasons. Based on our review of BXA and as generally supported 
by the findings of the other IGs, we determined that the 
interagency license review process is working reasonably well 
and has improved much since 1993.
    The Departments of Defense, Energy, State, Justice, and the 
CIA now review many more of the license applications submitted 
to Commerce. In fiscal year 1998, BXA referred 85 percent of 
license applications. That is up from 53 percent in 1993. 
Clearly, this multi-agency review brings divergent policy views 
and more information to bear on license decision-making. In 
addition, the four-level escalation process for resolving 
license disputes among the referral agencies is working 
relatively well.
    While we found significant areas of improvement since our 
1993 review, we also identified a number of issues that warrant 
the attention of the Commerce Department, the administration, 
and the Congress. First and foremost, it is time to push even 
harder for new legislation to replace the expired Export 
Administration Act.
    There is also a need to clarify the licensing policy and 
regulations regarding the release of controlled technology to 
foreign nationals working in Federal and private research 
facilities, commonly referred to as deemed exports. We found a 
general lack of knowledge and understanding on the part of U.S. 
industry and the Federal laboratories about deemed export 
regulations and when such an export license is required.
    A third area where we see the need for change involves the 
requirement that post-shipment verifications be conducted for 
every high-performance computer, or HPC, greater than 2,000 
MTOPS that is shipped to countries of concern. Our review 
concluded that this is not an effective use of government 
resources. This requirement has enforced BXA to divert some of 
its enforcement resources to verify shipments of lower-end HPCs 
or on multiple visits to the same end users.
    Mr. Chairman, in response to your question about the 
adequacy of guidance and training for licensing officers, we 
have mixed findings. We initially identified the lack of up-to-
date guidelines as one of BXA's major weaknesses. However, near 
the end of our review, BXA officials issued new work guidelines 
for licensing officers and are considering further changes. We 
have also recommended that BXA establish a formal training 
program for all of its licensing officers to supplement the 
current on-the-job training.
    In response to your question, Mr. Chairman, about the 
pressure on licensing officers, most BXA licensing officials 
reported that they had not been pressured into changing their 
recommendations on specific licenses. Two of the 36 licensing 
officers who responded to our survey question did State, 
however, that they have received some pressure from management, 
but our intensive follow-up on this question did not provide 
evidence to support these individuals' statements.
    We did, however, have questions about BXA managers' 
instructions to the chair of the operating committee on her 
decision on a few OC cases. We advised them that if the chair 
makes a decision that BXA disagrees with, BXA should escalate 
the case to the Advisory Committee for Export Policy in order 
to avoid even the appearance that this process is not 
    The Commodity Classification Process, or CCATS, is another 
area ripe for improvement. First, BXA needs to improve the 
timeliness of its processing of exporter CCATS requests. 
Second, we recommend that BXA refer all Defense-related CCATS 
requests to both the Defense Department and the State 
    As I stated earlier, I believe that the overall process is 
generally more effective because of greater interagency 
involvement. However, we still found problems. We are 
especially concerned about the licensing officers amending some 
existing licenses without interagency review, inadequate time 
being provided to the CIA's Nonproliferation Center for its 
end-use checks, and BXA's approval of licenses based on a 
favorable end-use check after the pre-license check was 
canceled. BXA management has agreed to correct or address most 
of these problems.
    In addition, I would like to highlight two other problems 
that require interagency action and attention by the Congress. 
First, we found that the CIA and its Nonproliferation Center, 
at their own request, review only 45 percent of all referred 
dual-use export licenses. In addition, they do not always 
conduct a comprehensive analysis of the applications they do 
    Furthermore, there is no mechanism to track the cumulative 
effect of technology transfers. Such cumulative effect, while 
admittedly difficult to determine, would be a very useful 
addition to the license review process. Another key missing 
element is the screening of all license applications against 
the Treasury Enforcement Communications System database 
maintained by Customs.
    We also have recommended a change in the exporter appeals 
process. Once an export application has been formally denied, 
the exporter has the right to appeal to the Under Secretary of 
Commerce. Although BXA confers informally with the referral 
agencies before deciding on appeals, we believe that the 
interagency process should be formalized.
    Regrettably, Mr. Chairman, we found that BXA is still not 
adequately monitoring license conditions, as we first reported 
in 1993. This means that BXA is less able to determine if 
licensed goods have been diverted to unauthorized end users and 
exporters may receive new licenses even if they did not comply 
with previous licenses. We found recurring problems with 
respect to end-use checks conducted by Commerce's U.S. and 
Foreign Commercial Service, including untimely end-use checks 
and the use of foreign service nationals.
    And finally, Mr. Chairman, in response to your question 
about BXA's automated export licensing system, called ECASS, we 
found that the system's internal controls are generally 
accurate. At the same time, it is clear that BXA's automated 
information system is inefficient and needs to be replaced.
    This concludes my statement and I will be glad to answer 
any questions.
    Chairman Thompson. Thank you very much. Mr. Payne.

                      DEPARTMENT OF STATE

    Mr. Payne. Thank you, Mr. Chairman, and Members of the 
Committee. We appreciate the opportunity to testify today on 
this very important issue. I have a very brief statement which 
I will attempt, as you suggested, to make even briefer, based 
on the discussion earlier.
    \1\ The prepared statement of Mr. Payne appears in the Appendix on 
page 94.
    The Secretary of State is charged with administering the 
Arms Export Control Act for defense articles and services on 
the U.S. munitions list. Munitions are generally products that 
have been specifically designed for military application. In 
fiscal year 1998, State's Office of Defense Trade Controls 
processed over 44,000 munitions license applications.
    The State Department also reviews, for foreign policy 
considerations, dual-use license applications referred by 
Commerce. During fiscal year 1998, State reviewed over 8,000 
dual-use applications, which represent about 75 percent of all 
the applications Commerce had received.
    In our 1993 review, we found fragmented licensing 
responsibilities within State, confusion at overseas posts 
about responsibilities for end-use checks and verifications, 
and a lack of program files and documentation. State has made 
improvements since the 1993 review, including consolidating the 
export license functions and improving documentation of the 
referral process.
    During our current review, we found that, overall, the 
export licensing process is working as intended and the State 
Department consistently executed its export licensing 
responsibilities in accordance with existing policies. We found 
no significant inconsistencies or ambiguities in the 
legislative authorities that guide the export licensing 
    Based on a statistical sample of applications processed, we 
found that State referred all appropriate applications to other 
agencies for review and fully addressed all concerns that they 
raised. We found no evidence that State licensing officials had 
ever been improperly pressured by their superiors to approve 
applications. Finally, we found that an adequate and reliable 
audit trail existed for the processing of both munitions and 
dual-use licenses at State.
    In addition to these improvements, we identified some areas 
which need further attention. State's formal process for 
conducting end-use checks, referred to as the Blue Lantern 
program, was created to verify the ultimate end use and end 
user of U.S. defense exports. Although State continues to 
refine its program, we believe that further changes are needed.
    First, given the limited number of Blue Lantern checks each 
year, 418 checks out of 44,000 licenses in 1998, attention 
should be concentrated on the most significant munitions 
categories. In addition, State needs to more closely monitor 
and follow up on Blue Lantern requests assigned to overseas 
posts. We found requests that had not been addressed for almost 
a year. Also, the Department needs to assist posts with 
appropriate expertise for technical on-site inspections when 
they are required.
    Licensing officers need additional training. State relies 
primarily on the apprenticeship approach, and although this 
provides important hands-on training, there is no formal 
training for new licensing officers. Training for more 
experienced licensing officers is practically nonexistent.
    The current munitions licensing process does not fully 
measure cumulative effect of technology transfers. State can 
improve its assessment of the cumulative effect by expanding 
the use of trend analyses and other reporting mechanisms. 
Nevertheless, State represents only one piece of a much larger 
picture. To fully assess the cumulative effect, information on 
technology transfers resulting from munitions and dual-use 
exports and foreign military and third-country sales need to be 
considered, as well as the internal capabilities of the 
specific country. A comprehensive assessment will probably 
require a joint effort with resources and coordination from 
various Federal departments and agencies involved in the 
licensing process. It likely will also require Congressional 
    Many of the concerns cited above are symptomatic of a 
larger problem at the State Department, insufficient resources 
to meet the expanding licensing mandate. State has fewer 
employees, heavier workloads, and lower pay grades in licensing 
activities than its counterparts at Commerce and Defense. In 
fiscal year 1998, 16 State licensing officers processed over 
44,000 applications. Processing times have also increased. In 
1992, State took an average of 4.5 days to process a non-
referred license application. It now takes an average of 21 
days, and State's mandate continues to increase as 
responsibility for all commercial satellite cases was 
transferred from Commerce in March of this year.
    Recognizing the need for additional resources and the 
recent statutory change in commercial satellite responsibility, 
Congress has recommended that State provide an additional $2 
million to hire more senior-level personnel and support staff 
to improve the scrutiny of the export license applications, 
enhance end-use monitoring, and strengthen compliance 
enforcement measures. Earlier this month, State increased the 
export licensing budget by $2 million and plans to fund an 
additional 23 positions.
    That concludes my statement, Mr. Chairman. I would be happy 
to try to answer any questions.
    Chairman Thompson. Thank you very much. Mr. Friedman.

                      DEPARTMENT OF ENERGY

    Mr. Friedman. Mr. Chairman, considering the fact that I 
testified before you on June 10 on this subject, if it is the 
will of the Chair, I would be more than happy to forego an 
opening statement.
    \1\ The prepared statement of Mr. Friedman appears in the Appendix 
on page 104.
    Chairman Thompson. Thank you very much. Mr. Rogers.

                     DEPARTMENT OF TREASURY

    Mr. Rogers. Well, that is fast. Thank you, Mr. Chairman. I 
appear here today on behalf of the Treasury IG and, basically, 
our role in answering your letter from last year has been to 
look at the process that goes on in Customs, the last check-
point as materials, goods leave the country.
    \2\ The prepared statement of Mr. Rogers appears in the Appendix on 
page 119.
    I would like to be very brief and just say, generally, we 
noted that while we were not involved in this earlier report, I 
think it is good we are here now. Customs has made the outgoing 
check on goods as one of their core groups. We looked at their 
process and found several things that we reported as issues, 
among them being untimely export reporting data that comes 
after departure, which makes it very difficult to target 
enforcement effort. We think that there needs to be an 
improvement in the internal Customs license enforcement 
efforts, better training, staffing at checkpoints, and so 
    We also think that there is an issue about slowness in 
response to data inquires from Customs to the Department of 
Commerce, noted also by the Department of Commerce, I think, 
that the applications that are being processed by Commerce and 
State are not routinely screened against the Treasury 
Enforcement Communications System, but this is one of the 
issues that Customs agreed to take on, and, in fact, I would 
like to say that in every case, they have agreed with the 
recommendations and are undertaking some ameliorative effort to 
correct them.
    Overall, we hope that the recommendations are helpful to 
them and we think they have been. I would say also that some of 
our report has been classified for limited official use only 
because of our concern and Customs' concern that details about 
their operations at the borders might enable people to avoid 
Customs controls at exit points.
    With that, sir, I will conclude my statement.
    Chairman Thompson. Thank you very much. Mr. Snider.

                      INTELLIGENCE AGENCY

    Mr. Snider. Thank you, Mr. Chairman. I will also try to be 
brief, in view of your admonition.
    \1\ The prepared statement of Mr. Snider appears in the Appendix on 
page 127.
    The CIA supports the export licensing process at State and 
Commerce by providing relevant intelligence information that is 
available within the agency on end users and intermediaries 
identified in export license applications. The CIA obtains this 
information in the normal course of its activities to gather 
and analyze information on proliferation activities around the 
world and on programs that other governments have for 
developing weapons of mass destruction.
    The agency also provides additional support to the 
licensing process by preparing and providing finished 
intelligence reports and briefings on the results of its 
activities and through its participation in a number of the 
advisory committees that participate in the licensing process.
    What we attempted to do in our review was to look at what 
the CIA is currently doing to support this process and identify 
ways that the Agency can improve its support. We found, first, 
that not all of the agency databases that might reasonably be 
expected to contain relevant information on end users were 
routinely being searched by the analysts doing such searches. 
We recommended that this be corrected.
    Second, we found that the searches undertaken by CIA 
analysts were not being documented in a uniform way, either in 
terms of what was being done as part of the search or in 
documenting what was being reported to the Commerce and State 
Department. We recommended that be corrected.
    Third, we believe that the response time of 9 days which 
the CIA has to review cases from the Department of Commerce is 
unrealistic and cannot be satisfied within the existing staff 
resources of the Nonproliferation Center. It is recommended 
that the agency work with Commerce to establish a more 
realistic response time and then that the agency staff its 
analytical capabilities accordingly.
    Fourth, we found that Commerce does not fully appreciate 
the nature and limitations of the agency's capabilities to 
support the licensing process, and in turn, we found that 
agency analysts did not always understand or have a clear 
perception of the licensing officer's needs. To remedy this, we 
recommended a full-time agency liaison officer be assigned to 
Commerce to help bridge the gap.
    Finally, we saw the need for guidance to the agency 
analysts who were providing support to the licensing process to 
ensure that they understand what management expects in terms of 
type of searches, the degree of searches that they are expected 
to do, and also guidance that provides for alternative 
reporting channels in those cases where sensitive intelligence 
information cannot be routinely included in end-user reports. 
We recommended that the Special Assistant to the DCI for 
Nonproliferation formulate this guidance.
    In sum, while the CIA plays a limited supporting role in 
the export licensing process, we believe it can play that role 
more effectively and more efficiently. Indeed, I might add, Mr. 
Chairman, that the offices involved in the process at CIA have, 
in fact, taken steps to improve their performance as a result 
of our inquiry, so I think it is already having salutary 
effects on the agency's performance. Thank you very much.
    Chairman Thompson. Thank you very much.
    Senator Collins, do you have any preliminary comments 
before we get started here?
    Senator Collins. I do not, Mr. Chairman. I just want to 
thank you for holding this hearing. This is a very important 
issue that the Committee has been involved in for some time and 
I salute your leadership.
    Chairman Thompson. Thank you very much.
    Gentlemen, thank you very much. As I said, your reports are 
very comprehensive. You have had quite a long time to work on 
this and it shows. I congratulate you for that.
    I do not necessarily agree with some of the assessments. 
Your factual analysis, I think, is probably unassailable, but 
the idea that some of these things are working reasonably well 
kind of depends on what you expect and what you call reasonably 
    I mean, it is true, for example, that more cases are being 
referred out to these other agencies and the Executive Order 
did that. That is a step in the right direction, but when you 
look and see that they have less time to deal with these 
complex matters and there are more of them to deal with, and 
that they are not getting adequate training, and then you find 
that when they object, they are immediately rolled and there is 
no appeal taken--you have this nice, beautiful appeal process, 
but it is not being used. Nothing has ever gotten to the 
President. Nothing has ever even gotten to the second level of 
appeal. So, I mean, it depends on what you think is working 
reasonably well. The process is there. You talk to most of the 
managers and I am sure they will tell you that things are 
working just great.
    It is your job to be objective and you have been and I 
appreciate it, but it is our job to be skeptical, so we are 
going to have to go through these things one at a time and 
maybe try to get underneath the surface a little bit.
    There are so many issues here and so many departments, the 
best way to handle it maybe is to go back to the questions that 
we originally asked, and that is kind of the way that you have 
dealt with it in your report. We will see how far I can get 
there. I will not go through all of them, Senator Collins, 
before I turn to you, so do not get too concerned.
    The first two have to do with the statutory framework, and 
the second question also has to do with the Executive Order 
pursuant to the statute and how that is working. Basically, you 
think the statute is not ambiguous, and that is fine. I believe 
you all recommend or think it would be a good idea for the 
Export Administration Act to be reauthorized, is that basically 
    Mr. Frazier. Yes, sir.
    Chairman Thompson. Was it you, Mr. Frazier, who said, for 
example, that we need to let the world know we are serious 
about this? If nothing else, that would do that. Is that 
    Mr. Frazier. That is correct. I think that anything that we 
can do to remove the ambiguity, the confusion, to send signals 
not only to the rest of the world but to all of the referral 
agencies. So I think that is the first step, getting the Act 
    Chairman Thompson. The Executive Order, of course, set up 
this escalation process, whereby the agencies will get 
together. First of all, you have an operating committee that is 
chaired by an employee of the Department of Commerce, and we 
can talk about that a little bit more in a minute, but the 
operating committee considers these licenses. The licenses that 
are referred to the operating committee are growing, as I 
recall. Every year, there are more and more coming in to that 
level. It consists of representatives from all the relevant 
departments and agencies, and I believe they are at the 
operating committee level. I think we will have a chart here in 
a minute that will show that.
    Basically, at that level, the chair of the operating 
committee can basically do what she wants to do. She is 
supposed to listen, but she can make the determination at that 
level herself as to whether or not to approve or not approve a 
license or approve with conditions, is that basically correct?
    Mr. Frazier. That is correct, but what we find in practice 
is that she surely works to achieve a consensus. In one 
instance, I think, we made reference to the fact that she felt 
that she had been pressured in a couple of cases to advance the 
BXA position. What we have said in that regard to BXA is that 
they should treat her as an independent person. If there is a 
problem, they should then have it elevated to the next level. 
But she is a Commerce representative.
    Chairman Thompson. Right. I was thinking more of the 
framework right now, more than actually how it works in 
practice. But your points are well taken.
    Then if one of the agencies wants to appeal that, it goes 
to the Advisory Commission on Export Policy, and that is 
comprised of people at the assistant secretary level or some 
confirmable position, as I recall it, with the advice and 
consent of the Senate.
    Mr. Frazier. Correct.
    Chairman Thompson. Then, if an agency is dissatisfied 
there, they can go to the Export Administration Review Board. 
Then the next appeal is to the President. So that is the 
process this Executive Order set out, and we can discuss that 
in a little bit more detail.
    I think one of the things that was pointed out that the 
Executive Order did not address, and the law apparently does 
not address at all, is what about exporter appeals? You have 
got this process where it comes into Commerce, Commerce refers 
or chooses not to refer to these other agencies and so forth 
and everybody has their input and it is supposed to be 
considered. But if an exporter is denied and he appeals that 
denial, there is a danger that he can circumvent that whole 
process if he gets the initial decision overturned by Commerce 
alone. Is there not a danger that he can circumvent that whole 
process and wind up with his license without having to go 
through the process?
    Mr. Frazier. Well, it should not work that way. One of the 
things that they do now, and it is through an informal----
    Chairman Thompson. You mean it should not work that way?
    Mr. Frazier. There is an informal process that exists now. 
The final decision is left to the Under Secretary for BXA. He 
makes the final decision on the appeals. However, we could not 
find an example where he made that decision without going back 
to the appropriate referral agencies, and what we are 
recommending is that process be formalized. As it is now, it is 
an informal process and in practice, he looks for the input.
    Chairman Thompson. But I think throughout this, it is 
important for us to keep in mind and for you gentlemen as 
Inspectors General, what you go in there and they tell you how 
it works, that is important. You can listen to them and we will 
give them the benefit of the doubt on some of these credibility 
issues and so forth, despite the Rudman report.
    But the formalized process is what we first of all need to 
look at. I am not too interested in the fact that somebody who 
is in charge of it says that it is working good and he picks up 
the phone and does this, that, and the other. The fact of the 
matter is, right now, there is no process--I mean, it can work 
exactly as I suggested and what you are suggesting is that be 
    Mr. Frazier. Yes. In fact, Mr. Chairman, one of the points 
that you mentioned was that you, as the Chairman, are 
skeptical. I think, as the IG community, that is exactly the 
mantle that we wear very proudly. We think that this process 
should be formalized. I think that the point you make is right 
on the money.
    Chairman Thompson. Thank you. The third question was to 
please determine if there is a continued lack of interagency 
accord, as stated in your 1993 interagency report regarding 
whether the Commerce Department is properly referring export 
license applications out for review by other agencies. I am 
going to broaden that a little bit. This really has to do with 
how the whole process works. I want to go through a few points 
here and see if we can discuss them a little more.
    This timing situation was very much of a surprise to me, 
and Mr. Snider referred to the problem that the CIA has. 
Anybody who has ever dealt with the Federal Government has been 
exasperated. It takes forever to do anything, and yet it looks 
like, in dealing with dual-use export items, it is absolutely 
imperative to get everything done in as short a period of time 
as possible. We have the CIA being given 9 days to check out 
end users. Mr. Snider, what is the problem with that?
    Mr. Snider. The problem with that is it is simply not 
enough time for the analysts who are overwhelmed with many 
cases to do that kind of an analysis.
    Chairman Thompson. And the cases are escalating, are they 
not, the numbers?
    Mr. Snider. The number of cases is escalating, the number 
of databases they have to check, people they have to consult 
are increasing, so timing is a problem.
    Chairman Thompson. For the uninitiated, when I say check 
out end users, what are we talking about here? What are they 
    Mr. Snider. Well, end-users are people or companies who are 
identified in license applications as being the ultimate 
recipients or the intermediaries to receive the technology or 
equipment in question that is being exported. And what we do is 
attempt to see what information the agency may have that might 
bear upon a decision to license such an export.
    Chairman Thompson. In other words----
    Mr. Snider. They may be involved in proliferation 
activities that the agency has detected heretofore, this sort 
of thing.
    Chairman Thompson. In order words, you look and see who the 
actual end user is probably going to be, and what their 
activities have been, and whether or not they are the kind of 
people you want to have this technology.
    Mr. Snider. Correct.
    Chairman Thompson. Then you also look, do you not, at the 
likelihood that this might not really be the end user? This 
might wind up in somebody else's hands and somebody else not on 
the application is really the end user.
    Mr. Snider. That is correct.
    Chairman Thompson. So that is not an overnight process, is 
    Mr. Snider. No, it is not.
    Chairman Thompson. I mean, you are dealing with foreign 
entities and we are dealing in a world now where you have all 
these partnerships. You talk to the Russians, you talk to the 
Chinese, and when they get caught red-handed in some of the 
proliferation activities, they say, well, that was not us, it 
was one of these companies out here and we really do not have 
much control over these companies, and they do joint ventures a 
lot and various kinds of entities are together and they are the 
end user.
    Mr. Snider. You are correct.
    Chairman Thompson. So you get 9 days in order to check all 
that out. The Department of Defense components, and when we say 
Department of Defense components, we are talking about, what, 
Army, Navy, and all the----
    Mr. Mancuso. Right, and the intelligence agencies and any 
other Office of the Secretary of Defense components.
    Chairman Thompson. When they are brought in, when these 
matters are referred to them, I believe they get 10 days to 
make their assessment, is that correct?
    Mr. Mancuso. That is correct. And, in fact, what we found, 
for instance, in the Navy is that the 10-day period has forced 
them to adopt a system whereby they no longer refer the matters 
for review down to the appropriate commands, but rather, they 
rely on whatever front office or headquarters expertise they 
have developed to make those decisions, because getting it down 
to the people who would best be able to analyze it could not be 
handled within the 10-day period.
    Chairman Thompson. That speaks for itself.
    The Bureau of Export Administration, I believe, only has 9 
days from the filing of the appeal within which to make a 
    Mr. Frazier. From the filing of an application.
    Chairman Thompson. I am sorry, for an application for a 
    Mr. Frazier. Yes.
    Chairman Thompson. They have 9 days, and within that time, 
they have to decide what?
    Mr. Frazier. They have to make a lot of decisions in that 
period. They have to look at the reasonableness of the 
application to see if it seems to have merit, to see if it is 
logical, what is included in the application, and then they 
have to make a decision as to who it is going to be referred 
to. You would hope that they would check their database, which 
is ECASS, they would go to other sources that are available to 
them to decide what should happen during those 9 days. I surely 
agree with Britt that the 9 days that the CIA has to look at 
these licenses that are referred to is unacceptable. It is not 
enough time. I think that is something that definitely needs to 
be examined.
    Chairman Thompson. Chronologically, is it accurate to say 
that the Bureau of Export Administration wants this CIA 
assessment before they make their determination?
    Mr. Frazier. Well, no, not necessarily. In fact, one of the 
things that they will be doing, when an application comes in, 
they will be making an assessment as to whether it has to go to 
the CIA.
    Chairman Thompson. I see.
    Mr. Frazier. In fact, we had a chart that had the process. 
I do not know if that is available.
    Chairman Thompson. So that comes first. I think I 
understand what you are talking about.
    Again, in terms of the process, I think more than one of 
you were concerned that we are not taking advantage of the 
technology we have over at Treasury to check these people out, 
to check these exporters out, to run them through their 
database over there to see what kind of record these exporters 
have. Customs, I guess, is where the records lie, and that this 
has been a problem.
    Mr. Frazier. Yes.
    Chairman Thompson. You have pointed these things out before 
in prior reports. Why do they not check? The conditions on 
these licenses are really only as good as the people carrying 
them out, and so who the exporter is is important. So let us 
see whether or not they have prior violations, for example. Let 
us see what kind of citizens they are.
    Apparently, Mr. Rogers, you have that information over 
there, but it is not being called upon. Is that a correct 
    Mr. Rogers. The information is available. It is used to 
some extent, but time pressures, staffing and other 
limitations, from our perspective, it is not regularly used.
    Chairman Thompson. Any further comments on that point?
    Mr. Frazier. Yes, Mr. Chairman. We think that by automating 
that data--we have recommended since 1996 that they run the 
licenses against the TECS system and it just has not happened. 
We have been told recently that they are going to start working 
with Customs, but we will believe that when it happens because 
it is something that we have been on record about for at least 
3 years, is suggesting that it should happen and it should 
happen immediately.
    Chairman Thompson. All right.
    Mr. Payne. Mr. Chairman, the State Department is one of the 
agencies that does not run each of the applications that it 
receives for munitions list items against the TECS system, but 
it does run the registration information. In order to apply for 
a license, you have to be registered, and at the time a company 
or an individual registers for a license that information is 
run against the TECS system. Now, there would be additional 
benefits to run the individual applications, as well, because 
they will sometimes have additional information, such as 
forwarders or other companies or organizations identified on 
the application that would not have been in the registration 
    This is something that State does not object to, sees a 
need to, but has attributed to a resource problem just the 
additional time needed to run each of the individual 44,000 
applications against the database. So we are hopeful that as 
the resource problem is alleviated somewhat, that more of the 
application information will be run against the TECS system.
    Chairman Thompson. With regard to what you are referring 
to, does that have to deal with munitions items alone?
    Mr. Payne. Yes.
    Chairman Thompson. So you are addressing the munitions side 
of things and these other gentlemen basically have been 
addressing the dual-use side of things. But it all gets back to 
what you are talking about, resources and time constraints. 
People are being required to do more with less and in a shorter 
period of time. That is what it amounts to, and that gives much 
more authority to Commerce, frankly, and the chairman of the 
operating committee on the front end. Those are policy things 
that we can discuss, but I think that picture is fairly clear.
    I have one more question before I turn to Senator 
Lieberman, the fourth question that we asked. Please determine 
if the interagency dispute resolution or escalation process for 
appealing disputed license applications allows officials from 
dissenting agencies a meaningful opportunity to seek review of 
such applications and assess why this process is so seldom 
    We talked about that a little bit earlier, about the 
escalation process. But again, the time constraints here are 
interesting to me. You go to the operating committee. A 
decision there is made by the chair, hopefully with 
consultation, hopefully with a consensus, but she has total 
authority. She has the power, if she chooses to exercise it, to 
totally ignore everybody, and in one case, with regard to 
encryption, she was told by her superiors at the Department of 
Commerce to ignore everybody. Does anybody dispute that?
    [No response.]
    All right. But however that works, I am sure it works fine 
in most cases. You can appeal her decision to the Advisory 
Commission on Export Policy, ACEP. You can appeal to ACEP and 
you have 5 days to appeal that case and it has to be signed by 
an assistant secretary. Now, I do not know how many people have 
experience in getting a busy assistant secretary's attention on 
anything important, or maybe even not so important. But 5 days 
to get someone at that level, to track them down and explain 
this case, you have to have burning ambition in order to do 
that, and it is reflected in the number of cases in which no 
appeal occurs.
    So that is 5 days. Then if you are still of a mind, if you 
have not gotten the picture by then, you can go to the Export 
Administration Review Board, and you have 5 days to do that, 
and the secretary himself has got to do that to make that 
    This board has decided two cases since 1992. There have 
been two cases appealed to this board since 1992. The numbers 
are here on the chart, as you can see. Let us take 1998. The 
number of cases referred to the agency is 9,100. Then 766 cases 
were referred to the operating committee, and as we can see, 
those numbers have shown a general increase. They declined 
there for a while, and then after the Executive Order, they 
picked back up.\1\
    \1\ The chart referred to appears in the Appendix on page 47.
    But past the operating committee, the numbers have 
decreased. For the cases referred to and reviewed by ACEP, I 
guess 1993 was the highest on this chart, when 142 cases were 
appealed to ACEP. Last year, only 34 were.
    With regard to the next level of appeal, to the Export 
Administration Review Board, in 1998, there were no cases. In 
1997, one case. In 1996, none. In 1995, none. In 1993, none. 
You have to go back to 1991 to find any more, and you have got 
    So, basically, what does that mean? I think one or two of 
you think that means the system is just working dandy because 
everybody agrees on everything. But I think, when you get into 
it and you talk to folks, like the Department of Defense you 
get a different picture. At Defense, for example, who took a 
sample of 26 cases. The Department of Defense, on this random 
sample, approved 6 and opposed 17, was their recommendation, 
almost a 3-to-1 rate of recommended denial over approval.
    The operating committee approved 14 of those licenses over 
Department of Defense objections, and the Department of Defense 
only appealed one case. Out of that whole batch that you 
checked, the random sample, they only appealed one case. You 
talked to them about it, and apparently they told you. But 
after initially opposing these licenses, the Department of 
Defense later changed. Of these 14 cases, 9 of the 14 were with 
regard to China, India, and Russia on issues of risk of 
diversion and end user. But apparently, after a little 
discussion, the Department of Defense decided to go along with 
the licenses, with conditions. Now, we will learn later that 
nobody follows up to see if the conditions are complied with, 
    They told you that, well, ``we look at the likelihood of 
success on appeal''--it is kind of like an intersection 
lawsuit, I guess, that you lose in court--in which you decide 
whether to appeal based upon the likelihood of success and how 
important it is. Then they said that they felt like they were 
required to have concrete evidence that the end user is a high 
diversion risk and they felt like that was obviously a high 
standard to have to have--though I do not know how much more 
evidence they would need with regard to China and India and 
Russia. Our own CIA calls China the world's greatest 
proliferator of weapons of mass destruction.
    But, anyway, they wind up basically going against their own 
judgment. They approved 6 and denied 17. They wound up 
basically going along with everything and appealing only one. 
Mr. Mancuso, and correct me if I am wrong on my analysis, tell 
us what additional information you have about that.
    Mr. Mancuso. I have very little----
    Chairman Thompson. Tell us as to why they did not appeal 
    Mr. Mancuso. You are certainly factually correct in your 
description of the numbers and of what happened. We queried 
them on each of the cases and they had a variety of reasons. 
Some of them, they moderated their position after considering 
that the items were, in fact, in support of international 
    Chairman Thompson. What does that mean?
    Mr. Mancuso. In general, it means that it was not a single 
application. It was going to be a broader application that had 
wider ramifications and they considered that fighting the 
denial for this one specific country apparently would have 
little overall effect and they, again, moderated their 
    Chairman Thompson. Does that mean that there were broader 
foreign policy objectives involved? I saw where you said, in 
support of international programs, and----
    Mr. Mancuso. That is correct.
    Chairman Thompson [continuing]. I am still not sure exactly 
what that means.
    Mr. Mancuso. I think, in a minute, I am going to refer back 
to the person who handled the audit. But before I do that, in a 
number of the cases, they just simply felt that in reviewing 
their arguments, because as you escalate you begin to bring in 
higher-level officials within Defense and consider the 
appropriateness of the escalation, and they felt that they just 
did not have a strong enough policy argument to make at that 
    Chairman Thompson. So you have----
    Mr. Mancuso. I am certainly not saying that I would agree 
with that rationale, but it is their rationale.
    Chairman Thompson. Let us think about this practically. I 
understand what you are saying and I appreciate it. But as a 
practical matter, this person who has this concern, or all 
these concerns with all these items, and this was a random 
sample of 26--goodness knows how many there are out there in 
terms of, say, the Department of Defense objective--but he has 
to go to them and resist. The Department of Commerce, who is 
primarily in charge of this, and presumably some other of our 
agencies, will then presumably say we are all on the same team 
here and this is what we want to do. But this person who thinks 
its a bad idea still has to get to Mr. Assistant Secretary, 
within 5 days and convince him to go against that grain.
    I am not passing judgment on whether or not he should, but 
that is the practical reality of what he has to do in order to 
escalate it to the ACEP level, is that basically correct?
    Mr. Mancuso. That is correct, and I guess in the colloquial 
sense, we all say, how often do you want to expend that silver 
bullet? And they looked at each one of these issues and in 
their own reasoning and with their experience, they decided on 
each of these issues to either accept conditions or to not seek 
a further level of appeal.
    Chairman Thompson. Do they actually change their denial to 
approval in some cases?
    Mr. Mancuso. I believe in some cases, they went with----
    Chairman Thompson. With conditions?
    Mr. Mancuso. The term is ``approve with conditions.'' In 
others, they simply let their objection stand on the OC level 
but failed to follow up within the 5 days to seek appeal. So 
the record would reflect the objection.
    Chairman Thompson. One final point. Is it not also true 
that there is no documentation on why appeals were not taken?
    Mr. Mancuso. In some cases----
    Chairman Thompson. Basically, you are going back and 
talking to them about it, but in terms of a paper trail or in 
terms of an audit trail, it is very difficult to determine the 
reasons why appeals were not taken after objections had been 
lodged, is it not?
    Mr. Mancuso. That is correct, and that goes all the way 
back to the initial licensing officer's decision, where we 
spoke about the fact that we also found that supervisors, in 
some cases, changed the licensing officer's position without 
that person's knowledge or consent.
    Chairman Thompson. We will get to that.
    Mr. Mancuso. And the facts behind that were not documented, 
as well.
    Chairman Thompson. No reasons were given for that, either? 
We will have a chance to revisit some of these things a little 
    Senator Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman. I wanted to get to 
the subject of deemed exports and the deemed export 
regulations. When we had the hearing on Mr. Friedman's report, 
this interested us in the basic notion that the exchange of 
technical information can be effectively an export and, 
therefore, evoke the same kinds of security concerns as the 
sale of a commodity. Therefore, it requires an application for 
a license, very few of which are filed, as Mr. Friedman's 
report showed.
    I note that the Commerce IG has identified this issue as a 
more widespread problem than just at Department of Energy 
facilities. It appears that in addition to problems in the 
federally-funded labs, other agencies, including NIST at 
Commerce, Defense's Army, Navy, and Air Force labs, and the 
Centers for Disease Control and Prevention have not submitted 
any applications on behalf of foreign nationals coming to their 
    I know that some people say that the problem here is in the 
ambiguity of the deemed export requirements and the Department 
of Commerce regulations. I just wanted to take that up a bit 
further, and perhaps I will start with Mr. Frazier. Are the 
Commerce regulations ambiguous, and if so, what can we do to 
help to clarify the application of the rule?
    Mr. Frazier. Senator, they are, indeed, ambiguous. I looked 
at a couple of them myself, and when it explains the types of 
people who would have to come in to get an export or deemed 
export, it addresses the question of basic research without 
defining clearly what that means.
    The other thing is that when we interviewed various people 
and we would ask them their impressions as to under what 
circumstances you would need to come in for an export license, 
most of them had varying interpretations and understandings as 
to the circumstances under which you would do that. Even at the 
Department of Commerce, we have our NIST labs and we were 
uncertain as to whether they, in fact, would be required. We 
know that there are various scientists and researchers that 
come to visit at NIST often, but not one deemed export license 
had been requested there.
    It is something that I think is a big loophole. I think 
that most people do not have a clue as to the circumstances 
under which this should happen. We have encouraged BXA to try 
and come up with some better guidelines, to do more outreach, 
to get the message out, to target certain labs in the public 
and private sectors to make sure that they are aware of this. 
It is something that people just do not have a clue on. I think 
that is so unfortunate.
    Senator Lieberman. Is anything happening? Is anybody at 
Commerce responding to try to resolve the situation?
    Mr. Frazier. In response to our report, they have, indeed, 
suggested that they will do more in this area, that they plan 
to do more outreach. I think that it is an area that there 
needs to be clearer guidance, there need to be some policy 
determinations made to clarify it. It should not be something 
that people have to go and make these assessments with these 
ambiguous guidelines. We think that it should be something that 
it is almost a checklist. If you have this, if this is going 
on, come in for the license. I would always encourage people, 
when in doubt, to come in and ask about the license anyway, but 
that is not happening.
    Senator Lieberman. Let me ask anybody who wants to comment 
whether you have any judgment or have reached any judgment on 
the underlying policy here. Is it right to have the category of 
deemed exports and to require license applications, leaving 
aside, for a moment, whether the regulation is ambiguous or 
    Mr. Frazier. I think that it definitely is.
    Senator Lieberman. It is?
    Mr. Frazier. I think it is no question.
    Senator Lieberman. On the theory that I mentioned very 
briefly, which is that in the exchange of information, you can 
have as much either positive or negative occur as in the 
transfer of a commodity.
    Mr. Frazier. Very definitely, even more so in certain 
    Senator Lieberman. Right.
    Mr. Friedman. I would support that.
    Senator Lieberman. You would? OK. Let me go briefly to the 
cumulative effect problem that we talked about. I appreciate 
you drawing that to our attention.
    What is being done now to assess the cumulative impact of 
controlled exports? Is there any response to the problem or is 
it totally running in separate pipes?
    Mr. Frazier. Clearly, not enough.
    Senator Lieberman. No?
    Mr. Frazier. I think, as the Chairman pointed out, people 
will look at one part of the dam. They will look at this hole, 
they will look at that, but very little is being done on a 
collective basis. In fact, when the staff who did the work 
raised that issue, I asked them to give me some ideas as to 
what kinds of things should happen. You are going to have to be 
willing to put a lot more resources into the issue. You are 
going to have to be willing to spend additional time. I think 
the Chairman has highlighted that repeatedly. Timing becomes an 
issue here. But it is something that is seldom done. It is an 
area that I think we are fairly vulnerable in.
    Senator Lieberman. Did any of you, in your work on this, or 
Mr. Mancuso, discover a specific case in which you were able to 
conclude that the availability of cumulative effect information 
might have changed the outcome of a particular application, or 
was the concern more--I do not want to demean it by saying 
theoretical, but that you saw a potential loophole here?
    Mr. Mancuso. No, Senator, only because we were not 
evaluating the appropriateness of each license application. 
Rather, we were looking at the process.
    Senator Lieberman. Yes.
    Mr. Mancuso. But I would add that when we looked, for 
instance, at the fact that there were a number of applications 
not referred to Defense from Commerce, we did a sampling of 
about 10 percent, and in 5 of the 60 samples, we found 
disagreement in Defense where Defense components felt they 
should have been referred.
    Senator Lieberman. Right.
    Mr. Mancuso. Three of those were cases in which Commerce 
had received an application regarding the transfer of 
technology to India. India was under Presidential order at the 
time that they could not ship items, so Commerce decided 
unilaterally not to share the application request with Defense. 
Well, that has a direct bearing on the cumulative effect 
analysis, because our license officials feel that even though 
Commerce was denying the license, we would want to know what 
was being requested, what was being looked for by this 
particular country, and we would have benefited from that.
    If you are going to look at cumulative analysis, it is not 
just of the matters that are currently being referred. It is, 
overall, what are the items that are even being denied without 
the knowledge of the individual departments, such as Defense. 
So we certainly found some loopholes in looking across the 
board at all of these issues.
    Senator Lieberman. Let me move to that now. I know that DOD 
and DOE expressed concern that Commerce was not appropriately 
referring license applications to them for review, and the DOE 
actually rescinded its delegation of authority to Commerce, 
which had previously allowed Commerce to forego referrals to 
DOE of some license applications.
    Does Commerce disagree with this expression of opinion from 
the Department of Energy and the Department of Defense that it 
was not referring all the licenses it should have to them for 
    Mr. Frazier. I think, as Don pointed out, we had a sample 
of about 60 cases that were not referred, and in looking at 
those, 5 of them should have gone to the Defense Department. 
BXA still took the position on reflection that they still felt 
that they had acted appropriately on all of them----
    Senator Lieberman. They did?
    Mr. Frazier [continuing]. So I think that is their 
    Senator Lieberman. Is any action occurring now within 
Commerce to respond to those concerns expressed by the other 
two agencies?
    Mr. Frazier. In the case of Energy, I think it was returned 
without action. So the five that Don referred to were cases 
that we did both look at, and I think it is drawing a lot of 
attention to that process. We would think that the Department 
would have to be very careful in anything that it makes a 
decision not to refer.
    Senator Lieberman. Finally, I wanted to ask you to 
elaborate a bit on this interesting requirement for post-
shipment verification of high-performance computers that I know 
was part of the Defense Authorization Act, I think, of 1998. 
That is the post-shipment verification to be conducted on all 
HPCs with a performance capability between 2,000 and 7,000 
MTOPS that went to Tier 3 countries, which are countries that 
we have concern are proliferating. First, help us understand 
what the mechanism was supposed to be for a post-shipment 
    Mr. Frazier. The issue here is that we would either have 
the U.S. and Foreign Commercial Service, which is stationed 
around the world in 67 countries, do it, or BXA's Safeguard 
Verification Program, where we sent export licensing agents 
from the United States overseas to verify shipments.
    Senator Lieberman. And the verification, obviously, is to 
make sure they are being used----
    Mr. Frazier. That they have, in fact, ended up where they 
said they were going to end up. You go there and you verify 
    Senator Lieberman. Is the purchaser required as a condition 
of the license to give permission for those post-shipment 
verifications to occur? In other words, what is the basis for 
us to go in through either the BXA or Commerce personnel?
    Mr. Frazier. That is a general requirement. One of the 
things with China, China has always been a special problem 
because we exported, I want to say, in the neighborhood of 191 
HPCS to them in FY 1998 alone.
    Senator Lieberman. Right.
    Mr. Frazier. In the process, Commerce did only one HPC 
post-shipment verifications during that year.
    Senator Lieberman. That is exactly right. I was going to 
ask you about that. My numbers say 390 shipments of high-
performance computers to Tier 3 countries in 1998, 1 year. Only 
104 post-shipment verifications occurred, but, just as you say, 
of 190 high-performance computers sold to China, only one post-
shipment verification occurred.
    Mr. Frazier. Yes. One of the things is that the Chinese 
Government requires that we get a special approval from them 
before these can be conducted. They usually go with the people 
from the United States who do the post-shipment verifications. 
The United States now requires exporters to obtain an end-user 
certificate from the Chinese Government for each HPC they plan 
to export to China, whether or not the export is licensed.
    Senator Lieberman. So do you think that change will 
increase the proportion of post-shipment verifications----
    Mr. Frazier. Yes, because, basically, what it does is put 
the Chinese Government on notice that if these commodities, 
these high-performance computers, are going to be sent to them, 
it is unacceptable for them not to allow these verifications to 
take place.
    Senator Lieberman. But for now, we do know that of 190 
high-performance computers sold to the Chinese last year, that 
we only have verified in one case that the computer is being 
used for what the representations were that it was going to be 
used for.
    Mr. Frazier. Regrettably, that is true.
    Senator Lieberman. That is something I think we should 
focus in on, because as we see this emerging picture, we want 
to have trade with China, we want to have relations, economic 
and diplomatic, with China, but the picture we get of a very 
broad effort, basically, to obtain the technology that we have 
worked very hard and invested billions of dollars to develop 
and then perhaps to proliferate it, we have got to raise our 
guard. It just struck me that you all have pointed out one area 
here where our guard has been remarkably low, so I hope as we 
continue to oversee, and I ask your help in that, too, what the 
departments are doing, that we press in on this to see that 
more of that post-shipment verification is occurring.
    Thanks to all of you. Thanks, Mr. Chairman.
    Chairman Thompson. Thank you very much.
    Mr. Friedman. Mr. Chairman, could I just clarify one point 
for Senator Lieberman?
    Senator Lieberman. Yes, please.
    Mr. Friedman. I do not know whether you were relying upon 
my testimony from June 10 with regard to the withdrawal of the 
delegations of authority. You may well have been, because that 
is what we were told.
    Senator Lieberman. Right.
    Mr. Friedman. In fact, Senator Lieberman, on July 11, the 
day after the hearing, I believe, the Department sent a memo to 
the Department of Commerce, the responsible parties there, not 
withdrawing the delegation but attempting to clarify the 
circumstances under which delegations will be appropriate. So 
it is a very different----
    Senator Lieberman. I see.
    Mr. Friedman. The actual outcome turns out to be quite a 
bit different than what we had been told and we have not 
analyzed the contents of that document.
    Senator Lieberman. OK. So there is some negotiation going 
on now between the two departments?
    Mr. Friedman. I do not know whether--I cannot tell you 
there is negotiation----
    Senator Lieberman. I appreciate that clarification. As a 
matter of fact, the delegation has not been withdrawn?
    Mr. Friedman. That is correct.
    Senator Lieberman. Thank you.
    Chairman Thompson. Thank you. Let us go back just a moment 
to the escalation process where we left off and the OC chair, 
the operating committee chair where the initial group 
discussion, at least, takes place. It looks to me like we could 
all benefit from a clarification of the role of the chairperson 
of that operating committee. We had a little discussion about 
this earlier. Consensus is said to be the practice, but the 
authority is clear and in some cases it has been exercised 
where unilateral authority could be exercised.
    The Department of Commerce, as I read their response to all 
this, basically says, well, it says right there in plain 
English that she is an employee of the Department of Commerce 
and she is reflecting the Commerce position, and in effect, we 
make no apology about that.
    I think you pointed out that at least the position was, or 
the desire was, when this was set up in the Executive Order, 
that she would be at least somewhat objective. I know, for 
example, in the encryption case, that she told you that she was 
told, basically, not to particularly pay any attention to what 
anybody else thought. Defense and Justice both, I think, had 
problems with that. She is not objective and she ought to be.
    Mr. Mancuso, I think Defense was one that had a problem 
there. This is a policy decision. If, in fact, we want to set 
up someone in Commerce to have unilateral authority, at the 
initial stage, anyway--which, of course, in my estimation is 
extremely important because of the difficulties of going past 
that initial stage--that is a policy decision that I guess 
would be consistent with the Act. Or if we want to have someone 
who is supposed to be objective, that is another way to go.
    It looks to me like we ought to lay our cards on the table 
and acknowledge what it is we are doing. Are there any 
recommendations in your report in terms of--I do not recall--
clarification of that role, or do you have any thoughts? Mr. 
Frazier has discussed it a bit with me, but do you have any 
thoughts, Mr. Mancuso?
    Mr. Mancuso. As we stated in our report, we clearly feel 
that the process favors the Department of Commerce. That is the 
way the system was set up, that someone in Commerce would head 
up this committee, and it is assumed that the process would 
favor Commerce, which again leads to further analysis as to 
what might be an appropriate case to escalate.
    In that regard, Mr. Chairman, I would respond to your 
earlier question about the international programs. My associate 
has told me that what we were speaking about there is the 
Israeli Arrow program, which has involvement that goes beyond 
Israel and has the support of the Department of State and other 
agencies. So within Defense, the Defense concerns were 
reevaluated in light of the feelings of the other participating 
organizations and the Department felt that their concerns----
    Chairman Thompson. Your initial concern had something to do 
with them, and when you learned that they were a part of the 
process, that alleviated some of your concerns?
    Mr. Mancuso. Well, it also caused some belief that if the 
Defense Department position was not a very strong position, 
clearly, we would not prevail.
    Chairman Thompson. All right. Back on this other point, 
what about the encryption issue? What happened there? 
Obviously, that is a very sensitive subject that we are dealing 
with up here right now. It is another balancing act. I am not 
sure where the administration stands on this today, but in 
times past, anyway, the Justice Department and FBI have taken 
the position that we have to be very, very careful about this. 
Some of our manufacturers over here want to loosen the 
standards and there is another debate going on here involving 
commerce with a little ``c'', commerce versus national 
    Encryption was at State at one time, was it not, and it was 
transferred to Commerce. Was that part of items taken off of a 
munitions list? Anyway, the transfer was made. Then Justice 
became a part of the process. Did that happen simultaneously, 
or exactly how did it come about that encryption came to 
Commerce, and does that sensitive item present a special 
problem? Apparently, it was the only time that the OC chair 
says that she was given those kinds of instructions back at 
Commerce as to how to deal with the subject. First, does 
encryption present a special problem for us? I do not want 
everybody to speak at once.
    Mr. Frazier. I am not aware of the chronology. I think that 
what is tripping us up here is how it got to Justice. I just 
cannot address that point.
    Mr. Payne. Yes. My staff just tells me that in 1996, the 
devices moved from the munitions list to the dual-use list and 
there is a process for moving items back and forth.
    Chairman Thompson. OK. So it was like the satellites?
    Mr. Payne. Exactly, like the satellites.
    Chairman Thompson. Anybody on the staff may speak up if you 
want to. Was Justice involved in the process at that same time, 
or do we know?
    [No response.]
    All right. That is for further consideration.
    On the cumulative effect issue, let us move on to question 
five. Senator Lieberman dealt with that. In the first place, I 
think it is important to point out or highlight what you point 
out in your report here. Mr. Mancuso, I think this is your 
    A Defense science task force report on globalization and 
security issued in December 1998 discussed how globalization 
and technology increases the need for those concerned with 
technology security to focus on the capabilities created by the 
integration and military application of uncontrolled 
technologies. A study released in early 1999 by the Department 
of Commerce discusses how the cumulative effect of 
technological transfers to China might pose long-term economic 
risk to U.S. competitiveness and suggested that the topic 
warranted further study.
    In fact, in the Department of Defense policies and 
procedures directive 2040.2, international transfers of 
technology, the policy states that DOD components--and we've 
discussed what the components were within DOD--shall annually 
assess the total effect of transfers of goods, munitions, 
services, and technology on U.S. security. So there seems to be 
a pretty clear policy directive that DOD is supposed to make 
such an assessment, is there not, Mr. Mancuso?
    Mr. Mancuso. Yes, there is.
    Chairman Thompson. And that is not being followed, is it?
    Mr. Mancuso. No. We found that it is not. At best, it was 
performed on an ad hoc basis.
    Chairman Thompson. My notes indicate that when you talked 
to them about it, they said that it was too costly and too slow 
to make the 30-day turnaround requirement that they had, is 
that correct?
    Mr. Mancuso. Correct. They attributed it to resources and 
    Chairman Thompson. Resources and timing, a recurring 
problem. The only problem here is that you have an official who 
basically decides to ignore the policy of his own department. 
Hopefully, that is not commonplace. I just came from a hearing 
yesterday on Energy, you can tell, and we saw this time and 
time and time again over there. That is just something that we 
are not going to tolerate.
    Congress needs to face up to the resources issue. Congress 
needs to face up to the timing issue, too, and perhaps we can 
address that in the Export Administration Act. It all gets back 
to the people administering the program, though, and what their 
ideas and proclivities are. If you have a bunch of people who 
so heavily weight things in favor of getting the merchandise 
out the front door, I am not sure any of the procedures are 
going to do you much good. Hopefully, however, we can do 
something about it, by pointing out the importance that this 
not be the prevailing attitude.
    On number seven, the issue of whether or not cases were 
properly referred out to the various agencies for comment, Mr. 
Frazier, I believe that it was you who suggested that the CIA 
should get more time to look at these matters.
    Mr. Frazier. Yes.
    Chairman Thompson. You said in your prepared remarks, too, 
that they were not being referred as many things as you feel 
like they should be referred. In fact, here is the CIA 
apparently saying, we do not want all this.
    Mr. Frazier. That is right.
    Chairman Thompson. They had more important things to do. 
Therein lies another problem, right, Mr. Snider?
    Mr. Snider. That is correct, Mr. Chairman. The 
Nonproliferation Center actually takes the position they are 
getting referrals they should not be getting, where the license 
application really does not involve the potential threat of 
proliferation activity or can be applied to proliferation 
activity. So there is a disconnect there.
    Chairman Thompson. Who makes the determination as to 
whether or not it involves proliferation activity? How do you 
know that until you take a look at it? You have got somebody on 
the other end who does not have the qualifications to make that 
determination making it.
    Mr. Snider. I am not sure how Commerce makes the 
determination. They refer the cases. They decide which should 
be referred under the MOU with the agency. They do that and 
then our analysts take a look at it and assess it from there.
    Chairman Thompson. You generally describe the kind of cases 
you want?
    Mr. Snider. Yes.
    Chairman Thompson. And then they have to decide whether or 
not a particular case fits that category? What is the problem 
with that, Mr. Frazier?
    Mr. Frazier. Well, the thing that we are trying to push, 
Mr. Chairman, is that when in doubt, send it. I mean, do not 
leave it to chance. You are right. The licensing officer has a 
body of information that he or she is working with. They get 
that. If they have any remote consideration that it should be 
referred, it should be referred. I just do not think that you 
leave it to chance. That is the message that we surely have 
tried to get BXA to address.
    Chairman Thompson. All right. Clearly, this is something we 
need to have some further discussion about, and again, if it is 
a resources question, then it is something we need to face up 
to and Congress needs to face up to. We cannot have our cake 
and eat it, too, either.
    Senator Akaka, it just occurred to me that I did not call 
on you. I am so sorry. I am going to stop right now and defer 
to you. You were here earlier and I got carried away.


    Senator Akaka. Mr. Chairman, do not feel badly about that. 
I am patient and I know you have so many important questions to 
    Mr. Chairman, I want to commend you for holding this 
hearing, especially after we have had an August 1998 
investigation on the conduct of this interagency licensing 
process for dual-use items, and also a hearing that we had June 
10 on dual-use and munitions export control issues relating to 
    Mr. Chairman, I want to ask that my statement be placed in 
the record.
    Chairman Thompson. It will be made a part of the record.
    [The prepared statement of Senator Akaka follows:]
    Mr. Chairman, with you, I am pleased to welcome the Inspector 
Generals (IGs) from the Departments of Commerce, Defense, Energy, 
State, and Treasury and the Central Intelligence Agency to discuss 
their reports on the review of the export licensing processes for dual-
use and munitions commodities.
    I am heartened to learn that the IG's overall conclusion is that 
the dual-use referral and dispute resolution processes work reasonably 
well. The dual-use and munitions license processes have greatly 
improved since the 1993 review was completed. However, more work needs 
to be done to ensure that the United States has a highly efficient, 
effective and transparent export-control process.
    Mr. Chairman, I, therefore, strongly recommend that the Committee 
invite the agencies to report on the measures taken in response to the 
IG's reports in 6 to 9 months. As the case with the 1993 IG reports, we 
do not want to wait another 5 years before someone reviews the actions 
taken by the agencies to implement the sound recommendations made by 
the IG's to improve the performance of our export-control process.
    A catalyst issue for these IG reports was testimony last year 
before this Committee by Dr. Peter Leitner of Defense's Agency on 
Threat Reduction. He testified that recommendations he entered into 
Defense's computer system were later changed without his consent or 
knowledge and that there was undue pressure to issue or change 
    I am pleased to learn that, apparently with very few exceptions, 
although there have been instances of indirect pressure, this is not 
the case. Dr. Leitner's reporting was a serious concern to the 
Committee. I trust that with the IG's review of this issue and 
continued Congressional oversight future problems will be resolved.
    Finally, Mr. Chairman, the various agencies generally agreed with 
the numerous recommendations made by their IG's for improving the 
export-control process, but they highlighted resource and budget 
    If the United States is to implement an effective, efficient and 
transparent export license control process, the Congress must ensure 
that the appropriations for each of these agencies is adequate for this 
    In light of the recent Cox Report findings and the additional 
funding granted to the Department of Energy's National Laboratories for 
implementing a secure counter-intelligence program, the Congress should 
consider appropriating funds for the specific procedures which need 
enhancements, such as Commerce's antiquated computer system, training, 
personnel resources for monitoring license conditions, end-user 
proliferation reviews and pre-license and post-shipment checks.
    I welcome the witnesses and look forward to their testimony.

    Senator Akaka. I also want to say that I would hope that 
the Committee would not wait another 5 years before we hear 
from this group, that maybe even in 6 months, to see what has 
been done, and even more importantly, so that we can carry out 
your recommendations as they come from you, since you are the 
men in the trenches and have been able to see the problems that 
we have to face.
    I have a question here for Energy. Mr. Friedman, you 
requested your general counsel to look into a possible conflict 
between Section 12(c) of the Export Administration Act 
regarding the protection of companies' proprietary information 
and the 1981 Executive Order 12333 regarding the United States' 
intelligence activities. What specific issues may be in 
conflict and what is the status of your general counsel's 
review on this issue?
    Mr. Friedman. Let me answer the second part of your 
question, Senator Akaka, first. The last time I checked, which 
was about 3 or 4 weeks ago, the general counsel had not opined 
on that issue. They were waiting for additional information and 
they had not rendered an opinion at that point.
    The general essence of the issue is whether export control 
analysts should have full access to intelligence data gathered 
by the Department's intelligence group and to raw information 
and others, conversely, whether the Director of Intelligence 
should have access to whatever information is generated as part 
of the export control licensing process within the Department 
of Energy. That was the technical distinction between those two 
documents that we asked the general counsel to render an 
opinion on.\1\
    \1\ The information entitled ``Dual-Use License Process'' submitted 
by Senator Akaka appears in the Appendix on page 132.
    Senator Akaka. Does the general counsel have any problems 
in that?
    Mr. Friedman. I cannot speak for them. Certainly, waiting 
this long for a legal opinion on a matter of this sort is not 
acceptable and I am sure the current general counsel would 
agree with that, but I cannot----
    Chairman Thompson. You ought to give them 9 days. 
    Mr. Friedman. My guess is this is a case that illustrates 
your point earlier, Mr. Chairman.
    Senator Akaka. In your report, Mr. Friedman, you indicated 
that the State Department does not have an established 
interagency fora to discuss routine munitions license 
applications and that there is no process for escalating 
disputed applications. What steps has DOE taken with the State 
Department to rectify these issues?
    Mr. Friedman. Well, as I indicated on June 10, the under 
secretary has formed a task force to look at the broad range of 
export control issues and that is one of the issues on their 
plate. At this point, I, frankly, cannot tell you whether they 
have instituted any kind of discussions with the State 
Department on this matter.
    Mr. Payne. Senator Akaka, may I address that from the State 
Department perspective?
    Senator Akaka. Yes, Mr. Payne?
    Mr. Payne. On the munitions side, there is not an 
escalation process similar to the dual-use side. The State 
Department has the final authority to make the decision. Now, 
there is a fairly extensive referral of licenses to the 
Department of Defense and Energy and so forth and we are not 
aware of any specific cases where the State Department has not 
fully taken into consideration the concern expressed by the 
other agencies. It is true there is not a process, but we are 
not aware of any specific cases where there was concern by 
other agencies that the State Department ignored.
    Senator Akaka. It seems as though there either needs to be 
a process or we cannot let that fall between the cracks and 
disappear. Mr. Payne, the reports note that Commerce should 
fully implement 1996 NSC guidance on referring commodity 
classifications to state and Defense which could involve 
possible munitions items and that there should be more 
transparency in dual-use classifications, which should perhaps 
be open for all agencies to review. How many technical 
personnel, it could be engineers or whatever they are, are on 
State's Defense Trade Council, DTC's, political and military 
affairs staff, excluding any detailed personnel from the armed 
services? How many technical personnel are there?
    Mr. Payne. I believe, currently, there are 16 licensing 
officers on the DTC staff.
    Senator Akaka. How many armed services personnel are 
detailed to both DTC and PM?
    Mr. Payne. I am told four.
    Senator Akaka. If State DTC and PM do not have technical 
personnel on its staff, my question is, how can it perform 
commodity classifications under the Commerce control list, 
which is more complex than the U.S. munitions list?
    Mr. Payne. I think the main concern the State Department 
has in wanting to see more of those commodity classification 
applications is that it would be able to spot those items that 
are not appropriately classified. For example, had that 
information in the Hughes case come to State, it would have 
objected to that information and Commerce's decision. I do not 
know how much additional technical capability State would need 
to review licenses, but State has only seen 21 of those 
classifications over the last number of years and there are 
something like 2,000-plus each year. State would just like to 
have access to more of those so that it could express an 
opinion on the appropriateness of the decision being made.
    It is true, State already suffers from a shortage of people 
and an inability to really perform the current responsibilities 
that it has, but we discussed earlier that there is a plan in 
motion to provide additional funding and to more than double 
the size of the staff in the DTC area.
    Senator Akaka. Mr. Snider, all of the IGs determined that 
our export license analysis will be better served if we have 
data on the cumulative effect of technology transfers. Do you 
believe the CIA is the appropriate organization with the U.S. 
Government to perform that function?
    Mr. Snider. I am not certain the CIA necessarily has all 
the answers here. They certainly have a lot of information. It 
seems to me that, certainly, we are not looking at cumulative 
effect solely in terms of what licenses have been issued in the 
past and that sort of thing. We take into account lots of other 
factors in terms of what we know about what the country is 
producing indigenously, for example, what they are getting from 
third countries. There are factors that need to be taken into 
account, it seems to me, in the export licensing process but 
are not necessarily limited to cumulative analysis of end users 
and license applications. So I think intelligence has a 
critical part to play here in informing the export license 
process even beyond simply reporting on end users and 
    Senator Akaka. The Commerce IG's report states that CIA's 
Nonproliferation Center is not fully engaged in the license 
process because it only receives about 45 percent of dual-use 
cases. Further, NPC only reviews applications for items 
controlled for proliferation reasons and not for national 
security for other foreign policy reasons.
    Do you believe that the NPC could provide meaningful input 
on these types of applications and should it review a broader 
scope of dual-use licenses?
    Mr. Snider. Well, let me respond this way, Senator. The 
dual-use applications are referred to NPC pursuant to an 
agreement, an MOU, between Commerce and the CIA that provides 
basically that applications will be referred to NPC that have 
some sort of potential implication for proliferation concerns. 
That is the business of NPC. That is what its analysts do and 
what they analyze.
    Whether they can make a meaningful contribution in terms of 
analyzing the national security implications of other kinds of 
technology or goods or services, I rather doubt. That is not to 
say the agency itself could not provide analysis on these other 
topics, but I am not sure the NPC would be the correct place to 
do it.
    Again, I think this is something that needs to be discussed 
between the Department of Commerce and the agency management to 
come up with a common understanding where we can play a useful 
role, if we are not fulfilling that role already.
    Senator Akaka. Thank you. I just want to touch on something 
that the Chairman raised about the issue of encryption. That is 
to anyone that would answer this. Is it not true that 
encryption software exports are still tightly controlled and 
that this is still an issue of debate in the software industry?
    Mr. Frazier. The answer is yes. I mean, one of the things I 
see here even in my notes, that this is something that the 
National Security Agency is very much interested in. We know it 
is a hot issue at the Department of Commerce. So I think there 
is a debate. It has not been decided. There is a business 
concern that has been raised, a trade issue that has been 
raised. There are security issues that have been raised. I know 
the Justice Department has weighed into it. So the answer is 
definitely, yes, it is an issue that is being debated that 
needs more discussion and it will be interesting to see when it 
is resolved.
    Senator Akaka. I thank you for the responses. Mr. Chairman, 
you did accept my full statement, but in that statement, I am 
again asking and strongly recommend that these agencies report 
to us in 6 to 9 months rather than more than that.
    Chairman Thompson. I think that is a very good suggestion. 
Thank you very much.
    Let us move to the training issue again, because I have a 
hard time imagining bringing in these new licensing officers, 
especially in some of these sensitive areas--defense, for 
example--and not having any formal training period for them. 
They rely upon on-the-job training and mentoring. If that is 
not a way to keep total control of your new employees, I do not 
know what is, because that mentoring is going to reflect and 
the on-the-job training whatever the mentality of the people 
who are providing the mentoring. You might say the same thing 
with the formal job training, but I do not think so.
    The thing that strikes me is that in the Federal law, Title 
5, Section 4103, Mr. Mancuso, you point out with regard to 
question 8, the head of each agency shall establish, operate, 
maintain, and evaluate a program or programs and a plan or 
plans for training agency employees. The Department of Defense 
training policy, the directive carrying that policy out 
requires ``heads of DOD components to plan, program, and budget 
for training programs to meet employees' development needs,'' 
etc. You checked with the Army and they have none. The Navy, 
they have none. The Air Force, they have none. The Joint 
Chiefs, they have none. Nor does DTRA, which does the 
technology assessments.
    I would hate to think how someone would go over there and 
become a licensing officer and have to make a technology 
assessment for some kind of a component with nuclear 
ramifications without any real training. I guess I would do 
what they do for a while, anyway, and I would just kind of do 
what I was told. But they are not following the law.
    I was struck with what these licensing officers are 
required to do. Mr. Frazier, I think it was in your report that 
you said that the operating manual being used by licensing 
officers at the time of our review included a small section 
entitled ``case analysis guidance,'' which outlined eight 
points that must be addressed as part of the licensing officer 
analysis of an export license application and be included in 
the initial referral comments.
    So before you can refer it, he has to consider: (1) export 
control classification. I am going to abridge some of this.
    (2) background statement highlighting licensing history 
involving the applicant. Well, of course, we know we do not 
check with Customs or Treasury to find out the licensing 
history of the applicant. Information about this might come in 
over the transom, but that is one source we do not look at. The 
officer must also consider previous working group 
consultations, issues of interest, any precedent-setting 
aspects of the proposed transaction.
    (3) the licensing officer has to consider the 
characterization of the end user, including type and 
relationship with the applicant, if any, such as a bank or a 
motel or a U.S. subsidiary.
    The licensing officer, (4) has to consider the number of 
end users and the reasonableness of the end use. This is what 
he has got to do within 9 days, is it not, Mr. Frazier?
    Mr. Frazier. Yes, sir.
    Chairman Thompson. (5)--we are not through yet--reason for 
not referring to an agency.
    (6) the licensing officer's written recommendation.
    (7) statements as to whether or not conditions are 
appropriate, and if so, identification of the specific 
conditions of the Department of Commerce.
    (8) the licensing officer's name, telephone number, 
facsimile number.
    All these things this licensing officer has to do and there 
is no classroom training, and there is no plan, there is no 
program. There is no real training--all, I would submit, in 
clear violation of the regulations and directives of the 
Department. I think you all point out the need to standardize a 
training program.
    Yes, you are able to go to some of these people and ask 
them, well, do you get sufficient training, and few of them are 
going to say, ``No, we are basically flying blind here and do 
not know what we are doing.'' They did not report that. They 
basically feel like they are doing a pretty good job and they 
are up to it and all that, which you might expect.
    But accompany this with the further findings that you had 
with regard to the pressure. Of course, you did not find many 
instances or many people who said much about that. There were 
some instances in the Department of Defense, but you could not 
really tell because there is generally no paper trail. You 
could not tell the extent of it, as I understand it, but you 
did get some instances of what was called indirect pressure. 
Some of these employees, and I assume licensing officers are 
included--if I am not right, you can point that out--said that 
they felt that promotions, bonuses, getting to travel, and 
things like that were at stake in terms of the extent to which 
they went along with the program management policy.
    As I say, you accompany that with the fact that these 
people are not getting the training that is responsive to what 
they need and I think the picture emerges fairly clearly as to 
where the process heavily leans. In all these disputes and all 
these turn-downs, the people raising the question are always 
objecting to the license and the Department of Commerce is 
always overruling in favor of approving the license. That is 
what I've seen in all these samples, and if I am wrong, you can 
tell me. But that is what the dynamics are.
    You have these agencies, at least in the beginning, anyway, 
who will say no but the weight and the burden--considering the 
standard of proof that apparently is being required--is in 
favor of granting the export license. Anybody can jump in here 
at any time, with the remote possibility that somebody might 
disagree with what I say.
    Mr. Frazier. Let me jump in on the training issue.
    Chairman Thompson. Yes.
    Mr. Frazier. One of the points, I think, that you point out 
is the importance of training. Unfortunately, too often in 
government agencies, training is one of the first things that 
is cut. Too often, the people who are very busy doing their 
jobs do not have the time to get away for training. At least, 
that is the thinking of too many managers.
    What we know is that as we try and improve this process, 
there should be a formalized training program that is in place, 
that we should be able to cross-train people with various 
agencies. I ought to be able to send someone from Commerce over 
to the Defense Department so that they can work on a brief 
internship, for example, to understand better what goes on, 
have people from the Defense Department come over.
    One of the things that is happening in the Department of 
Commerce, one division has a very good training program that 
they have instituted for their new licensing officers. We are 
encouraging BXA to replicate that, if you will, because we can 
see in looking at those individuals, when they have a formal 
training program, that it is a better situation. It enables 
them to do their job better.
    We have come up with many recommendations and ideas as to 
some of the things that can be put in place, checklists, 
examples, things that will make it easier, if you will, for the 
licensing officers to reach a decision. You just elaborated on 
the eight or so requirements that they have to deal with. I 
mean, there can be checklists that would, in fact, help them. 
There are some that exist. They need to be improved.
    Training will make a big difference, because I think it 
will make sure that everybody is singing from the same song 
sheet, if you will. And at the same time, I think that to the 
extent that the other agencies understand what we are doing, to 
the extent that we understand what they are doing, it just has 
to improve the process. Something definitely should happen.
    Chairman Thompson. I think that is absolutely right and I 
appreciate the clear recognition on behalf of all of you with 
regard to that. Not only is it the law, but it just stands to 
reason. People of varying levels of experience, I suppose, have 
to make determinations about end users. People did not come 
into the world knowing about practices of these various 
countries and all the complexities and arrangements that we 
were talking about earlier with regard to how they disguise 
what they are doing. We have also learned that some people do 
not always do exactly what they promise to us that they will do 
and that they are deceptive.
    Mr. Frazier. And it changes daily. The fact that something 
was handled one way this week, it will not necessarily be the 
same next month.
    Chairman Thompson. And we are constantly learning about how 
vulnerable we are to being wed to the old world kind of 
counter-espionage practices that we have, where we were set up 
and designed to counter things that no longer exist, the Soviet 
Union, for example. Now, we have different kinds of threats 
from different kinds of countries and entities that work in 
different ways and it is not easy to recognize warning signs so 
that you can bring the CIA into it. If they never see it, I 
think it was your point earlier, then they are not going to be 
able to do their thing, either.
    Mr. Frazier. Mr. Chairman, one of the other points that you 
rightly raise is the question of resources. For example, to do 
one post-shipment verification to a place in the Soviet Union 
may cost about $6,000. That is a resource issue. Someone that 
has a limited budget has to weigh that. Do you spend the $6,000 
to take that trip to the Soviet Union or do you save that for 
training, do you save that for other trips? Those are the kinds 
of decisions that ultimately have to be made.
    Chairman Thompson. Or is it just too expensive to ship a 
supercomputer to them under those circumstances?
    Mr. Frazier. That is the other issue.
    Chairman Thompson. Thank you for that. On the technology 
and information systems, this is another thing that it looks to 
me like we could make a lot of progress on. Mr. Mancuso, you 
talk about the DOD system, FORDTIS, is that the acronym for it?
    Mr. Mancuso. That is correct, Mr. Chairman.
    Chairman Thompson. Basically, explain what it is, and maybe 
each of you might want to take a crack at that. Everybody seems 
to have their own database. There is some access, that you have 
one with another, but not total. Now, we learn that some of 
your departments are modernizing, but without talking to each 
other, so you do not know whether or not it is all going to fit 
together. We saw that with the Internal Revenue Service. That 
is part of the problem the IRS has. You have a bunch of great 
stovepipes, systems totally unrelated to each other and that 
cannot talk to each other. Is that where we are headed here if 
we are not careful? What do we have and what do we need, Mr. 
    Mr. Mancuso. Well, basically, what we have is a system that 
is supposed to be a comprehensive reference database and it is 
supposed to track all of the goods, munitions, services, and 
    Chairman Thompson. When you say ``we'', are you talking 
about Defense now?
    Mr. Mancuso. ``We,'' meaning the Department of Defense are 
supposed to be doing that, and in many ways, FORDTIS does 
exactly that. On the other hand, it lacks certain controls and 
it also is not as easily accessible and relational to other 
databases that we may, in fact, be very much interested in.
    We focused, in this case, on who can make changes in 
FORDTIS and who is responsible for updates and are those 
updates being made. What we found is that some of the problems 
with the system were actually planned, not as problems, but 
there was a rationale given as to why, for instance, 
supervisors could overwrite the positions of their licensing 
officers without any concurrent policy that would require some 
documentation in the system as to what the initial position was 
and the fact that it had been changed, etc.
    We also found that, in looking long range, in tracking 
through end-use verification, etc., that frequently, there were 
not the updates to the system that would be needed and would be 
beneficial for future reviews. So in a few instances, we found 
that the final Defense position recorded differed when we 
looked at the Commerce system, and vice versa.
    Basically, what we have is a usable system that needs some 
work. We have made some suggestions to management as to what 
improvements could be made and suggested the importance of 
being able to relate clearly to the State Department and 
Commerce and others.
    Chairman Thompson. Commerce is one of those departments 
that is attempting to modernize their system somewhat, as I 
understand it.
    Mr. Frazier, you might take us through what happens. An 
application comes in. How does the system work now? What do you 
need to be able to call on within Commerce? What kind of 
information do you need? What do you rely upon? I assume that 
if Defense is brought in, then they look to their own systems. 
Do they need to be able to use yours or vice versa? What is the 
set-up now and what should it be, do you think? Do you happen 
to have a chart?
    Mr. Frazier. There is a chart that Jennifer has put up that 
is on the entire process. But since you are primarily 
interested in the systems, our system at Commerce is called the 
ECASS system and that system is working. The problem is that, 
as I pointed out, that system was developed in 1984. It would 
be the same thing if you had a computer from 1984. It would 
still work. I mean, it is probably a 286 and it would still 
work, but it surely would leave you in the dark ages in many 
respects. There is so much information that is available that 
if we had an updated system, that the licensing officers would 
have right at their fingertips.
    They could have information from a classified system, and 
that is an issue that we have to, I think, collectively agree, 
in terms of whether that information that would come from the 
CIA, for example, should be readily available to the licensing 
officers. It would have to be a classified system and that 
would have to be something that would have to be approved at 
the appropriate levels.
    Chairman Thompson. Is that not one of the problems that you 
have now even with regard to an unclassified situation, and 
that is licensing officers not really having access to what is 
    Mr. Frazier. That is probably the number one problem. For 
example, the current system, it is working. That is what we 
point out in the report. However, it is not user friendly. So 
if while you are doing your research to answer those eight or 
nine questions on determining what should happen to a license, 
you need to stop and write a letter or something, you have to 
get out of that system. It is not user friendly. You cannot 
cross-link it with other systems that exist in the Department.
    We are aware that the Department has requested a little 
over $2 million to begin to upgrade that system. That would be 
an investment that would be well worth the money. I think it 
would pay for itself in weeks, if not minutes. That is how 
important I think that this actually is.
    This system can be the lifeblood, if you will, of the 
licensing process in terms of improving it. Information is the 
key here. As we try and encourage the other referral agencies 
to give us more information, that information should be in the 
system so that we can always deal with the questions that you 
raise, like an audit trail, so we can always have a history as 
to what has transpired on every case, that people have a record 
of really what happened. If somebody raises a question, that 
should be a part of the permanent record.
    Chairman Thompson. That could even help on the cumulative 
effect issue, could it not?
    Mr. Frazier. That is exactly it. I think when we talk about 
the cumulative effect, we are talking about information, and 
that is what cumulative effect means, getting information from 
as many sources as possible. Clearly, the CIA has a major role, 
the State Department, Energy, all of the referral agencies, but 
other sources, too. We need to get the information pulled 
together in such a way that we can deal with the cumulative 
issues. It is all about having a system. We have the technology 
readily available, again, and it is a relatively small 
investment from where I sit.
    Chairman Thompson. What about the issue of DOD and DOC both 
trying to modernize without integrating much?
    Mr. Frazier. The first thing we are saying, we probably 
have in here--I am looking at it--we have in excess of 30 
specific issues that any changes to the ECASS system should 
address. But the most important recommendation that we have is 
that the system be developed in concert with the Defense 
Department and the other referral agencies. It would be 
foolhardy if these systems cannot talk with one another, cannot 
interact with one another, including the Treasury system and 
others. So that is the number one recommendation that we have. 
We think this should not be done in isolation. It is something 
that surely should be coordinated amongst the referral 
    Chairman Thompson. That is something we can talk to OMB 
about. It seems like it is a very important issue to me. Does 
anybody else have any comments on this issue or disagreements?
    [No response.]
    Mr. Mancuso, you mentioned the fact that on some occasions, 
the Department of Defense, there were some occasions when the 
recommendations of the licensing officer were actually changed. 
In the system, in other words, a change was made, and you point 
out that there is, I suppose, legal authority to do that. You 
do not have to accept the decision of the person working for 
    But beside that problem, or potential problem, the other 
problem is that there is nothing in the system to tell how many 
times that has happened or to tell what changes were made, what 
the original recommendation was, or what the override has and 
the reasons for that were. We do not have the benefit of that 
now, do we?
    Mr. Mancuso. Well, in part, we do, Senator, because the 
system allows for that information to be included, and, in 
fact, many times, that information was included and there is a 
clear trail that explains how and why a supervisor changed a 
subordinate's decision and, in fact, tracks through the rest of 
the process, as well.
    But there were also numerous occasions where a licensing 
official told us that they had documented a particular opinion, 
found later that had been changed, and the system doesn't 
reflect that it was a change. You would think common courtesy, 
if not good management, would have required that the supervisor 
alert the licensing official as to his or her intent to make a 
change and it is not there.
    Chairman Thompson. And if you were the final decision 
maker, you would assume that this was the licensing officer's 
opinion when you were making your decision. So they are being 
    Mr. Mancuso. That is correct.
    Chairman Thompson. You can understand that when there is a 
paper trail and reason, a person is willing to stand up and 
say, this is what I did and this is why I did it, that is fine. 
But changing it, not telling the licensing officer you are 
changing it, not giving any reason for it, and making it look 
like it is his recommendation, that is not done for any valid 
purpose in my opinion. What are you recommending that we do? Is 
this just a matter of putting down another policy directing 
that they quit doing that?
    Obviously, this is a technology problem, in part, is it 
not? It gets back to the problem we were just addressing: 
Having the capability of putting the information in there so 
that you can have an audit trail, so that when these satellite 
launches explode and all the politicians start asking 
questions, you can go in there and find out who did what.
    Mr. Mancuso. And that is a primary recommendation that we 
are making, that the system needs to be adjusted to accommodate 
those changes and to reflect those changes so as to ensure a 
complete audit trail, from the earliest decisions by a 
licensing officer to the final DOD and U.S. Government 
    Chairman Thompson. All right. On the end-user checks, part 
of the justification for lowering our guard, you might say, and 
allowing individual license grants, is that sometimes the 
government will say, well, OK, we are going to approve it. But 
we are going to put some additional conditions on it, but those 
conditions are no better than our ability to check up on these 
end users and check up on the exporters' adherence to the 
    So we have a system of, first of all, pre-license checks 
and then we have a system of post-shipment verification. As I 
read your reports, it really does not look like much emphasis 
is being placed on either of these.
    Mr. Frazier. And, hopefully, those are the exceptions. That 
is when someone has to go from the United States. Most of the 
end-use checks would be performed by folks that are stationed 
overseas. But, of course, one of the real problems there is 
that they have other priorities. They have other 
responsibilities. Again, you get back to your question of 
    Chairman Thompson. I believe you pointed out that some of 
them told you, anyway, that export promotion takes precedence 
over the pre-license checks and the post-shipment verification.
    Mr. Frazier. That is their mission overseas.
    Chairman Thompson. That is their job.
    Mr. Frazier. That is right.
    Chairman Thompson. They just happen to be over there, so we 
want to use them, but in addition, there is the question of 
training and do they really know what they ought to be looking 
    Mr. Frazier. We have raised the issue of training there, 
also. But in theory, Mr. Chairman, the folks who are overseas 
should be in the position to better identify the companies. 
They should know a little more about the individual companies 
that these things have been shipped to. So, in theory, they 
should be in a better position to do the work, because they 
live in those countries, they deal with those firms on a 
regular basis.
    Chairman Thompson. Senator Lieberman pointed out, with 
regard to China, anyway, that there certainly is hardly 
anything going on there. I wonder what reasons they give for 
not letting us verify that they are using our high-speed 
computers and sophisticated tools the way that they say that 
they are going to use them.
    Mr. Frazier. The new changes suggest that, in certain 
computers, the ones that are the most sophisticated, that 
before a license will be issued, they are to get a 
certification from the Chinese Government that a post-shipment 
verification check will, in fact, be performed, will be 
allowed. So the message there is that if you do not agree to 
this post-shipment verification, then you will not get this 
computer, and that is a recent change. Hopefully, we will be 
able to see those numbers go up.
    Chairman Thompson. That just has to do with computers?
    Mr. Frazier. Yes, the high-performance computers.
    Chairman Thompson. The exporters also are supposed to 
report actual shipments against the license that they have, but 
I believe you found that the Bureau of Export Administration 
does not really monitor that, do they?
    Mr. Frazier. We found that BXA does do some monitoring of 
exports of HPCs and other commodities but that the level of 
monitoring is inadequate.
    Chairman Thompson. So there is a diversion issue. I mean, 
how else are you going to feel comfortable about whether or not 
something is being diverted, is that correct?
    Mr. Frazier. That is correct.
    Chairman Thompson. We talked about the audit trail 
difficulties. I think each of you saw some problems there. 
FORDTIS is insufficient.
    One of the things, for example, as you suggested, is that 
we could have more information with regard to what goes in on 
these operating committee meetings. For example, explanations 
of why decisions are made, should be more than just summaries. 
They should include what new information has been brought to 
the meeting by those who were there that should impact on the 
decision, why a department chooses not to escalate when they 
object. We do not have the benefit of that right now and we 
need it.
    Mr. Frazier. If I can add, if there is one word that I 
would like to come out of the Commerce report, that word would 
be ``transparency''. That is the message that we are advancing 
here. We have not found anything that should be hidden, and so 
let us open it up and make people able to see what is going on.
    Chairman Thompson. And transparency promotes 
    Mr. Frazier. Yes.
    Chairman Thompson. That is what we are all striving for.
    On the monitoring programs, in general, I think the burden 
there, as DOD points out again, is going to increase, the need 
for monitoring is going to increase. But, apparently, we are 
not adequately monitoring the license conditions. We talked 
about this, of course, before. We put these conditions on 
usually, I guess, for reasons having to do with the end users, 
but we are not really monitoring whether or not those 
conditions are being carried out, are we, Mr. Mancuso?
    Mr. Mancuso. We are not.
    Chairman Thompson. All right. We have gone through all 14 
points at least once. I did not think we could get through with 
all the points I wanted to make today, but we did. This is just 
the beginning. This is an excellent piece of work and I want to 
thank all of you for what you have done and the time you have 
put in on this. Your job is not to reach subjective conclusions 
in the way that we have the luxury of doing up here. I know it 
is a fine line to walk sometimes that you have, but part of our 
job on this Committee is making sure that you are allowed to do 
your job. I think this report indicates that part is working 
reasonably well.
    I must say, I come away from this very concerned, although 
this is not to say that everything has gone wrong. We have not 
had a cause and an opportunity to look at these various 
departments the way Senator Rudman, for example, and his people 
looked at one particular department. But to me, it is clear 
that we have got some real problems and they are under the 
radar screen. They are not espionage and they will never make 
the front page of the paper, and there is not any one thing 
that really grabs you that will make the evening news.
    But when you put all this together, we come away with a 
picture that is troubling, to say the least. We are dealing 
with more and more complex issues all the time. We are asking 
more and more of these licensing officers. We are giving 
everybody less time to run the checks that they need. There is 
very little, if any, formal objective training, contrary to 
what they are required to give these people, no assessment as 
to the cumulative effect of what we are doing in this area, no 
real checks on the front end with Treasury and Customs as to 
the track record of these exporters, no real check on the back 
end as to what these people are actually doing with the dual-
use items that we are sending them, and we have a process that 
basically is set up to make pretty sure that Commerce gets its 
way on anything that it really wants to get its way on.
    These are my conclusions. I am not asking you gentlemen to 
adopt it. It is very cleverly set up and it was highly promoted 
and very effectively done, this appeal process, but it is just 
not being used and it is ineffective and it is designed to 
discourage people within the administration from rocking the 
boat. There is also the lack of training, and at least some 
people were able to talk about the fact that there is some 
informal pressure on them, that to get along, you go along. It 
is not a good picture at all. I think that we are hurting 
ourselves with the system we have.
    Part of the problem is back here on this side of the table, 
too. Everything I have mentioned probably costs some money, 
probably not nearly as much as people in the departments say it 
does, but we have got to be able to restructure our own 
priorities and come up with the funding to do what everybody 
ought to know is necessary in terms of controlling these 
computer systems.
    With that, job well done. Thank you very much for what you 
have done. I look forward to working with you in the future to 
see if we cannot go about resolving some of these problems.
    Let us keep the record open for 1 week. We may have 
additional written questions or comments that other Members 
might want to submit to you.
    We are in recess.
    [Whereupon, at 12:45 p.m., the Committee was adjourned.]
                            A P P E N D I X


                       REFERRALS OF DUAL-USE CASES
               Cases Referred      Cases          Cases      Referred to
      FY         to Agencies    Referred to    Referred to  and Reviewed
                     \1\        and Reviewed  and Reviewed   by the EARB
                                 by the OC     by the ACEP       \2\
     1991        7,000            169             89            20
     1992       11,100            333            105             0
     1993       13,900            493            142             0
     1994        6,800            281             97             0
     1995        5,100            161             68             0
     1996        6,800            435             71             0
     1997       10,400            784             38         \3\ 1
     1998        9,100            766             34             0
\1\ Data based on date actual referral occurred.

\2\ Export Administration Review Board.

\3\ One case was referred to the EARB in FY 1997; however, the EARB did
  not review it.


                         Committee on Governmental Affairs,
                                               U.S. Senate,
                                            Washington, DC.
                                                    August 26, 1998

The Honorable Eleanor Hill
Inspector General
Department of Defense
400 Army Navy Drive
Arlington, VA 22202

Mr. Gregory H. Friedman
Acting Inspector General
Department of Energy
1000 Independence Avenue, S.W.
Washington, D.C. 20585

Mr. Richard B. Calahan
Acting Inspector General
Department of Treasury
Room 2412, Main Treasury Building
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

The Honorable Jacquelyn Williams-Bridgers
Inspector General
Department of State
2201 C Street, N.W., Room 6817
Washington, D.C. 20520

Mr. Johnnie E. Frazier
Acting Inspector General
Department of Commerce
14th St. and Constitution Ave., N.W.
Washington, D.C. 20230

Ms. Dawn Ellison
Acting Inspector General
Central Intelligence Agency
Room 2X30 New Headquarters
Washington, D.C. 20505
    Dear Inspectors General: In 1993, the Inspectors General of the 
Departments of Defense, State, Energy, and Commerce collaborated to 
conduct an interagency review of the export licensing processes for 
dual-use and munitions commodities. I am writing to request that you 
update and expand your work in this important area, particularly in 
light of testimony the Committee received at a June 25, 1998 hearing. I 
have included the Inspectors General of Treasury and the CIA in this 
request because the 1993 interagency report concluded that those 
agencies played major roles in the licensing process.
    On June 25th, the Committee heard from Dr. Peter Leitner, a senior 
strategic trade advisor in the Defense Technology Security 
Administration. Dr. Leitner provided an unsettling description of the 
dual-use review process. I urge you to read the hearing transcript, an 
unofficial copy of which is enclosed.\1\ His testimony raised many 
specific areas of concern, but he also recounted, drawing on his twelve 
years of experience in this area, what he views as a general breakdown 
in our licensing controls:\1\
    \1\ We request that you use the enclosed unofficial transcript for 
internal purposes only. We will forward you an official transcript once 
it is available.

        [O]ver the past six years the formal process to control exports 
        of dual-use items has failed its stated mission--to safeguard 
        the national security of the United States. . . . Through a 
        tireless campaign, the opponents of export controls have 
        managed to destroy the 16 nation Coordinating Committee on 
        Export Controls, decontrol vast arrays of critical military 
        technology, rewire the U.S. domestic export controls process so 
        that it is structurally unsound and unable to safeguard our 
        security, and erect a series of ineffectual domestic 
        regulations and international working groups designed to 
        project a false impression of security, deliberation and 

    (Hearing transcript at pp.7-8.) Although he took issue with some of 
Dr. Leitner's specific criticisms, a second hearing witness, Principal 
Deputy Assistant Secretary of Defense Franklin Miller, told the 
Committee there was room for improvement in the Department's handling 
of dual-use applications.
    Your 1993 interagency report detailed a number of problems. For 
example, you described that in nearly a quarter of sampled cases 
referred for review to Energy by Commerce, the agencies maintained 
inconsistent information in their respective databases about a given 
case, a shortcoming which ``tends to diminish the credibility of the 
licensing process.'' (Report at p. 20.) In addition, you noted that for 
dual-use licenses that required exporters to document compliance with 
certain conditions, the government received the required documentation 
in only four percent of cases sampled. The Commerce Department, 
moreover, had taken no steps to bring the 96 percent of nonfiling 
exporters into compliance. (Report at p. 3.)
    While I leave it to your judgment to determine how best to examine 
the dual-use and munitions licensing processes, I ask that in 
performing the work you address the questions that are listed below. 
Please do not treat the following list as an exhaustive one; rather, it 
is suggestive, setting forth some issues arising from the Committee's 
June 25th hearing:

           1. LPlease examine whether the current, relevant legislative 
        authority contains inconsistencies or ambiguities regarding the 
        licensing of dual-use and munitions commodities, and the effect 
        of any such inconsistencies and ambiguities.

           2. LPlease examine whether Executive Order 12981 (1995) as 
        implemented is consistent with the objectives of the Export 
        Administration Act and other relevant legislative authority.

           3. LPlease determine if there is a continued lack of 
        interagency accord, as stated in your 1993 interagency report 
        (at page 13), regarding whether the Commerce Department is 
        properly referring export license applications (including 
        supporting documentation) out for review by the other agencies.

           4. LPlease determine if the interagency dispute resolution 
        (or ``escalation'') process for appealing disputed license 
        applications allows officials from dissenting agencies a 
        meaningful opportunity to seek review of such applications, and 
        assess why this process is so seldom used.

           5. LPlease review whether the current dual-use licensing 
        process adequately takes account of the cumulative affect of 
        technology transfers resulting from the export of munitions and 
        dual-use items, and the decontrol of munitions commodities.

           6. LPlease review whether the current munitions licensing 
        process adequately takes account of the cumulative affect of 
        technology transfers resulting from the export of munitions and 
        dual-use items, and the decontrol of munitions commodities.

           7. LPlease determine whether license applications are being 
        properly referred for comment (with sufficient time for 
        responsible review) to the military services, the intelligence 
        community, and other relevant groups (the ``recipient groups'') 
        by the Defense Department and other agencies. Please consider 
        in particular numerical trends in the frequency of such 
        referrals, trends in the types of applications referred, trends 
        in the nature of the taskings made in connection with the 
        referrals, and the perceptions of officials at the recipient 

           8. LPlease determine whether license review officials at 
        each of the agencies are provided sufficient training and 
        guidance relevant for reviewing license applications, and 
        whether more formal training and guidance is warranted. Dr. 
        Leitner noted a paucity of such training and guidance in his 
        Committee testimony. (Hearing transcript at pp. 43-44).

           9. LPlease review the adequacy of the databases used in the 
        licensing process, such as the Defense Department's FORDTIS, 
        paying particular attention to whether such databases contain 
        complete, accurate, consistent, and secure information about 
        dual-use and munitions export applications.

          10. LIn his testimony, Dr. Leitner described instances where 
        licensing recommendations he entered on FORDTIS were later 
        changed without his consent or knowledge. (Hearing transcript 
        at pp. 46-47.) Please examine those charges, and assess whether 
        such problems exist at your agencies.

          11. LPlease determine whether license review officials are 
        being pressured improperly by their superiors to issue or 
        change specific recommendations on license applications. Dr. 
        Leitner testified about one such incident that happened to him 
        at DTSA. (Hearing transcript at pp. 47-50.)

          12. LPlease determine whether our government still uses 
        foreign nationals to conduct either pre-license or post-
        shipment licensing activities and whether such a practice is 

          13. LPlease determine whether the agency licensing process 
        leaves a reliable audit trail for assessing licensing 

          14. LPlease describe the procedures used by agencies to 
        ensure compliance with conditions placed on export licenses 
        (e.g., no retransfers without U.S. consent, no replications, 
        and peaceful use assurances), and assess the adequacy and 
        effectiveness of such procedures.

    I appreciate your prompt attention to this important project. If 
you need assistance or have questions about the request, please contact 
Jack Cobb or Maggie Hickey of the Majority staff at (202) 224-4751.

                                      Fred Thompson