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U.S. Export Control Reform: Impacts and Implications for Controlling the Export of Proliferation-Sensitive Goods and Technologies, A Policy Document for the New President and Congress

by Andrea Stricker with David Albright

May 17, 2017

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Executive Summary

The United States’ export control system serves a vital role in preventing the spread of proliferation-sensitive goods to the nuclear, missile, and military programs of our adversaries, such as Iran and North Korea. Both countries, among others, mount aggressive efforts to obtain controlled goods from the United States and other suppliers. Stopping these countries from succeeding requires a robust, effective export control system.

The U.S. control system is complex. Authorities and control lists are delegated to multiple federal agencies, and the system was created largely piecemeal to prevent the spread of sensitive goods during the Cold War. Governmental and non-governmental analyses, along with the relevant exporting sectors of industry, have noted for decades serious problems with the system, including the slow pace of obtaining an export license, overregulation of small parts, the failure of the government to standardize and interconnect information technology (IT) systems, and inefficiencies and redundancies in export law enforcement efforts. With these criticisms in mind, the Obama administration set out in 2009 to carry out a wholesale reform of the system and in 2010 launched the Export Control Reform Initiative (ECR Initiative). The ECR Initiative planned to create a single export licensing agency, merge commodity control lists into a single list, adopt a common IT system, and move most export enforcement efforts under the purview of a single agency. These so-called “four singles” were never achieved due to a shortage of time and a lack of Congressional support for carrying out a bureaucratic restructuring of this scale. Several important and impactful reforms did occur, however, bringing the reforms part of the way to completion.

The ECR Initiative at its core attempted to address the question of what the appropriate balance is between increasing U.S. exports and trade and maintaining strict control of sensitive goods in order to enhance national security objectives. Overall, we assess that the reforms tilted the balance more toward increasing exports and trade at the expense of controls and national security. As a result of the reforms, thousands of items usable in military systems and equipment are now more readily available to long time U.S. allies, as well as to some countries of governance or transshipment concern. Little effort was devoted to better securing the most proliferation-sensitive goods. In response to the inherent question asked by the reforms: should the United States loosen controls on items that are being made available from other countries – the answer reached appears to have been tilted to the affirmative. As a result, it is far from clear whether U.S. adversaries such as Iran and North Korea are now increasingly able to obtain sensitive parts and components to outfit their military and other sensitive programs.

The export control reforms were announced by the Obama administration to Congress and the business community as an effort to fix overregulation of the most innocuous items and allow allies to obtain needed items more easily, while more tightly regulating the most sensitive goods. These goals are not problematic if the items truly are innocuous and the changes addressed legitimate concerns of the government, allies, and exporters. However, the effort may have simply contributed to increasing the world’s supply of sensitive goods usable in military programs – and thereby increasing availability of such goods to adversaries. This result is likely to be at odds with overarching U.S. national security goals in the long term. Serious review is needed to answer important questions, such as: what damage, if any, has been done to national security objectives by the freer availability of goods usable in military equipment? Where are these goods today? Are they remaining with legitimate end users or are they being sent onward to proliferant states such as Iran, Syria, Pakistan, or North Korea? Are the goods being misused in countries favored by U.S. export control reforms? Is there a need to re-visit controls on some of the goods? What about the integrity of the process for determining the control status of goods in the reformed “catch and release” system? The Obama administration did not have to answer these questions through any substantive reporting or testimony during a review. It is now time for Congress to become involved to ensure that this review and reporting is performed by the executive branch. The risks of not performing such a review may be that only a major scandal associated with the spread of deregulated goods would necessitate a review ipso post facto, which is not a preferable way to conduct policy.

In addition, most agree that finishing the ECR Initiative as originally envisioned would be challenging but that stopping the process before the intended completion also has its own risks. A review should seek to determine whether not completing the reforms is on balance a net positive or negative. Have the reforms as completed to date improved the effectiveness of U.S. export controls regarding the transfer of proliferation-sensitive goods? Should the Trump administration push to finish the reforms, in whole or in part? It is important for the Trump administration and Congress to take stock of the ECR Initiative’s accomplishments, including determining the impacts of completing or not completing the process.

The Institute for Science and International Security became interested in the results of President Obama’s ECR Initiative in 2015, after hearing differing opinions about the impacts of the reforms. The reforms generated intense controversy among experts, officials, company officials, and practitioners who were involved in the initiative or had seen initial results regarding the control of proliferation-sensitive goods. The Institute decided to investigate the reforms and contact a wide range of officials and experts to better understand and assess the ECR Initiative. This resulting report is intended to serve as a guide for the Trump administration and the 115th session of Congress. It is not intended to be an exhaustive review of every change made under the ECR Initiative, but to focus on those reforms with implications for the control of proliferation-sensitive commodities and technologies. We understand that some readers may disagree strongly with some of the suggestions based on their own experiences in government or industry; however, we have attempted to achieve a balanced assessment of this complex issue and hope that at least some recommendations will appeal to each audience. We welcome feedback and comments on this paper.

In Part I of this report, we explain the main elements of the ECR Initiative, including its goals, justification, intended impacts, and status. We also provide an overview of the U.S. export control system, including its licensing and enforcement functions. We describe how the ECR Initiative has impacted government functions more broadly based on preliminary data.

Part II discusses the positive, negative, and neutral views of more than a dozen experts we interviewed about the effects of the reforms. These off-the-record meetings included discussions with the following: Obama administration officials and other government personnel (at the time of interviews) who were instrumentally involved in implementing the ECR Initiative, from the Department of Commerce, Department of State, and Department of Homeland Security; U.S. prosecutors; a former law enforcement official from Homeland Security Investigations; lawyers in private practices with former senior federal law enforcement and export control implementation experience; professional staff of members of Congress; a Congressional expert; and private sector representatives. This last group included: the former head of an industry association with senior experience in federal export control implementation; an executive partner at a trade compliance group; and a senior executive in trade compliance at a major international company headquartered in the United States. We also appreciate the informal feedback of several Senate and House Congressional staff members who added importantly to our final version of this paper during meetings in mid-2017. We appreciate the candidness of all of these participants and that they allowed us to better understand the reforms and their impacts through each of their particular lenses of expertise.

In Part III we offer policy solutions for mitigating the potential threats identified in Parts I and II that may have been opened by the reforms. These solutions are aimed at better securing efforts to prevent the spread of proliferation-sensitive goods under a reformed U.S. export control system. We also suggest ways for the Trump administration and Congress to further implement and strengthen the reforms.

Highlights of the ECR Initiative and Recommendations

Transfers of Goods from the United States Munitions List to the Commerce Control List

The ECR Initiative involved the transfer of thousands of items from the United States Munitions List (USML) under the Arms Export Control Act’s (AECA) International Traffic in Arms Regulations (ITAR) and administered by the State Department’s Directorate of Defense Trade Controls (DDTC), to the Commerce Control List (CCL) under the Export Administration Regulations (EAR), which is administered by the Commerce Department’s Bureau of Industry and Security (BIS). The EAR is maintained by the president’s annual renewal of the state of emergency under the International Emergency Economic Powers Act (IEEPA) following the expiration in 2001 of the Export Administration Act (EAA). The CCL allows for the more flexible export of former USML items that the government deemed to be not worthy of the strictest control. The EAR also allows for the unlicensed export of certain categories of goods to country groups, whereas the ITAR does not specify this ability. The ITAR as administered by the State Department usefully allows the Secretary of State to weigh in on transfers of the most sensitive military items as to their impact on foreign policy and national security objectives.

A substantial part of the ECR Initiative involved an elaborate bureaucratic and time intensive process of reviewing and moving individual goods from the USML to the CCL. This process was thorough, technically rigorous, and involved what is often pointed to as unprecedented interagency collaboration. The effort required the entirety of six years of the reforms, or from 2010 to 2016.

Nonetheless, on balance, we find that the transfer of goods from the USML to the CCL represented a weakening of controls. This is due in part to the number of licensing exceptions, or terms under which an entity does not have to obtain a U.S. government license, that are available on the CCL. In addition, some of the exceptions include well-known countries of transit concern such as Turkey. Overall, there is a broad conception that goods on the CCL are controlled less effectively than those on the USML. An example of this is the fact that categories 1-3 of the USML covering firearms, artillery, and ammunition were not transferred to the CCL due to concern that doing so could lead to the proliferation of firearms internationally. Federal law enforcement agencies vehemently opposed the transfer of these items to the CCL due to fears that they would spread more rapidly or be re-transferred to unintended end users. Overall, they feared that the transfers would complicate national and international security objectives.

In addition, some of the firearms prepared for transfer are inherently deadly weapons that should not be in the hands of U.S. adversaries or those who would use them for their own nefarious objectives, including in civil wars or to violently put down domestic uprisings. It is worth noting that Turkey is in the midst of an authoritarian crackdown and may be seeking weapons and other sensitive items for such use. The planned list transfers include high caliber sniper rifles and weapons that could be later modified to render them even more deadly. They could also be exported to actors that would seek to use them against U.S. troops in conflict situations. The new administration needs to ask: What beneficial purpose would the transfers serve? Some have argued for the transfers as export promotion, but we would urge the administration to ask what security risk this poses.

We understand that the categories 1-3 transfers appear imminently prepared for completion by the State Department. We would urge Congress and the administration to quickly become involved and halt the effort, given the extent of concerns. Moving forward with the transfers appears risky and it would also diminish the State Department’s ability to weigh in on the security impact of arms related transfers. At the very least, if they are transferred, some of the most deadly weapons should require stricter controls and not be granted eligibility for license exceptions on the CCL.

A major objective of the Obama administration was to reduce the number of items on the USML in order to allow more time and resources for officials to scrutinize export requests for the remaining goods on that list. More scrutiny is a worthwhile goal. However, as stated above, it is difficult to see how the administration’s pledge to erect “higher fences” around those remaining “crown jewels” has been accomplished. In fact, the administration appears to have devoted little effort to developing enhanced protection of the items remaining on the USML. Nothing in practice was done to strengthen the controls on the USML side, or for that matter, controls for those goods already on the CCL, while placing more goods on the CCL has led to an increase of exports of thousands of sensitive items that alone are typically innocuous but have dual uses in outfitting military systems and equipment. The effects of this deregulation are still not adequately understood. Some loopholes in the form of general licensing and other exceptions also could have been addressed, but were not, under the reforms.

Given the time and amount of effort involved, however, there would be little technical justification to move goods back to the USML from the CCL unless there is overriding evidence of the need for such transfers. If studies and evidence of problems find that certain items should go back to the USML, this could be considered. A potential tightening of the licensing process and reduction in the number of goods allowed exceptions by the Commerce Department may be warranted as well as adding additional criteria for making decisions about the control status of exports. In general, the effects of these transfers require intensive governmental studies as to their effects on U.S. and international security.

Some nuclear-related items were transferred from the USML to the control of the Department of Energy (DOE) under the Atomic Energy Act (AEA). The transfer of nuclear-related items from the USML to the DOE was viewed as beneficial and not a weakening of controls. Nonetheless, a review of the implementation and effectiveness of this transfer is needed. In addition, a review is needed to determine if higher fences should be applied to certain critical items on both the USML and CCL.

Strategic Trade Authorization. The critical exception created for the USML goods moved to the CCL is the Strategic Trade Authorization (STA). This exception, which involves the former USML items under a newly created 600 series category of goods on the CCL, is the mechanism that allows for unlicensed exports within a certain set of criteria to a specified group of countries. The ultimate end user must be a government, although the initial importer can be a company. The STA group of countries includes most NATO members and other close U.S. allies to which the U.S. government seeks to export military related items to more easily. The importing entities are subject to a range of controls, such as having already been vetted for a previous Commerce Department license. However, they may exploit this exemption over time and onward proliferation may occur outside the awareness or scrutiny of the United States. It is also possible that an approved government recipient could send goods to unauthorized end users. USML categories 1-3 goods, if transferred over, would be eligible for the STA as currently envisioned.

Specially Designed

The Obama administration harmonized definitions on the USML and CCL, in particular what constitutes the control of goods that are “specially designed” for use in a sensitive piece of equipment. The stated intention of that change was to narrow the scope of the controls over smaller parts and items that are used in larger military equipment, thus freeing them from overregulation.

The new specially designed definition is controversial and needs to be reviewed. The changes to the definition of specially designed goods on the USML and CCL may have weakened enforcement efforts overall due to what U.S. prosecutors view as the definition’s problematic interpretation and historical cases. This may render it as having weak standing in court. U.S. attorneys may now seek to prosecute only the most clear-cut cases relating to country sanctions violations, such as those involving Iran, North Korea, or China. A governmental study is needed to look at how enforcement of the ITAR and EAR specially designed definitions are implemented by federal agencies following the reforms and how the changes are interpreted in practice by U.S. prosecutors and courts.

The Trump administration should revisit and consider strengthening the design intent definition changes or otherwise change the definition to one that will have a better chance of holding up in court.

Export Enforcement Coordination Center

The standing up of the Export Enforcement Coordination Center (E2C2) was a key accomplishment of the ECR Initiative. E2C2 provides de-confliction of cases and ensures that all enforcement agencies are aware of what others are doing or have collected on a particular case, helps delegate and streamline export investigations among agencies, and builds more effective criminal investigations. We find that its role should be strengthened and broadened, and it should be granted devoted, annual funding by Congress, including the ability to hire its own employees who are currently drawn from the Department of Homeland Security (DHS) and other agencies. Its existing deconfliction mandate would be supported through increased resources thus allowing for an expanded and more efficient deconfliction process.

E2C2’s intelligence coordination mandate could also be bolstered and broadened. Its mandate could be broadened further to coordinate pre- and post-shipment verification performed by the various export agencies.

The Trump administration and Congress should also establish E2C2 as an information sharing point of contact for companies and academic institutions, since it already successfully acts as a deconfliction center and works with export control implementation, intelligence, and enforcement agencies. Such an initiative should encourage companies to voluntarily report on, or even require them to report on, suspicious approaches by potentially illicit customers to purchase controlled or sensitive goods. In turn, the E2C2 could provide tips or other information about what to watch for in the way of suspicious activities. Legislation may be required to provide liability protections for companies and to allow for declassifications of government information provided to industry.

Need to Bolster Enforcement Efforts

The Department of Justice (DOJ) should provide guidance to U.S. prosecutors stating that strong criminal enforcement of trade control violations is a national priority for the administration. It should also encourage prosecutions of violations not involving traditional U.S. adversary countries or countries of transit concern, in addition to reiterating the need for ongoing focus on sanctioned countries.

DOJ should commit to more aggressively investigating, indicting, and extraditing those involved in outfitting Iran’s nuclear, missile, or conventional weapons programs in defiance of U.S. laws and sanctions. During the Obama administration’s efforts to negotiate and maintain the Iran nuclear deal, there was an excessive denial or non-processing of extradition requests and lure memos out of a misplaced concern about their effect on the deal.

Consolidating Enforcement at Homeland Security Investigations While Leaving Voluntary Compliance in Place

Problems need to be addressed concerning an increased overlap of authorities between the Commerce Department’s Office of Export Enforcement (OEE), which is authorized to conduct export enforcement of CCL goods, and the Department of Homeland Security (DHS)’s Homeland Security Investigations (HSI), which has authority to handle both USML and CCL goods. By not completing the fourth single – or folding OEE into HSI as originally envisioned – OEE and HSI now have even more jurisdictional overlap of controlled items than before the ECR Initiative was initiated. This is due to the fact that HSI already had enforcement authority for both USML and CCL goods and OEE only had jurisdiction over CCL goods. Now that thousands of USML goods have transferred to the CCL, jurisdictional overlap between these agencies has significantly increased. The result is increased confliction issues and the possible expenditure of unneeded resources. Complicating matters is the role of the Federal Bureau of Investigation (FBI) which can handle general national security cases involving proliferation-sensitive goods.

In general, HSI has claim to wider authorities and a larger cadre of employees than Commerce’s OEE. We recommend, while recognizing that this recommendation is controversial to some, that the Trump administration should fold Commerce’s criminal enforcement sections in OEE into HSI, as originally envisioned under the ECR Initiative. However, BIS’s authority and expertise to evaluate voluntary compliance would be retained and operate in parallel to DDTC’s voluntary disclosure process. The FBI would maintain its current role. This reform would be a positive step toward making the enforcement system more efficient and consolidate DHS/HSI as the primary agency responsible for enforcement of the EAR and CCL items.

In this process, the Trump administration should also direct BIS to evaluate and, as necessary, reform its voluntary self-disclosure process to operate more in the fashion of DDTC’s voluntary disclosure process. DDTC’s process is viewed as more lenient toward accidental violations than BIS’s, but levying of harsher penalties for egregious or repeat violators.

Consolidated Screening List

Another major accomplishment was the creation of a Consolidated Screening List (CSL) in 2010 of entities and individuals so that exporters and the government no longer need to consult up to six separate lists for denied parties.

Information Technology Improvements

We find that the administration should direct the Defense Technology Security Administration (DTSA) to continue its efforts begun under the ECR Initiative to institute more integrated government IT platforms for export administration and licensing and work to overcome barriers in IT system compatibilities. Congress should fund this effort.

The formation of some elements of a common IT system occurred on the government’s end by implementing use of a previously created Department of Defense (DOD) government IT interface for licensing, USXPORTS. It is being used by the State Department, but the Commerce Department has not yet transitioned to the platform.

Other Recommendations

The administration should review other exceptions, such as the Additional Permissive Re-export exception under the CCL, and seek to close such loopholes that could be exploited by illicit actors. It should investigate and put a stop to any practice by the Commerce Department that involves issuing general EAR-99 licenses for EAR 99 indexed goods without first investigating whether the goods are subject to the USML.

The administration should work to establish “watch lists” for major nuclear, missile, and military technologies based on existing control lists and proliferant state smuggling efforts and distribute them to relevant companies. Not all such goods are currently covered by export controls; however, they may be sought by a proliferant state, and they should be considered for inclusion on control lists. In addition, these lists could inform which items on the USML and CCL need higher fences.

The administration and Congress should continue to hear issues raised by the business community about ease of exporting and comprehending regulations under the reformed system, particularly those experienced by small businesses, which are under-resourced in many cases to cope with the massive compliance changes and may still be adjusting. They should assess whether exporters are still having difficulties determining the control status of goods under the new system. They should make practical changes and continue to address issues of undue administrative and regulatory burdens without sacrificing the primary mission of controlling the export of proliferation-sensitive goods.

Administration and Congressional Review

Critical to moving forward is reviewing and refreshing the ECR process. Toward those goals, the president should establish at the National Security Council (NSC) a special advisor who would be wholly focused on export control coordination, implementation, and enforcement matters.

In order to better understand the reforms to date, the Trump administration should direct BIS and HSI to provide a joint report that performs an in-depth sampling and assessment of former USML goods’ status, locations, and end uses. The reporting should contain statistics about specific goods authorized and actually exported and where these goods are today. It should include statistics on license or exception denials, close calls in exporting to unauthorized end users, and use of pre- and post-shipment and end use checks and related results. Reporting should also involve critically examining the results of enforcement efforts and investigations including real world examples.

The administration should request that BIS conduct a thorough examination of the end uses of STA exception goods processed since 2011, or near the start of the reforms, to ensure that the exception is not being taken advantage of over either the short or long term, particularly by countries of transit concern that fall into the STA authorized category. A BIS priority should be to continually conduct checks on goods exported since the exception’s creation to ensure that they have not been re-transferred.

Congress can play a role, if needed, by passing legislation requiring in-depth reporting as described above on a consistent basis, such as in biannual reports. Each of the described reporting efforts should include information on cases in which nefarious attempts to procure U.S. exports by unauthorized end users were successfully blocked or not blocked by the new system. The reports should contain specific, targeted questions that require the executive branch to critically self-examine and indicate how well the system is performing based on data and actual incidents.

Congress should direct the Government Accountability Office (GAO) to produce a comprehensive report looking at the impacts of the ECR Initiative regarding the control of proliferation-sensitive goods and improvement or degradation in government functions. This effort should attempt to assess the impact of the freer flow of goods on U.S. security interests and use specific, targeted questions, such as the ones above, in order to obtain a critical look at executive branch activities.

Congress should request a GAO report on the status of enforcement-related changes to the export control system, including the increased overlap between OEE and HSI, and query whether prosecutors are now more discouraged in bringing EAR cases to court or are having difficulty enforcing the new definition of specially designed.

Congress should hold a series of hearings during its next session to gauge the impact and success of the ECR Initiative. Through the hearings and studies, Congress should assess whether new action, including legislation, is required to repair flaws in the system and ensure proliferation-sensitive goods are adequately controlled.

The administration should utilize the results of all of these review efforts to repair weaknesses in the system or add additional criteria for obtaining proliferation-sensitive goods. Export licensing and enforcement agencies should review all of the reporting in an interagency effort to determine if changes are needed. Congress should structure the legislation so that the agencies have clear incentives to respond to the review effort.

As part of this review, Congress should consider the question of whether to implement comprehensive export control legislation and finish the implementation of the ECR Initiative’s originally envisioned four singles. Congress should consider review and passage of an Export Control Reform Act as originally proposed by an ECR Initiative Presidential Task Force. The legislation would create a single export control list, a single export licensing agency, and a consolidated primary export enforcement agency (merger of OEE into HSI).

Absent that action, Congress should update and pass a new EAA and eliminate the annual renewal requirement under the IEEPA as currently required. The original’s expiration in 2001, rendering the EAR subject to IEEPA and U.S. presidents renewing annually the state of emergency regarding export regulation under that statute, is not an ideal mechanism for export enforcement.

There are also enforcement related concerns in perpetually using IEEPA for export enforcement. Other countries are reportedly more hesitant to cooperate on mutual assistance or extradition requests for IEEPA cases because offenses are often viewed as political crimes with no similar statutes in the receiving nation. As a result, U.S. prosecutors typically add other charges (such as fraud, making false statements, smuggling, etc.) to IEEPA violation cases in order to bolster the chances that a judge or foreign magistrate will adequately acknowledge the dual criminality necessary for international law enforcement assistance. There is also concern that a single court case overturning an IEEPA violation could bring down the EAR enforcement system. A new EAA or comprehensive export control reform legislation would obviate these problems.

As this review occurs, U.S. Export Control Reform: Impacts and Implications for Controlling the Spread of Proliferation-Sensitive Goods and Technologies, provides a baseline of information about the ECR Initiative. It is also a way to start assessing the reforms completed during the Obama administration, in addition to those that are still needed. Over the next year, the president and Congress should place this issue high on their agendas for study, review, and further action.

The full report continues in PDF (link above).