ADMINISTRATION AND ENFORCEMENT OF U.S. EXPORT CONTROL PROGRAMS

WEDNESDAY, MAY 1, 1991

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON OVERSIGHT,
Washington, D.C.

The subcommittee met, pursuant to notice, at 9:35 a.m., in room 1100, Longworth House Office Building, Hon. J.J. Pickle (chairman of the subcommittee) presiding.

Chairman PICKLE. The committee will come to order, and we will ask our guests to please take their seats.

The subcommittee's first day of hearings on enforcement of U.S. export control laws, held on April 18, 1991, clearly illustrated that we do have questionable export control policies and enforcement programs-a problem that, if not quickly addressed, will lead to another dictator threatening his neighbors with weapons of mass destruction and jeopardizing our national security. The military might of this Nation is no substitute for effective export controls. Despite its great success, the cost of Desert Storm far exceeded the price of developing and implementing an effective export control policy.

This country needs a rational and enforceable export control system, one that preserves international trade but stems the proliferation of weapons of mass destruction. That is not an easy task, but the consequences of delay could be catastrophic, particularly when considering the number of nations now trying to procure nuclear weapons with ballistic missile delivery systems.

The ability of potential adversaries to acquire sensitive U.S. technology, equipment, and materials is largely beyond the current control mechanisms established by the United States. Dr. Stephen Bryen, former Director of the Defense Technology Security Administration, of this country, testified on April 18 that,

Our ability to prevent the proliferation of weapons of mass destruction to countries is extremely limited. The reasons for this are: one, the near collapse of our own domestic export control system and that of our allies to the point where no system in the West can be relied upon to operate effectively to restrain the sale of goods, technology and know-how; two, the disintegration of multinational controls on critical technology; and, three, the absence of international cooperation on enforcement where proliferation controls are involved.

Our investigation of this issue supports Dr. Bryen's conclusion. He was one of our top defense officials.

Today is the subcommittee's second day of hearings on the administration and enforcement of U.S. export control laws. At the

first hearing, we examined four export control cases which illustrated how the game is played, who the players are, the role of Customs and other Federal agencies, and the methods or diversion schemes used to circumvent our export laws. We were able to trace those cases from beginning to end, identifying a long list of deficiencies in our export control system. Today, the subcommittee's goal is to sort through the issues raised by these cases and identify overall the problems the Federal Government faces in administering the law. Most importantly, we need to look carefully at the agency's evaluation of the situation and consider their specific proposals to improve our enforcement effort. As evidenced in our April 18 hearing, the problems are clear and the solutions complex.

It seems that our export control programs depend heavily on informant sources and intelligence information, and very little on systematic agency program operations. Also, someone who wishes to export sensitive commodities illegally without detection can do so with relative ease. Finally, it doesn't seem as though all the Federal Government's efforts have much of a deterrent effect in stopping illegal exports. I don't think the Federal Government is even close to knowing whether we get 10 percent or 90 percent of the commodities prohibited from export.

For example, in three out of the four cases we considered, we were not able to "catch the crooks" until substantial quantities of the goods had already left the United States. Many of the criminals are living grand lifestyles, right out in the open, and we don't seem to be able to touch them. Even those that we did catch only got a few years in prison or were just put on probation. In one case, 630 tons of chemicals used to make mustard gas was sold to Iraq and Iran before Customs "got a tip." Further, no one who worked for the exporter went to jail, and the company only was fined $438,000-less than the profit that the company made on the illegal sales. In another case, only two members of a smuggling ring which relied heavily on Egyptian Government diplomatic officials went to jail, and they only got a little over a 3-year sentence each. In the final case reviewed, high-tech equipment was smuggled out of the United States without detection, using our Canadian neighbor as the diversion point. The international ringleader involved here continues to deny complicity, after pleading guilty to violation of the U.S. export laws, and he will be out of prison soon and be able to conduct business as usual. Government witnesses reported that the criminal hasn't told the U.S. Government a "sliver" of what he knows. That is his quote.

In concluding, I want to say for the record that this subcommittee has never had more difficulty investigating the effectiveness of a set of laws, and the administration's performance and enforcement efforts. The purpose of today's hearing is to complete the hearing record of April 18 and to get answers to some basic questions. Some of the witnesses at the earlier hearing, I believe, were less than candid when asked direct questions, or suggested that today's witnesses could better address such matters. We intend to go through these unanswered questions of April 18 and address overall policy and enforcement issues. We have a very distinguished list of witnesses here today, and I hope we will dispel any

suspicion that the administration or the individual agencies have anything to hide.

I am pleased that our first two witnesses today are members of the committee-that is, this committee-and they have expressed longstanding interest in the subject of U.S. export controls. I welcome them both: Congressman Pete Stark and Congressman Jim Moody. Following their testimony, we will hear from the Department of the Treasury Office of Foreign Assets Control, commonly referred to as OFAC, with regard to its role in formulating, administering, and enforcing financial and trade sanctions. Then the subcommittee will proceed with the statements and questioning of the U.S. Customs Service Commissioner, Carol Hallett; the Department of Commerce Deputy Assistant Secretary for Export Enforcement, Kenneth A. Cutshaw; and the Department of State Deputy for Defense Trade, Bureau of Politico-Military Affairs, Charles Duelfer. Now, our first witness will be Mr. Pete Stark, but before I yield to him, I will ask Mr. Schulze if he has any opening statement.

Mr. SCHULZE. Thank you, Mr. Chairman. I am pleased to join you in this second day of hearings on the enforcement of U.S. export controls.

At our hearing on April 18, the subcommittee learned what I have known for a long time, and that is that our export controls are weak and we are being beaten at every turn. We heard credible testimony from export enforcement officials that diversions continue to this day and that it is extremely easy to get away with illegal export schemes.

A major reason we find ourselves in this dilemma, Mr. Chairman, is that Congress pushed our export administrators in the wrong direction time and time again over the last decade. For example, in the 1985 Export Act, so-called foreign availability requirements added to a steady erosion in export enforcement. Under this twisted logic, if another country sells a controlled commodity to one of our enemies, then we should, too, because to do otherwise just hurts business. In the omnibus trade bill of 1988 and again in the Export Act amendments of 1990, Congress prevailed in essentially removing the Defense Department from export control decisions a serious mistake, in retrospect. Before we in Congress start pointing the finger elsewhere, many of us should check our own voting records rather than spread the blame. It is time for Congress to "get religion" and change the law to prevent the next Iraq from happening.

Mr. Chairman, the subcommittee's investigation found weakness at every point in the export control system. Smugglers most often bypass the elaborate and confusing licensing system altogether, and many dangerous commodities aren't even controlled. In both licensing and enforcement, it appears that there may be just "too many cooks in the kitchen." The constant back and forth between agencies may do more to confuse things than to enhance them.

I was disturbed to find how easy it is to buy controlled goods on the U.S. market. In fact, you and I could go out right now, Mr. Chairman, and buy dangerous amounts of these sensitive controlled commodities as long as we promised that they were only for domestic use. We could then easily change the markings on our high-tech package and send it on its way to Singapore and on to

God knows where from there. Yet many U.S. companies go on selling without knowing to whom they are selling, and by looking the other way, our so-called friends in Europe and the Orient have provided an open conduit to our foes in the Middle East and elsewhere.

To be fair, when our agents in the field have been alerted to an illegal export operation, they do a very good job of shutting it off. However, the big problem is that most often these schemes go on for years before we catch on, if at all. We discover the problem usually based on a tip that comes after the "horse is already out of the barn." So we just sit back and wait for the next big tip.

It is clear that the law needs to be changed and toughened to take the profit out of illegal exports and prevent those who are caught from walking away scot-free. I hope that today's witnesses don't come in here and try to "pull the wool over our eyes," but rather, offer constructive suggestions on how to improve export control enforcement.

Mr. Chairman, I thank you for having this series of hearings. I think they are informative and interesting, and I look forward to receiving the testimony from today's witnesses.

Chairman PICKLE. Thank you, Mr. Schulze.

Mr. Anthony, do you have an opening statement?

Mr. ANTHONY. I have no statement, Mr. Chairman.

Chairman PICKLE. The first witness will be the Honorable Fortney Pete Stark who has been interested in this subject for some time.

Mr. Stark, we are pleased to have you this morning.

STATEMENT OF HON. FORTNEY PETE STARK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. STARK. Thank you very much, Mr. Chairman.

I could make your job much shorter by just bringing to you and asking you to put in the record testimony that I heard as a member of the Joint Economic Committee last week, which in the words of the distinguished Chair was "a bag of horsefeathers."

You are going to hear from Commerce and the State Department that, yes, there may have been some problems but they have their act together. If you look at the charts of how they think they have their act together, I would assume that this committee would find, as the Joint Economic Committee found, that they don't. They are representing sellers-which they should do-and there is a conflict of interest.

But I am here on a particular issue; and I am going to deal with one country, although there are several, and I am going to deal with one type of export-nuclear paraphernalia, equipment, the means with which other countries could build nuclear weapons. Particularly, seeing as Germans like Mr. Schulze and myself like weapons, we can talk about the land of our forefathers and say that they are really not obeying the law. Even if this committee were able to bring pressure on our own Government, how do we stop Seimans, a Germany company, from selling to Iraq or Pakistan the equipment to build a nuclear weapon? And the answer is we can't. They don't obey our laws. They obey German laws.