Nuclear Nonproliferation: Export Licensing Procedures for Dual-Use Items
Need to Be Strengthened

04/26/94

Iraq's use of so-called dual-use equipment--items with civilian uses that can also be used to build nuclear explosives or produce weapons grade uranium and plutonium--has raised concerns about the effectiveness of export controls over this material. The United States approved more than 1,500 licenses for dual-use items, mainly high-speed computers, to eight countries with suspected nuclear weapons programs, significantly increasing the risk that U.S. exports are fueling nuclear proliferation.

Weaknesses in the interagency licensing review process have resulted in the approval of a number of sensitive license applications without review by the Energy Department or other members of the Subgroup on Nuclear Export Coordination, an interagency group. U.S. government approval of sensitive exports dictates the need for effective ways to prevent or detect export diversions, but GAO discovered several weaknesses in current procedures. These include (1) inadequate criteria for selecting prelicense checks and postshipment verifications, (2) ineffective methods used to do these inspections, and (3) a lack of verification of government-to-government assurances against nuclear end uses. GAO summarized this report in testimony before Congress; see: Nuclear Nonproliferation: Licensing Procedures for Dual-Use Export Need Strengthening, by Joseph E. Kelley, Director of International Affairs Issues, before the Senate Committee on Governmental Affairs.

Report to the Chairman,
Committee on Governmental Affairs,
U.S. Senate

April 1994

NUCLEAR NONPROLIFERATION - EXPORT LICENSING PROCEDURES FOR DUAL-USE ITEMS NEED TO BE STRENGTHENED

GAO/NSIAD-94-119

Abbreviations

ACEP - Advisory Committee on Export Policy
ACDA - Arms Control and Disarmament Agency
COCOM - Coordinating Committee on Multilateral Export Controls
EARB - Export Administration Review Board
ECASS - Export Control Automated Support System
GAO - General Accounting Office
NRL - Nuclear Referral List
PLC - pre-license check
PSV - post-shipment verification
SNEC - Subgroup on Nuclear Export Coordination


B-256585

April 26, 1994

The Honorable John H. Glenn
Chairman, Committee on Governmental Affairs
United States Senate

Dear Mr. Chairman:

As you requested, we reviewed export licensing procedures for dual-use nuclear items. In this report, we discuss the nature and extent of such exports, how well the U.S. government is implementing policies and procedures to prevent exports that pose a proliferation risk, and the effectiveness of methods used to deter and detect
diversion of such exports to foreign nuclear proliferation programs. We make several recommendations to improve export license review procedures and enhance the effectiveness of license checks.

Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Secretaries of Commerce, Energy, State, and Defense; the Director of the Arms Control and Disarmament Agency; and other interested congressional committees. Copies will also be made available to others on request.

If you or your staff have any questions about this report, please call me on (202) 512-4128. The major contributors to this report are listed in appendix V.

Sincerely yours,

Joseph E. Kelley
Director-in-Charge
International Affairs Issues

EXECUTIVE SUMMARY

PURPOSE

Iraq's extensive use of so-called dual-use equipment in its nuclear weapons program has raised concerns about the effectiveness of export controls over these items. At the request of the Chairman, Senate Committee on Governmental Affairs, GAO (1) determined the nature and extent of U.S. nuclear-related dual-use exports to countries of proliferation concern, (2) assessed U.S. policies and procedures for reviewing license applications for items that pose a proliferation risk, and (3) examined some U.S. methods used to deter and detect the diversion of exports to foreign nuclear proliferation programs.

BACKGROUND

Nuclear-related dual-use items consist of equipment, materials, and technical data that have civilian uses but that can also be used for the design, fabrication, testing, and production of nuclear explosives or special nuclear material (such as weapons grade uranium or plutonium). The United States controls exports of these items to help prevent the proliferation of nuclear weapons.

By law, the Department of Commerce, in consultation with other agencies, is responsible for controlling nuclear-related dual-use exports. Commerce's Export Administration Regulations require an "individual validated license" for (1) items identified as having potential significance for nuclear explosives development, (2) items controlled for other than nuclear proliferation reasons but destined for nuclear end users or end uses, and (3) items that the exporter knows or has reason to know will be used in proscribed nuclear activities.

Commerce is required to refer all requests for such licenses to the Department of Energy, although in practice Energy has delegated some of its review authority to Commerce. When either agency believes a license request should be reviewed by other agencies, or denied, it is referred to the Subgroup on Nuclear Export Coordination, an interagency working group, and to higher levels if necessary.

To deter and detect the diversion of nuclear-related dual-use exports to proliferation activities, Commerce or other consulting agencies may request pre-license checks or post-shipment verifications. Pre-license checks are used to establish the legitimacy of the end user or verify the intended end use of the export; post-shipment verifications are used to ascertain whether exported items are being used appropriately. The U.S. government may also seek assurances from foreign governments that items will not be diverted to nuclear uses.

RESULTS IN BRIEF

The U.S. government has approved a significant number of nuclear-related dual-use licenses to 36 countries identified as posing a potential proliferation concern. Computers and other items with wide civilian uses account for the largest share of these exports. In contrast, items with critical applications in nuclear explosives development and few nonnuclear uses have only rarely been approved.

Most licensing decisions for eight countries GAO focused on were consistent with the goal of minimizing proliferation risk. However, from fiscal years 1988 to 1992, over 1,500 licenses were approved for organizations in these countries involved in or suspected of being involved in developing nuclear explosives or special nuclear material. These approvals increase the risk, in some cases significantly, that U.S. exports could contribute to nuclear proliferation, although GAO has no evidence that these exports did support proliferation activities. GAO also found weaknesses in the interagency licensing review process that have resulted in approval of a number of sensitive license applications without review by Energy or other members of the Subgroup on Nuclear Export Coordination.

U.S. government approval of sensitive exports dictates the need for effective ways to prevent or detect export diversions, but GAO identified several weaknesses in current procedures. These include (1) inadequate criteria for selecting pre-license checks and post-shipment verifications, (2) ineffective methods used to perform these inspections, and (3) lack of verification of government-to-government assurances against nuclear end uses.

PRINCIPAL FINDINGS

SIGNIFICANT NUMBER OF LICENSES APPROVED TO COUNTRIES OF PROLIFERATION CONCERN

From fiscal years 1985 to 1992, the United States issued about 336,000 nuclear-related dual-use licenses for exports valued at $264 billion. Of these, about 55,000 (16 percent) were for items valued at $29 billion exported to the 36 countries that the United States has identified as posing a potential proliferation concern.

Computers accounted for 86 percent of nuclear-related dual-use licenses to these 36 countries. Also licensed in large numbers were common industrial and scientific equipment such as measuring and calibrating equipment, oscilloscopes, lasers, and numerically controlled machine tools. Items with few nonnuclear applications, such as maraging steel (used in the process to enrich uranium), were only rarely licensed.

SOME LICENSES APPROVED TO SENSITIVE END USERS

U.S. policy governing nuclear-related dual-use licenses is to prevent exports that could support nuclear proliferation without impeding legitimate exports. GAO's review indicated that decisions for most of the licenses from fiscal years 1988 to 1992 for eight countries of particular proliferation concern--Argentina, Brazil, India, Iran, Iraq, Israel, Pakistan, and South Africa--were consistent with the goal of minimizing proliferation risk. Approved licenses generally involved destinations and items of little or no apparent proliferation concern. License requests that were denied were typically for technically significant items or involved end users associated with nuclear proliferation activities.

However, of the 24,048 licenses approved for these eight countries, 1,508 (6 percent) were for end users involved in or suspected of being involved in nuclear weapons development or the manufacture of special nuclear materials. These licenses were approved because agency officials believed that the items would not be used to support nuclear proliferation activities. A number involved items that, because of their technical significance, present a higher risk of diversion to proscribed nuclear activities. Others involved sensitive end users that have played key roles in their countries' nuclear weapons development programs and for which U.S. officials have denied a large number of dual-use licenses.

EXPORT CONTROL REFERRAL PROCEDURES HAVE WEAKNESSES

The Commerce Department did not always refer nuclear-related dual-use license applications to the Department of Energy as required by regulations. From fiscal years 1988 to 1992, Commerce unilaterally approved the export of computers and other nuclear-related items to countries of proliferation concern, even though these licenses should have been referred to Energy. Commerce also approved without Energy consultation numerous licenses for other items going to end users engaged in nuclear weapons activities, despite regulations requiring referral of such licenses. Commerce and Energy officials agreed that many of these licenses should have been referred, and acknowledged that referral policies should be clarified to correct the problems.

During the same period, Energy did not forward to the Subgroup on Nuclear Export Coordination about 74 percent of the licenses it received from Commerce for end users of nuclear proliferation concern. These licenses involved items such as computers, oscilloscopes, and lasers intended for end users suspected of developing nuclear explosives or special nuclear material. Energy recommended that Commerce approve most of these licenses because it believed that the exports were of limited technical significance and would not support nuclear proliferation activities.

Although Energy has discretion in determining which licenses to forward to the Subgroup, its practice of seeking interagency consultation on only a minority of licenses raises concerns that other agencies may be precluded from bringing their policy perspectives to bear on important licensing decisions. During our review, Defense and Arms Control and Disarmament Agency representatives to the Subgroup identified a number of licenses that they believed warranted interagency review but were not placed on the Subgroup's agenda. Moreover, agencies represented on the Subgroup are limited in their ability to influence which licenses Energy selects for interagency review and are unable to hold Commerce and Energy accountable for their review decisions because they lack consistent access to licensing information.

INADEQUATE METHODS FOR DETERRING OR DETECTING DIVERSIONS

Existing selection criteria do not provide sufficient guidance on what checks to undertake. During fiscal years 1991 and 1992, Commerce selected a number of cases for inspection involving items of low technical significance. For example, approximately 63 percent of nuclear-related pre-license checks in the eight countries of proliferation concern that GAO focused on were conducted on items that officials from the Los Alamos and Lawrence Livermore National Laboratories indicated were of lesser proliferation concern. In addition, cases were selected for end users whose proliferation credentials were already known. For example, about 39 percent of nuclear-related pre- license checks in the eight countries were conducted for end users that had already been identified by the Department of Energy as posing a nuclear proliferation concern. National laboratory and Defense officials indicated that pre-license checks are less useful in cases involving well-known end users because the existence and activities of the entities are already established.

GAO also found that (1) U.S. embassy officials who perform the pre-license checks and post-shipment verifications typically lack technical expertise in how nuclear-related dual-use items could be diverted; (2) Commerce's requests for inspections frequently omitted vital information, such as the reason for the inspection or licensing conditions; and (3) Embassy officials frequently sent foreign service nationals to conduct inspections of their own countries' facilities.

The U.S. government does not systematically verify compliance with government-to-government assurances on the use of nuclear-related dual-use items because they are diplomatically negotiated agreements intended to carry the weight of an official commitment by a foreign government. According to State Department officials, the only method available would be a post-shipment verification, but post-shipment verifications are not used for this purpose. Thus, the U.S. government cannot be certain that exports licensed with government-to-government assurances are being used for their intended
purposes.

RECOMMENDATIONS

GAO makes several recommendations to the Secretaries of Commerce, Energy, State, and Defense, and the Director of the Arms Control and Disarmament Agency to (1) improve review procedures for nuclear-related dual-use licenses and (2) enhance the effectiveness of pre-license checks and post-shipment verifications.

AGENCY COMMENTS

As requested, GAO did not obtain official agency comments. However, GAO discussed the contents of the report with program officials at Commerce, Energy, State, Defense, and the Arms Control and Disarmament Agency. These officials generally agreed with the information presented in the report, although Commerce and Energy officials disagreed with the need to change the licensing review process to improve referrals to the Subgroup on Nuclear Export Coordination.

INTRODUCTION
Chapter 1

Preventing the proliferation of nuclear weapons is a fundamental U.S. national security and foreign policy objective. One means of advancing this objective is controlling nuclear-related dual-use exports. However, the discovery of Iraq's reliance on foreign imports for its nuclear weapons program has raised concerns about the effectiveness of U.S., as well as international, control efforts.

WHAT ARE NUCLEAR-RELATED DUAL-USE EXPORTS?

Nuclear-related dual-use exports consist of equipment, materials, and technical data that have civilian or nonnuclear uses but can also be used for the design, fabrication, testing, or production of nuclear explosives or special nuclear material (such as weapons grade uranium or plutonium). For example, computers are nearly indispensable in daily business and scientific activities, but can also be useful for designing nuclear weapons. Other dual-use items can be used for enriching uranium, separating plutonium from spent nuclear fuel, producing heavy water, or assisting in nuclear weapons testing.

WHY AND HOW NUCLEAR-RELATED DUAL-USE EXPORTS ARE CONTROLLED

The United States controls nuclear-related dual-use exports to meet U.S. statutory requirements and fulfill international obligations to prevent nuclear weapons proliferation. Controls are intended to signal U.S. opposition to proliferation, increase costs to countries developing nuclear explosives, and buy time for diplomacy to work. The United States is a signatory to the Nuclear Non-Proliferation Treaty, which prohibits nonnuclear states from acquiring nuclear weapons and nuclear weapons states from assisting them.

Section 309(c) of the Nuclear Non-Proliferation Act of 1978 requires the President to publish procedures for the Department of Commerce to control nuclear-related dual-use exports. The act covers all items under Commerce's jurisdiction which, if used for other than their intended purposes, could be of significance for nuclear explosive activities.

The procedures established pursuant to the Nuclear Non-Proliferation Act are contained in Commerce's Export Administration Regulations (15 C.F.R. Part 778). Under these regulations, exporters are required to seek an "individual validated license" for commodities and technical data controlled for nuclear proliferation reasons--items on the Nuclear Referral List (NRL). This list is updated periodically. Exporters are also required to obtain an individual validated license for any item if the exporter knows or has reason to know that the item will be used in proscribed nuclear weapons activities, including designing, developing, fabricating, or testing nuclear weapons or nuclear explosive devices or designing, constructing, fabricating, or operating facilities, or components for facilities, for (1) chemical reprocessing of irradiated special nuclear or source material; (2) producing heavy water; (3) separating isotopes of source and special nuclear material; or (4) fabricating nuclear reactor fuel containing plutonium.

Those countries that have not acceded to the Nuclear Non-Proliferation Treaty or are suspected of engaging in nuclear proliferation activities appear on the "Nuclear Non- Proliferation Special Country List," contained in a supplement to the Export Administration Regulations (see app. I). This list is intended for use as a basic guide for agency officials when reviewing nuclear-related licenses. As of 1992, 36 countries were on the list.*1

The regulations also establish interagency review procedures for licenses subject to nuclear proliferation controls. Commerce is required to refer all requests for such licenses to the Department of Energy. When either Commerce or Energy believes that a particular application should be reviewed by other agencies, or denied, the application is to be referred to an interagency working group--the Subgroup on Nuclear Export Coordination (SNEC). When the SNEC cannot reach a consensus, license requests are escalated to higher interagency groups such as the sub-Cabinet-level Advisory Committee on Export Policy (ACEP), and then to the President.

During the licensing review process, Commerce and other reviewing agencies can request a pre-license check (PLC) or a post-shipment verification (PSV). The purpose of a PLC is to determine whether an overseas person or firm would be a reliable recipient of U.S.-controlled goods and technical data. A PSV is used to confirm that licensed goods exported from the United States actually were received by the party named on the license and are being used in accordance with license provisions. The U.S. government may also seek assurances from foreign governments that items will not be diverted to nuclear uses.

OBJECTIVES, SCOPE, AND METHODOLOGY

We reviewed U.S controls over nuclear-related dual-use exports at the request of the Chairman, Senate Committee on Governmental Affairs. Specifically, we (1) determined the nature and extent of nuclear-related dual-use exports to countries of proliferation concern, (2) assessed U.S. policies and procedures for reviewing proposed nuclear-related dual-use exports that present a proliferation risk, and (3) examined some methods used to deter and detect the diversion of exports to foreign nuclear proliferation programs.

To address these objectives, we analyzed data from Commerce's Export Control Automated Support System (ECASS), a computerized export licensing database. We obtained computer records for all dual-use license applications for the 36 countries on the Nuclear Non-Proliferation Special Country List for fiscal years 1985 to 1992.

To determine the reliability of the data, we assessed the relevant general and application controls for the system and found them to be generally adequate. Commerce officials told us that data are less reliable for fiscal years 1985 to 1987, before the introduction of automated data entry. Commerce reported that since fiscal year 1988, data entry reliability has approached 100 percent with the addition of electronic license application filing and optical character reader technology. We did not systematically sample licensing records to test data accuracy, but did verify specific examples cited in the report.

To determine the nature and extent of nuclear-related dual-use exports to countries that pose a proliferation concern, we devised, in consultation with Commerce, a methodology to identify all license applications for fiscal years 1985 to 1992 that were subject to nuclear proliferation controls. We also analyzed licensing patterns of Nuclear Referral List commodities and changes to the list.

For this report, we define nuclear-related dual-use exports to include all items appearing on the NRL each year, along with any other items that were referred by Commerce to Energy for nuclear proliferation review. Although we believe that our methodology provides a sufficient basis for the analyses and conclusions in this report, the methodology has three limitations that affect the accuracy of the data presented. First, ECASS data allow us to identify NRL items by commodity classification number only. As a result, the number of nuclear-related licenses is overstated because a small number of NRL commodity classifications also contain items not controlled for nuclear proliferation reasons. Additionally, some commodities may be included even though they have technical characteristics that exempt them from controls. Finally, our methodology assumes that Commerce always followed procedures for referring to Energy all non-NRL license applications for items intended for nuclear end uses or end users. Because Commerce did not always follow these procedures (as discussed in ch. 4) a number of such licenses are not included in our totals. We do not believe that these limitations, which are offsetting, are large enough to significantly alter the data we present.

To assess the policies for reviewing nuclear-related dual-use license applications, we analyzed licensing decisions for eight countries on the Special Country List-- Argentina, Brazil, India, Iran, Iraq, Israel, Pakistan, and South Africa. We selected these countries for one or more of the following reasons: (1) except for Iran, Iraq, and very recently South Africa, they are not parties to the Nuclear Non-Proliferation Treaty; (2) their actions have indicated a desire to obtain nuclear weapons; and (3) they have the technical capability to obtain enriched uranium or plutonium for use in a nuclear explosive device.*2 We also examined pertinent regulations and policy guidelines in effect during the time of our review;*3 reviewed the minutes of SNEC and ACEP meetings; reviewed various intelligence reporting on proliferation programs; and discussed licensing decisions with officials at the Departments of Commerce, Energy, State, and Defense, and the Arms Control and Disarmament Agency (ACDA).

To assess the license review process, we reviewed the Commerce database and the minutes of interagency meetings to identify license applications referred by Commerce to Energy and from Energy to interagency review bodies during fiscal years 1988 to 1992. We compared referrals from Commerce to Energy with regulations and Commerce and Energy procedures, and discussed the results with agency officials. We discussed Energy's referral process with SNEC representatives from each of the agencies and reviewed proposals from the Department of Defense and ACDA to reform the referral process. Finally, we compared licensing recommendations made by the SNEC with the final licensing decisions as contained in the ECASS database to determine the extent to which Commerce followed SNEC licensing recommendations.

To assess methods for deterring and detecting the diversion of nuclear-related dual-use items, we (1) reviewed Commerce criteria and guidelines for selecting and conducting pre-license checks and post-shipment verifications and discussed their appropriateness with Commerce, State, Defense, and Los Alamos and Lawrence Livermore National Laboratory officials; (2) compiled data from Commerce on the numbers of PLCs and PSVs conducted during fiscal years 1991 and 1992; (3) met with and obtained documents from U.S. embassy and consulate officials in Germany, Israel, South Africa, India, Pakistan, and Hong Kong;*4 and (4) observed several PLCs conducted by U.S. embassy and consulate officials in Hong Kong and Pakistan. We also compiled data on government-to-government assurances obtained during fiscal years 1988 to 1991, and determined the extent to which the U.S. government verified compliance with these assurances.

We conducted our work from January 1992 to October 1993 in accordance with generally accepted government auditing standards.

As requested, we did not obtain official agency comments. However, we discussed the contents of the report with program officials at Commerce, Energy, State, Defense, and ACDA. These officials generally agreed with the information presented in the report, although Commerce and Energy officials disagreed with the need to change the licensing review process to improve referrals to the SNEC.


NATURE AND EXTENT OF NUCLEAR-RELATED DUAL-USE EXPORTS
Chapter 2

During the past several years, the Department of Commerce approved a significant number of nuclear-related dual-use export licenses for countries that pose a proliferation concern--the 36 countries on the Special Country List. The majority of these licenses involved NRL items, such as computers, with numerous civilian uses. NRL items with especially critical nuclear applications and relatively few nonnuclear uses have been licensed in small numbers or not at all.

The volume of licenses for NRL items has declined since fiscal year 1987, although less for Special Country List destinations than for other countries. This decline is due in large measure to the easing of licensing requirements for computers, which occurred in 1987 and again in 1990. License applications for computer exports should further decline in the future because of additional liberalization steps.

SIGNIFICANT NUMBER OF NUCLEAR-RELATED DUAL-USE LICENSES APPROVED TO COUNTRIES OF PROLIFERATION CONCERN

From fiscal years 1985 through 1992, Commerce approved 54,862 nuclear- related dual-use export licenses to the 36 countries on the Special Country List. These licenses constituted 16 percent of the 336,389 nuclear-related dual-use licenses approved worldwide during this period. Exports covered by these licenses were valued at approximately $29.3 billion, compared to approximately $264 billion for all nuclear-related dual-use licenses. Ninety-three percent of nuclear-related dual-use licenses for Special Country List destinations during the 8-year period were for NRL items, compared with 98 percent for all destinations.*5

As shown in figure 2.1, five of the eight countries we focused on accounted for 77 percent of the licenses approved for Special Country List destinations. The other three countries, Iraq, Iran, and Pakistan, accounted for 5 percent of the licenses for Special Country List destinations.

Figure 2.1: Distribution of Licenses Approved for Special Country List Destinations (Fiscal Years 1985-92)

(See figure in printed edition.)

Commerce approved the great majority of nuclear-related dual-use license applications submitted during this period. During the 8-year period, Commerce approved 87 percent of such licenses to Special Country List destinations, denied 1.2 percent, and returned 11.8 percent without action (meaning that the exporter failed to provide sufficient information or withdrew the application, or Commerce determined that the item did not require a validated license).*6 This approval rate was only slightly lower than that for all countries--on average, Commerce approved 89.1 percent of nuclear-related dual-use licenses during this period, denied 1.5 percent, and returned 8.9 percent without action.

A MAJORITY OF ITEMS ON THE NRL HAVE BEEN LICENSED FOR EXPORT

The U.S. government generally licenses for export the large majority of NRL items, although critical items with few nonnuclear uses were licensed less frequently or not at all. Of the 92 categories of items listed in the Export Administration Regulations since fiscal year 1985 as controlled for nuclear proliferation reasons,*7 59 were licensed to Special Country List destinations between fiscal years 1985 and 1992. Worldwide, 67 of the 92 NRL items were licensed during this period. (See app. II for the list of NRL items as of 1992.)

Computers account for the largest share of nuclear-related dual-use licenses. Between fiscal years 1985 and 1992, 86 percent of such licenses approved to Special Country List destinations involved computers and computer-related equipment, compared with 77 percent for all countries. Computers account for this large share because of their extensive civilian applications.

Other NRL items have also been licensed in large numbers, both worldwide and to Special Country List destinations. Table 2.1 shows the number of licenses approved for the 10 NRL items--other than computers--licensed in greatest numbers to Special Country List destinations since fiscal year 1985. (See app. III for additional information on NRL items licensed to Special Country List destinations.) In general, these items were also the ones most commonly licensed to all countries during this period.

Table 2.1

NRL Commodities Besides Computers Licensed in Greatest Numbers to Special Country List Destinations (Fiscal Years 1985-92)

\a Since fiscal year 1992, these items have not been controlled for nuclear proliferation reasons.

\b Flash X-rays constitute only a small number of the 965 licenses approved for electronic equipment.

Source: Department of Commerce.

The NRL items most commonly licensed have a variety of applications for nuclear weapons development, including weapons testing, uranium enrichment (isotopic separation), implosion systems development, and weapons detonation. According to Energy officials, these items are in greater demand than the rest of the NRL because they have wide civilian applications. For example, fibrous and filamentary materials are used to manufacture tennis rackets and fishing poles, while oscilloscopes have innumerable uses in the electronics industry.

In contrast, NRL items with relatively few nonnuclear uses were approved in small numbers or not at all, especially to Special Country List destinations. Generally, licenses for these items were approved in such small numbers because there were few license applications. Table 2.2 lists the items and shows the number of approved licenses between fiscal years 1985 and 1992, both worldwide and to Special Country List destinations.

Table 2.2

Licenses Approved for NRL Commodities With Least Nonnuclear Uses (Fiscal Years 1985-92)

\a Streak and framing cameras constituted an extremely small number of the licenses approved under this Commodity Control List entry; most included film, cinema recording cameras, and image intensifiers.

Source: Department of Commerce.


According to Energy officials, demand for these items is far smaller relative to other NRL items. In addition, our analysis confirms that not only do few end users have any need for these items, but in most instances only legitimate end users apply for them. According to Energy officials, illegitimate end users know these items will be denied because of their critical applications in nuclear weapons development, such as testing of implosion systems, manufacturing of gas centrifuge components, and production of heavy water.

DECLINING TREND OF NRL LICENSES

Since fiscal year 1987, the volume of individual validated licenses for NRL items has declined, although less for Special Country List destinations than for other countries. The number of NRL licenses worldwide declined 81 percent from fiscal years 1987 to 1992, compared with a 65-percent drop in NRL licenses to Special Country List destinations, as shown in figure 2.2.

Figure 2.2: Licenses for NRL Items to Worldwide and Special Country List Destinations (Fiscal Years 1987-92)

(See figure in printed edition.)

This decline in approved NRL licenses is due to the liberalization in export controls that occurred during the late 1980s. The United States eased licensing requirements for computers in 1987 and again in 1990, and also took other liberalization steps in accord with decisions reached by the Coordinating Committee on Multilateral Export Controls (COCOM).*8 In June 1990 COCOM exempted some items from export licensing requirements when the items were destined for COCOM member states. Because some of these items were also on the NRL, this exemption resulted in fewer total licenses; it did not affect licenses to Special Country List destinations because these countries are not members of COCOM. Also in June 1990, COCOM removed some commodities from its control list that were also on the NRL, thereby liberalizing licensing requirements for NRL exports not only to COCOM members but to all countries.*9

Of all of these actions, the liberalization in computer licensing requirements has had the greatest impact: computers represented 92 percent of the decline in licenses for NRL items to Special Country List destinations and 86 percent of the decline for all countries.

On October 6, 1993, the Commerce Department published an interim rule further easing licensing requirements for computer exports. Under the new policy, only supercomputers (as they are currently defined) will require an export license for nuclear proliferation reasons and only when exported to Special Country List destinations.*10 This new policy will almost certainly result in a substantial decline in the number of computer license applications. We estimate that if these policy changes had been in effect in fiscal year 1992, there would have been approximately 86 percent fewer license applications for computer exports to countries on the Special Country List.

In formulating this new policy, the executive branch sought to promote U.S. computer exports by reducing the licensing burden and bringing U.S. export controls more in line with those of other countries.

DUAL-USE NUCLEAR LICENSING POLICY AND ITS IMPLEMENTATION
Chapter 3

Most licensing decisions for eight countries of particular concern were consistent with the U.S. goal of minimizing proliferation risk. However, over 1,500 nuclear- related dual-use licenses were approved by the U.S. government to end users in these countries involved or suspected of being involved in nuclear proliferation activities. Some licenses involved technically significant items or facilities that have been denied licenses in other cases because of the risk of diversion to nuclear proliferation activities. These approvals, although generally consistent with U.S. policy implementation guidelines, do present a relatively greater risk that U.S. exports could contribute to nuclear weapons proliferation.

U.S. NUCLEAR-RELATED EXPORT POLICY GUIDANCE

It is U.S. policy to prevent exports that would contribute to nuclear weapons proliferation, but without impeding legitimate exports. In accord with this policy, Commerce and other agencies with whom it consults conduct a case-by-case review of license applications using the following licensing factors:

• stated end use of the item;
• significance of the item for nuclear purposes;
• availability of the item from non-U.S. sources;
• types of assurances against nuclear explosive use; and
• nonproliferation credentials of the destination country.

The Subgroup on Nuclear Export Coordination has developed more detailed guidelines that agencies can follow in their case-by-case reviews. Specifically, the guidelines permit agency officials to review with a "presumption of approval" all applications except those that involve the following circumstances:

Exports to Special Country List destinations if there is any evidence that they will be used for proscribed nuclear activities such as the design, manufacturing, or testing of nuclear weapons.

Exports to any country if they involve (1) an unsafeguarded nuclear activity;*11 (2) a foreign naval nuclear propulsion program with which the United States does not cooperate; (3) items that present a high risk of diversion; or (4) a nuclear activity in a country for which the United States has a policy of nuclear noncooperation.

These guidelines are intended to balance U.S. nonproliferation policy objectives with legitimate commercial interests. They seek to minimize the risk that U.S. exports could support nuclear proliferation activities, while providing licensing officials wide latitude to approve exports for other activities. For example, in certain circumstances licenses will be approved for Special Country List destinations even if the end user is involved in proscribed or unsafeguarded nuclear activities, so long as (1) the end user is also involved in non-proscribed activities, (2) the exports are intended and are appropriate for those non- proscribed uses, and (3) U.S. officials are able to develop conditions that would provide the necessary degree of confidence that the items will not be diverted.

LICENSING OUTCOMES FOR EIGHT COUNTRIES OF CONCERN

To assess the implementation of U.S. licensing policy, we analyzed licensing decisions for nuclear-related dual-use exports to eight countries of proliferation concern for fiscal years 1988 to 1992. The eight countries are Argentina, Brazil, India, Iran, Iraq, Israel, Pakistan, and South Africa. During this period, the United States reviewed 27,567 nuclear-related dual-use license applications for the eight countries and approved 24,048, or approximately 87 percent, as shown in table 3.1.

Table 3.1

Licensing Outcomes for Nuclear-Related Dual-Use Exports for Eight Countries of Concern (Fiscal Years 1988-92)

Note: Percentages may not add to 100 due to rounding.

\a Includes licenses returned to the exporter without action, still pending, canceled, or suspended.

\b Data through August 2, 1990. All pending applications were returned without action.

Source: Department of Commerce.

The four countries that accounted for the great majority of license applications (Brazil, Israel, South Africa, and India) have the largest and/or most technically advanced economies in the group and the greatest demand for nuclear-related dual-use items. The small volume of applications for Iran and Iraq and relatively lower approval rates are due to the less-developed nature of their economies and the more stringent application of U.S. licensing policy. The United States has embargoed all exports to Iraq since the Persian Gulf War, and since fiscal year 1992 has tightly restricted exports of proliferation items to Iran.

MOST LICENSING OUTCOMES CONSISTENT WITH GOAL OF MINIMIZING RISK

In general, the licensing decisions summarized in table 3.1 were in accord with the overall goal of minimizing the risk that U.S. exports could be used to support nuclear proliferation. Most licenses that were approved entailed little or no apparent proliferation risk, while those that were denied represented an unacceptable risk because of the types of items or end users involved.

Approximately 90 percent of the 24,048 approved licenses were for exports to hospitals, banks, factories, and other civilian and governmental institutions that did not appear on the Department of Energy's Nuclear Proliferation Watch List.*12 Computers accounted for a large number (17,106) of the licenses to these end users.

Conversely, most of the 289 denied licenses represented an unacceptable proliferation risk because they involved (1) technically significant items going to end users or countries where the risk of diversion to proscribed activities was viewed as particularly high; (2) end users involved in unsafeguarded nuclear activities or foreign naval nuclear propulsion programs; or (3) end users engaged in nuclear activities in countries for which the United States has a policy of nuclear noncooperation. The following are examples of licenses denied based on the risk of diversion.

A license for two three-axis turning machines capable of manufacturing nuclear weapons components to the Saddam General Establishment in Iraq.

Nineteen licenses for high-powered computers to a military end user in Israel.

The following are examples where applications were denied because the recipients were primarily involved in unsafeguarded nuclear activities or a foreign naval nuclear propulsion program.

Seven license applications for computers, radiation detection equipment, nuclear reactor equipment, bellows valves, and an oscilloscope to Israel's unsafeguarded nuclear program.

All but 1 of 12 license applications for exports to an unsafeguarded nuclear research center in India.*13

Six licenses to a military end user in Brazil involved in naval nuclear propulsion research.

It has been U.S. policy not to cooperate with the nuclear programs in India, Iran, Iraq, Israel, Pakistan, and South Africa, resulting in denial of some licenses. For example, licenses involving computers, measuring and calibration equipment, and other NRL items were denied for the Iraqi Atomic Energy Commission, a nuclear end user in India, and a nuclear power plant in Pakistan. According to a State Department official, the United States has adopted a policy of nuclear noncooperation for some countries because of concerns that technology for civilian nuclear programs could be diverted to nuclear weapons development.

SOME LICENSES APPROVED DESPITE HIGHER PROLIFERATION RISKS

Although most of the licensing decisions for the eight countries we reviewed were in accord with the goal of minimizing proliferation risk, we did identify a number of licenses that were approved for exports to end users engaged in, or suspected of being engaged in, nuclear weapons proliferation. In approving these licenses, officials concluded that the items would not be used in proscribed nuclear activities. We have no evidence that such exports have contributed to nuclear proliferation; however, they do pose a relatively greater proliferation risk because of the end users involved.

LICENSES APPROVED TO SENSITIVE END USERS

Of the 24,048 licenses approved for our eight countries of concern, more than 1,500 licenses were approved to "sensitive" end users involved or suspected of being involved in proscribed nuclear activities,*14 as shown in table 3.2. These exports were valued at $350 million. (App. IV contains more detailed information on these licenses.)

Table 3.2

Approvals of Nuclear-Related Dual-Use Licenses to Sensitive End Users in Eight Countries of Concern (Fiscal Years 1988- 92)

\a Does not include licenses for non-NRL items approved without
referral to the Department of Energy (see ch. 4).

\b Through August 2, 1990.

Source: Department of Commerce, Department of Energy.

In reviewing these licenses, officials were to weigh the technical significance of the items in combination with the country and the end user. They concluded that there was little or no risk of diversion to proscribed and/or unsafeguarded nuclear activities. Generally, the end users for these 1,508 licenses were government agencies, research organizations, universities, and defense companies that, while participating in proscribed and/or unsafeguarded nuclear activities, are also engaged in other activities. Moreover, 241 of these licenses involved non-NRL items. According to the Chairman of the SNEC, non-NRL items generally have little or no significance for nuclear explosive purposes and, therefore, present only a small proliferation concern. Most of the remaining 1,267 licenses involved computers and computer parts, measuring and calibrating equipment, lasers, pressure measuring instruments, fibrous materials, and oscilloscopes.

In some instances, decisions to approve licenses for sensitive end users were also influenced by special country considerations--for example, the close bilateral relationship between the United States and Israel. In some of these cases, approval decisions were contingent on government-to-government assurances against misuse or other licensing conditions (such as exporter reporting) designed to deter and detect diversions.

SPECIFIC CASES THAT CONSTITUTE HEIGHTENED PROLIFERATION RISK

Although we have no evidence that any items exported under these 1,508 licenses have been used to support nuclear proliferation activities, some of these licenses may constitute a heightened proliferation risk by virtue of the items or end users involved. A number involved items that, because of their technical significance, present a higher risk of diversion to proscribed nuclear activities. Others involved sensitive end users for which U.S. officials have denied a large number of dual-use licenses because there was a risk of diversion to proscribed nuclear activities. These end users have been or are suspected to be key players in their countries' nuclear weapons programs.

EXAMPLE: MACHINE TOOL TO PAKISTAN

In late 1989, the U.S. government approved a license to a military end user in Pakistan for two four-axis grinding machines capable of manufacturing critical nuclear weapons components. According to the Department of Energy's Nuclear Proliferation Watch List, the end user is involved, among other things, in sensitive nuclear activities, such as the design, manufacture, or testing of nuclear weapons or production of special nuclear materials.

The license was originally denied on grounds that there was an unacceptable risk of diversion to nuclear weapons development. However, the SNEC subsequently recommended approval based on (1) the exporter's argument that a diversion of the machine tool was unlikely and (2) the Department of Energy's conclusion that while the equipment was capable of contributing to sensitive nuclear activities, such capability would not necessarily translate into a diversion. The decision to approve the grinding machines, valued at $1.5 million, came after the SNEC had recommended denial of less valuable NRL licenses to the same end user, including measuring and calibrating equipment valued at under $10,000 and kevlar fabric valued at under $2,000. The SNEC had recommended denial of these licenses on grounds that there was an unacceptable risk of diversion to nuclear proliferation activities. Moreover, the license for the grinding machines was approved on the condition that the exporter provide the SNEC with periodic reports on the status of the item; however, according to Commerce officials, no such reports have ever been provided.

EXAMPLE: COMPUTERS TO ISRAEL

During fiscal years 1988 to 1992, the United States issued 238 licenses for computers to certain Israeli end users linked to the unsafeguarded Israeli nuclear program. While the U.S. government denied some licenses for high-powered computers for these end users, the computers that were approved were generally more powerful than any exported to sensitive end users in other countries of concern. They were also more powerful than those used to develop many of the weapons in the U.S. nuclear arsenal.

According to a State Department official, while the United States does not support the Israeli nuclear program, it has approved such computer exports because of the overall U.S.-Israeli relationship and the U.S. policy of maintaining Israel's qualitative military superiority over its neighbors. In addition, the decision to approve some of these computer exports was influenced by the foreign availability of the equipment. For 62 of the 238 licenses, the United States received government-to-government assurances against nuclear use. According to a State Department official, there is no evidence that Israel has violated its assurances, although the U.S. government has not verified compliance (see ch. 5).

EXAMPLE: COMPUTERS AND EQUIPMENT TO IRAQ

The U.S. government approved 23 licenses during fiscal years 1988 and 1989 for computer equipment to end users later determined by the United Nations to be involved in Iraq's nuclear weapons program. Three of the licenses were for personal computers to the Iraqi Atomic Energy Commission (the headquarters for the Iraq nuclear weapons program), while six were for minicomputers and personal computers to Iraqi state establishments involved in uranium enrichment activities. According to a U.S. government assessment, Iraq may have made use of such computers to perform nuclear weapons design work, as well as to operate machine tools which may have been used in fabricating nuclear weapons, centrifuges, and electromagnetic uranium enrichment components.

Although it was U.S. policy not to support Iraq's efforts to acquire nuclear weapons, it was also U.S. policy to support benign trade with Iraq as a way to improve relations between the two countries and assist in rebuilding Iraq's economy following the Iran-Iraq War. According to a State official, prior to the Persian Gulf War U.S. licensing officials were concerned about Iraq's nuclear activities, but were not aware of the existence of its uranium enrichment programs. As a result, while most licenses for the Iraqi Atomic Energy Commission and certain other state establishments were denied, some involving moderately capable computers were approved. At the time these licenses were approved, only the Iraqi Atomic Energy Commission was identified as a sensitive end user; other Iraqi state establishments were not identified as potentially involved in nuclear weapons activities.

EXAMPLE: VARIOUS NRL ITEMS TO INDIA

The United States approved 33 licenses to a nuclear research center in India that operates an unsafeguarded reactor and unsafeguarded isotopic separation facilities. According to testimony by the Director of Central Intelligence before the Senate Governmental Affairs Committee, the center is also involved in thermonuclear weapons design work. A State Department official told us that it is U.S. policy not to cooperate with the Indian nuclear program, but the United States attempts to separate its concerns about the Indian nuclear program from other aspects of the U.S.-Indian relationship.

Of the 33 licenses approved, 14 were for such NRL items as computers, laser equipment, and pressure measuring equipment. According to an Energy official, these licenses were approved because they involved technically insignificant items with legitimate uses for civilian research and because, in the official's view, there was little likelihood that the items would be diverted to proscribed nuclear activities. Other licenses for the center, involving more technically significant NRL items, have been denied.

The U.S. government also approved six licenses involving NRL items such as computers and equipment for ammonia production for Indian fertilizer factories. These factories also make heavy water as a by-product, which is important to the Indian nuclear program because India's unsafeguarded nuclear reactors require it to operate. Heavy water production is a proscribed activity and is subject to International Atomic Energy Agency safeguards. According to a State Department official, the United States approves licenses for Indian fertilizer manufacturers collocated with heavy water production facilities if the exports will not ontribute to heavy water production.

CONCLUSIONS

Short of denying all exports to countries or end users of concern, U.S. licensing decisions will continue to require judgment and the balancing of proliferation concerns against legitimate trade interests and other U.S. objectives. While the United States has denied licenses believed to pose an unacceptable proliferation risk, it has approved other licenses for end users involved in or suspected of being involved in nuclear weapons activities. Officials approved these licenses because they believed the items would not support proliferation activities, even though other licenses to these same end users were denied. In some cases, decisions to approve these licenses were influenced by assurances against misuse, or specific methods (such as exporter reporting) to verify compliance with U.S. licensing conditions, but such assurances are not routinely verified (see ch. 5) and in at least one instance required exporter reporting has not been done.

We have no evidence that any of these exports have been used in nuclear explosives programs. However, they constitute a higher nuclear proliferation risk--some significantly higher--than most of the other licenses that were approved because of the sensitivity of the items involved or the role of the end users in unsafeguarded nuclear activities.


THE INTERAGENCY REVIEW SYSTEM SHOULD BE STRENGTHENED
Chapter 4

The interagency process for reviewing license applications has weaknesses that have prevented some nuclear-related dual-use licenses from receiving adequate review. We found that the Commerce Department did not always send to Energy all those licenses requiring referral and that Energy recommended approval of a majority of licenses for end users engaged in nuclear weapons activities without subjecting them to interagency review. Such recommendations by Energy do not violate regulations, but do limit the opportunity for the Department of Defense and the Arms Control and Disarmament Agency to see all licenses they believe warrant their review.

THE INTERAGENCY REVIEW PROCESS

Regulations pursuant to the Nuclear Non-Proliferation Act of 1978 establish an interagency review process for nuclear-related dual-use licenses involving the Departments of Commerce, Energy, State, and Defense, and ACDA. The act specifies that Commerce must consult with these agencies as needed when making licensing decisions. Figure 4.1 illustrates the path a license application takes during the review process, depending on whether the license involves an NRL or non-NRL item.

Referral procedures are designed to allow licenses to be reviewed by agencies with relevant technical expertise as well as different perspectives on nuclear proliferation issues. Energy advises Commerce because of its technical expertise in nuclear weapons research and development. In turn, Defense, State, and ACDA bring national defense, foreign policy, and arms control considerations into license decision-making. By participating in interagency review groups such as the SNEC, these agencies can attempt to block any export that in their view would not be in the national interest.

COMMERCE AND ENERGY REVIEW

The regulations require Commerce to refer nuclear-related dual-use license applications to Energy, but in practice Energy has delegated some of its review authority, enabling Commerce to decide some licenses on its own.*15 Energy's intent in such delegations is to decrease the volume of license applications it reviews, so those licenses that do not pose a proliferation risk can be processed more quickly.

In accord with these delegations, license applications involving more than half of the items on the NRL can be decided by Commerce without consultation unless they involve a nuclear end use or end user or certain countries designated by Energy as being of significant proliferation concern. License applications for another fifth of the NRL are referred to Energy only if intended for a Special Country List destination or to certain other countries, or involve a nuclear end use or end user.

Energy has not delegated its authority to review applications for the more sensitive categories of nuclear-related dual-use licenses. Energy also has retained its authority to review license applications for non-NRL items involving nuclear end uses or end users.

REFERRALS TO THE SNEC AND OTHER INTERAGENCY REVIEW GROUPS

Regulations require that licenses be referred to the SNEC if either Commerce or Energy believes that a particular license should be reviewed by other agencies or denied. The SNEC is an interagency working group consisting of voting representatives from Commerce, Energy, Defense, State, and ACDA.*16

When the SNEC cannot reach consensus, license applications are escalated to the Advisory Committee on Export Policy--an Assistant Secretary-level interagency review group consisting of voting representatives from the SNEC agencies. ACEP votes by majority, although dissenting agencies can escalate licenses to a higher level interagency group--the Export Administration Review Board (EARB)--which in turn can send licenses to the President. Although Commerce is the licensing authority, it will, according to Commerce officials, follow the recommendations of Energy, the SNEC, ACEP, or EARB in making its licensing determinations.

RESULTS OF REVIEW PROCESS

From fiscal years 1988 to 1992, Commerce decided without Energy consultation about 50 percent of the 34,281 nuclear-related dual-use license applications to Special Country List destinations. Of the licenses Commerce referred, Energy made recommendations to Commerce on about 93 percent without subjecting them to interagency review.

Table 4.1 shows the results of license reviews by Energy and succeeding review levels. The SNEC and ACEP cause a higher proportion of licenses to be denied than Energy because these groups review more sensitive licenses*17 and Energy is generally required to refer to the SNEC those licenses that it believes should be denied.

Table 4.1

Licensing Decisions by Review Level (Fiscal Years 1988-92)

Note: Percentages may not add to 100 due to rounding.

\a Includes licenses that were returned without action, still pending, canceled, or suspended.

\b All 19 licenses, for computer exports to certain Israeli end users, were reviewed in 1991; according to Commerce data, the EARB reviewed no licenses in fiscal year 1992.

Sources: Department of Commerce and the SNEC.

We reviewed SNEC licensing decisions from fiscal years 1988 to 1991 and identified only two cases where Commerce approved licenses even though a majority of other SNEC agencies had voted that they be denied. They both occurred in fiscal year 1990.

The two licenses involved (1) a flash X-ray system to an end user suspected of engaging in proscribed nuclear activities and (2) a low-speed computer to an end user which at the time was a known diverter. Some agencies voting for denial at the SNEC wanted these licenses escalated to a committee of the National Security Council, but Commerce approved them without escalation because it did not recognize the authority of the National Security Council committee. Commerce believed that agencies voting for denial should have escalated these licenses to ACEP. At the time, the ACEP escalation process was informal--it had not yet been established by regulations.*18

COMMERCE DOES NOT REFER ALL LICENSES TO ENERGY THAT IT SHOULD

Most of the nuclear-related dual-use licenses Commerce decided without Energy review did not have to be referred because they were covered by Energy delegations of authority. However, from October 1987 to May 1992, Commerce approved about 130 licenses for NRL items going to Special Country List destinations without obtaining Energy review, even though no Energy delegations of authority applied.

Of these NRL licenses, more than three-quarters were for computers going primarily to Argentina, Brazil, India, Israel, and South Africa, and in a small number of instances to Iran and Iraq. Additionally, 23 of these computer licenses involved end users on Energy's Nuclear Proliferation Watch List, including some end users listed as "sensitive" because of their possible involvement in proscribed nuclear activities. The other NRL licenses involved spark gaps, thyratrons, oscilloscopes, and other items, some to sensitive Watch List end users.

In addition to the NRL licenses, Commerce approved without Energy review nearly 1,500 licenses for non-NRL items going to end users on Energy's Watch List, even though regulations require Energy review of non-NRL licenses involving nuclear end users. The large majority of these licenses were for Argentina, Brazil, India, Israel, and South Africa, although 26 were for Iraq, Pakistan, and Iran. Of these licenses, about 500 were for sensitive end users.

REASONS GIVEN FOR NON-REFERRAL

Commerce officials acknowledged that Energy should have been consulted on most of the approximately 130 NRL licenses. According to these officials, an inexperienced licensing officer was responsible for a large number of the computer licenses that were not referred as required. Additionally, most of the licenses were reviewed prior to the adoption in October 1991 of a "two-person sign-off rule," whereby the decisions of one licensing officer must be reviewed by another licensing officer.

In the case of the non-NRL licenses, Commerce officials told us they had the discretion to decide which licenses involving Watch List end users should be referred and which should not. They said that although Energy's initial intent in providing the Watch List was that all licenses would be referred, this policy had eroded over time because of repeated messages from Energy that it did not wish to see certain licenses. As a result, Commerce licensing officers now use the Watch List as a general guide and do not routinely forward all license applications involving Watch List end users to Energy.

Nonetheless, Commerce officials acknowledged that some of the non-NRL
licenses did involve end users of "true" proliferation concern and
should have been referred to Energy. An Energy licensing official
agreed with Commerce that many of the non-NRL licenses should have
been referred, although he understands why Commerce believes it has
some discretion. However, the Energy official told us that Commerce
improperly exercised that discretion, particularly for the licenses
for end users listed on the Watch List as sensitive. Officials from
both agencies acknowledged that the referral policy for licenses to
Watch List end users should be clarified.

IMPACT OF COMMERCE'S FAILURE TO REFER LICENSES

Commerce's failure to properly refer licenses increases the risk that a U.S. export could support a nuclear proliferation program. Energy or other reviewing agencies could, if given the opportunity, vote to deny some licenses Commerce fails to refer.

On the basis of our analysis, we believe many of the approximately 130 NRL licenses would have been approved by Energy had they been referred. For instance, of the computer licenses, most are similar to cases that were approved by Energy. However, seven of them, based on similar past cases, could have been escalated to the SNEC, where five might have been approved and two might have been denied depending on the end use, the specific facilities receiving the exports, or other policy considerations. Analyzing the other NRL licenses is more difficult because we were unable to assess the technical significance of the items; however, other licenses for such items have been approved by Energy under similar circumstances.

We cannot be certain whether any of the approximately 500 non-NRL licenses involving sensitive end users would actually have been denied if Commerce had referred them. However, we found that Energy and the SNEC had recommend denial of a small number of similar licenses in the past, a few involving sensitive end users that were also listed among the approximately 500 licenses Commerce did not refer to Energy.

REFERRALS TO THE SNEC

Energy has discretion in deciding which license applications it should forward to the SNEC. Two agencies on the SNEC, the Department of Defense and the ACDA, have expressed concern over Energy's exercise of its discretion and the lack of visibility over licenses not referred, leading to proposals to reform the review process.

ENERGY REFERRAL GUIDELINES AND ACTIONS

Regulations generally require that if Energy believes Commerce should deny a license, it must refer that license to the SNEC. However, according to an Energy official, in some instances Energy does not refer licenses to the SNEC that it wants denied because the SNEC already has a policy that such licenses should be denied.*19

If Energy believes a license should be approved, it reviews SNEC referral policies to decide whether the license application should be referred. Generally, the SNEC has directed Energy to refer licenses for which there is a risk of diversion to nuclear end uses, in addition to certain licenses for specific end users. Energy officials told us they also refer other licenses that they would recommend be approved if they believe other SNEC agencies would want to review them.

Under these guidelines, from fiscal years 1988 to 1992, Energy referred to the SNEC only 26 percent of the license applications it received from Commerce for end users listed as sensitive on its Nuclear Proliferation Watch List. Of the licenses not referred by Energy, 79 percent were ultimately approved, less than 1 percent were denied, and the remainder were generally returned without action.

Most license applications for sensitive end users that Energy referred to the SNEC involved NRL items; few non-NRL licenses for sensitive end users were referred. According to an Energy official, license applications for sensitive end users that were not referred to the SNEC generally involved items that would not contribute to a country's nuclear program. In addition, Energy officials said these licenses posed no risk of diversion because they were intended for use in non- proscribed activities.

DEFENSE AND ACDA CONCERNS ABOUT ENERGY REFERRALS

Although the State Department representative to the SNEC said he was satisfied with Energy referrals, Defense and ACDA officials stated that not all nuclear- related dual-use licenses that could be of concern to various SNEC agencies are being referred to the SNEC. In addition, Defense and ACDA officials said they have only a limited ability to hold Energy accountable for its licensing recommendations because they lack access to licensing information.

At our request, Defense and ACDA representatives to the SNEC reviewed a list of licenses that in June 1991 Energy recommended be approved without SNEC review. They identified several licenses that they believed warranted such review.

Defense and ACDA officials stated that although they would not necessarily have voted to deny all of these licenses, they were concerned that Energy reviewed them without interagency consultation. They believe Energy has a policy perspective that could lead it to recommend approval of some licenses that Defense and ACDA want denied. For example, according to Defense officials, Energy emphasizes technical factors, such as the sophistication of the item and its appropriateness for the stated end use, while downplaying political developments within a country or the statements of its leaders. Defense officials also believe that Energy does not fully appreciate the potential utility of low-technology NRL items or non-NRL items to nuclear proliferation activities in less developed countries.

Defense's and ACDA's complaints regarding the SNEC agenda stem in part from the fact that these agencies vote to deny nuclear-related dual-use licenses more often than other agencies. For example, for the licenses escalated to ACEP between March 1991 and July 1992, Defense and ACDA voted at the SNEC for denial 63 and 50 percent of the time, respectively, while Energy voted for denial 47 percent of the time, Commerce 13 percent, and State 8 percent. Defense never voted to approve any of these licenses; in those cases where it did not to vote to deny, it decided to defer its position until further discussion at the ACEP.

Although technically all agencies are allowed to place license applications on the SNEC agenda, in most instances only Commerce and Energy have the ability to do so because they are the only agencies with access to all nuclear-related dual- use license applications.*20 Other SNEC agencies can request that Energy refer certain types of licenses, but Energy will only do so if directed by a consensus vote at the SNEC, which is generally difficult to achieve.

Other SNEC agencies are also limited in their ability to hold Commerce and Energy accountable for their licensing decisions because they rarely are given information on licenses decided without interagency review. Although guidelines from the SNEC chairman recommend that Energy report periodically to the SNEC on licenses that are approved, Energy officials said they provide such information to the SNEC only on an ad hoc basis because of resource constraints and because in their view it is unclear what would be gained by distributing such data. Our review confirmed that Energy has not provided the SNEC with information on licenses approved without SNEC review since October 1991.

PROPOSALS FOR REFORMING THE ENERGY REFERRAL PROCESS

To better ensure that the right licenses reach the SNEC agenda, Defense proposed in February 1992 that Energy refer to the SNEC all licenses for items controlled multilaterally by the Nuclear Suppliers Group when destined for certain countries that are not in this group.*21 The SNEC did not accept Defense's proposal because representatives from Commerce, State, and Energy did not agree that these types of licenses were of sufficient concern to warrant SNEC review. Defense also proposed that Energy provide information on all approved licenses not reviewed by the SNEC, but the SNEC rejected this as well.

To provide more transparency to the process, ACDA has proposed that all licenses referred from Commerce to Energy be referred simultaneously to other SNEC agencies. Commerce opposed this on the grounds that (1) it would be duplicative and costly, and could add to license processing time, if each agency reviewed every license and (2) it is of questionable value given that other SNEC agencies do not possess expertise or intelligence information beyond that available at Commerce and Energy.

CONCLUSIONS

Although Commerce referred most licenses in accord with Energy delegations of authority, from October 1987 to May 1992 not all licenses were referred to Energy as required. Commerce's failure to refer some licenses to Energy as required increases the chance that a license will be improperly approved for lack of adequate technical review. Commerce's adoption of a two person sign-off rule should partially address the cause of its failure to refer some NRL licenses. However, there is no agreement between Commerce and Energy on the proper use of the Nuclear Proliferation Watch List in making referral decisions. Until Commerce and Energy take steps to clarify what licenses should be referred, Commerce may still fail to refer some non-NRL licenses for sensitive nuclear end users, even though regulations require referral of such licenses and Energy wishes to review them.

Although Energy has discretion in determining which licenses to forward to the SNEC, its practice of seeking interagency consultation on only a minority of licenses for sensitive end users raises concerns that other agencies may be precluded from bringing their policy perspectives to bear on important licensing decisions. During our review, Defense and ACDA representatives to the SNEC identified a number of licenses--some involving nuclear-capable items destined for end users of proliferation concern--that they believed warranted SNEC review but were not placed on the SNEC agenda. These agencies are limited in their ability to influence which licenses Energy selects for interagency review and are unable to hold Commerce and Energy accountable for their review decisions because they lack consistent access to licensing information.

RECOMMENDATIONS

We recommend that the Secretary of Energy reach agreement with the Secretary of Commerce on guidelines for referral of licenses involving end users on the Nuclear Proliferation Watch List.

To ensure that the most sensitive licenses are referred to the SNEC, we recommend that (1) the Secretaries of Commerce and Energy provide periodic reports to the SNEC on those nuclear-related dual-use licenses approved without interagency review and (2) the Secretaries of Commerce, Energy, State, and Defense and the Director of the Arms Control and Disarmament Agency (the voting members of the SNEC) use licensing information contained in these reports to establish mutually acceptable guidelines for selection of licenses for interagency review.

METHODS USED TO DETER AND DETECT DIVERSIONS HAVE LIMITATIONS
Chapter 5

The U.S. government's methods for deterring and detecting diversions of nuclear- related dual-use items have several limitations. First, selection criteria for pre- license checks and post-shipment verifications do not provide sufficient focus to ensure useful selection of nuclear-related inspections. Second, the methods used to perform these inspections hamper their effectiveness. Finally, the U.S. government does not systematically verify compliance with government-to- government assurances on the use of nuclear-related dual-use items because they are diplomatically negotiated agreements intended to carry the weight of an official commitment.

FEW NUCLEAR-RELATED DUAL-USE LICENSES ARE SUBJECTED TO INSPECTION

Only a small proportion of the nuclear-related dual-use licenses referred to the Department of Energy have been subjected to PLCs and PSVs. During fiscal years 1991 and 1992, Commerce conducted PLCs for 221 (2.6 percent) of the 8,370 nuclear-related dual-use licenses referred to Energy. During the same period, 56 PSVs were conducted on already exported items.

More than half of the PLCs and PSVs were conducted in the eight countries of particular proliferation concern. Figure 5.1 shows the distribution of PLCs among the eight countries, the other 28 countries on the Special Country List, and all other countries.

Figure 5.1: Geographic Distribution of Nuclear-Related Dual-Use PLCs (Fiscal Years 1991-92)

(See figure in printed edition.)

Table 5.1 shows the actual number of inspections (both PLCs and PSVs) conducted in each of the eight countries. Brazil, India, Israel, South Africa, and Pakistan accounted for the highest volume of checks.

Table 5.1

Nuclear-Related Dual-Use Inspections Conducted in Countries of Proliferation Concern (Fiscal Years 1991-92)