Top Ten List for the 106th Congress

Make U.S. Arms Exports More Accountable and Less Costly to Taxpayers


In a February 1995 fact sheet, the White House cited "control, restraint and transparency" as critical elements of the Clinton administration's arms transfer policy. The following year, Congress passed H.R. 3121, a law that increased the level of openness around U.S. arms exports. Listed below are ten steps Congress could take this year to build on that progress and further assist the Clinton policy.

The ten reforms outlined in these pages--

  • promote American participatory democracy by increasing the amount of information available to Congress, the media and the public on U.S. arms exports and related policies;
  • streamline U.S. weapons export programs, making them easier to monitor and oversee; and
  • save millions of dollars in government subsidies.

 

Prepared by the Arms Sales Monitoring Project of the Federation of American Scientists
307 Mass. Ave. NE, Washington, DC 20002; tel--202/675-1018 or 1016; www.fas.org/asmp


Issue 1. Eliminate the Defense Export Loan Guarantee Program.

Background/rationale. The Defense Export Loan Guarantee (DELG) Program was established in 1996 to provide up to $15 billion worth of guaranteed loans to 39 qualifying countries for the purchase of U.S. military wares, theoretically at no net cost to the U.S. government. As an auto-financing program, the DELG Program requires borrowers to pay high fees to cover the risk of a loan default and the costs of running the program. As a result, the only loan granted since its inception was $17 million to Romania, and the program is losing money.

A December 1998 General Accounting Office (GAO) report outlined several problems with the DELG Program's financing mechanism, saying it was only cost effective for the most risky of the eligible countries. Moreover, while the defense industry fought for the program to increase their competitiveness in the international market, the GAO report concluded that the availability of a guaranteed loan may not be a key factor in the purchasing country's decision. While the Department of Defense wrote the GAO in December 1998 that it would propose legislation to terminate the DELG, Secretary Cohen now is trying to keep it running.

As it stands now, the DELG is costing the U.S. taxpayers hundreds of thousands of dollars a year be-cause there are not enough customers' fees to pay for the start-up and operational costs. The defense in-dustry's solution to the high fees which ward off potential users is to lower them substantially, passing on the costs to taxpayers. Less restrictive rules on auto-financing, however, would create yet another subsidy for the arms industry and for purchasing countries that could not otherwise afford pricey U.S. equipment.

Since 1990, U.S. taxpayers have footed the bill for around $10 billion worth of defaulted military loans, and the U.S. is currently owed another $14 billion in DoD guaranteed and direct loans, with $1 billion of that overdue. The U.S. government should not take on the burden of risk for another $15 billion of debt. Dismantling the DELG is therefore the only feasible solution.


Issue 2. Prohibit offsets on exports financed in whole or in part by U.S. military aid.

Background/rationale. Offsets are side-deals used by arms manufacturers to attract customers and clinch deals by providing some economic benefit back to the customer country. Typical offsets are the co-production of the weapon system or its components in the purchasing country, investment in the importing state's non-military industries, or assistance marketing the foreign country's goods and services in the United States or elsewhere.

According to the Department of Commerce, between 1993 and 1996, U.S. defense companies entered into new offset agreements valued at $15.1 billion in support of $29.1 billion worth of defense contracts. In other words, for every dollar a U.S. company received due to an arms sale associated with offsets, it returned 52 cents worth of offset obligations to the purchasing country. Organized labor and the sub-contracting base strongly oppose offsets because they often have a negative impact on employment in the United States.

Every year, the U.S. government gives away nearly $3.5 billion in Foreign Military Financing (FMF) grants and loans. Except for a portion of Israel's annual aid package, all of this aid must be spent on American-made weapons, meaning that such sales are not subject to international competition-the usual rationale for offsets. Nevertheless, current laws and policies do not prohibit offsets on FMF-related sales. In 1994, the General Accounting Office (GAO) examined 48 sales to the four largest FMF recipi-ents-Israel, Egypt, Turkey and Greece-over an unspecified time period. These contracts, valued at $11.6 billion and paid for with U.S. military aid, included offsets worth at least $4.7 billion, effectively increasing the assistance amount to $16.3 billion.

The GAO also reported that, according to knowledgeable Pentagon officials, "No other arms supplier has a program that provides a combination of grant aid and allows offsets." Therefore, "it is unlikely U.S. contractors would lose sales to foreign competitors if they could not provide offsets in sales funded with U.S. grant aid." As such, the GAO suggested that Congress consider amending the relevant laws "to prohibit the use of FMF grants [and possibly FMF concessional-rate loans] to pay for or request, re-quire, obtain or provide offsets in connection with sales of U.S. military goods and services." The Commerce Department has also called for a ban on offsets in sales financed with U.S. military aid.

Permitting offsets on sales financed in whole or in large part with taxpayer funds is grossly unfair to the general public, which is already being called upon to underwrite the development of the weapons being exported and to pay for the foreign government's purchase of the weapons. When offsets are permitted these deals, some American workers are also hurt as all or part of the manufacturing work is sent over-seas.


Issue 3. Repay taxpayers for public funds expended to research and develop weapons which are exported abroad and consolidate responsibility for collecting those funds.

Background/rationale. The Pentagon spends over $30 billion of public money annually on research and development (R&D) of weapons systems for U.S. forces. Beginning in the 1960s, the DoD had added a charge to both industry-negotiated direct commercial sales and to government-negotiated Foreign Military Sales (FMS) in order to recover part of the cost of developing the weapons. The fees averaged five percent of the weapon's value, and the recouped money was returned to the Treasury as general revenue (deficit reduction). In 1976, the requirement that these "recoupment" fees be added to Foreign Military Sales of major equipment was enacted into law (Arms Export Control Act, section 21(e)(1)(B)). A similar requirement was not legislated for direct commercial sales, but the practice was continued by successive administrations.

In 1992, the Bush Administration abolished recoupment fees on direct commercial arms sales. Since then, industry has argued that recoupment fees on FMS must be repealed as well since the fees render government-negotiated sales more expensive. The Pentagon is concerned that the lack of equal treatment between the two arms sales programs will encourage buyers to go the commercial route, which entails less government oversight.

A more fiscally sound way to restore equal treatment-and to channel buyers back toward government-negotiated sales-would be to reinstate recoupment fees on commercial sales. Recoupment fees are not a tax on arms exports; they are a reimbursement to taxpayers of hefty R& D costs which directly benefit U.S. arms manufacturers and foreign customers. Because arms manufacturers do not have to absorb R&D costs and the cost of establishing the production line on most exported goods-which were first produced for the Pentagon-they make a handsome profit on weapons exports. Because foreign custom-ers do not have to pay any portion of the weapon development costs-either in fees or in higher prices- they also receive a substantial benefit.

However, even the modest attempt to reimburse taxpayers on FMS sales often fails, according to recent GAO investigations. An October 1998 survey of just 30 such sales found over $183 million in uncol-lected R&D recoupment fees. An April 1999 memo by congressional auditors cited $152 million in costs that the U.S. Air Force (USAF) has not yet collected from Saudi Arabia associated with a single sale of 26 F-15s. The USAF and other military agencies that manage sales do not always follow proper procedures for reporting deliveries, and thus customers' FMS accounts don't get billed. The responsi-bility for timely collection of these fees should therefore be consolidated into a single agency, such as the Defense Security Cooperation Agency. The GAO has estimated that if recoupment fees were charged on all arms sales, at least $500 million per year would be returned to the Treasury.


Issue 4. Amend Section 655 of the Foreign Assistance Act to include data on commercial sales deliveries and place the "655 Report" on-line.

Background/rationale. The "655" annual report on U.S. arms exports-reinstated in the Foreign Assistance Act in fiscal year 1996-provides the most timely and comprehensive account of U.S. arms sales and give-aways. Most arms exports fall into one of two categories (see idea #9): Direct Commercial Sales (DCS), which are negotiated directly between the defense firm and the importing state or company, and Foreign Military Sales (FMS), which are negotiated between the manufacturer and the Pentagon, on behalf of a foreign government.

Exporters using the Direct Commercial Sales program must receive an export license from the Depart-ment of State's Office of Defense Trade Controls. These licenses are valid for four years, as the actual sale may not go through immediately (and in many cases, the deal may not go through at all). The State Department is currently informed when licensed exports are actually shipped to a foreign customer by Customs officers, who collect shipping documents on arms exports and send them back to State. Since this information arrives slowly and unreliably, the State Department only includes in the 655 Report in-formation on approved licenses, not actual shipments of DCS goods. The Pentagon, on the other hand, reports on actual shipments of weapons in its section of the 655 Report.

While it is useful to know the amount of arms State will license for export, one cannot calculate the total quantity of U.S. arms transfers without knowing the amount of DCS actually exported. Many analysts actually leave out DCS sales altogether when reporting on U.S. arms exports because of the difficulty of obtaining timely, reliable reports on DCS shipments. The State Department has issued an average of $25 billion worth of DCS export licenses for each of the past two years, and the former Arms Control and Disarmament Agency estimated that almost half of these licenses (about $10 billion/year) are actually exported. Thus, the absence DCS data severely distorts the picture of U.S. arms exports.

The State Department can overcome this difficulty by requiring companies to send a copy of completed contracts or shipment papers directly to the State Department. This information would therefore skip the Customs middleman and go immediately and reliably to State. With or without this method, the State Department should be required to present as much information as possible on DCS deliveries in the 655 Report.

In addition, the U.S. government asserts that it has one of the world's most transparent arms sales pro-grams. But the State and Defense Departments have made the 655 reports increasingly difficult for the public to obtain. Moreover, these reports are several hundred pages long, meaning that copies which are sent to the public waste an enormous amount of time and paper in the copying process. For complete transparency on U.S. arms transfers, the entire "655 Report" should therefore be put on a government web site.


Issue 5. Amend Sections 36(a) and (b) of the Arms Export Control Act (AECA) and Section 655 of the Foreign Assistance Act to require notification and reporting on offsets.

Background/rationale. Little information is available about U.S. arms exporters' offset agreements with foreign customers (see idea #2). These deals provide economic returns, either directly or indirectly, to the purchasing country as a condition for the sale. But offsets are not taken into consideration during the congressional arms sales approval process, nor are they included in the annual reports to Congress on U.S. arms exports. Offsets--combined with heavy government subsidies in support of arms exports--lower the net economic gains provided by arms exports. Yet economic gains are one of the key justifications used by defense industry proponents to promote high levels of arms exports.

Sections 36(a) and (b) of the Arms Export Control Act (AECA) require the administration to notify Congress about sales over $14 million for "major defense equipment" and over $50 million for all other conventional weapons. Congress then has 30 days to pass legislation opposing such transfers (15 days for NATO members) or the deals will go through. Yet there is no information on offsets to balance the financial picture of seemingly lucrative sales. Congress is therefore being denied the capacity to make a fully-informed judgement on the desirability of these sales. These laws should therefore be changed to require that descriptions and values of offset deals be made public at the time Congress is notified of pending arms sales.

In addition, the Foreign Assistance Act's requirement for an annual "655 Report" on U.S. arms transfers should be amended to require inclusion of information on offsets. Currently, the report presents detailed information on all weapons approved for export or shipped to foreign entities, leaving the reader with a slanted view of the economic impact of U.S. arms exports. The Commerce Department sends an annual report to Congress of aggregated offset information, but it does not include information on specific sales or offset deals. Including information about the type and value of corresponding offsets in the 655 Re-port and the Commerce report would provide a more complete and accurate view of this trade. Greater transparency on offsets will help belie the myth that arms exports are always good for American workers.


Issue 6. Hold hearings on arms export licensing, end-use monitoring programs, and conventional weapons proliferation.

Background/rationale. Congress has devoted a great deal of attention recently to the impact of U.S. exports on nuclear weapons-related proliferation; concerns about China warranted establishment of the "Select Committee on U.S. National Security and Military/Commercial Concerns with the People's Republic of China." Yet it is conventional weapons that are most likely to "boomerang" back in future conflicts and put American soldiers' lives at risk. However, Congress has not examined licensing and monitoring pro-grams for conventional weapons since 1994.

The U.S. has been exporting arms of ever-increasing lethality, many into regions of tension and conflict. Between 1994 and 1998, the U.S. has agreed to export more than $36 billion worth of government-to-government arms sales and has issued an estimated $95 worth of export licenses for conventional weap-onry. Export licenses for industry-direct arms sales in particular have increased dramatically, now aver-aging around $25 billion per year.

The level of technology being exported through U.S. weapons sales has never been higher. The United States has often been primarily responsible for accelerating regional arms races; for instance, introduc-ing next-generation air-to-air missiles in the Middle East. Now U.S. customers are demanding, and are rumored likely to get, the "source codes" for sophisticated weapons systems like the F-16 fighter jet, the classified computer program that runs the plane. Access to source codes would allow the owner to alter critical specifications, such as "friend or foe" designations.

At the same time, grave concerns have been voiced about the effectiveness of U.S. export controls. The Cox report demonstrated that Commerce-regulated dual-use export controls are fallible, and that U.S. companies sometimes intentionally circumvent governmental scrutiny when their own economic inter-ests are at stake. Several government reports have sharply criticized the State Department's management of its weapons export program, in particular citing inadequate end-use checks to protect against diver-sion or misuse of U.S.-origin arms. Even Canada, previously granted special privileges because of its close ally status, has been found to have illegally diverted arms to Iran.

Despite the risk of regional arms races, ill-advised technology transfers, and weapons misuse, there is no regular evaluation of the U.S. conventional arms transfer process. Congress can help solve this problem with regular and rigorous hearings on licensing programs, end-use monitoring of exported arms, and the overall impact of massive U.S. arms transfers on global conventional weapons proliferation. Required annual reports to Congress from the Defense and State Departments should be critically analyzed during such hearings to address concerns about the illicit traffic in arms, military technology transfers, and the use of U.S.-supplied arms in the commission of human rights abuses. An increase in Congress' over-sight role could also contribute valuable information to current efforts to reform military sales programs and revamp the EAA.


Issue 7. Amend Sections 36(b) and (c) of the AECA to require congressional notification of all small arms and light weapons exports.

Background/rationale. Small arms and light weapons are the leading killers in today's conflicts, replacing major weapons systems as the leading cause of fatalities in civil wars worldwide. Small, durable, and easy to use, they often end up being circulated from conflict to conflict on the black market. They are also the weapons of choice for repressive state security forces, paramilitary groups, insurgents, and drug traffickers. Congressional oversight on small arms sales is therefore especially important, but usually nonexistant.

Under Sections 36(b) and (c) of the Arms Export Control Act (AECA), Congress is notified of all arms exports worth over $14 million for "major defense equipment" and over $50 million for all other con-ventional weapons. Congress then has 30 days to pass legislation opposing such transfers (15 days for NATO members) or the deals will go through. Yet small arms sales usually fall under the high monetary thresholds established by the AECA and are only reported to Congress after the fact in the annual "655 Report" (see idea #4).

Sections 36(b) and (c) of the AECA should therefore be amended to require Congressional notification of all proposed small arms, light weapons, ammunition, and explosives transfers, regardless of value. While lowering the notification threshold for all arms might overwhelm Congress with large numbers of spare parts notifications, requiring notification of small arms and light weapons would place reasonable and much needed oversight on these transfers.


Issue 8. Amend Sections 502B and 581 of the Foreign Assistance Act and to include all military training programs, including those not primarily designed to train foreign soldiers.

Background/rationale. The Department of Defense trains foreign militaries through several different programs, some fund-ed by the Pentagon's budget and others by the State Department-administered foreign aid budget. The International Military Education and Training (IMET) program-with a budget rising from $22 million in fiscal year 1994 to $50 million for 1999-is the best known and most transparent of these programs. The Pentagon has historically used IMET to train foreign troops in the use of U.S.-supplied equipment and in U.S. military doctrine and tactics. Yet as Congress began to prohibit or place restrictions on IMET for governments with poor human rights records, including Indonesia in 1992, the Pentagon started to use other, less transparent, programs to train black-listed or problematic states. Programs have been developed to train foreign soldiers in counter-narcotics, counter-terrorism, and counter-insurgency, to name but a few. In many instances, soldiers trained under these programs have been accused of human rights abuses.

One way the Pentagon has escaped oversight and human rights criteria has been to use programs for which the official primary purpose is to train U.S., not foreign, soldiers. For example, the primary pur-pose of the Joint Combined Exchange Training program (JCET) is to train U.S. special operations forces on foreign terrain. In practice, however, foreign soldiers on site are usually trained in lethal combat skills along with U.S. troops. Indonesian soldiers were trained by U.S. foreign operations troops in the JCET program after IMET training was banned because of Indonesia's poor human rights record. Spe-cial Forces-known best for counterinsurgency operations and irregular warfare-also train African soldiers in "peacekeeping" under the five-year African Crisis Response Initiative, launched in 1996.

The increasing number of programs has made it easier for the Pentagon to avoid eligibility restrictions placed on original programs and has made it difficult for Congress and the interested public to know the extent of this activity or to over-see it adequately. For this reason, all foreign military training programs, including those for which the official primary purpose is not foreign training, should be subject to the same restrictions and reporting mechanisms.

Section 502B of the Foreign Assistance Act prohibits security assistance to states the government of which engages in a "consistent pattern of gross violations of human rights." This section refers explicitly to the International Military Education and Training Military programs, but not to other programs funded under the FAA (e.g., some counter-narcotics training, law enforcement training, and training equipment training purchased by foreign states) and or to training programs funded under the Pentagon's budget (e.g., other counter-narcotics programs, the School of the Americas, and JCET). The human rights criteria-which should also be strengthened-should be applied to all foreign military training programs.

As well, Section 581 of the Foreign Assistance Act requires an annual report on State and Defense De-partment-funded training programs, the foreign policy justification for these programs, costs, units trained, and the operational benefits to U.S. troops of such programs. The first version of the report was sparse on justification and benefits descriptions, preventing Congress from playing an effective over-sight role on some of the new and less well-understood programs. Also, some of the information (such as JCET details) is classified, preventing access by the concerned public. Given the potential for trained soldiers to abuse the skills taught by U.S. trainers, the entire report should be unclassified for maximum accountability.


Issue 9. Standardize U.S. arms export systems.

Background/rationale. The United States is the only arms exporter with two separate channels for selling weapons abroad-Foreign Military Sales (FMS) and Direct Commercial Sales (DCS). In the FMS program, the Pentagon (represented by the Defense Security Cooperation Agency) negotiates arms sales with foreign governments, buys the weapons from manufacturers and oversees shipments. DCS sales are brokered directly between arms manufacturers and foreign corporations or governments, and the State Department's Office of Defense Trade Controls licenses the exports. The two different arms sales systems are essentially competitors for foreign sales - a competition to the bottom in terms of oversight and restraint.

FMS have historically accounted for the majority of U.S. arms exports. In recent years, however, the dollar volume of DCS licenses has skyrocketed, with multi-billion dollar deals of sophisticated weapons cleared for export, as well as vast quantities of small arms. Buyers are turning to DCS because the com-mercial route is quicker, cheaper, more covert and entails less government oversight.

The Pentagon is much more open about FMS than the State Department is about DCS. Specific infor-mation on DCS (such as the manufacturer, items and value of the contract) is considered "confidential business information" and, while not classified, is unavailable to the general public. Information on ac-tual deliveries of weapons through this program is nearly impossible to come by (see idea # 4). Moreo-ver, Direct Commercial Sales--as the name implies--are treated basically as business deals. If the li-censing paperwork is filled out properly, and if there is no overriding foreign policy or national security reason to block an export, a license will be granted. By definition, the U.S. government performs less oversight on DCS than FMS (see idea #6).

The defense industry and State and Defense Departments have played regulatory differences between the two programs off each other to bring legal restrictions down to the lowest--and government assis-tance and subsidies up to the highest--common denominator. For instance, the Defense Department, stung by criticism of its slowness and bureaucracy in comparison to DCS, has pledged to improve its relationship with buyers and sellers by processing arms sales faster and more easily. The DoD is falling into the trap of becoming the advocate of sales it is supposed to restrict and regulate. Having two sepa-rate sales channels also increases the difficulty of accurately quantifying U.S. arms exports in a given year. DCS are routinely omitted from arms trade statistics because of the difficulty of obtaining accurate data (see idea #4).

Finally, having two separate sales programs--run by two entirely different bureaucracies--is unnecessar-ily costly. For all of these reasons, the State Department's licensing function for Direct Commercial Sales should be drastically altered or simply ended, and all U.S. arms exports should be run through an FMS-like program.


Issue 10. Ratify the OAS Convention against Illicit Manufacturing and Trafficking of Small Arms.

Background/rationale. The Inter-American Convention Against the Illicit Manufacturing and Trafficking in Firearms, Ammunition, Explosives, and Other Related Materials (known as the "OAS Convention") was signed by the U.S. government and 27 other states in November 1997. The Convention is a Mexican-led initiative that was initially aimed at stemming the flood of U.S. guns flowing south across the border. The Convention will impose stringent, uniform standards on weapons marking (at manufacture, import, and export), export controls, and import and export licenses.

The OAS Convention is a crucial first step towards stemming the illicit trade in small arms and light weapons in the Americas, which threaten U.S. security and political interests in the region. Hundreds of thousands of guns, rifles, and light artillery, most left over from the Central American wars of the 1980s, re-circulate through the hemisphere on the black market, fueling the drug trade and political and eco-nomic instability. The OAS Convention will make it easier for states in the Americas to trace such fire-arms from their illicit use to their place of origin. Provisions to aid border control and requirements for states to issue import as well as export licenses for small arms should also help cut down on this trade.

The convention was transmitted to the Senate on June 9, 1998, and awaits action by the Committee. While the Convention has already had the required number of ratifications to come into force, it will not be truly effective until the United States also ratifies. U.S. leadership, as always, sets in motion similar actions by other states that look to the United States for guidance.


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