STATEMENT OF SENIOR ADVISER JOHN D. HOLUM
BEFORE THE HOUSE INTERNATIONAL RELATIONS COMMITTEE
MARCH 28,2000

Thank you very much, Mr. Chairman, for the opportunity to appear before your committee to discuss the important topic of munitions export controls administered by the Department of State. From my perspective, the challenge of advancing U.S. Foreign Policy and National Security goals in an era of globalizing defense industries is daunting. As you well know, it has enormous currency in my building as well as in DoD.

The questions before us today are: How can American advanced technology transfers best support national, regional, and international security goals? What is the "correct" amount of technology transfer?

As you and the Congress at large appreciate, the regulation of arms for commercial export --both in terms of licensing and enforcement of compliance requirements -- is a complicated and often sensitive process involving billions of dollars of U.S. exports. Defense export licensing has important implications for the national security, economic security, and foreign policy interests of the United States, as well as the well-being of thousands of American companies and their employees.

Let me say at the outset that "controls" in terms of export regulation and enforcement is not a dirty word in this Administration. "Controls" for the State Department is a reminder of two things. First, that we in government have well-defined responsibilities and authorities aimed at ensuring defense trade is conducted in a manner that furthers U.S. foreign policy objectives and national security interests. Secondly, that U.S. companies have a substantial role in protecting U.S. security because we share some of our most sophisticated technologies with foreign countries and companies.

The State Department is committed to giving the regulation and facilitation of responsible defense trade the attention and the resources it deserves, and to improving the efficiency, timeliness and security with which we carry out these functions.

Three principal concerns dominate discussion of commercial arms sales: (a) the ability of the State Department to administer effectively munitions export licensing; (b) concerns about diversion or unauthorized use of U.S. defense exports; and (c) the desire among some quarters, U.S. and foreignf private and public sector, to lessen or relax current controls.

The stakes are high. Our success or failure to manage the technology revolution and changes in international defense trade will have broad implications for various countries' economic prosperity, as well as for their ability to support -or threaten -- regional and international stability. The proper and timely resolution of this problem is critical. It is imperative that our conclusions reflect broad U.S. foreign policy and national security goals and not simply defense industrial base considerations. I believe that the new shape of the part of my organization supporting this effort will make an important difference.

State Department's Legal Authority

Let me begin where the Administration's authority begins -with the law. The President's statutory authority, which has been delegated to the Secretary of State for arms transfers and retransfers derives from the Foreign Assistance Act and the Arms Export Control Act.

These laws stipulate that, under the authority of the President, the Secretary of State shall be responsible for "the continuous supervision and general direction of ...'exports under this Act ... to the end that sales, financing, cooperative projects, and exports will be integrated with other U.S. activities to the end that the foreign policy of the United States would be best served thereby." These statutory authorities are implemented through regulations, primarily the International Traffic in Arms Regulations, or ITAR. U.S. policy guidelines on arms transfers in turn derive from the President's Conventional Arms Transfer Policy, or CAT.

The current statement of CAT policy was approved in February 1995 and is the foundation of this Administration's approach to the role of arms transfers in U.S. foreign policy. Our CAT policy aims to strike the right balance between support to our friends and allies, the U.S. defense industrial base, our democracy and human rights objectives, and our regional stability and security goals. We try to prevent the transfer of technologies that exceed these requirements and may therefore threaten regional stability or contribute to arms races. We weigh all of these considerations in every arms transfer decision.

A good example of this effort is our work on small arms and light weapons. These items are low-tech and inconsequential in terms of directly threatening U.S. national security. Yet consider the foreign policy implications:

items that are as low-tech as machine guns, mines, mortars and grenades are responsible for most of the killing that has taken place in intrastate conflicts since the end of the Cold War.

In fact, small arms and light weapons were the only weapons used in 46 of the 49 regional conflicts that have occurred since 1990. In sub-Saharan Africa, the AK-47 is virtually a weapon of mass destruction. In Latin America, and the Balkans, small arms and light weapons have exacerbated.and prolonged conflicts, undermined peace agreements, contributed to regional instability, facilitated crime, and have hindered economic and political development.

At the other end of the technology spectrum, our decisionmaking aims to protect the U.S. technological edge. We take into account nonproliferation objectives in an attempt to control the ultimate possessor and end user of U.S. manufactured advanced weapons. The risk of diversion of advanced weapons into the hands of rogue state and non-state actors grows every day. We must use all the tools at our disposal to guard against an upward spiral of conventional arms acquisitions with destabilizing consequences. Our most effective tool in this quest to date has been a comprehensive defense trade control system. We remain convinced that the existing export controls system provides essential tools for advancing U.S. foreign policy, and must be preserved.

Globalization

We are mindful of the changes that have taken place in the defense marketplace as a result of globalization. We recognize that technology advances and political developments have altered the international environment substantially over the past decade.

As a result, it is imperative that we in the export control business proceed quickly to acquire sufficient human resources, streamline our processes, and adopt modern business practices. These are the steps that will allow us to properly balance:

The opportunities afforded by globalization and commercialization to enhance the military aspects of national security, while
avoiding or mitigating possibly deleterious impacts of globalization and commercialization.

A ninety-five percent reduction in non-Middle East security assistance funds, declining investment in defense R&D and a two-thirds reduction in procurement since the end of the Cold War have accelerated a number of underlying trends affecting U.S. arms transfer policy and have made weapons transfers, for many of our security partners, the new "Coin of the Realm" in defense relations with the United States.

Once the exclusive domain of governments, defense trade is evolving into a vibrant commercial enterprise. Deregulation and global competition are compelling defense industries to consolidate via mergers, acquisitions and joint ventures on an unprecedented scale. At the core of this global integration is a technology revolution that has increased dependence on information-based war-fighting capabilities.

A diffusion of advanced dual-use technology, the commercialization of formerly military technology, and 'the growing reliance of militaries on commercially developed technologies has made for an increasingly permissive and sophisticated conventional arms market. Major suppliers today rely on the export of arms as a means of not only preserving national industries but also as a way of funding next generation systems. As more countries seek to either develop or acquire advanced technologies and capabilities, they are encouraged in their quest by a "buyers" market.

Buyers are demanding. They regularly receive increasingly sophisticated technology, as well as financial concessions. We are often faced then with the dilemma of wh-ether or not to sell sensitive technology before other arms suppliers can. The problem is exacerbated by some foreign suppliers offering incentives to buyers - offsets, release of production technology, transfers of state-of-the-art systems - to try to counter U.S. market dominance.

It is also true that the USG has its own strategic interests in arms transfers - namely to promote interoperability with our key allies and friends, to help them maintain some degree of technological parity in defense capabilities, and to protect the viability of our defense industrial base.

We recognize that defense industrial cooperation can help both U.S. and allied defense establishments spread the fiscal
burden of new system development and production. This is a significant element in the United States Government's ' commitment to the NATO Defense Capability Initiative (DCI), for example. This initiatives is among those broad objectives of the USG designed to address the challenge of maintaining allied force interoperability in this era of rapid technological change.

Globalization poses tremendous challenges for the USG policy community. How can we effectively control items in this environment, while enabling necessary technological cooperation? Many argue that defense trade today has become so globalized that controlling it is both hopeless and counterproductive. They would say the U.S. should simply abandon our export control system - cast it off as an outdated relic of the Cold War.

Others contend that the U.S. defense trade controls system today is non-functional and needs to be rebuilt from scratch. They would suggest focusing only on controlling especially sensitive technologies, while permitting essentially unrestricted commerce in so-called "low risk" technologies.

In my view, neither argument is correct.

However, it must be a system that can quickly arrive at the proper answer that will get the right stuff, to the right place, on time. That is where we are headed now.

A comprehensive export control system is needed - now more than ever - to protect our national interests in an international security environment that is increasingly unpredictable. I believe that what is required is a reformist approach that recognizes - and takes due account of - the political, military and technology realities of globalization.

We are convinced that the existing defense trade controls system is flexible enough to enable us to adapt to these new demands. Modifying or adapting the system so that it remains viable in this era of globalization is a top priority for the State Department and one which we are committed to addressing in a timely, but carefully considered way.

Whatever changes we may ultimately decide to make must not compromise the underlying'purpose or the essential integrity of the existing system. Despite resource constraints, we are now in the process of examining munitions export controls to look for ways to expedite the review of licenses, especially for close allies. We are confident it will be possible, within the existing defense trade controls system, to facilitate and enhance.defense industrial cooperation with our allies without sacrificing necessary controls. I am pleased to report that we are already making great progress in this effort.

State Department Resources and Capabilities

The Department's Office of Defense Trade Controls (DTC) provides advice to U.S. persons involved in the manufacture, export, temporary import, and brokering of defense articles and defense services. On an annual basis, DTC, in administering the International Traffic in Arms Regulations (ITAR), reviews about 45,000 license applications or other requests to export or temporarily import defense articles or defense services. The value of the authorizations provided to the U.S. defense industry averages about $27 billion. The average processing time in Fiscal Year 1999 for completing the review of license applications that were not referred to other offices and agencies (some 75 percent of the cases received) was 24 working days; processing time for cases staffed to other agencies averaged 98 days.

These timelines include over 130 cases, representing about one-third of the total dollar value of all authorizations, that required prior notification to the Congress pursuant to Section 36(c) of the Arms Export Control Act (AECA). Defense trade authorized by DTC is overwhelmingly concentrated among a small number of U.S. friends and allies (i.e.: about 85 percent of total authorizations are for NATO, other Western European countries [such as Sweden and Finland], Japan, Australia, Taiwan, South Korea, Israel, Egypt and GCC states [such as Saudi Arabia]).

DTC cooperates closely with law enforcement authorities to ensure compliance with the AECA and the ITAR, both at home and abroad. DTC personnel regularly assist Customs, U.S. Attorneys, and Justice in investigations and trial preparation, and frequently serve as expert government witnesses at trials. In the area of civil enforcement, in FY-99, DTC handled about 175 voluntary disclosure case from the U.S. defense industry and about 50 referral cases from other sources involving violations of the AECA/ITAR.

In all cases DTC works to ensure corrective action has been taken by industry, and over the years a substantial number of cases have resulted in civil penalties utilizing administrative measures such as debarment from participation in U.S. defense trade, insistence on comprehensive compliance programs subject to independent audit, and punitive fines. A substantial number have also resulted in criminal prosecutions. DTC also administers an extensive watchlist containing parties of concern and other relevant information for use in reviewing export licenses, as well as a global end-use verification program ("Blue Lantern") that encourages foreign government and private sector compliance with U.S. law and regulations. Both of these programs are widely recognized by oversight bodies (e.g., Office of the Inspector General, General Accounting Office) as effective measures in helping ensure the application of appropriate controls over defense exports.

This is in marked contrast to the State Department munitions export control function that was described a number
of years ago by the General Accounting Office as "a paper-mill, the focus of which was on approving licenses, not on enforcing
laws." State, however, wants to do much better. We welcome in particular the funding that the Congress has directed to
supplement DTC staffing and operations. Of the $9 million provided in Fiscal Year 2000, $5.5 million has been allocated
for American salaries, in part to fund 23 additional full-time positions. We are upgrading a number of key positions, and we
are working hard to fill remaining vacancies.

An additional $1.5 million is being used to fund ongoing contracts for support personnel and computer hardware purchases. The remaining $2 million is being used for new contract personnel, to support communications satellite and firearms licensing and reinforce compliance efforts, computer hardware and software purchases to accelerate electronic licensing, development of officer training aids, and travel (for audits, end-use monitoring, and industry education/outreach). We believe that with successful recruitment of personnel and establishment of these new programs, this level of funding will be sufficient to meet our statutory mandates, and that average license review timelines might be shortened to 10-12 days for cases entirely handled internally by DTC, and 60-65 days for staffed cases.

Diversions and Other Unauthorized Munitions Exports

Diversions and unauthorized re-transfers of U.S.-origin defense exports are of particular concern to the Department. Many recipients of U.S. defense exports are required to seek U.S. approval prior to the re-transfer of a U.S. export, and U.S. law provides for criminal and civil sanctions for retransfer violations. U.S. prosecution (both domestic and foreign) has been vigorous.- The Department, during recent years, has intensified its monitoring and review of alleged retransfers and diversions.

In 1993, the Department developed, with oversight of senior management, a formal process to make decisions on reports to Congress regarding unlawful use or transfer of U.S.origin defense goods, services, and technologies. When positive determination about allegations is made, coordination .among relevant bureaus is initiated to conduct Congressional consultation and notification.

A specific unit within DTC (the Research and Analysis ,Branch, or RAB) was created and charged with leadership in both identifying "reliable information" regarding such diversions or unauthorized transfers and in preparing the required notifications to Congress. To ensure effective execution of these responsibilities, RAB works closely with the intelligence Community, the U.S. Customs Service, the Defense Department, State's office of the Legal Adviser, Department geographic.and policy offices, and DTC colleagues performing licensing and compliance functions. The end-use check program su pplements this effort.

DTC has generally handled 50-90 cases annually that typically involve,a substantial number of potential Section 3 Congressional notifications, as well as diversion matters. In many cases, bilateral dialogue has proved fruitful. We have seen, for example, enhanced Israeli compliance with U.S. controls. On the other hand, we remain concerned that a brisk trade in "gray market" arms for Iran continues, particularly in aircraft and armored vehicle parts, and sophisticated military electronics.

DTC analysis has demonstrated notably that, in addition to transshipments from the U.S. to Iran through middlemen in Europe and the Far East, there is a disturbing trend concerning control over military surplus disposed overseas by NATO countries and possibly U.S. defense depots. Unauthorized transfers that have resulted in the transfer of militarily significant technology to China are examples of other activity with which we have considerable concern. While the Administration did not agree with all of the analysis in the Cox Committee Report, it shares the common objective of ensuring that U.S. national secrets are protected and that our technology is not diverted for military purposes. We also specifically agree on the need to ensure that the launch of U.S.-manufactured civilian satellites by China or any other foreign country does not inadvertently transfer missile technology.

As required by the National Defense Authorization Act for Fiscal Year 1999 (NDAA), satellite licensing jurisdiction was transferred to the Department of State on March 15, 1999. We have busily implemented specific, enhanced controls for the export of satellite and satellite related technology, and, following consultations with the defense industry, the ITAR has been amended in order to reflect the jurisdictional change and establish NDAA-mandated procedures that enhanced scrutiny of export license applications.

State'Department comsat licensing since March 15, 1999 has included over 900 interagency staffed cases, taking an average of slightly more than 80 calendar days to process (including time out with DoD and time to obtain Missile Technology Control Regime assurances). There were about 300 cases that were not staffed to other agencies for which the average processing time was 25 days. Fourteen cases required Congressional notification.

The Secretary of State, in her January 1999 rep-ort to the Congress concerning NDAA implementation, established, with Defense, a goal of "90 working days" for acting on satelliterelated munitions export requests, exclusive of cases raising substantial policy issues or major sales requiring notification to Congress, and assuming the availability of additional financial and personnel resources. Clearly, even with the vigorous license review mandated by the NDAA, the "90 working day" goal has been generally met or bettered. We expect these processing times to decrease even further as a result of the 2000 State Authorization Bill, which provides for a new commercial satellite regulatory regime.

Pressure for Fewer Munitions Export Controls

During the past several months, we have seen a number of proposals that are aimed at reducing the license review times, increasing efficiency by placing greater emphasis on an electronic control process, and reducing the types of defense trade transactions for which exporters must now seek USG authorizations. In this context, there has been extensive discussion with the Defense Trade Advisory Group for U.S. industry perspective, the Department of Defense and interested U.S. agencies.

The Department of State is exploring a number of ideas to improve export licensing efficiency and effectiveness. This includes ideas in general areas of:

a. "'Umbrella" approaches, such as a global cooperative project license when there are programs covered by a government-togovernment or defense agency memorandum of understanding which, along with related documentation, sets forth detailed parameters for bilateral cooperation;

b. Special handling for cases associated with particularly important programs such as the Defense Cooperative Initiative with NATO allies; and

c. Streamlining of retransfers for NATO, Australia and Japan.

d. Extending the duration of certain types of licenses.

Additionally, the State Department would be supportive of more extensive Department of Defense use of licensing exemptions that currently are provided in the ITAR. We believe that better use can further interoperability, coalition warfighting, and other national security objectives.

A major issue that has arisen in the context of our work on licensing reform is whether to extend regulatory provisions like the Canadian ITAR exemption to countries willing to align their export controls with ours. Such a step would, in effect, exempt defined categories of defense exports to specific countries, from USG licensing.

The question of whether or not to exempt categories of defense technologies that take steps to align their export control systems with us raises many difficult legal, regulatory, and policy issues. Strong arguments are being raised on both sides of the case. Secretary Albright as chief manager of defense export controls under the Arms Export Control Act is consulting with her colleagues considering these issues before coming to a decision.

Today's hearing is timely, in that it will enable me to convey to the Secretary the views of the members of this Committee.

Underlying many of the reform proposals is a common appreciation that review of licenses supported by voluminous hard-copy documentation can be cumbersome and that reduction of this material to an electronic format is highly desirable. The State Department is working hard with DOD to meet this goal, and we believe that in the near future much of the information we collect and-disseminate in the licensing process can be handled via an electronic medium.

Likewise, we are hotly pursuing the electronic collection of actual export shipment data under our Direct Shipment Verification Program and expect in the relatively near future to promulgate regulations that will institutionalize this program throughout the U.S. defense industry. This system's development will be a considerable boon to our analytical capabilities when reviewing license applications, as well as our enforcement efforts.

We also believe that a "major program License" proposal made by the State Department, which would facilitate licensing by reducing the number of hardware licenses for major commercial programs and providing a longer duration for the licenses in question, is a type of initiative likely to be beneficial to commercial exports, while protecting our policy interests.

Our aim in these efforts is to develop a plan for reforming and adapting defense trade controls that will serve all of us well for years to come. I need to emphasize that these are ideas under discussion within the Administration and that no final decisions have been made. As soon as we have an Administration position, we will consult with Congress.

Conclusion

In conclusion, the State Department is mindful that every time we approve the transfer of a weapons system, we must be confident that the transfer strikes a good balance among the various goals and criteria of our conventional arms transfer policy.

Individual defense companies can judge success solely based on their total sales. The government does not have this luxury. DoD procurement officials may understandably judge success based on the effect on unit costs in U.S. procurement. The government as a whole-must take a broader view. Regardless of the value of U.S. arms sales, our success must be judged by our contribution to meeting U.S. foreign policy and national security goals, including theenhancement of international peace and stability.

This involves taking various objectives and considerations into account. We seek to enhance the ability of the U.S. defense industrial base to meet U.S. defense requirements in a secure and economical way. We also must ensure that our military forces can continue to enjoy a technological advantage over potential adversaries. But we must also be wary of inadvertently providing military means to future U.S. adversaries or combatants in unstable regions that will contribute to violence and regional instability.

Managing our transfer policy clearly requires a government-wide effort. The people in this room have significant expertise that must be brought to bear on the arms transfer review process - not only on the technical aspects of weapons proposed for transfer - but on regional dynamics, including states' vulnerabilities, insecurities, perceptions, motives, and needs.

I look forward to working with you, both personally and through my staff, on advanced technology and U.S. arms transfer decisions that look ahead to the future - decisions that take account of the trends in the global security environment, as well as in the global arms and technology marketplace.

Many of these decisions are not easy. Finding the right balance often requires close interaction between Congress, the Administration and industry.

we want America to maintain its predominance. We will do our part to achieve that objective.

Mr. Chairman, members of the Committee, I appreciate your attention and will be happy to answer any of your questions.