U.S. Senate Republican Policy Committee
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No. 19 August 14, 2001
S. 149 -- The Export Administration Act of 2001

Calendar No. 26

Reported from the Committee on Banking, Housing, and Urban Affairs, on April 2, 2001, with amendments, by a vote of 19-1 (Senator Shelby voted no). S. Rept. 107-10; additional views filed.

NOTEWORTHY

HIGHLIGHTS

According to the report, this new authorization bill establishes an effective, modern framework for export controls by reforming and replacing the Export Administration Act of 1979, a statute that authorizes the President to control the export of dual-use items for national security, foreign policy, and short-supply purposes. The bill seeks to balance three important U.S. policy interests: the national security interest in controlling the export of dual-use goods, services, and technologies; the economic/national security interest in promoting U.S. exports and maintaining U.S. leadership in promoting such exports; and foreign policy interests in promoting international peace and stability. As such, the bill seeks to update export controls to reflect the current world situation by recognizing the changed nature of the threats facing the United States, as well as the importance of exports to U.S. economic, national security, and foreign policy interests.

Specifically, according to the Committee report, S. 149 would establish new criminal and civil penalties for export control violations, grant the President special control authorities for cases involving national security, international obligations, and international terrorism, promote discipline and transparency in licensing decisions, and encourage U.S. participation in multilateral export control regimes.

Among its provisions as found in the general authority section of the report, S. 149 directs the Secretary of Commerce to establish and maintain a Commerce Control List, consisting of items that, if exported to certain end-users or for certain end-uses, could jeopardize U.S. national security. Under Title I, the Secretary may require a license, other authorization, or other requirement for the export of any item on the Control List. Further, the Secretary may establish conditions, including reporting and recordkeeping requirements, for the use of any license or other authorization to ensure proper use of the license or other authorization.

The bill provides that the Secretary may create regulations to implement the bill's provisions regarding the Control List, export licenses, and other authorizations and requirements, and any other provisions of S. 149, and states specifically that no fees may be charged in connection with an export license application.

BACKGROUND

The Export Administration Act

Since the Export Administration Act expired in 1994, the President has continued export controls pursuant to his authority under the International Emergency Economic Powers Act (IEEPA). The Committee report states that IEEPA is a poor instrument for maintaining export controls indefinitely in place of the EAA, as it contains lower penalties for violations, is poorly structured for export control purposes, and has been subjected to judicial challenge.

The current effort to establish an effective, modern statutory framework for export controls began during the 106th Congress. Hearings were held throughout 1999, with testimony from a variety of industry, defense and national security, and government agency representatives. On September 23, 1999, the Committee passed S. 1712, with one amendment. This bill was called up on March 8 of 2000, but then returned to the Calendar where it remained upon adjournment of the 106th Congress. However, the Congress did pass legislation (H.R. 5239, P.L. 106-508), providing a short-term extension of the EAA through August 20, 2001.

S. 149: Legislative History

On January 23, 2001, Senators Enzi, Gramm, Sarbanes, Johnson, Hagel, Roberts, and Stabenow introduced S. 149, the Export Administration Act of 2001. According to the report, this legislation, based on S. 1712, included certain improvements relating to enhanced controls, maintenance of the National Security Control List, and finality in foreign-availability and mass-market determinations. The Committee held two hearings on S. 149. On March 22, the bill passed the Banking Committee by a vote of 19-1, with Senator Shelby voting no. (See "Other Views", pp. 11-13 of this Notice, for Senator Shelby's concerns about the bill). On April 26, then Majority Leader Trent Lott moved to proceed to S. 149, but the motion was withdrawn that same day following an objection by Senator Shelby. The bill was discussed extensively, with Senators Shelby, Thompson, McCain, Kyl, Inhofe, and Warner voicing their concerns while Senators Gramm, Sarbanes, Johnson, Enzi, and Hagel spoke in support of the bill. (See pages S3937-3966 of the April 26, 2001 edition of the Congressional Record).

House Action

The House of Representatives passed by voice vote on July 30, 2001, legislation providing for a short-term extension of the EAA until November 20, 2001, but the Senate did not act on such an extension prior to the August recess. Before adjourning, the House International Relations Committee marked up and reported by a vote of 26-7, with amendment, H.R. 2581, its export administration reauthorization bill.

BILL PROVISIONS

Title I - General Authority

Title I provides general authorities for the conduct of U.S. export control policies. Under this title, the Secretary of Commerce (the Secretary) is authorized to identify items subject to export controls, and to establish and maintain a Commerce Control List (Control List) consisting of items that, if exported to certain end-users or for certain end-uses, could jeopardize U.S. national security.

The Committee intends that exporters be able to provide replacement parts for their exports unless the Secretary determines that there is a reason not to do so. Title I provides that a license or other authorization will not be required for after-market service or replacement parts provided on a one-for-one basis for lawfully exported items.

The Committee also intends that exporters be able to export technologies incidental to exported items, as long as such technologies relate to the installation and operation of the items, and do not enhance any capability that led to the item's inclusion on the Control List. The bill therefore provides that a license for export of an item includes the export of incidental technology, but only so long as that technology does not exceed the minimum necessary to install, maintain, repair, inspect, operate, or use the item.

The Committee believes that export control processes and procedures should be transparent and recognizes the value in allowing exporters to make their case about what items should and should not be controlled. Toward that end, the bill directs the Secretary to consult with a broad array of interested parties, particularly when it comes to decisions on the mass-market or foreign-availability status of items on the Control List, and to inform the public about changes in export policy, procedures, and regulations. In addition, the Secretary is authorized to appoint Export Control Advisory Committees, with membership drawn from U.S. industry and government, to provide technical advice regarding export control policy.

Title II - National Security Export Controls

Subtitle A: Authority for National Security Export Controls

This title authorizes the President to impose national security controls to restrict items that would contribute to the military potential of countries in a manner detrimental to U.S. national security; to stem the proliferation of weapons of mass destruction; and to deter acts of international terrorism. Specifically, the authority to impose national security controls is vested in the President and is exercised by the Secretary of Commerce, in consultation with the Secretary of Defense, the intelligence agencies, and other appropriate departments and agencies.

The bill authorizes export controls based on end-use or end-user of an item if that item could contribute to the proliferation of weapons of mass destruction or the means to deliver them. The Committee intends this provision to permit the control of items that may not be listed on the Control List, but that should be controlled due to the intended recipient or anticipated use of the item.

Section 201(d) authorizes the President to impose enhanced controls on an item controlled for national security purposes, notwithstanding its status as an incorporated part or component or as a foreign-available or mass-market item, if the President determines that the removal of controls would constitute a significant threat to U.S. national security. The Committee intends for this authority to be used only in extraordinary circumstances, thus ensuring that the export control system maintains maximum transparency and predictability, with minimum regulatory burden for the exporter. If such authority is exercised, the President must report the determination to the congressional committees of jurisdiction.

The Secretary of Commerce, with the concurrence of the Secretary of Defense, is directed to identify items to be included on a National Security Control List. Among the risk factors to be considered in establishing the list are the characteristics of the item, the threat to the United States from misuse or diversion of the item, and the effectiveness of national security controls on the item. The Commerce Secretary is required to periodically review the list and, with the concurrence of the Secretary of Defense, make adjustments to it.

The bill establishes a country tiering system under which countries are assigned to one of a range of tiers for each controlled item or group of items, with the lowest risks of diversion or misuse to be assigned to the lowest tier; the highest risks are to be assigned to the highest tier. The Committee intends for the tiering system to provide license applicants with greater knowledge of the likelihood of their license applications being approved, as well as to provide an incentive for countries to improve their export control systems and to reduce the incidence of misuse or diversion of controlled items, and thereby be assigned to a lower tier.

Section 204(a) recodifies the provisions of current law that state that controls may not be placed on an item solely because the item contains parts or components subject to controls if the parts or components are essential to the functioning of the item, are customarily included in the sale of the item, and comprise 25 percent or less of the total value of the item. Section 204(b) codifies current regulatory practice requiring controls on re-export of an item produced in a foreign country if it contains controlled U.S. parts or components, unless the value of the parts or components comprise 25 percent or less of the item's total value. A license is required for re-export to countries designated as supporting international terrorism, and the value threshold for exemption from control is reduced to 10 percent.

Section 205 requires the Commerce Secretary to establish a process for interested persons to petition to change the status of an item on the Control List.

Section 2 defines the terms used in the bill. According to the Committee report, the bill's definition allows the Commerce Secretary the flexibility to define further, via regulation, the term to deem the disclosure of an item to a foreign person to be an export to the country of which the foreign person is a national. It is the Committee's understanding that the Administration will be reviewing the deemed export control process with a view to clarifying its application.

Subtitle B: Foreign-Availability and Mass-Market Status

The bill allows the Secretary of Commerce to remove controls on an item that has been determined to have foreign-availability or mass-market status, and requires the Secretary to make foreign-availability or mass-market status determinations within six months of receiving a petition for such status.

The Committee believes there is little national security benefit derived from controlling U.S. items if substantially identical items can be acquired through another source or if such items are produced and available for sale in large volume to multiple purchasers. Therefore, according to the Committee report, the U.S. export control system should focus on controlling those items that pose the greatest risk to national security by putting up higher walls around a much smaller group of capabilities and technologies. Toward that end, the bill includes mechanisms whereby controls on items which have foreign-availability or mass-market status would be removed.

Section 211 directs the Secretary, in determining foreign-availability status, to consider criteria such as the item's availability from sources outside the United States, its price, and whether it is available in sufficient quantity to render controls ineffective. The President is authorized to set aside a foreign-availability determination if he finds that the absence of controls on that item would constitute a threat to U.S. national security and that controls would advance U.S. national security, or that there is a high probability that the foreign-availability status will be eliminated through international negotiations. Any Presidential "set-aside" determination is to be reviewed every six months, with a report sent to the congressional committees of jurisdiction for each "set-aside." Consistent with the foreign-availability provisions in the current Export Administration Act, the "set-aside" of such determination is to expire no later than 18 months after such determination, unless the President has been able to achieve an agreement to eliminate the foreign availability of that item.

In determining mass-market status, the Secretary is directed to consider criteria such as the item's production and availability for sale, its distribution, its conduciveness to commercial shipping, and its usage for its normal intended purpose without modification. The President is authorized to set aside a mass-market determination if he finds that the absence of controls on that item would constitute a serious threat to U.S. national security, and that controls would advance U.S. national security interests. Again, any Presidential "set-aside" determination is to be reviewed every six months, with a report sent to the congressional committees of jurisdiction for each "set-aside."

Section 214 creates an Office of Technology Evaluation (OTE), responsible for gathering, coordinating, and analyzing information for foreign-availability and mass-market determinations, as well as conducting evaluations of worldwide technological developments, multilateral export control regimes, other governments' export control policies, and U.S. industrial sectors critical to the U.S. defense industrial base.

Title III - Foreign Policy Export Controls

Title III authorizes the imposition of export controls for foreign policy purposes. Since most foreign policy controls often are unilateral in practice, and because it is clear that multilateral controls are preferable to unilateral controls, Title III imposes certain disciplines on the imposition of foreign policy controls to ensure that they principally affect the target of the controls rather than American suppliers.

According to the report, Title III specifically authorizes export controls to be imposed to promote the foreign policy objectives of the United States; to promote international peace, stability, and respect for fundamental human rights; and to deter and punish acts of international terrorism.

In order to impose foreign policy controls, the President must follow certain procedures, including consulting with the congressional committees of jurisdiction and negotiating with the government of the country against which the control is proposed prior to imposing a foreign policy export control. Section 302 provides that the President must publish a notice in the Federal Register at least 45 days prior to (and solicit public comment at least 30 days prior to) the imposition of a control, but allows the President to defer compliance with this requirement if deferral is in the U.S. national interest and the President satisfies these requirements within 60 days of the imposition of the control. To impose controls for foreign policy purposes, the President must meet five criteria (a-e), as outlined in Section 303 of the bill.

Section 307 requires the President to review all existing controls by February 1, 2003, and every two years thereafter (the renewal year). According to the report, any control not specifically renewed pursuant to the required report to the congressional committees of jurisdiction is to expire on March 31 of the renewal year.

According to the report, sections 309 and 310 ensure that notwithstanding any other provision of the Act, controls may be maintained in order to comply with international obligations, and against countries designated as supporting international terrorism.

Title IV - Export License and Interagency Dispute Resolution Procedures

The bill establishes a "risk management framework" for the license review process. Criteria are established for review of the license applications, including the characteristics of the item, the threat to U.S. national security or foreign policy interests, the destination country's tier designation, and the risk or diversion of misuse. According to the report, the analytic product of the intelligence community is to be fully considered with regard to license applications.

Under Section 401, the Commerce Secretary is directed, within nine days, to review applications for accuracy and refer them to the Secretary of Defense, Secretary of State, and the heads of other appropriate departments. Each referral department is required, within 30 days, to provide a recommendation either to approve or deny the license. A referral department that fails to provide a recommendation within 30 days is deemed to have no objection to the Secretary's decision. There are exceptions from the stated time periods in specified circumstances, including instances in which the Secretary and the applicant mutually agree to delay, a pre-license check is required, or consultation with foreign governments is required. The Commerce Secretary is required, if agreement exists among the referral departments, to notify the exporter of the decision to approve or deny the license application. If an export license application is to be denied, the Secretary is to inform the applicant of the determination to deny, the specific basis for the denial, and any modifications to the proposed export that might permit the export to be approved. The applicant is permitted 20 days to respond to the proposed denial.

For those cases in which there is no agreement on license applications, an interagency dispute resolution process is established. An initial level of review is conducted by an interagency committee chaired by the Commerce Secretary's representative who has the authority to decide application approval or denial after considering the position of other agencies. The chair's decision may be appealed by the representative of a dissenting agency. Additional levels of review must provide for decision-making based on a majority vote (rather than the current practice of unanimity), and an appeal of a denial or approval of a license application at the higher level of review may only be escalated to the next higher level of review by a Senate-confirmed agency official. Finally, the entire interagency process is to be completed or referred to the President not later than 90 days after the date of the application's initial referral.

With regard to a written request for classification, the bill directs the Commerce Secretary to notify the Defense Department as well as other appropriate departments of those requests, and to inform the requestor of the proper classification within 14 days. According to the report, the Committee left intact existing guidelines regarding interagency coordination and transparency until such procedures are modified or replaced by the Administration.

Title V - International Arrangements; Foreign Boycotts; Sanctions; and Enforcement

Section 501 of the bill encourages U.S. participation in new and existing multilateral export control regimes that support U.S. national security objectives, and directs the President to take steps to enhance multilateral export control regimes by including in them features such as full membership, effective enforcement and compliance, periodic meetings among high-level representatives, a common list of controlled items and regular updates thereto, harmonization of license approval procedures, treatment of certain countries, and agreement to prevent undercutting of regime member controls. As for foreign boycotts, the bill directs the President to issue regulations prohibiting the participation of U.S. persons in boycotts imposed by a foreign country against a country that is friendly to the United States.

The bill establishes criminal and civil penalties for export control violations. For individuals, the criminal penalties include a fine of up to $1 million or 10 times the value of the export, whichever is greater, per violation, and up to 10 years' imprisonment per violation, with possible life imprisonment for multiple violations or aggravated circumstances. The bill provides criminal penalties for corporations of up to $5 million or 10 times the value of the export, whichever is greater, per violation. In addition, the bill requires individuals or corporations convicted of criminal violations to forfeit the property that was the subject of the violation, and any properties used to aid the violation. Further, under Section 503, the Commerce Secretary may impose on a violator, in addition to or in lieu of criminal penalties, a maximum civil fine of up to $500,000 per violation and may deny export privileges for violations.

Sections 504 and 505 reauthorize both the current missile proliferation control sanctions and the current chemical and biological weapons control sanctions.

According to the report, the Committee places strong emphasis on the use of post-shipment verifications (PSVs) as an important part of the enforcement effort, and therefore directs the Secretary to target post-shipment verifications against exports involving the greatest risk to national security. The bill requires the Secretary to deny a license to any end-user who refuses to allow post-shipment verifications. The bill authorizes the Secretary to deny future exports of an item to any country that refuses to allow post-shipment verifications.

Section 506 authorizes funding for the Bureau of Export Administration of the Commerce Department, with significant additional resources for enforcement programs.

Finally, within section 506 is a limitation terminating the authority granted under S. 149 on September 30, 2004, unless the President provides to Congress a detailed report on the operation of the EAA of 2001 and of U.S. export control proposals in connection with that report, or certifies to Congress that reforms in connection with that report are not necessary. This is a one-time condition which, once met, sets aside the effect of the sunset in the statute. The report and legislative proposals are to be submitted to Congress any time prior to October 1, 2004.

Title VI - Export Control Authority and Regulations

Title VI authorizes certain officials to implement the authorities granted under this bill. Further, Section 602 increases the penalties that can be imposed for disclosure of confidential information such that if an officer or other employee of the U.S. government knowingly discloses confidential information, such person can be fined up to $50,000 and imprisoned not more than one year, for each violation. The bill also authorizes the Secretary to impose civil penalties of not more than $5,000 on persons who otherwise disclose information in violation of the provisions of the bill.

Title VII - Miscellaneous Provisions

Section 701 requires the Secretary to report annually to Congress regarding export controls. Section 702(k) repeals certain provisions of the FY 1998 National Defense Authorization Act relating to the measurement standard (known as MTOPS) used for control of high-performance computers. The Committee recognizes the difficulty of effectively controlling widely available commercial computer systems in today's rapidly changing world, and believes that the repeal will allow the President the flexibility to address computer controls in an effective manner.

ADMINISTRATION POSITION

In its Statement of Administration Policy (SAP) issued on April 26, 2001, the Bush Administration stated:

"The Administration supports S. 149, as reported by the Senate Banking Committee. The bill provides authority for controlling exports of dual-use goods and technologies. The Administration believes that S. 149 would allow the United States to successfully meet its national security and foreign policy objectives without impairing the ability of U.S. companies to compete effectively in the global marketplace. As reported, S. 149 includes a number of changes that the Administration sought to strengthen the President's national security and foreign policy authorities to control dual-use exports. The Administration will continue to work with Congress to ensure that our national security needs are incorporated into a rational export control system."

President Bush has subsequently expressed his support for S. 149. On March 28, 2001, in a meeting with high-tech leaders at the White House the President said, ". . . After a lot of work with industry leaders and the administration and members of the Senate, the Export Administration Act, a good bill, passed the Banking Committee, 19 to 1 . . . And I urge the Senate to pass it quickly."

National Security Adviser Condoleezza Rice, in a letter dated August 2, 2001, to Senator Gramm, reiterated the Administration's desire for swift enactment of the bill because "a new EAA will provide us the strongest authority to administer dual-use export controls, particularly as related to enforcement, penalties for export control violations, and the protection of business proprietary information."

COST

The Congressional Budget Office (CBO) estimates that implementing S. 149 would cost about $377 million over the 2001-2006 period, assuming the appropriation of the necessary amounts. Because the bill would increase criminal and civil penalties for violation of export controls, CBO estimates governmental receipts would increase by $23 million over the 2002-2006 period. CBO estimates that the increase in criminal penalties would cause direct spending from the Crime Victims fund to rise by about $7 million over the 2002-2006 period. Because the bill would affect direct spending and receipts, pay-as-you-go procedures would apply.

OTHER VIEWS

Additional Views of Senator Shelby

Senator Shelby, who, in addition to being a Banking Committee member, is Ranking Member of the Select Committee on Intelligence, filed additional views. The following are excerpts [S. Rept. 107-10, pp. 40-42]:

During the 106th Congress I joined with the national security committee chairmen and other senators - Senators Helms, Warner, Thompson, McCain, Smith, and Kyl - in opposing legislation to reauthorize the Export Administration Act. Similar legislation, S. 149 - the Export Administration Act of 2001 - has been introduced in the 107th Congress. Like last year's bill, S. 149 fails to strike the correct balance between commercial considerations and national security.

* * *

Even with the Administration's improvements to this legislation, there remain several overarching issues that require a more detailed review of the legislation than the Administration has had time to undertake. For an export control regime to function properly, it must provide for a balancing of the commercial benefits involved - which are generally obvious, easily-quantified, concentrated, and immediate - with the national security risks, which are often shrouded in secrecy, difficult to quantify, diffuse, and long-term in nature. I believe that the amendments adopted by the Committee during markup represent a useful start toward a balanced and rational export control policy. I am concerned, however, that despite these changes, the bill in its current form still favors commercial interests over national security equities.

Therefore, I believe that the Administration and the Senate should consider the following additional modifications:

1. Provide a Broad National Security Exemption. S. 149 restricts the President's authority to regulate the export of products that could have serious implications for our national security. The President, as the official ultimately responsible for balancing commercial and national security policies, should have complete, unqualified discretion to override the mass market, foreign availability, overseas production, or incorporated parts provisions of the bill if the President determines that export of a product would threaten national security.

2. Permit Full Interagency Participation. S. 149 provides overly broad or exclusive authority to the Secretary of Commerce on important procedural issues such as commodity classifications, license and dispute referrals, license exemptions, and development of export administration regulations. In export controls, as in many other complex areas, procedure is policy. If national security concerns are to be given adequate consideration in export decisions, the Departments of State and Defense must be given greater authority and a larger role in the export licensing process. As a general matter, S. 149 is permeated by a presumption that national security concerns have only equal or lesser weight than commercial concerns. Here are just a few examples: Section 202 (National Security Control List) establishes a risk assessment balancing test that gives equal value to national security concerns and economic costs. Elsewhere, despite the Administration's intent to ensure that the interagency dispute resolution process established under section 502 be comprised of national security experts, the legislation does not require that this appeals board be so constituted. Section 701(c) (issuance of regulations) gratuitously states that nothing "require[s] the concurrence or approval of any official, department, or agency to which such regulations are submitted." In other words, regulations may be promulgated without the concurrence of the national security agencies.

3. Address Problematic Mass Market Provision. S. 149 prohibits export controls on items otherwise controlled for national security reasons if they are widely available in the United States. Domestic availability should be considered along with other factors, but "mass market" should not be an independent exemption category.

4. Address Incorporated Parts and Components Loophole. S. 149 prohibits export controls on items otherwise controlled if they are incorporated into products in which the controlled component comprises 25 percent or less of the total value, or if the controlled item is shipped overseas for final assembly. Automatic decontrol of an item otherwise appropriately controlled simply because it has been incorporated into a larger item, or because it is produced overseas using American parts or components, is counterintuitive - should the technology be exported or not? - and will undermine the effectiveness of our export control regimes.

5. Address Use of Foreign Availability as a Measure for Decontrol. S. 149 prohibits export controls on items available from foreign suppliers, codifying a presumption that when other countries sell sensitive technologies to countries of concern like China, the United States is obligated to follow suit. The degree to which an item is available from foreign sources is a factor that should be considered, but should not automatically result in the elimination of export controls on an item.

6. Address Deemed Exports not Covered. S. 149 does not cover the transfer of knowledge, information, or know-how of controlled goods or technologies, to foreign persons or entities, whether in the United States or abroad.

Senate Republican High Tech Task Force

On June 28, 2001, Senators Allen, Allard, Bennett, Brownback, Burns, Grassley, Hatch, and Hutchison of the Senate Republican High Tech Task Force wrote to Senator Daschle requesting that he schedule floor consideration of S. 149. The members stated, in part:

"The proposed EAA legislation represents a logical improvement over the outdated EAA Act passed in 1979 and the current patchwork of executive orders regulating export controls. . . . At a time when our technology industries are seeing declining sales, it is imperative that the Congress remove unnecessary and ineffective barriers to exports that will keep technology jobs in this country."

POSSIBLE AMENDMENTS

At press time, it is our understanding that the Ranking Members of the Governmental Affairs (Thompson), Foreign Relations (Helms), Armed Services (Warner), Intelligence (Shelby), and Commerce (McCain) Committees, along with Senator Kyl, may offer amendments that reflect the concerns outlined in Senator Shelby's Additional Views, as well as other concerns voiced during discussion of this bill on the Senate floor April 26, 2001.

Roberts. Intends to prevent the authorities provided under this bill from being used to impose unilateral sanctions on food and medicine.

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