Possible System Overhaul? - GAO Finds Problems with Commerce Department’s Deemed Export Control System and the Regulation of the Transfer of Sensitive Technology to Foreign Nationals

The General Accounting Office ("GAO") recently released a report critical of the Department of Commerce’s Deemed Export Control System and how it regulates the transfer of technology to foreign nationals. Moreover, the Department of Defense reviewed the GAO’s recommendations and agreed with their suggested course of action. While the Department of Commerce responded to the GAO by stating that it had an effective monitoring system in place, the Department also stated that it would explore the GAO’s recommendation for changes to the system.

For the uninitiated, a "deemed export" occurs when an export of a controlled commodity or technology subject to the Export Administration Regulations ("EAR") of the Department of Commerce is made to a foreign person, whether in the United States or abroad. The export is legally "deemed" to be an export to the country of which the foreign person is a national. The GAO report should be of particular interest to employers who are involved with controlled technologies and commodities that are subject to the EAR and who employ foreign nationals who are not permanent resident aliens ("Green Card" holders). The GAO’s recommended changes to the Deemed Export Program could result in a more stringent enforcement of the current export regulations and a possible revamping of the entire system. Employers should ensure that they are in compliance with Commerce’s Deemed Export Control Program as violations may result in administrative or criminal penalties including fines, denial of export privileges and imprisonment.

As background, the U.S. Government regulates and controls the exports of certain non-military (the Department of Commerce) and military (the Department of State) technologies and commodities. Certain technologies and commodities that may have both a military and a non-military application are referred to as "dual-use" and are also controlled by the Department of Commerce. The EAR may require your company to obtain licenses from Commerce before exporting "dual-use" technologies. Such technologies are subject to export controls because they could be used by other countries to upgrade their military systems or the technologies are tied to national security or foreign policy issues. In particular, countries of concern are China, Cuba, India, Iran, Iraq, Israel, Libya, North Korea, Pakistan, Russia, Sudan and Syria, although the EAR and its restrictions pertaining to "dual-use" exports apply to all foreign entities, wherever located.

Companies that employ foreign nationals who are involved with working with or who have access to controlled technologies are required to apply for deemed export licenses. Generally, technologies that require a license when exported to certain countries, either for actual export or deemed export, are: technologies connected with certain nuclear materials, facilities and equipment; propulsion systems and space vehicles; navigation and avionics; chemicals, "microorganisms" and toxins; electronics; computers; materials processing; telecommunications and information security; and lasers and sensors.

Based on the GAO’s review of the Commerce’s Deemed Export Program, it appears there are serious weaknesses in the control of transfers of technology to certain foreign nationals. According to the GAO, the majority of deemed export licenses issued in fiscal year 2001 involved countries of concern with 73% of the licenses were issued for Chinese nationals, and another 14% of the licenses were issued to Russia, Iran, India, Syria, Israel, Iraq, and Pakistan.

In particular the GAO found two major issues with the Program. First, Commerce currently screens thousands of overseas visa application selected by the Department of State to find foreign nationals who may be subject to deemed export control licensing. However, according to the GAO, Commerce has no process in place to examine the individuals who change status in the U.S. to work for companies that are involved in dual use technologies. GAO looked at the numbers of individuals who in fiscal year 2001 switched to the H-1B nonimmigrant classification in the past year as a sample study (H-1B is the classification for temporary workers). They found a possible 15,000 foreign individuals in H-1B status alone who may be subject to deemed export controls based on the type of work their position required.

The second major issue the GAO found with the Program is that Commerce rejects very few applications for deemed export licenses, and it does not have an effective monitoring system in place to determine if companies are enforcing the conditions under which a deemed export control license is issued. As part of the issuance of deemed export licenses, Commerce attaches security conditions to almost all licenses which are supposed to cut-down the risk of allowing the foreign nationals to have access to controlled technologies. Currently, the impetus of enforcing these security conditions is left up to the company applying for the deemed export license. Commerce does not normally conduct any type of follow-up visits to the companies who have applied for deemed export licenses to check to see if the companies are implementing the security conditions of the license. According to GAO, Commerce has no clear idea if these controlled technologies are being protected from being transferred to countries of concern through their foreign nationals.

Based on its findings, GAO made several recommendations on how Commerce could improve its Deemed Export Control Program. In order to improve its screening and identification of all individuals who could be subject to deemed export controls, the GAO recommended that Commerce use all existing U.S. immigration data to assist them in this process. According to the GAO, this should assist Commerce in identifying those individuals who are attempting changes of immigration status in the U.S. and who are currently not being screened as they are not necessarily applying for visas. In order to ensure compliance with the security conditions, the GAO also recommended that Commerce work closely with the Department of Defense, Department of State and the Department of Energy in order to develop a program that is risk-based in order to monitor compliance with deemed export license requirements.

In the aftermath of the GAO report, many expect that Commerce will certainly seek to tighten its rules on deemed exports, and that we will see those changes published in the Federal Register as changes to the EAR. Employers involved with technologies and commodities subject to the EAR that employ foreign nationals should be aware that they may face tighter regulation and enforcement in the future. This enforcement could possibly involve random checks by Commerce employing the use of immigration data to monitor whether the company’s employees are properly covered by a deemed export control license as well as compliance visits to ensure that companies that have deemed export control licenses are enforcing the security conditions.

If you have any questions regarding the deemed export compliance issue, please feel free to contact Dawn Lurie in Greenberg Traurig’s Immigration Practice Group or Fred Shaheen in our Export Control Practice Group (703-749-1355).

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