Key Elements of an Effective Export Control System

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[Introduction] ["Best Practices" of Policies & Procedures by Governments] [The German Example] [Models of Internal Compliance Systems][Key Questions and "Red Flags"][Internal Export Control Hierarchy][Additional Responsibilites for an Effective Internal Compliance System][Approve or Deny?][Enforcement][Challenges Facing Companies][The Psychology of Illegal Exports][Ensuring End-User Verification]

Key Elements of an Effective Export Control System

Effective export controls must be a combined effort between governments and companies. This section will discuss three distinct aspects of a good export control system, as well as offer some possible solutions to challenges that may arise. It will discuss:

The government's role in developing policies to better regulate export controls and create an environment supportive of nonproliferation efforts;
Industry's role in developing internal compliance systems to ensure strict adherence to governments' policy;

The need for companies and governments to work together to enforce those policies; and
Specific challenges and possible solutions to problems in implementing export controls.

Introduction

The purpose of nuclear export controls is not to deny the export of every nuclear weapon-related commodity, but to create obstacles and bottlenecks in secret nuclear programs by recognizing key items and blocking their transfer.

The German Peace Research Institute has identified several functions of export controls:

Delaying and Increasing costs. Export controls can delay the acquisition of nuclear weapons and increase the costs of success.

Deterrence. The threat to punish violations of foreign trade restrictions is a deterrent against those who would illegally export and import items. Two conditions, however, must be met. First, a significant probability of detection must exist. Second, the severity of the punishment must outweigh the potential benefits.

Detecting and preventing proliferation. Export controls increase the probability that illicit procurement is uncovered and the sinister intentions of would-be proliferants discovered. If a country is detected trying to import items illicitly, an effective export control system can increase scrutiny of that country and improve the chance of preventing future illicit efforts.

Intelligence gathering. The process of operating an effective export control system provides governments with opportunities to identify and analyze clandestine nuclear programs.

Confidence-building. An effective export control system, particularly in conjunction with international safeguards and national intelligence activities, can create confidence within the international community that a state is abiding by its international obligations. If no violations of export control regulations are registered, states can more credibly believe that these countries are not engaged in clandestine nuclear activities.

Triggering safeguards or broadened declarations. Export controls provide the mechanism to define items subject to international safeguards. Internationally agreed lists of controlled items serve to define what a state must declare or report to the International Atomic Energy Agency (IAEA) under advanced safeguards agreements.

Supplier's treaty compliance. By controlling the foreign trade activities of their citizens and of firms under their jurisdiction, states fulfill their obligations under Article III of the Nuclear Non-Proliferation Treaty (NPT) and the Nuclear Suppliers Group.

For export controls to be effective, governments and companies need to work together. In the United States, the Department of Energy has initiated the International Nuclear Export Control Program (INECP) that aims to strengthen international export control practices. Although written mainly from the perspective of the government, the INECP has summarized the roles of companies and governments regarding effective export control:

Export controls rest on an interlocking set of national and international laws, regulations, and agreements. These laws require a transparent and standardized national licensing system and competent technical review of proposed transfers of nuclear-related materials, equipment, and technologies. These reviews must take into account national laws, international obligations, and proliferation risks associated with a particular item or technology, as well as the reliability of the end-user and intermediate consignees.
Industry awareness and compliance are the prerequisites for the success of any nation's system of nuclear export controls. Key goals are promoting communication between government and industry and establishing procedures for industry to regulate the export of controlled commodities. The government should promote industry use of internal compliance programs and other tools-of-the-trade to reinforce export control 'best practices' at facilities that produce nuclear related commodities.

The last line of defense in export controls is a government's ability to prevent illicit shipments while facilitating legitimate commerce. Weaknesses in this area are a leading proliferation risk today. This risk is particularly acute for states engaging in significant transshipment trade. In collaboration with other agencies, the governments should provide tools that enable customs personnel, border guards, and other officials in partnering countries to enforce their national nuclear export control requirements.

"Best Practices" of Policies & Procedures by Governments

Governments need to develop a sustainable infrastructure designed to control sensitive exports without unduly limiting trade. Moreover, governments need to establish and reinforce an export control "culture" that emphasizes nonproliferation security over specific sales and company contracts. Guarding against illicit exports of advanced technology or other dual-use items should be an ongoing effort, not just a passing concern with each scare over Iraq, Iran, or another country. Responsible export attitudes must be cultivated and encouraged. Without the government's support and positive reinforcement, individual companies might not take the initiative to proactively limit sensitive trade on their own.

On the most basic level, governments need to draft export laws and adopt a standard set of export control procedures. These policies are the foundation upon which everything else is built. These regulations should be in depth and comprehensive. The Lawyer's Alliance for World Security (LAWS) developed a compilation of 14 generic concepts that export laws should incorporate, which should serve as a basis for export control regulations. Although this compilation does not represent the exact language for adoption, governments have used this as working model on which to fashion their export control policy. For a more detailed description of these topical areas, please click here. (note: vol as in volume, 02)

The 14 areas covered include:

Policy - states the government's position on export controls and how it will proceed to accomplish the goals;
Right to Export - states that one has the inherent right to export unless the item or country to which you are exporting are pursuant to government regulations;
Authority - identifies the person or agency ultimately responsible for enacting the policies;
Control List - lists specific states and items that are subject to licensing requirements;
Controlled Countries - lists countries to which exports are limited or prohibited;
Licensing - explains the various types of licenses and what is required for what export;
Special Licensing Authority - provides guidelines for a special license for specifically named "dual-use" exports;
Notification of the Public - accounts for the government's responsibility to keep the public informed on all the export control policies;
Advisory Committees - establishes a committee of experts to assist and advise on matters relating to export control policy and procedures;
Negotiations with Other Countries - verifies that authority heads and officials, in consultation with the various heads of other appropriate agencies dealing with export controls, negotiate and cooperate with other nations when establishing and enforcing export control policies;
Record Keeping - mandates that all records of licenses and transactions be properly maintained and made available to other agencies if requested;
Confidentiality - states that all information submitted by an exporter is not to be made public without the consent of the applicant or as authorized by law;
Penalties - states that there should be an agency established to review suspect exports and enforce penalties as designated by officials and experts; and
Transshipments - states that items in transit through the country are subject to control laws and regulations.

In order to cultivate a culture sensitive to the need for export controls, however, merely having strongly worded policy is not enough. The ultimate goal is for companies to do more than just obey the letter of the law.

Governments should make a concerted effort to engage companies and government enterprises. Governments should do this by acting as a liaison to the companies to facilitate a better understanding of the laws. The government should establish programs geared towards training companies and company representatives through workshops and seminars. The government also needs to provide assistance by disseminating information and be better prepared to respond to inquires or problems in a timely and efficient manner. The government needs to construct user-friendly aides and resources to assist the companies with adhering to the regulations. These resources need to be provided in a variety of forums, through personal contacts with representatives, seminars and workshops, hardcopy print, and electronic resources.

Each government needs to collaborate with experts in the nonproliferation, commerce, and border control fields to develop appropriate export control licensing policies. It then needs to train government and industry officials regarding those policies to make sure these policies are properly executed. For example, the government needs to work hand-in hand with the customs and border control guards to ensure that the items listed on the export declaration are identical to the actual items being shipped. This ensures that undeclared or illegal exports are not permitted to leave the country under false pretenses.

The government should also take into consideration international export controls as well. It should look at the Zangger Committee Trigger List, which implements supplier commitments in the Nonproliferation Treaty, and the Nuclear Supplier's Group, which places additional controls on the transfer of nuclear commodities.

Governments have met for over two decades to work out satisfactory arrangements for exporting dual-use items. The results of such meetings can be seen in agreements such as the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies (WA) was established to promote transparency and greater responsibility in transfers of conventional arms and dual-use goods and technologies. Participating states seek, through their respective national policies, to ensure that transfers of these items do not contribute to the development or enhancement of military capabilities, which undermine nonproliferation goals.

Towards this aim, WA obtained from its member states a collection of the "best practices" for effective export control policies, including:

Consultations occur among relevant government agencies within the exporting country with respect to license applications to export very sensitive list (VSL) items. During these consultations, the appropriateness of the quantity and technological level of the item to the stated end-use, and bona fides of the end-user are among the criteria considered;
In order to determine, inter alia, the risk of diversion or unauthorized use, additional information on end-users may be gathered, as necessary, using appropriate means ranging from documentation to visitation (with consent of the visiting country) prior to the licensing decision;
As necessary, post-shipment verification may be carried out through appropriate means by the exporter, supplier or officials of the exporting country.

While these examples are specifically for items considered most sensitive, the same careful procedures would be required for other, less sensitive items, as well. For more detailed examples of WA's best practices, click here.

The United States has a good web site, the Export Administration Regulation Database, which contains more helpful practices and additional information on the U.S. export control system. Other countries in the NSG also maintain informative web sites in different languages.

The German Example

Germany is a useful model of a specific country that drastically improved its national export control laws in a relatively short period of time. In the late 1980s and early 1990s, several German companies were found to have exported numerous sensitive items that had greatly assisted Iraq's clandestine weapons of mass destruction (WMD) programs, particularly its nuclear weapons program. Blame for these exports fell not only on the companies and individuals, but also on the German government.

When it was discovered that German companies had been providing vital assistance to Iraq's weapons program, that knowledge prompted dramatic reform of Germany's export control system. Prior to the Gulf War, the German government did not have strict export control laws, and the laws that it did have were poorly enforced. Therefore, in order to regain the confidence of the international community, Germany severely tightened its export control policies and enforcement procedures. Formerly a weak system overrun with loopholes was transformed, within the course of a few years, into one of the world's strongest systems.

In the late 1980s, the German government was becoming increasingly aware that something was wrong with its export control system. As early as 1988, the government conducted a parliamentary inquiry into doubtful nuclear trade. Based on its findings, the government tightened the interagency process for licensing to give Germany's Foreign Office a stronger role in trade with sensitive countries. In 1989, Germany sought to strengthen export control legislation. These efforts, however, were inadequate and significant illicit exports continued to occur.

After the Gulf War, the UN-mandated inspection process revealed how German companies easily manipulated Germany's weak and over-burdened export control system with false and misleading end-user information. Other governments condemned Germany's illicit exports to Iraq and elsewhere, and Germany was accosted as a "black sheep" of export controls.

The German media played an extremely important role in creating a strong political constituency demanding fundamental change. Extensive publicity about these illicit or questionable exports damaged the reputations of many German companies. They not only suffered legal consequences, but also were condemned publicly as amoral.

In order to regain its image and international respect, the German government radically tightened its export control system twice - once in 1990, and again in 1992. The penalties for foreign trade violations were drastically increased and the range of mechanisms for effective export control was expanded.

In Germany, exports are not prohibited, per se. Rather, exports are subject to an extensive authorization process. This approval process became more extensive in the post Gulf War years. The government also provided the export classification system with the general "catch-all clause," which says that all products are subjected to approval requirements to the extent that the exporter has knowledge of an actual or intended use for weapons production.

Under the new laws, German companies are required to create stringent internal compliance systems and senior officials are now legally responsible for the actions of their employees. The law permits the prosecution of senior company officials for the illegal exports of lower level employees, creating a powerful incentive for companies to create stringent internal controls.

Despite the tightening of German governmental standards, a major burden still resides on the companies to act with honesty and moral integrity. The companies are recognized as playing a major role in achieving nonproliferation goals. In several cases, their internal compliance systems have become models for both other companies and governments. For a more in-depth discussion of German export control laws and practices, please click here.

Models of Internal Compliance Systems

Corporations and government-owned entities must share in the responsibility to halt the proliferation of sensitive nuclear or nuclear-related technology. Officials, management, and employees of companies must make a firm commitment to proactively address nonproliferation through strict export control regulations and implementation. The most common method for a company to accomplish this goal is the creation of an internal compliance system.

An internal compliance system is an arrangement in which a company ensures that it is completing legal transactions, obeying the regulations enacted by the government, and fulfilling company export policies. Internal compliance systems typically include a set of procedures that company officials must satisfy before an item leaves the company. Such procedures include a thorough investigation of the buyer and end-user prior to the shipment of a purchased item off-site.

However, many companies lack procedures or resources to establish effective internal compliance systems. In some cases, the internal compliance systems that are established do not have the resources that they require to function effectively. In other cases, company officials lack even rudimentary knowledge of their government's export laws and regulations, let alone the expertise to create an internal compliance system.

Many models of internal compliance systems exist. One particularly effective system was created by the German company Leybold in the early 1990s. It provides an excellent example of how a company confronted the challenge of internally strengthening export controls. In the early 1990s Leybold developed an internal compliance system that not just met the requirements for Germany's strengthened export laws but exceeded them. Click here for an in-depth discussion of this development. Since the early 1990s, Leybold has changed owners and split into many smaller companies, but the different entities have tried to maintain the internal compliance system.

Key Questions and "Red Flags"

There are several steps a company can take to ensure its transactions are viable and legal. Most important, a company must develop a set of procedures specifically intended to guard against sales of sensitive or dual-use technology to unauthorized parties. The procedures must be applied throughout the entire framework of the company, including any separate divisions and subsidiaries.

Internal compliance systems should address several specific goals:

To develop contacts and good-standing relationships between the company and export agencies;
To remain informed of updates to the government's export control laws and regulations;
To centralize export-related questions and issues;
To standardize procedures;
To provide early warning and screening of all inquires and orders;
To generate coherent and complete documentation of all sensitive export transactions; and
To train all employees engaged, either directly or indirectly, with exports.

The most important aim of an internal compliance system is to prevent doing business with unauthorized parties. There are several measures that can be taken to ensure that company officials are not dealing with unauthorized parties. First and foremost, one must know the customer. A thorough background check of any customer requesting sensitive items should be performed. Many supplier countries publish databases containing lists of names of individuals and companies who are known to be associated with illicit procurement efforts. The U.S. Bureau of Industry and Security, for example, has developed a comprehensive "Denied Persons List" as a reference tool to help companies recognize potential violators of export laws and other parties who are known to have previously engaged in illicit procurement behavior. To view this list, click here. Checking national lists should be done routinely. Such checks should include any freight forwarding companies, as well as intermediate consignees and the ultimate consignee.

Companies should develop and apply routinely a specific set of questions to examine each potential sale prior to completing the transaction. Questions should include:

Careful screening of the customer

Is the identity of the customer or end-user requesting the item transparent?
Is there any intermediary agent involved?
Is the customer or its address similar or the same to that found on the governmental denied persons list or on a governmental or company database of known front companies?
Is the customer or purchasing agent hesitant to provide information regarding the end-use of the item in question, or the future research and development or the industrial production of the item in question?
Does the product's capabilities coincide with the buyer's line of business?
Is the item in question incompatible with the technical level of the country?
Is the customer willing to pay in cash for an expensive item that normally requires financing? Or are there unusual favorable payment terms, prices or other conditions offered or accepted by the customer?
Does the customer have little or no business background?
Is the customer unfamiliar with the item and its capabilities but still wishes to purchase it?
Is the customer related to military business or under the control of the defense ministry or armed forces?

Careful screening of end-use or end-user

Is the buyer evasive and unclear about whether the product is intended for domestic use, for export or for reexport when questioned?
Have the nonproliferation credentials of the recipient country been thoroughly screened?
Has particular attention been paid to whether or not the product or service is intended for military use or subject to licensing?
Careful screening of final destination

Is the requested order suitable to improve existing equipment or plants for military use?
Are there excessive safety or security measures in light of the nature of the equipment?
Is equipment to be installed in an area under strict security control or adjacent to military-related facilities?

Careful screening of shipping procedures

Are delivery dates vague or are deliveries planned for out of the way destinations or is a freight-forwarding firm listed as the product's final destination?
Is the shipping route abnormal for the product and destination?
Is the packaging inconsistent with the shipping mode or destination?
Are there unusual requests concerning labeling or shipment of goods?

Careful screening of terms of sale

Are there any requests for normally unnecessary devices or no request for usually necessary devices and lack of a convincing explanation for the request or non-request?
Was there no request for performance guarantee, warranty or normal service?
Are routine installation, training or maintenance services declined by the customer?
Does the customer request completion of a partly finished product?

The company should also evaluate whether the recipient country is a member of an international nonproliferation agreement or regime. In addition, it should determine the degree to which the importing government cooperates with nonproliferation policies, and whether or not the buyer or end-user has been previously denied by another supplier for an item they are requesting.

In carrying out the normal procedures of evaluating purchases, authorities also recommend that officials do not "self-blind" themselves, meaning that they do not cut off or ignore the flow of information that is received in the normal course of business. For company officials, the best advice is: Ask questions and be alert!

The United States has developed a set of indicators, or "red flags," that can indicate that the customer is attempting to engage in illegal or potentially illegal transactions. These indicators are similar to some of the above questions, but are designed to alert company officials to the need for increased suspicions and scrutiny. The following is a list of examples of red flags published by the U.S. Bureau of Industry and Security Export Enforcement web site:

If the customer or purchasing agent is reluctant to offer information about the end-use of the item.
If the product's capabilities do not correspond with the buyer's stated line of business, such as an order for sophisticated computers from a small restaurant.
If the item ordered is incompatible with the technical level of the country to which it is being shipped, such as semiconductor manufacturing equipment bring shipped to a country that has no electronics industry.
If the customer is willing to pay cash for an expensive item that ordinarily requires financing.
If the customer has little or no business background or if the customer is unfamiliar with the product but still wants to purchase the item.
If routine installation, training or maintenance services are declined by the customer.
If delivery dates are vague, or deliveries are planned for out of the way destinations.
If a freight forwarding firm is listed as the product's final destination.
If the shipping route is abnormal for the product destination.
If the packaging is inconsistent with the stated method of shipment or destination.
If when questioned, the buyer is evasive and remains especially unclear about whether the purchased item is for domestic use, export, or re-export.
If the customer or its address is similar to one of the parties found on the Denied Persons List.

Should a company official be asked to participate in a transaction that is suspicious or illegal, authorities recommend refraining from the transaction, disclosing the information to the government's established export control agency, and waiting for the agency's response. Any information that a company gathers could be useful to prosecuting the suspicious customer or building a dossier on the individual or company in question.

Other useful lists of questions or procedures exist. The Wassenaar Arrangement established a list of end-use assurances that helps provide a checklist for both governments and companies of what information needs to be obtained for a particular transaction. Items on this list include:

Making sure to provide a detailed description of goods, which discloses their true identity;
Describe the specific end-use of the goods;
Provide assurances that the goods will not be used other than for the stated purposes and/or provide an undertaking that the goods will be used for civil end-uses;
Provide certification that the goods will be installed at the premises of the end-user or will only be used by the end-user;
The final consignee/end-user's undertaking not to transship or re-export the goods covered by the End-use Certificate/Statement;
The final consignee/end-user's undertaking not to divert the goods covered by the End-use Certificate/Statement to another destination or location in the importing country;
Provide a commitment by the final consignee to provide the exporter or the exporting government with proof of importation, upon request (e.g., provide a Delivery Verification Certificate); and
Obtaining signature and end-use certification by the final consignee's/end-user's government or other authority as to the authenticity of the primary details provided in the document.

Internal Export Control Hierarchy

An export control hierarchy creates at a company or government-owned entity a system of checks and balances within separate divisions and ensures that these different divisions work together to examine the sale of products, services, or technology. The company should also establish a senior group to oversee and take responsibility for the internal compliance system's integrity, effectiveness, and compliance.

The U.S. Lawrence Livermore National Laboratory (LLNL) developed a unique and thorough way to implement U.S. export control laws and regulations that uses a hierarchical system. It developed a panel whose members consist of various managers of its export control programs and its chair is the Export Control Officer. These members include :

Commodity Export Manager - who is responsible for assessing and ensuring that all LLNL commodity exports are in full compliance with U.S. export control laws and regulations. This manager also serves as LLNL's policy and licensing liaison with the federal government's export control community on commodity export matters.
Technology Export Manager - who is responsible for assessing whether or not a proposed technology (or software) export requires a license, and also serves as LLNL's policy and licensing liaison with the federal government on technology export matters.
Sensitive Countries Information Logging System Manager - who is responsible for overseeing the Sensitive Countries Information Logging system, a Department of Energy (DOE) system to track requests for and transmittal of technical information (including software) to countries on the DOE Sensitive Countries List.
Foreign Visit/Assignment/Travel Coordinator - who is responsible for coordinating approvals for foreign visits and assignments to the Laboratory and foreign travel by the LLNL personnel.
Export Counsel - who is responsible for providing legal guidance to the Laboratory's Export Control Office and Panel.
Topical/Functional Experts - Individuals from throughout the Laboratory may be called upon to provide technical expertise to the Export Control Office or Panel on an as-needed basis.

For a more detailed look at the LLNL methodology, click here.

Fewer people are used at Argonne National Laboratory (ANL) to control its exports and ensure that ANL adheres to U.S. export laws. ANL assigned certain individuals specific topical areas and developed an internal contact list so that anyone who has questions regarding a specific area can contact the right person. The contact list contains the current name, telephone extension, and organizational affiliation of the technical and administrative personnel responsible for different aspects of ANL's export control processes. Moreover, it also developed the position of Export Control Manager to assist employees in different sections of the laboratory with any general matters related to export control and export control determinations. To look at the list in depth, please click here.

While few companies have the resources or expertise of ANL or LLNL, they serve as models that show the functions a company must perform and the types of responsibilities that must be assigned to officials, which in most companies will involve a smaller group of people.

Additional Responsibilities for an Effective Internal Compliance System

Authority Approval A top company official, such as a chief executive officer (CEO) or the president, needs to act as an export officer and be ultimately responsible for the final approval of all export transactions. This official must have confidence that strong oversight is maintained over all the departments involved in exporting an item.

No product should be allowed to leave the company unless all internal compliance procedures have been met, the proper signatures have been obtained, and the transaction is officially approved by the highest authority. It is imperative that the sales decision be the responsibility of a senior official of the enterprise. A mid-level manager often is most concerned with meeting a sales quota and may have different objectives than that of a top official, who bears the responsibility of ensuring the future of the company.

Training All employees must be informed of their duty to adhere to the established export policies. Their attention to detail and their accurate examinations of export transactions are paramount in the decision making process of whether to proceed with a transaction. Extensive training, therefore, should be mandatory.

Export control systems are continually evolving and must continually be monitored and updated. There needs to be a department or official whose purpose is to remain current on export policies on the corporate, national, and international levels, and to disseminate this information in a comprehensible and accessible manner to other employees. Ambiguities can lead to confusion and could contribute to unsatisfactory practices or performances. The better a complex law or policy is understood, the more likely it will be applied correctly in practice.

To do this, the department needs to develop a good-standing liaison with government export officials and maintain contacts with international export control groups so that they remain abreast of any changes. Moreover, the department needs to share its resources and export information with other companies, both domestically and internationally, to promote a community of free exchange and export control assistance.

Employees should be required to complete training courses to learn about not only specific export regulations, but also about the particular products the company exports, ways in which such products can be misused, how to identify illegalities, and how to detect suspicious and inconsistent behavior. Resource materials need to be made available to them, and frequent workshops and seminars dedicated to updating their knowledge base needs to occur on a regular basis. Important updates can also be made on an "as needed" basis through personal contacts and company memorandums.

Reviewing the System Internal compliance systems should be reviewed to ensure that policy procedures are enforced and that high standards are maintained. Two separate reviews should be conducted. One review evaluates policies to ensure that they meet legal, regulatory, and company requirements and expectations. The other review assesses the implementation of the system. Reviews can be done internally or by a third party.

Special attention should be paid to making sure that all the company export policies are being fully implemented by the employees, and that employees are not taking short-cuts that could undermine the effectiveness of the process. The findings of any review should be widely available internally and senior management should be promptly briefed on the results of the review. Following the review, any changes to policy or procedures should be implemented as quickly as possible.

Taking Advantage of Available Resources Sometimes companies will encounter difficulties when implementing export control policies. If a company needs further assistance or technical advice, it should seek the expertise of other export control experts, such as representatives from government agencies, other groups specifically designed to monitor and develop export controls, or even other companies.

A company should consult available resources to familiarize itself with the export control system. These resources would assist in creating a step-by-step procedure on how to verify end-users, as well as work to ensure that the company remains up-to-date on export control laws and regulations. These resources should help to curb any potential problems that the company may face.

To ensure that an end-user is legitimate, the company can use a variety of resources. The internet provides a wide range of domestic and international databases and directories that list both private and public companies. These directories provide users with such company vitals as a listing of the board of directors, number of employees, products produced or services rendered, and some even delve into stock and financial information as well. Click here for links to additional export control resources.

Creation of Internal Resources & Databases Companies need to establish their own internal databases of denied persons, companies, and countries of concern. These databases should include any government lists and international lists. Moreover, the company needs to make sure that it is not in violation of any multilateral regime requirements. Therefore, it needs to establish dossiers on individual countries' laws and regulations as well as any trade organizations or other trade governing entities.

In order to establish these various lists and dossiers, the company should consult the proper government authorities and agencies both domestically and internationally, as well any domestic or international trade organizations, and nonproliferation organizations and experts. A variety of different resources are available.

Companies should develop a basic understanding of the process of proliferation and methods to stop it. Although expertise in nuclear weapon design and production is not necessary, company export control officials should be familiar with several known types of nuclear weapons, and with the processes to make the materials that go into them.

Senior company officials should be aware of the methods proliferant countries use to disguise their procurement networks. Dual-use items are hidden by using civilian-use cover stories and by routing the technology through countries that are not suspected of wanting nuclear weapons, but that are less careful about export controls. An awareness of these tactics is as important as knowing which countries are likely final destinations.

Approve or Deny?

The company should use its discretion when rendering an export approval. The interests of a company may be best served by approving exports on a case-by-case basis. Items should be segregated into various lists depending on their sensitivity. The higher the sensitivity of the item, the stricter the background check and documentation evaluation. If a company has any doubt regarding the end-use of the product, it should take the responsibility upon itself not to proceed with the transaction, even if the company anticipates receiving an approval from the government's exporting agency. Some exports will inevitably require further research. A company must establish a policy and develop procedures to deal with these suspect exports. For example, once an export has been classified as "suspect," does the company stop the transaction until further research has been completed, and wait until the transaction has been researched and authorized to complete the export, or rather not proceed with the export at all?

Each internal compliance system must develop procedures to augment and improve itself. The system must be able to grow and adapt as company personnel changes, government laws change, or company policy changes. Preventing a system from becoming rigid or obsolete requires sustained commitment by senior management.

Enforcement

Governments must strictly prosecute export violations. Experience has shown that export control laws are not taken seriously without effective enforcement. In addition, governments must establish strict fines, significant prison sentences, and other penalties severe enough to deter violations of export regulations. Although states are responsible for creating and enforcing laws, companies should also maintain effective procedures to hold their employees responsible for their actions.

The Wassenaar Arrangement assembled a collection of practices that illustrate an effective governmental enforcement program. Some of the recommendations include:

Using threat assessment techniques and procedures for evaluating parties involved in a proposed export transaction, paying particular attention to those considered to be suspicious, unreliable, or presenting a high risk of diversion;
Maintaining a list of problem end-users to identify license applications deserving closer inspection;
Obtaining assurances regarding end-use and non re-export of licensed items, as appropriate;
As necessary, confirming that exported goods have reached their intended destinations using appropriate means, ranging from documentation to on-site verification;
Seeking voluntary compliance by industry. As appropriate, encourage development by industry of internal compliance programs;
Providing adequate resources and training for enforcement officers;
Ensuring that national laws and regulations have statutes of limitations sufficiently long to permit the detection and prosecution of export control violators; and
Establishing effective penalties (including, as appropriate, criminal sanctions, civil fines, publicity and restriction or denial of export privileges) sufficient to punish and deter violations of export controls.

If a government denies a license to a company, the company should be required to conduct an audit to review its internal compliance measures to understand why it approved the export in the first place. The government should work with the company to rectify any problems that are identified.

On the corporate level, failures or individual acts of indiscretion or poor judgment require punishment and immediate rectification. Employees must know that if they are negligent or violate export control policies, they must bear the consequences of those failures. Punishments should vary, but include employment termination.

Challenges Facing Companies

Once a company has established an internal compliance system, it will face many challenges whose solution has proven difficult. Two recurring ones are keeping employees from being lured into illegal sales and obtaining reliable information about end users.

The Psychology of Illegal Exports

Despite the best internal controls, a company official may decide to violate export control laws. Understanding the psychology of those who would violate export control laws may prove useful in preventing a colleague from going too far to make a sale.

A lingering question in examining case studies of illicit exports is why highly skilled and educated technicians would choose to sell dangerous technology to a foreign government illegally. Simple explanations for these illegal activities include excessive greed and a basic moral depravity that permits someone to understand the real damage they may be doing without caring about the consequences. Some people have acted under these impulses, but in the majority of export control violations, these explanations do not hold up well.

Based on interviews conducted by ISIS staff, one particular trait of many businessmen or experts involved in illegal sales was their ability to rationalize their actions, and in some cases, block out the circumstances that would call into question the morality or legality of their actions. They appear to have created stories to justify their actions and repeated them to themselves long enough that they eventually believed their own lies. They have argued that they had no way of knowing what their export was used for, or that the export was meant for an exclusively civil purpose. They also justified questionable activities by giving themselves a "higher purpose" of saving their companies or employees during times of economic uncertainty. In addition, they convinced themselves that someone would carry out the sales, so it would not prevent anything by refusing the business themselves.

This ability to rationalize and justify their actions appears to be recognized and exploited by proliferant states. These states created stories that would not hold up under intense investigation or scrutiny, but give enough cover to company officials or experts that they could consent to the cooperation. The stories often provide enough explanation for the item to allow the businessmen to avoid asking the questions for which the answers might cause legal or moral conflict.

One example of this type of justification is the repeated assertion by some German businessmen that their work for Iraq in the 1980s was, in fact, for academic research at a university in Baghdad. This rationalization required the Germans to ignore the fact that they had met with military officials during visits to Iraq, and that, in a dictatorship like that of Saddam Hussein's, there is no real independent academic community. In addition, the explanation provided enough of an excuse for the Germans to be able to cooperate without asking further questions which might have resulted in unpleasant answers.

Ensuring End-User Verification

If corporations are to play a major role in thwarting would-be proliferators, they require reliable, current information about the end-users of sensitive items. This type of information is vital in deciding whether to refuse sales or reject contractual commitments, especially in cases where the export is in fact legal, but the end-use of the export remains in question.

Companies often depend on governments for this kind of information. Unfortunately, despite the existence of many databases, key information about certain companies is unavailable or kept secret by governments.

In addition, many companies and governments do not have the resources or expertise to create a system to thoroughly examine end-users. One Russian export control expert, for example, said that more than 90 percent of all Russian enterprises do not have books or other resources with which to research the companies buying their items. Thus, a seller in Russia has a difficult time verifying whether the information the customer provides is reliable and accurate. There is no international centralized database of known front companies or otherwise denied persons. Many countries possess such lists, but often times access to the lists from outside organizations proves difficult. In some cases, the language barrier cannot be overcome, foreign companies are denied access to other country's established lists, or lists are classified and restricted to cleared national officials only.

There remains a need for an open international database on end-users that can be accessed by all companies. To create this database, countries must be more willing to share information on end users. A group of nations, such as the NSG, will need to provide the resources to create and maintain the site. Such a database cannot completely stop front companies from going undetected, but it would make it significantly more difficult for them to illicitly procure items for long.

The United States, Japan and the European Union need to provide additional resources to Russia and other countries that are struggling to implement effective export control systems both on the national and corporate level. A relatively small amount of funds and other resources can significantly increase the security of all.