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Unauthorized Uses of Exported Defense Articles Increased in FY 2010, Report Says

Wednesday, January 04, 2012
Sandler, Travis & Rosenberg Trade Report

The State Department’s Directorate of Defense Trade Controls has posted to its Web site a report outlining the fiscal year 2010 performance of its “Blue Lantern” end-use monitoring program for defense exports. The report reveals that in FY 2010 about 21% of all Blue Lantern end-use checks were unfavorable (compared to 15% in FY 2009), indicating that the exported items are being used for unauthorized purposes.

The Blue Lantern program monitors the end-use of commercially exported defense articles and defense services subject to licensing or other authorizations under section 38 of the Arms Export Control Act and the International Traffic in Arms Regulations. Blue Lantern end-use monitoring entails pre-license, post-license or post-shipment checks undertaken to verify the bona fides of proposed foreign consignees and end-users, to confirm the legitimacy of proposed transactions and to provide reasonable assurance that (a) the recipient is complying with U.S. government requirements with respect to use, transfers and security of defense articles and defense services and (b) such articles and services are being used for the purposes for which they are provided.

According to the report, in FY 2010 the Blue Lantern program set a new record for the number of checks initiated (1,046, up from 774 a year before) for the eighth year in a row and also hit an all-time high for the number of countries in which checks were conducted (111, up from 104). Of the 723 cases closed in FY 2010, 150 (21%) were determined to be unfavorable. Unfavorable Blue Lantern cases may result in the rejection, denial or revocation of a license application, removal of a party, update of the DDTC Watch List, or referral to the office’s Enforcement Division for appropriate action. In FY 2010, of the 74 referrals to END, 18 resulted in directed disclosures and 26 went to federal law enforcement for possible criminal investigation.

The report points out that the geographical distribution of Blue Lantern checks initiated during FY 2010 does not necessarily match that of license applications received. As has been the pattern for several years, Europe had a relatively smaller share of total Blue Lantern initiations (22%) proportionate to its share of the total number of applications (39%), while the Americas were the site of 20% of all Blue Lantern checks despite representing only 14% of applications. East Asia continued to have the highest share of unfavorable Blue Lantern checks with 37%, followed by Europe (18%), the Americas (15%), South Central Asia (11%), Africa (9%) and the Near East (9%). However, DDTC points out two “notable trend changes from the previous two fiscal years:” South Central Asia had proportionally more unfavorable checks compared to the number initiated, and there were proportionally fewer unfavorable Blue Lanterns in the Americas relative to the total number of checks conducted.

The report also lists the reasons for unfavorable checks in FY 2010. “Derogatory information/foreign party deemed unreliable recipient” was the most frequent reason at 29% of the total, virtually unchanged from a year before. “Unable to confirm order or receipt of goods by end-user” rose from 10% to 18% to take second place, followed by “foreign party involved in transaction but not listed on license/application” at 11%, up from 6% in FY 2009. “Indications of diversion or unauthorized retransfer or reexport” fell from 13% to 9% of the total, “unauthorized brokering” increased from 6% to 9%, and “refusal to cooperate” plummeted from 36% to 5%. Other less prevalent reasons for unfavorable determinations in FY 2010 included “lack of adequate facilities to securely store U.S. Munitions List hardware,” “regional instability and security concerns” and “inability to confirm existence of party listed on license.” No cases were closed unfavorable due to unauthorized warehousing or stockpiling, a category that garnered an average of 7% of unfavorable results in FYs 2008 and 2009. DDTC states that the fluctuations year-over-year are not necessarily due to a change in behavior among foreign parties but instead are likely due in part a combination of factors weighing into individual compliance analyst targeting decisions, such as regional diversion concerns, commodity sensitivity and unfamiliar foreign parties.

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