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Defense Export End-Use Checks Continue to Find Problems

Thursday, June 18, 2020
Sandler, Travis & Rosenberg Trade Report

More than 40 percent of the defense export end-use cases closed in fiscal year 2019 found inconsistencies with or could not verify the information on license applications, according to a report from State Department’s Directorate of Defense Trade Controls. This report on the annual performance of DDTC’s “Blue Lantern” end-use monitoring program highlights the importance for defense exporters to maintain effective compliance procedures.

The Blue Lantern program monitors the end-use of defense articles, technical data, services, and brokering activities exported through commercial channels and subject to licensing or other approvals under section 38 of the Arms Export Control Act and the International Traffic in Arms Regulations. Blue Lantern end-use monitoring includes pre-license, post-license, and post-shipment checks to verify the bona fides of foreign consignees and end-users, confirm the legitimacy of proposed transactions, and provide reasonable assurance that (1) the recipient is complying with U.S. government requirements with respect to use, transfers, and security of defense articles and defense services and (2) such articles and services are being used for the purposes for which they are provided.

DDTC notes that in FY 2019 it initiated the first-ever series of joint end-use monitoring checks with the Department of Defense and completed the first tranche of Blue Lantern visits tailored to assess the risk of diversion of U.S. defense articles due to the acquisition of foreign companies by entities that pose a potential enhanced risk of diversion.

According to the report, in FY 2019 the Blue Lantern program initiated 187 checks in more than 40 countries, down from 466 in more than 70 countries the year before. Europe accounted for the largest share of these initiations at 32 percent (up from 14 percent), followed by East Asia and the Pacific at 20.2 percent (down from 43 percent), the Western Hemisphere at 16.2 percent (up from 7 percent), the Near East at 9.2 percent (up from 2 percent), South/Central Asia at 3 percent (unchanged), and Africa at 1.8 percent (down from 20 percent).

Of the 181 Blue Lantern cases closed in FY 2019 (down from 585), 101 (55.8 percent, up from 29 percent) were determined to be unfavorable. Africa had the highest rate of unfavorable checks at 93.3 percent (up from 41 percent), followed by East Asia and the Pacific at 58.8 percent (up from 5 percent), the Near East at 47.1 percent (up from 46 percent), South/Central Asia at 25 percent (down from 81 percent), Europe at 16.7 percent (down from 32 percent), and the Western Hemisphere at 8.3 percent (down from 32 percent).

The report states that the leading cause of an unfavorable finding in FY 2019 (40 cases, down from 52) was derogatory information/foreign party deemed unreliable recipient. Other reasons include unlicensed party (22, up from 12), inability to confirm an order or receipt of goods (13, down from 54), unauthorized reexports/retransfers (5, up from 3), foreign party uncooperative or failing to respond to an end-use check (4, down from 68), inability to confirm existence of foreign party (1, down from 3), and lack of secure storage facilities (1, down from 7). No instances of indications of potential or actual diversion were documented.

Finally, the report notes that unfavorable cases resulted in DDTC recommending denial, removal of an entity, or return without action on more than 130 license applications, up from 57. Eight were referred to Defense Trade Controls Compliance (down from nine).

For more information on defense export issues, please contact Kristine Pirnia.

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