GAO calls on Commerce to suspend VEU program

A congressional watchdog recommended that the U.S. Commerce Department suspend a special export compliance that exempts licensing requirements for certain approved Chinese importers until end-user verification requirements are firmly in place.

Commerce launched the validated end user program in June 2007. The VEU covers a list of 31 entries on the Commerce Control List, such as aircraft and aircraft engines, avionics and inertial navigation systems, lasers, depleted uranium, underwater cameras and propulsion systems, certain composite materials, and some telecommunications equipment for space communications or air defense.

These technologies are referred to in export control circles as dual use, because they can be used for both commercial and military applications.

So far, Commerce has approved five Chinese importers for this status.

In a report to the House Committee on Foreign Affairs about China's rapidly emerging semiconductor industry, the Government Accountability Office chastised Commerce's Bureau of Industry and Security for initiating the VEU program without reaching an agreement with the Chinese government to conduct on-site reviews of validated end-users, a mechanism cited by Commerce as critical to ensuring compliance.

Instead, the department has attempted to conduct VEU on-site reviews under the 2004 End Use Visit Understanding, which requires VEU participants to obtain End-User Statements for shipments, imposing an additional burden on validated end-users, the GAO noted.

Obtaining an End-User Statement is not a VEU program requirement, and runs counter to the trade facilitating objectives of the program, the GAO said. Therefore, an amended or new agreement is needed.

The Chinese Ministry of Commerce has also imposed measures that severely restrict foreign governments, including the United States, from conducting in-country interviews and investigations related to export controls without permission.

The Chinese government has asked Commerce to refrain from approving any new, additional validated end-users until the two sides can agree on terms for conducting on-site reviews of validated end-users.

The VEU program has yet to produce the advantages anticipated by Commerce, and challenges with program implementation may limit Commerce's ability to ensure that items shipped under the program are being used as intended. Commerce has yet to realize trade gains and enhanced national security because few U.S. exporters have taken advantage of the VEU program, the GAO said.

As of June 2008, the GAO said only one of the three validated end-users involved in China's semiconductor industry authorized to receive U.S.-made semiconductor equipment and materials had received any items under the program.

Furthermore, according to Commerce, since the first validated end-users were authorized in October 2007, approximately 6 percent of the total exports of semiconductor manufacturing equipment to China have taken place under the VEU program, whereas 94 percent were conducted under an export license, the GAO said.