HEARINGS BEFORE THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE NINETY-SEVENTH CONGRESS SECOND SESSION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00364R001001520004-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 661
• Document Creation Date: December 20, 2016
• Document Release Date: December 11, 2007
• Sequence Number: 4
• Publication Date: May 1, 1982
• Content Type: REPORT

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TRANSFER OF UNITED STATES HIGH TECHNOLOGY
TO THE SOVIET UNION AND SOVIET BLOC NATIONS
HEARINGS
BEFORE THE
PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS
OF THE
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
NINETY-SEVENTH CONGRESS
SECOND SESSION
MAY 4, 5, 6, 11, AND 12, 1982
Printed for the use of the Committee on Governmental Affairs
C / 3 7
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TRANSFER OF UNITED STATES HIGH TECHNOLOGY
TO THE SOVIET UNION AND SOVIET BLOC NATIONS
HEARINGS
BEFORE THE
PERMANENT
SUBCOMMITTEE ON INVES
OF THE
IGATIONS
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
NINETY-SEVENTH CONGRESS
SECOND SESSION
MAY 4, 5, 6, 11, AND 12, 1982
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
95-9290 WASHINGTON ; 1982
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402
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COMMITTEE ON GOVERNMENTAL AFFAIRS
WILLIAM V. ROTH, JR., Delaware, Chairman
CHARLES H. PERCY, Illinois
TED STEVENS, Alaska
CHARLES McC. MATHIAS, JR., Maryland
JOHN C. DANFORTH, Missouri
WILLIAM S. COHEN, Maine
DAVID DURENBERGER, Minnesota
MACK MATTINGLY, Georgia
WARREN B. RUDMAN, New Hampshire
HARRISON H. SCHMITT, New Mexico
JOAN M. MCENTEE,
THOMAS F. EAGLETON, Missouri
HENRY M. JACKSON, Washington
LAWTON CHILES, Florida
SAM NUNN, Georgia
JOHN GLENN, Ohio
JIM SASSER, Tennessee
DAVID PRYOR, Arkansas
CARL LEVIN, Michigan
Staff Director
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
WILLIAM V. ROTH, JR., Delaware, Chairman
WARREN B. RUDMAN, New Hampshire, Vice Chairman
CHARLES H. PERCY, Illinois SAM NUNN, Georgia
CHARLES McC. MATHIAS, Ja., Maryland HENRY M. JACKSON, Washington
JOHN C. DANFORTH, Missouri LAWTON CHILES, Florida
WILLIAM S. COHEN, Maine JOHN GLENN, Ohio
JIM SASSER, Tennessee
S. CASS WEILAND, Chief Counsel
MICHAEL C. EBERHARDT, Deputy Chief Counsel
ELEANORE J. HILL, Chief Counsel to the Minority
KATHERINE BIDDEN, Chief Clerk
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CONTENTS
Testimony of? Page
Arkov, Joseph, (assumed name for former Soviet engineer) 27
Asselin, Fred, staff investigator, Permanent Subcommittee on Inves-
tigations 82
Baker, Dr. Lara H., Jr., assistant office leader, International Tech-
nology Office, Los Alamos National Laboratory, University of
California _ 54
Bell, William H., prisoner; accompanied by Robert L. Kirste, at-
torney_ 37
Brady, J. Lawrence, Assistant Secretary of Commerce for Trade
Administration, Department of Commerce 262
Bryant, Clyde, Chief, Support Services Division, Office of Munitions
Control, State Department 156
Bryen, Dr. Stephen D., Deputy Assistant Secretary of Defense, Inter-
national Economics, Trade and Security Policy, Department of
Defense 249
Buckley, James L. Under Secretary of State for Security Assistance,
Science and Technology, Department of State 156
Corcoran, George G., Assistance Commissioner (Border Operations),
U.S. Customs Service 193
Fry, Glenn W., staff investigator, Permanent Subcommittee on Inves-
tigations
74, 82
Greenberg, Theodore, assistant U.S. attorney, Eastern District of
Virginia 129
Inman, Adm. Bobby R., Deputy Director, Central Intelligence
Agency 235
Johnston, Ernest, Deputy Assistant Secretary of State for Economic
and Business Affairs 156
Kapper, Dr. Frank, Director of Military Technology Sharing 218
Lecht, Charles, former president and chairman of the board, Advanced
Computer Techniques Corp 229
Lomacky, Dr. Oles, 'Director of the Office of Technology Trade 218
Lorenzo, Michael, Deputy Under Secretary of Defense, International
Programs and Technology, Department of Defense 218
Maguire, John, president, Software AG of North America, Inc 121
Marshall, John D., businessman, Santa Clara, California 71
Martin, John L., Criminal Division, U.S. Department of Justice_ 129
O'Brien, Patrick, Director, General Investigations, U.S. Customs
Service 193
O'Malley, Edward J., Assistant Director, Intelligence Division,
Federal Bureau of Investigation 168
Southard, Douglas, deputy district attorney, County of Santa Clara,
California 143
Van Cook, Arthur, Director of Information Security, Department of
Defense, and chairman, National Disclosure Policy Committee 181
Von Raab, William, Commissioner, U.S. Customs Service 193
Vorona, Dr. Jack, Director, Scientific and Technical Information,
Defense Intelligence Agency, Department of Defense 10
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Iv
EXHIBITS
Intro-
duced Appears
on Page an Page
1. Assessment of the technology transfer problem regarding diver-
sions to the Soviet Union 6 7
2. Public Law 96-72, 96th Congress, September 29, 1979, Export
Administration Act of 1979 97
3. Testimony of William V. Skidmore, Director, Office of Export
Administration, Department of Commerce, before the Sub-
committee on International Economic Policy and Trade of the
House Committee on Foreign Affairs, March 26, April 14, 28,
and May 13, 1981, Export Administration Amendments Act
of 1981 97
4. Export Administration report to Congress, October 1978?March
1979, issued by the Industry and Trade Administration, De-
partment of Commerce; Export Administration report to
Congress, April 1979?September 1979; issued by the Industry
and Trade Administration, Department of Commerce; Export
Administration annual report fiscal year 1980, issued Febru-
ary 1981, by International Trade Administration, Department
of Commerce; Export Administration annual report fiscal year
1981, issued February 1982, by the International Trade Ad-
ministration, Department of Commerce 97
5. Memorandum from Sharon R. Connelly, Director, Compliance
Division, to William V. Skidmore, Director, Office of Export
Administration, on "Administrative Enforcement Activity in
the Compliance Division in Fiscal Year 1981 Compared to
Prior Years," October 5, 1981 97
6. 198L summary of work of Facilitations Branch of Compliance
Division_ 97
7. S. 206, 96th Congress, Office of Strategic Trade Act of 1980,
introduced on April 24, 1980, by Senator Garn ; floor remarks
of Senator Garn; and May 8, 1980, "Dear Colleague letter"
regarding legislation__97
8. Letter to the Speaker of the House and the President of the
Senate transmitting a report from President Carter, "Ship-
ments of Agricultural Commodities to the Soviet Union,"
January 2, 1980_ 97
9. Report by the Comptroller General of the United States,
"Lessons To Be Learned From Offsetting The Impact Of The
Soviet Grain Sales Suspension," July 27, 1081, -U.S. General
Accounting Office. 97
10. Memorandum from William Green, Deputy Assistant Com-
missioner for Border Operations, Customs Service, to Robert
L. Kench, Associate Deputy Attorney General and Chairman
of Inter-agency Working Group on Export Control, October
20, 1980 97 97-99
11. Los Angeles Times article, "4 Accused of Exports for Soviet
Bloc Nations," August 20, 1981, p. 1 97 *
12. Indictment, United States v. Werner J. Bruchhausen, Anatoli
Tony Maluta, Sabina Dorn Tittel; and Dietmar Ulrichshofer;
U.S. District Court for the Central District of California 97
13. Information, United States v. Anatoli Tony Maluta, U.S. District
Court, Central District of California 97
14. Stipulation of Facts and Exhibits re: trial of Anatoli Tony
Maluta, United States v. Anatoli Tony Maluta, October 27,
1981, U.S. District Court, Central District of California_ _ _ _ 97
15. Memorandum re: Sentencing; Exhibits; Declaration of Theodore
W. Wu, United States v. Anatoli 7'. "Valuta and Sabina D.
Tittel, U.S. District Court, Central District of California 97
16. Commerce Department press release of April 3, 1981, an-
nouncing that the Department had denied all U.S. export
privileges to Anatoli Maluta, Sabina Dorn Tittel; and Werner
J. Bruchhausen and three firms associated with them; and 16
more Commerce Department press releases relating to actions
taken in connection with alleged violations of export laws
and regulations in 1980 and 1981 97
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EXHIBITS?Continued
Intro-
duced Appears
on page on page
17. Commerce Department press release of September 8, 1980
in which Commerce Secretary Philip M. Klutznick and
Attorney General Benjamin Civiletti announced that Pres-
ident Carter had directed formation of an interagency work-
ing group chaired by the Justice Department 'to examine
ways to improve compliance with the export control laws."_ _ _
18. Commerce Department press release of January 11, 1980,
announcing, 'Commerce Secretary Denies $1 Billion Plus
In Export Licenses for Soviet Union"
19. Volumes 4, 7, 8, and 11, reporter's transcript, U.S. v. Spawr,
Optical Research, Inc., Walter J. Spawr, Frances Spawr,
November 13, 24 and 25 and December 3, 1980, U.S. District
Court, Central District of California
20. Qualification standards and position discriptions on? GS-1811
Federal criminal investigation issued by the Office of Per-
sonnel Management
21. Speech by Senator Henry M. Jackson on "Technology Transfer
Policy?The High Stakes," in Senate, February 11, 1982 _
22. Congressional Research Service report entitled, "Foreign
Espionage and U.S. Technology," prepared at the request of
the Senate Permanent Subcommittee on Investigations by
Mark M. Lowenthal, Foreign Affairs and National Defense
Division; and George Holliday and Lawrence Evans, both
of the Economics Division; August 12, 1980
23. Statements of Lawrence J. Brady, Assistant Secretary of
Commerce for Trade Administration, before House Sub-
committees on Science, Research and Technology and on
Investigation and Oversight, March 29, 1982; and before
Senate Subcommittee on International Finance and Monetary
Affairs, April 14, 1982
24. Commerce Department April 1982 biography of William V.
Skidmore, Director, Office of Anti-Boycott Compliance;
and Acting Director, Compliance Division
25. New York Times editorial, "Smothered By A Security Blanket,"
April 12, 1982
26. Letter from Frank Carlucci, Deputy Secretary of Defense
to William D. Carey, Executive Officer and Publisher of
Science magazine, printed under the heading, "Scientific
Exchanges and U.S. National Security," in January 8, 1982
issue
27. Soviet Military Power, Department of Defense publication_ _ __
28. Letters from Chairman Roth and Senator Nunn to Commerce
and Treasury Departments requesting specific information on
export controls, September 21, 1981; April 14 and 16, 1982__
29. Sworn affidavit of John Rennish
30. Sworn affidavit of Michael Dolphin
31. Sworn statement of Charles McLeod
32. Freedom of Information Act (S. 1751), and a section by section
analysis, submitted by Mr. Van Cook
33. Briefing on duel-use technology prepared by Col. Kenneth
Evans, U.S. Army
34. Statement prepared for the subcommittee by the American
Society for Industrial Security
35. Prepared statement submitted to the subcommittee by the
Computer ?Sz Business Equipment Manufacturers Association..
36. Prepared statement submitted by the Electronics Industries
Association
37. Prepared statement submitted by the Scientific Apparatus
Makers Association
38. Court exhibits, documents and related material
97
97
97
97
*
97
*
97
*
97
*
97
97
*
97
*
97
*
97
*
277
278
277
283
277
287
191
*
296
*
296
*
296
*
296
*
296
*
296
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VI
APPENDIX
Asselin, Fred, investigator, Permanent Subcommittee on Investigations.
Prepared statement, including a summary written by Mr. Asselin on the Page
CTC case 366
Baker, Dr. Lara H., Jr., assistant office leader, Los Alamos National Lab-
oratory, "Talking Notes"' of Dr. Baker; his submitted r?m?a memoran-
dum dated April 16, 1982, which contains Dr. Baker's response to the
Customs Bureau regarding the CTC case 338
Brady, Lawrence, Assistant Secretary of Commerce for Trade Adminis-
tration, Department of Commerce, prepared statement 596
Bryen, Dr. Stephen D., Deputy Assistant Secretary of Defense, Inter-
national Economics, Trade and Security Policy, Department of Defense,
prepared statement_ 583
Buckley, James L., Under Secretary of State for Security Assistance, Sci-
ence and Technology, Department of State, statement with related mate-
rial and attachments_ 533
Cohen, Senator William S., prepared statement 313
Fry, Glenn W., staff investigator, Permanent Subcommittee on Investi-
gations, prepared statement 426
Greenberg, Theodore, assistant U.S. attorney, Eastern District of Virginia,
prepared statement 432
Inman, Adm. Robert R., Deputy Director, Central Intelligence Agency,
prepared statement_ 577
Jackson, Senator Henry M., prepared statement; letters to President
Reagan dated March 8, 1982, and November 14, 1980, relating to the sub-
committee's investigation; a newsletter by Senator Jackson dated
February 11, 1982, on the subject matter_ 315
Lecht, Charles, former president and chairman of the board, Advanced
Computer Techniques Corp., statement 570
Lorenzo, Michael, Deputy Under Secretary of Defense, International
Programs and Technology, Department of Defense, prepared statement;
copy of speech dated March 11, 1982, to the George Washington Univer-
sity on Military Transfer Technology_ 552
Southard, Douglas, deputy district attorney, county of Santa Clara, Calif.,
prepared statement 475
U.S. Department of Commerce: Inspector General's Report of Inspection
of the Export Administration's Compliance Division 606
Wu, Theodore Wai, assistant U.S. attorney, Criminal Division, Central
District of California, prepared statement (did not testify) 510
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TRANSFER OF UNITED STATES HIGH TECHNOLOGY
TO THE SOVIET UNION AND SOVIET BLOC NATIONS
TUESDAY, MAY 4, 1982
US. SENATE,
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS,
Washington, D.C.
The subcommittee met at 10:10 a.m., pursuant to call, in room 3302,
Dirksen Senate Office Building, under authority of Senate Resolution
361, dated March 5, 1980, Hon. William V. Roth, Jr., presiding.
Members of the subcommittee present: Senator William V. Roth,
Jr., Republican, Delaware; Senator William S. Cohen, Republican,
Maine; Senator Warren B. Rudman, Republican, New Hampshire;
Senator Henry M. Jackson, Democrat, Washington; Senator Lawton
Chiles, Democrat, Florida; and Senator Sam Nunn, Democrat,
Georgia.
Members of the professional staff present: S. Cass Weiland, chief
counsel; Michael C. Eberhardt, deputy chief counsel; Katherine Bid-
den, chief clerk; Eleanore J. Hill, chief counsel to the minority;
Gregory Baldwin, assistant counsel to the minority; Jack Key, Glenn
Fry and Fred Asselin, staff investigators to the minority; and
Kathleen Dias. executive secretary to the minority chief counsel.
[Members of the subcommittee present at convening: Senators Roth,
Nunn, Jackson, Cohen, Chiles, and Rudman.]
Chairman ROTH. Today the Permanent Subcommittee on Investiga-
tions opens 5 days of in-depth hearings into the loss of U.S. technology
to the Soviet Bloc countries. At the very outset, I want to congratu-
late you, Senator Nunn, and your staff for the excellent work in put-
ting together this series of very important hearings.
As chairman I am, of course, cognizant of the accomplishments of
the subcommittee under you, Senator Jackson, on this subject during
the mid-seventies and fully support the tvne of investigation that has
led to the presentation of evidence we will begin to hear today.
The issues that will be addressed here in the next two weeks are of
great concern to me and should be fully understood so that the Ameri-
can people can better appreciate the extent to which our sensitive tech-
nology is finding its way into the Soviet Union and its bloc nations.
There is no question that the Soviets have undertaken a massive, *ell-
financed, expertly coordinated program to systematically acquire as
much as our high technology as they can steal, purchase through mid-
dlemen or otherwise appropriate. And all because they are unable to
produce that technology themselves. So they are left to copy ours and
use it, no to make life more comfortable for their citizens, but
to advance their numerous weapons systems and overall military
capabilities. -
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It is of the utmost importance, therefore, that our Federal law
enforcement and intelligence agencies work closely with representa-
tives of private industry in identifying and protecting those sensitive
items and processes which are the targets of Soviet operatives. But in
so doing we must remain committed to our great tradition of Ameri-
can competition in the world marketplace. A balance must be struck
between our legitimate effort to curtail any assistance to Soviet mili-
tary buildup on one hand, and our promotion of free, enterprise in
the world market on the other hand.
This is no easy balance to strike, but hopefully our hearings will
identify the issues that we must address if we are to succeed in both
of these goals.
One key factor to success will be the assurance that our Federal
intelligence agencies are interacting with Federal enforcement agencies
to identify those types of sensitive technology most desired by the
Soviet Union. This is where our e:mphasis on control must lie, not with
items of little or no priority to the Soviets.
Furthermore, much of the technology developed here in the United
States is also being developed by other Western nations for sale over-
seas, while our allies readily trade away sensitive information to the
Soviet bloc. We must, therefore, work together with our friendly
neighbors to establish carefully conceived important programs aimed
at specific types of technology.
Clearly, effectiveness depends on multilateral enforcement.. Where
that cooperation is lacking, we must build incentives to achieve them;
and where there are presently treaties in effect, we must insure that
there is a sufficient commitment to their vigorous enforcement.
I look forward to the next several days of hearings and again want
to thank Senator Nunn for his efforts.
Senator Nunn.
OPENING STATEMENT OF SENATOR NUNN
Senator Nuiciv. Thank you very much, Mr. Chairman. I want to
thank you, Mr. Chairman, and the entire majority staff for your
splendid cooperation during the course of this investigation and in
plans for these hearings. We have had the minority staff working on
this problem now for about 15 months and during the entire course of
that investigation, we have had splendid and total cooperation from
the majority, which we appreCiate very much.
The subcommittee today begins its evaluation of the effectiveness of
the executive branch in enforcing exPort controls, particularly with
regard to transfer of technology to the Soviet Union and other Warsaw
Pact nations.
The subcommittee has received information indicating that the exec-
utive branch has devoted insufficient attention and resources to enforc-
ing export controls on high technology. When I say the executive
branch during the course of these hearings. I want to make it absolutely
plain I am talking about the executive branch that exists now and the
one that existed before. This is a bipartisan thing and this is not aimed
at any particular administration. This problem transcends any admin-
istration or any leadership.
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For this Nation to neglect export controls is to assist the Soviets in
carrying out their global designs. They have stated often their goal to
achieve superiority in science and technology. We are mistaken not to
take them at their word.
Since the end of World War II, the Soviets have made great strides
in building their military prowess. Our own security analysts admit to
the increased level of deployed Soviet military technology. We have
relied on our technological superiority to offset the Soviet Union's
commitment to have more of everything, more men in arms, more
armor, more aircraft, more ships at sea. Kowever, the United States'
advantage in basic military technology is being challenged. Today the
Soviets have more of most things military. They are also closing the
gap technologically in many fields.
In modernizing their military capabilities, the Soviets first had to
modernize their industry. In that pursuit, they relied to an important
extent on technology from the United States.
According to American defense analysts, the United States has been
the source of much of the Soviet Union's electronic and computer tech-
nology and advanced manufacturing capability. Some of this ex-
pertise was given or sold to the Soviets willingly. Some of it the
Soviets obtained illegally.
The Soviets have come to view our technology as their technology, to
be obtained whenever they need it. As a consequence, we are in the posi-
tion of supporting our own costly national security apparatus, and
indirectly helping them to build theirs.
Since 1970, the Western democracies and Japan have supplied the
Soviet industrial sector with millions of dollars' worth of efficient
machine tools, chemical plants, precision instrumentation, and associ-
ated technologies. Western goods and technologies have played a major
role in the modernization and expansion of Soviet industry. The use of
the technology embodied in the Western equipment has enabled the
Soviet Union and the Warsaw Pact countries to achieve industrial
growth at a faster rate than would have been possible with their own
resources.
Our purpose in these hearings is to identify the principal vehicles
the Soviets use to obtain high technology from the United States and
to examine our ability to halt the technological drain.
Imagine for a moment an office in the Kremlin where senior Soviet
officials decide what kind of technology they need from us and then
devise their efforts to obtain it.
The Kremlin office, a composite of several Soviet departments, re-
sponds to the law of supply and demand. The demand is reflected in
the needs of military and industrial planners. The planners give the
"Technology Transfer Office" a shopping list of desired high technol-
ogy components and knowledge. The composite Soviet officers in charge
of obtaining American technology surveys his resources.
Generally speaking, he has seven basic approaches he can utilize.
First, there are the KGB and the GRU, the spy organizations which
practice traditional hand-in-the-safe information gathering crafts.
Their tactics range from bribery to blackmail to extortion.
Second, the Soviets rely on information published by the U.S. Gov-
ernment and made available by Federal agencies.
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The subcommittee will examine information indicating that too
much data about our military programs may be being made public. The
Soviets draw heavily on the Government's Public documents.
Third, the Soviets promptly translate U.S. technical journals and
distribute them among their scientists and engineers. There is nothing
the United States can do to stop that. However, the subcommittee will
examine the procedures with which the Government decides to make
heretofore sensitive information available.
Fourth, the Soviets promote information exchanges as ways to es-
tablish improved relations between the two countries. But information
exchanges may serve the Soviets in other ways.
The subcommittee will examine information indicating that the So-
viets exploited such exchanges for their own benefit and the United
States gives up more information than it receives.
Similarly, the subcommittee will examine information indicating
that the Soviets exploit the so-called student exchange program with
the United States. Sources indicate that the Soviets send to American
universities established scientists to learn at our Nation's centers of
high technology studies. In return, the United States usually is repre-
sented by college-age students whose interests are literature, art, or
history.
Fifth, the Soviets and their surrogates form marketing and manu-
facturing companies in this country which serve two purposes for
them. They buy high technology and munitions for illicit export to
the Soviet Union. Second, they use their facilities in the United States
as havens for spies. Both these techniques will be examined in the
hearings.
Sixth, the Soviets turn to agreements in which American companies
and consortiums build factories in the U.S.S.R.
Seventh, the Soviets employ business intermediaries in the United
States and foreign countries. Using false shipping documentation and
other illegal practices, business intermediaries buy high technology
components and knowledge and send them to the Soviet sphc?re.
It is important to note that in these hearings we have special
interest in so-called "dual-use" technology; that is to say, technology
developed or manufactured in this country primarily by the private
sector and primarily for commercial purposes. It is termed "dual use"
because in the hands of the Soviets or another adversary, the tech-
nology can have military applications that can be used against the
United States.
Such technology cannot be exported legally without a validated
license from the U.S. Department of Commerce.
The Commerce Department's Office of Export Administration,
known as OEA, has the responsibility of enforcing export controls
under the Export Administration Act. Investigation of alleged viola-
tions is conducted by 0EA's Compliance Division.
Our preliminary investigation has raised serious questions about
the ability of the, Commerce Department to enforce effectively those
U.S. export laws governing technology transfer.
The subcommittee will examine carefully allegations that from as
early as .1963, the Compliance Division has been undermanned and
undertrained as a law enforcement organization. By contrast, the
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Soviets have become increasingly adept in their ability to secure our
high technology.
In that context, the subcommittee intends to examine the mecha-
nisms both on the statutory and agency levels, which the United States
has developed to implement a strong policy aimed at halting the tech-
nology drain. We will weigh the testimony and evidence to determine
what can be done to improve the ability of the executive branch to
enforce export controls.
The transfer of technology to the Soviet Union is one of our most
important national security problems. It is a national security issue
that deserves the most responsible and thoughtful scrutiny.
I want to stress fiat a primary consideration of this subcommittee's
inquiry is to enable the private sector of our economy the opportunity
to export with as few regulations and controls as possible. One point
has come through clearly in the preliminary investigation. It is that
the way high technology export controls are administered now, too
many items are controlled, and because the Government tries to control
too many commodities, it fails to keep track of those products the
Soviets desire most. So, in the effort to broaden and have a comprehen-
sive list, we end up uncovering more and more. An improved system
of export regulations would focus on those high technology items the
Soviets must have.
This so-called Soviet shopping list, based on sound intelligence esti-
mates, will enable our Government to safeguard the most critical as-
pect of our technology and we hope also eliminate some of the regula-
tions and controls that cause American businessmen to complain bit-
terly about wasteful Government redtape.
The result, if it can be implemented, will be an improved enforce-
ment effort and an improved balance of trade.
What Chairman Roth pointed out at the beginning of these hearings
is very important. It is extremely difficult for an open society to have
restrictions on technology transfer. We have to arrive at a balance.
The openness of our society is one of the strengths that we have in de-
veloping new technologies. It is also apparent that the Soviet Union
has a distinct advantage in developing technology because they have a
closed society. So we certainly have to keep that balance in mind.
Mr. Chairman, I think it is appropriate at this point to express my
respect and admiration for our colleague on this subcommittee, Sena-
tor Jackson. who was one of the first to speak out on the importance
of the technology transfer issue.
As early as 1974, Senator Jackson. then chairman of this subcom-
mittee, convened hearings on this subject and helped focus needed at-
tention on a subject that was much in need of congressional oversight.
Senator Jackson's work in this area provided an accurate and com-
prehensive foundation for the investigation we launch today. So I
want to commend you, Senator Jackson, for your longstanding leader-
ship in this field and as I have said so many times in the post, you know
and understand national security matters very well?with one or two
poc-sible exceptions that we can -discuss later on.
In addition, Mr. Chairman. I want to point out that in this prelimi-
nary investigation, the minority staff has coordinated its efforts with
the staff of the Senate Select Committee on Intelligence. We have re-
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6
ceived complete cooperation and assistance from select committee staff
and I myself have benefited greatly from the generous guidance of my
distinguished colleagues, Senator Goldwater, the chairman of the
select committee, and Senator Moynihan, the vice chairman.
Our staff has provided thorough briefings to the select committee
staff and I have kept members of the select committee advised of our
progress as well.
In concluding my opening statement, Mr. Chairman, I request that
you order printed in the record at this point an assessment of the tech-
nology transfer problem regarding diversions to the Soviet Union.
The assessment prepared by national security specialists in the execu-
tive branch was made available to me through established procedures.
Chairman ROTH. Without objection, it will be so printed.
[The document referred to was marked "Exhibit No. 1," for refer-
ence and follows:]
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7
EXHIBIT NO. 1
Soviet Acquisition of
Western Technology
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8
Contents
Page
Introduction
Soviet Acquisition of Western Technology: A National-Level Program
Soviet Mechanisms for Acquiring Western Technology 2
Soviet Acquisitions and Benefits 5
Outlook for the 1980s 11
Appendix
Projected Soviet Technological Needs and Acquisition Targets 13
Through the 1980s
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Soviet Acquisition of
Western Technology
Introduction
The United States and its Allies traditionally have
relied on the technological superiority of their weap-
ons to preserve a credible counterforce to the quanti-
tative superiority of the Warsaw Pact. But that
technical superiority is eroding as the Soviet Union
and its Allies introduce more and more sophisticated
weaponry?weapons that all too often are manufac-
tured with the direct help of Western technology.'
Stopping the Soviets' extensive acquisition of mili-
tary-related Western technology?in ways that are
both effective and appropriate in our open society?is
one of the most complex and urgent issues facing the
Free World today.
This report describes the Soviet program to acquire
US and Western technology, the acquisition mecha-
nisms used, the spectrum of Western acquisitions that
have contributed to Soviet military might, the project-
ed Soviet priority needs for Western technology, and
the problems of effectively stemming the transfer of
Western technology that could someday find applica-
tion in weapons used to threaten the West.
Soviet Acquisition of Western Technology:
A National-Level Program
Since at least the 1930s, the Soviet Union has devoted
vast amounts of its financial and manpower resources
to the acquisition of Western technology that would
enhance its military power and improve the efficiency
of its military manufacturing technology. Today this
Soviet effort is massive, well planned, and well man-
aged?a national-level program approved at the high-
est party and governmental levels.
? While there are numerous interpretations of "technology" for
weapons, it is defined in this report as the application of scientific
knowledge, technical information, know-how, critical materials,
keystone manufacturing and test equipment, and end products
which are essential to the research and development as well as the
series manufacture of modern high-quality weapons and military
equipment. Western technology is defined as that technology
developed by the Free World.
1
9
This program accords top priority to the military and
military-related industry, and major attention is also
given to the civilian sectors of Soviet industry that
support military production.
The Soviets and their Warsaw Pact allies have ob-
tained vast amounts of militarily significant Western
technology and equipment through legal and illegal
means. They have succeeded in acquiring the most
advanced Western technology by using, in part, their
scientific and technological agreements with the West
to facilitate access to the new technologies that are
emerging from the Free World's applied scientific
research efforts; by spending their scarce hard curren-
cy to illegally purchase controlled equipment, as well
as to legally purchase uncontrolled advanced Western
technologies having military-industrial applications;
and by tasking their intelligence services to acquire
illegally those US and Western technologies that are
classified and export controlled.
The Soviets have been very successful in acquiring
Western technology by blending acquisitions legally
and illegally acquired by different government organi-
zations. The Soviet intelligence services?the Soviet
Committee for State Security (KGB) and the Chief
Intelligence Directorate of the Soviet General Staff
(GRU)?have the primary responsibility for collecting
Western classified, export-controlled, and proprietary
technology, using both clandestine and overt collec-
tion methods. They in turn make extensive use of
many of the East European Intelligence Services (see
inset, p. 2); for their efforts in acquiring Western
technology, these countries are paid in part with
Soviet military equipment and weapons.
Clandestine Requisition of the West's most advanced
military-related equipment and know-how by the
KGB and GRU is a major and growing problem.
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East European Intelligence Services Acquire
Technologies for the Soviet Union
In the late 1970s a former East European intelligence
officer revealed organizational and targeting details
related to Soviet-directed acquisitions of Western
technology by East European intelligence services
particularly military-industrial manufacturing-
related technologies that were given the highest prior-
ity for collection by at least one East European
intelligence service. Many technologies were acquired
through dummy firms established in Western Europe
that were successful in securing some of the most
advanced technologies in the West, including com-
puter, microelectronic, nuclear, and chemical
technologies.
In microelectronics, for example, many US firms
were targeted through their affiliates in Western
Europe; scientists, technicians, and commercial rep-
resentatives also were successfully recruited to pro-
vide information during their trips to Europe. Al-
though most of the military and defense-industrial
information acquired by East European intelligence
services went to the Soviets, much of it was used by
the East Europeans themselves to benefit their ntili-
tory and civilian industries. The computer, micro-
electronic, and photographic areas were priority tar-
gets. The East European countries benefited con-
siderably from microelectronic acquisitions, and
could not have achieved the present level of develop-
ment in their computer industry without illegal
acquisitions of Western technology
These intelligence organizations have been so success-
ful at acquiring kVestern technology that the man-
power levels they allocate to this effort have increased
significantly since the 1970s to the point where there
arc now several thousand technology collection offi-
cers at work. These personnel, under various covers
ranging from diplomats to journalists to trade offi-
cials, are assigned throughout the world.
Soviet foreign trade organizations, or enterprises,
although quasi-independent entities, are partially sub-
ordinated to the Ministry of Foreign Trade, and their
activities are closely coordinated by this Ministry.
10
They have major responsibilities for Both legal and
illegal acquisitions and purchases; they work closely
with the KGB and GRU in arranging trade diver-
sions. East European trade companies assist them in
clandestine and illegal acquisition operations.
Official Soviet and East European science and tech-
nology (s&-r) organizations also play a major role in
both open and clandestine acquisition of Western
technology. The Soviet State Committee for Science
and Technology (GKNT) is the key player in arrang-
ing government-to-government science and technol-
ogy agreements to facilitate access to and the acquisi-
tion of established as well as new technologies,
including those just emerging from Western universi-
ties, laboratories, and high-technology firms. It is the
GKNT that oversees the allocation of scarce Soviet
hard currency for the legal purchase by various Soviet
organizations of selected Western technology for So-
viet military purposes. If the GKNT is unable to
acquire the necessary technology by open or legal
means, it tasks Soviet intelligence to clandestinely
acquire the technology.
It is the well-organized and well-coordinated use of all
these organizations that has made the Soviet program
to acquire Western technology so successful. As a
result, the Soviets have acquired militarily significant
technologies and critically important industrial West-
ern technologies that have benefited every major
Soviet industry engaged in the research, development,
and production of weapon systems.
Soviet Mechanisms for Acquiring Western Technology
Soviet acquisition mechanisms include: legal means
through open literature, through legal trade channels,
and through student scientific and technological ex-
changes and conferences; illegal means through trade
channels that evade US and Western (i.e. CoCom)'
export controls, including acquisitions by their intelli-
gence services through recruited agents and industrial
'Thu Coordinating Committee (CoCom) was established in 1949 to
serve as the forum for Western efforts to develop a system of
strategic export controls. It is composed of the United States, the
United Kingdom, Turkey, Portugal, Norway, the Netherlands,
Luxembourg, Japan, Italy, Greece, France, the Federal Republic of
Germany, Denmark, Canada, and Belgium.
2
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espionage. While a large volume of technology is
acquired by nonintelligence personnel, the overwhelm-
ing majority of what the United States considers to be
militarily significant technology acquired by and for
the Soviets was obtained by the Soviet intelligence
services and their surrogates among the East Europe-
an intelligence services. However, legal acquisitions
by other Soviet organizations are important since it is
often the combination of legally and illegally acquired
technologies that gives the Soviets the complete mili-
tary or industrial capability they need.
Because of the priority accorded to the military over
the civilian sectors of the Soviet economy, Western
dual-use technology?i.e., technology with both mili-
tary and civilian applications?almost always finds its
way first into military industries, and subsequently
into the civilian sectors of industries that support
military production. Thus, Soviet assurances that
legally purchased dual-use technology will be used
solely for civilian applications can seldom be accepted
at face value.
Legal acquisitions generally have their greatest im-
pact on the Soviets' broad industrial base, and thus
affect military technology on a relatively long-term
basis. The Soviet Kama Truck Plant, for example,
was built over some seven years with massive imports
of more than $1.5 billion worth of US and West
European automotive production equipment and tech-
nology. Large numbers of military-specification
trucks produced there in 1981 are now being used by
Soviet forces in Afghanistan and by Soviet military
units in Eastern Europe opposite NATO forces. Simi-
larly, large Soviet purchases of printed circuit board
technology and numerically controlled machine tools
from the West already have benefited military manu-
facturing sectors.
The Soviets give priority to those purchases that meet
the direct needs of the Soviet military-industrial
complex by paying for them in hard currency. Over
the past 10 years, the Soviets legally and illegally
purchased large quantities of Western high-technol-
ogy microelectronics equipment that has enabled
them to build their own military microelectronics
industry in a short time. This acquired capability in
11
microelectronics is the critical basis for the present
wide-ranging enhancements of Soviet military sys-
tems and for their continuing sophistication.
Acquisitions through illegal trade channels often have
both industrial and military applications, and thus are
important in the near term. Illegal acquisitions of
technology fall into two general categories, both of
which are extremely difficult to detect and monitor.
One is the diversion of controlled technology from
legitimate trade channels to proscribed destinations.
This is done through US and foreign firms that are
willing to engage in profitable impropriety; through
agents-in-place in US or foreign firms or foreign
subsidiaries of US firms; through Soviet- and East
European?owned firms locally chartered in the
West; and through foreign purchasing agents (includ-
ing arms dealers). For instance, to evade the US
embargo on microelectronic technology exports to the
Soviet Union, the Soviets and their surrogates have
set up dummy corporations in the West that purchase
sophisticated microelectronics manufacturing equip-
ment. This equipment is then shipped and reshipped,
sometimes with the knowledge of individuals in the
companies, to disguise its ultimate destination?the
Soviet Union or Eastern Europe. Both the Soviet and
Warsaw Pact intelligence services are in the main-
stream of this illegal technology trade flow. The other
type of diversion is an in-place diversion, in which
legally acquired technology and equipment?in the
computer area, for example?are put to military end
uses not authorized in export license applications.
The acquisitions that most directly affect Soviet
military development have come from intelligence
collection and related illegal trade diversions. Soviet
Bloc intelligence services have concentrated their
effort in the United States, Western Europe, and
Japan. These services target defense contractors and
high-technology firms working on advanced technol-
ogy (both classified and unclassified), foreign firms
and subsidiaries of US firms abroad, and internation-
al organizations with access to advanced and/or
proprietary technology, including access to computer
data base networks throughout the world.
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Table I
Major Fields of Technology of Interest to
Soviet and East European Visitors to the United States
Computers
Materials
Architecture
Automatic Control
CAD (Computer-Aided Design)
Cybernetics/Artificial Intelligence
Data Bases
Image Processing Design
Image Processing/Retrieval
Amorphous
CAD
Composites
Cryogenics
Deformation
Memories
N/C (Numerically Controlled) Units
Networks
Pattern Recognition
Programming
Robots
Software
Metallurgy
N/C Machine Tools
Powder Metals
Superconductors
Testing/NDT (Non-Destructive)
Semiconductors
CAD
Circoits
Defects
Devices
Design
Ion Implantation
Production Technology
SAW (Surface Acoustic Wave) Devices
Commun(cations, Navigation,
and Control
Antennas
Microwave/Millimeter Waves
Radio Wave Propagation
Satellite Communications
Signal Processing
Telecommunications
Vehicular/Transportation
Laser and Optics
Marine Systems
Shipbuilding
Fiber Optics
Gas Lasers
Optics
Tunable Lasers
Nuclear Physics Cryogenics
Fusion
Materials
M111) (Ma g n etohydrodyna m ics)
rvIicrobiology Genetic Engineering
Reactors
Structural Designs
Superconductors
Both legal and illegal acquisitions of US and Western
technology and equipment are coordinated with infor-
mation obtained through the complex network of
international governmental scientific and technical
agreements and exchanges that the USSR maintains
with the advanced industrial nations. These include
know-how, equipment, and computer data base collec-
tion activities of Soviet scientists and engineers who
participate in academic, commercial, and official
S&T exchanges. Visiting Soviet and East European
technical and student delegations to the United States
generally consist of expert scientists, many of whom
arc connected with classified work in their home
countries. Such was the case with the Soviet scientist
who managed to get assigned to fuel-air explosives
work. When he finished his US study programs, he
almost certainly returned to the USSR to work on
related weapons. Other Soviet and East European
scientists have come to the United States to work in
the aerohydrodynamic, cryogenic, optic, laser, com-
puter, magnetic bubble computer memory, nuclear,
microelectronic, and structural and electronic materi-
al areas. Given the military importance of these fields
to the Soviet Union, it appears likely that a high
percentage of these scientists will work on military-
related programs in these areas after they return
home.
From the beginning, Soviet candidates in various
academic and scientific exchange programs have
nearly always proposed research activities involving
technologies in areas that have direct military appli-
cations and in which the Soviets are technologically
deficient. Table I provides a list of the key high-
technology fields that Soviet and East European
4
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visitors come to the United States to study, research,
or discuss, many of which are on the US Militarily
Critical Technology List today. In each of the past
two years, more than a third of the 50 program
proposals offered under the Graduate Student/Young
Faculty Program of the International Research and
Exchanges Board (IREX) has been completely un-
acceptable in terms of prospective technology loss,
and many other programs needed to be modified or
have access constrained before the exchanges could be
allowed.
The Soviets correctly view the United States and
several other Western countries as a continuing
source of important and openly available scientific
and technical information, which they take every
opportunity to-obtain access to. Some of the unclassi-
fied documents so acquired are previously classified
materials which had been downgraded to unclassified
through US procedures providing for automatic de-
classification after a stipulated period. When collect-
ed on a massive scale and centrally processed by the
Soviets, this information becomes significant because
it is collectively used by Soviet weapons designers and
weapons countermeasure experts.
The Soviets also regularly attend high-technology
trade shows, and attempt to visit commercial firms in
the West, particularly small and medium-sized firms
that are active in developing new technologies. These
apparent trade promotion efforts often mask Soviet
attempts to acquire emerging Western technological
know-how before its military uses have been identified
and government security controls have been applied.
Emerging technologies are particularly vulnerable to
foreign collection efforts of this type.
Soviet intelligence continues to place a high priority
on the collection of S&T information on genetic
engineering and futuristic weapons such as lasers and
particle beam weapons. The Soviets have been step-
ping up their efforts to acquire new and emerging
technologies such as very-high-speed integrated-cir-
cuit (VHS1C) and very-large-scale integration (VLSI)
technology from Western universities and commercial
laboratories for both military and commercial
applications.
5
13
Over the past few years there has been an increased
use of Soviet- and East European?owned firms locally
chartered in the United States and abroad to exploit
Western-controlled and military-related technology.
There are more than twenty Soviet- and East
European?owned firms in the United States, and near
the end of the 1970s there were more than 300 similar
firms in Western Europe. In addition to the United
States, heavy concentrations are in the United King-
dom, Sweden, the Netherlands, Italy, the Federal
Republic of Germany, France, Canada, Belgium, and
Austria. These firms are avenues for Soviet acquisi-
tion of advanced Western technologies, as was shown
when the US engineer arrested in late 1981 was
charged with selling US secret documents to an East
European intelligence officer employed by a Polish-
owned firm chartered in Illinois (see inset, p. 6).
Furthermore, firms chartered in the United States
can legally purchase controlled US technology and
study it without actually violating US export controls
unless they attempt to export the equipment or related
technical data from the United States without a
license.
Soviet Acquisitions and Benefits
Today's recognition of the crucial role of Western
technology in the development and production of
Soviet weapon systems and related military equip-
ment is not unique. Soviet dependence on Western
technology was visible and clear-cut in the years
immediately after World War II, when the Soviets
stole Western nuclear secrets leading to their develop-
ment of a nuclear weapon capability, and copied a US
bomber in its entirety leading to production of their
TU-4. To achieve major improvements in their mili-
tary capability quickly, they exploited captured scien-
tists and industrial plants and resorted to a combina-
tion of espionage, stealing, and copying Western
systems.
Since that early period of near-complete reliance in
the 1950s, the Soviets' dependence on Western tech-
nology to develop their weapons has decreased. Nev-
ertheless, despite several decades of Soviet priorities
focused on science, technology, and weapon systems,
the Soviets, because of their inability to be innovative
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US Radar Expert Passes Over 20 Significant Classi-
fied Reports on Future US Weapon Systems to Intel-
ligence Agent
William II. Bell, a radar project engineer for a high-
technology US defense firm was recruited by an
intelligence officer who operated under cover as a vice
president of the Polish firm called Polamco. This
firm iso subsidiary of the Polish Government Corpo-
ration and is incorporated in Illinois and Delaware. It
began as an importerlexporter of machinery, parts
and tools and as a consultant to firms exporting these
products to Poland. The recruitment began as a
simple friendship between neighbors with mutual
sporting interests, grew quickly to include their fam-
i:ies, then to proving Bell's credentials by showing a
classified document to the agent, and then to passing
microfilm copies of classified reports at meeting
places in the US, Switzerland, and Austria. Mr. Bell
was in financial straits and was easily influenced by
the cash proffered?a total of 5110,000 over a three-
year period. In all, over 20 highly classified reports
on advanced future US weapon systems or their
components were passed to the Polish Intelligence
Service and probably eventually to the Soviet Intelli-
gence Service.
Among the classified reports, those of prime impor-
tance to the West included the F-1.5 look-down-
shoot-down radar system, the quiet radar system for
the 81 and Stealth bombers, an all-weather radar
system for tanks, an experimental radar system for
the US Navy, the Phoenix air-to-air missile, a ship-
borne surveillance radar, the Patriot surface-to-air
missile, a towed-array submarine sonar system, a
new air-to-air missile, the improved HAWK surface-
to-air missile, and a NATO air-defense system. The
information in these documents put in jeopardy exist-
ing weapons and advanced future weapon systems of
the United States and its Allies. The acquisition of
this information will save the Polish and Soviet
Governments hundreds of millions of dollars in R&D
efforts by permitting them to implement proven de-
signs developed by the United States and by fielding
operational counterpart systems in a much shorter
time period. Specifications on current and future US
weapon systems will enable them to develop defensive
countermeasure systems.
14
and effectively apply new technology to weapons
developments, still depend on Western technology and
equipment to develop and manufacture some of their
advanced weapon systems more quickly.
Today, Soviet military designers carefully choose the
Western designs, engineering approaches, and equip-
ment most appropriate to their deficiencies and needs.
These needs are still substantial and pervade almost
every area of weapons technology and related manu-
facturing equipment. Table 2 lists classes of Western
technology acquired by the Soviets and East Europe-
ans and illustrates the wide range of Soviet military
technology needs. In the following paragraphs of this
section, Soviet Bloc acquisitions have been grouped
according to their likely applications: strategic sys-
tems, aircraft systems, naval systems, and tactical
systems. Also cited are acquisitions in the microelec-
tronic and computer areas that have broad application
to military and industrial programs. In certain of
these areas, notably the development of microelec-
tronics, the Soviets would have been incapable of
achieving their present technical level without the
acquisition of Western technology. In other areas,
acquisitions have allowed the Soviets to reduce the
indigenous effort they would otherwise have had to
expend.
The Soviets' strategic weapons program has benefited
substantially from the acquisition of Western technol-
ogy. The striking similarities between the US Minute-
man silo and the Soviet SS-I3 silo very likely resulted
from acquisition of US documents and expedited
deployment of this, the first Soviet solid-propellant
ICBM. The Soviets' ballistic missile systems in par-
ticular have, over the past decade, demonstrated
qualitative improvements that probably would not
have been achieved without Western acquisitions of
ballistic missile guidance and control technology. The
most striking example of this is the marked improve-
ment in accuracy of the latest generation of Soviet
ICBMs?an improvement which, given the level of
relevant Soviet technologies a decade ago, appears
almost certainly to have been speeded by the acquisi-
tion of Western technology. Their improved accuracy
has been achieved through the exploitation and devel-
opment of good-quality guidance components--such
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Table 2
Selected Soviet and East European Legal and Illegal Acquisitions
From the West Affecting Key Areas of Soviet Military Technology
Key Technology Area Notable Success
Computers Purchases and acquisitions of complete systems designs, concepts, hardware and software, including a
wide variety of Western general purpose computers and minicomputers, for military applications.
Microelectronics Complete industrial processes and semiconductor manufacturing equipment capable of meeting all
Soviet military requirements, if acquisitions were combined.
Signal Processing Acquisitions of processing equipment and know-how.
Manufacturing Acquisitions of automated and precision manufacturing equipment for electronics, materials, and optical
and future laser weapons technology; acquisition of information on manufacturing technology related to
weapons, ammunition, and aircraft parts including turbine blades, computers, and electronic
components; acquisition of machine tools for cutting large gears for ship propulsion systems.
Communications Acquisitions of low-power, low-noise, high-sensitivity receivers.
Lasers Acquisitions of optical, pulsed power source, and other laser-related components, including special
optical mirrors and mirror technology suitable for future laser weapons.
Guidance and Navigation
Acquisitions of marine and other navigation receivers, advanced inertial-guidance components, including
miniature and laser gyros; acquisitions of missile guidance subsystems; acquisitions of precision
machinery for ball bearing production for missile and other applications; acquisition of missile test range
instrumentation systems and documentation and precision cinetheodolites for collecting data critical to
postflight ballistic missile analysis.
Structural Materials
Propulsion
Acoustical Sensors
Electro-optical Sensors
Radars
Purchases and acquisitions of Westcrn titanium alloys, welding equipment, and furnaces for producing
titanium plate of large size applicable to submarine construction.
Missile technology; some ground propulsion technology (diesels, turbines, and rotaries); purchases and
acquisitions of advanced jut engine fabrication technology and jet engine design information.
Acquisitions of underwater navigation and direction-finding equipment.
Acquisition of information on satellite technology, laser rangefinders, and underwater low-light-level
television cameras and systems for remote operation.
Acquisitions and exploitations of air defense radars and antenna designs for missile systems.
as gyroscopes and accelerometers. The quality of
these instruments, in turn, depends to a considerable
degree on the quality of the small, precision, high-
speed bearings used.
Through the 1950s and into the 1960s, the Soviet
precision bearing industry lagged significantly behind
that of the West. However, through legal trade
purchases in the 1970s, the Soviet Union acquired US
precision grinding machines for the production of
small, high-precision bearings. Similar grinding ma-
chines, having lower production-rate capabilities,
were available from several foreign countries. Only a
few of these machines, either US or foreign, would
have been sufficient to supply Soviet missile designers
with all the quality bearings they needed. These
purchases provided the Soviets with the capability to
manufacture precision bearings in large volume soon-
7
er than would have been likely through indigenous
development. The Soviets probably could have used
indigenous grinding machines and produced the re-
quired quality of bearings over a long period by
having an abnormally high rejection rate.
While some of the Soviet acquisition in the aircraft
area appears directed toward the development of
countermeasures against Western systems, the Soviets
appear to target data on Western aircraft primarily to
acquire the technology. Furthermore, while the Sovi-
ets have acquired a large amount of hardware and
data from planes downed or captured in Vietnam and
elsewhere, they continue to attempt to acquire the
most advanced technologies through both legal and
illegal transactions with the West. Assimilation of
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Western technology has been of great benefit to both
their military and commercial aircraft development
programs?to the extent that aircraft from certain
Soviet military design bureaus are to a significant
degree copies of aircraft of Western design. Soviet
military aircraft designers have "ordered" documents
on Western aircraft and gotten them within a few
months, including plans and drawings for the US
C-SA giant transport aircraft early in its development
cycle; these plans, although dated now, have contrib-
uted to current Soviet development of a new strategic
military cargo plane. Designers were in particular
need of data on US technological advances, but more
importantly, they needed information on aerospace
manufacturing techniques.
Soviet aircraft designers have been interested in US
military transports and wide-body jets and probably
have managed to accelerate the development pro-
grams for their IL-76 Candid and :IL-86 transports.
The IL-86 looks much like the Boeing 747 and the
IL-76 resembles the C-141. Neither system is an
identical copy.
The IL-76 also is used by the Soviets as the platform
for their new AWACS (Airborne Warning And Con-
trol System), which is expected to be operational in
the mid-1980s. This system will provide the Soviets
with a major improvement in attacking low-flying
missiles and bombers. The Soviet AWACS is striking-
ly similar in many ways to the US AWACS, and is a
major improvement over their old AWACS.
The Soviets' acquisition effort in the naval systems
area reflects well the two major factors that motivate
their requirements: the acquisition-of technology not
readily available to them?yet critical to their pro-
grams?and the acquisition of equipment which,
while producible in the Soviet Union, allows them to
divert resources to more pressing naval programs. The
Soviets appear to have concentrated their acquisitions
in areas related to aircraft carriers, deep sea diving
capabilities, sensor systems for antisubmarine warfare
and navigation, and ship maintenance facilities. In the
maintenance area, two huge floating drydocks pur-
chased from the West for civilian use by the Soviets
have been diverted to military use. Drydocks are
critical for both routine and fast repair of ships
damaged in warfare. In 1978, when th,e Soviets took
possession of one of the drydocks, they diverted it to
the Pacific Naval Fleet. The other was sent to the
Northern Fleet in 1981.
These drydocks are so large that they can carry
several naval ships. More importantly, they are the
only drydock facilities in either of the two major
Soviet fleet areas?Northern or Pacific?capable of
servicing the new Kiev-class V/STOL aircraft carri-
ers. Soviet advanced submarines carrying ballistic
missiles, Soviet Kiev aircraft carriers, and Soviet
destroyers were among the first ships repaired in these
drydocks. It is important to note that the drydocks
themselves are so large that no Soviet shipyard would
have been capable of accommodating their construc-
tion without major facility modifications, associated
capital expenditures, and interruptions in present
weapons programs. Their importance will be even
more pronounced when the Soviets construct the still-
larger carriers (for high-performance aircraft) project-
ed for the 1990s. The Soviets even have acquired
Western aircraft carrier catapult equipment and doc-
umentation for this larger carrier; catapult technol-
ogy, though relatively common in the West, is outside
the Soviet experience.
Within the past few years, the USSR also has con-
tracted for or purchased foreign-built oceanographic
survey ships equipped with some of the most modern
Western-manufactured equipment. In place of US
equipment that was embargoed, other Western equip-
ment has been installed on the ships. This moderniza-
tion of what is the world's largest oceanographic fleet
with Western technology will help support the devel-
opment of Soviet weapon system programs and anti-
submarine systems against the West.
Although the Soviets have a strong indigenous tech-
nology base that could support the development of
much of their tactical weapons systems, this does not
prevent them from maintaining an ambitious program
for acquiring and benefiting from Western technology
in this area. In some cases, their acquisitions satisfy
deficiencies in Soviet technology; smart weapons tech-
nology and electro-optical technology are examples of
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Table 3
Microelectronic Equipment and Technology
Legally and Illegally Acquired by the Soviet Bloc
Equipment or Technology Comments
Process Technology for
Microelectronic Wafer
Preparation
The Soviets have acquired hundreds of specific pieces of equipment related to wafer preparation,
including expitaxial growth furnaces, crystal pullers, rinsers/dryers, slicers, and lapping and polishing
units.
Process Technology for
Producing Circuit Masks
Many acquisitions in this area include computer-aided design software, pattern generators and
compilers, digital plotters, photorepeaters, contact printers, mask comparators, electron-beam gener-
ators, and ion milling equipment.
Equipment for Device
Fabrication
Many hundreds of acquisitions in this area have provided the SoOets with mask aligners, diffusion fur-
naces, ion implanters, comers, etchers, and photochemical process lines.
Assembly and Test Equipment
Hundreds of items of Western equipment, including scribers, bonders, probe testers, and final test
equipment have been acquired by the Soviets.
this. Signal and information-processing technology,
particularly for Soviet air defense systems, is another.
More often, however, technology is exploited to speed
up a developmental program or to improve upon
original Western designs in an expeditious manner.
The Soviets appear to have concentrated their tactical
systems acquisitions on Western tank, antitank, and
air defense?related technology and equipment in or-
der to derive concepts and know-how to benefit their
weapons programs and to design countermeasures to
the Western systems. The Soviet SA-7 heat-seeking,
shoulder-fired antiaircraft missile contains many fea-
tures of the US Redeye missile. Such acquisitions
have enabled the Soviets to obtain advanced tactical
weapon capabilities sooner than otherwise would have
been possible.
Western equipment and technology have played a
very important, if not crucial, role in the advancement
of Soviet microelectronic production capabilities. This
advancement comes as a result of over 10 years of
successful acquisitions?through illegal, including
clandestine, means?of hundreds of pieces of Western
microelectronic equipment worth hundreds of millions
of dollars to equip their military-related manufactur-
ing facilities. These acquisitions have permitted the
Soviets to systematically build a modern microelec-
tronics industry which will be the critical basis for
enhancing the sophistication of future Soviet military
9
systems for decades. The acquired equipment and
know-how, if combined, could meet 100 percent of the
Soviets' high-quality microelectronic needs for mili-
tary purposes, or 50 percent of all their microelec-
tronic needs.
Table 3 identifies the microelectronic production-
related equipment that has been acquired by the
Soviet Bloc. These acquisitions have been grouped
into areas related to the four steps required to produce
a microchip: wafer preparation, circuit-mask making,
device fabrication, and assembly and testing.
Soviet computer technology has long been limited by
fabrication and production technology problems and
by difficulties in software development. Since 1969
the USSR and East European countries have been
developing a family of general purpose computers
known as the Ryad series. These computers, which
make up virtually the total Soviet and East European
effort in large general purpose computers, have been
and will continue to be used in a wide variety of civil
and military applications. Western technology has
been important to development of the Ryad series by
providing proven design directions both at the system
and component levels. The architectural designs of the
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R>ad computers, for example, arc patterned after
those of the highly successful mass produced IBM 360
and 370 series, computers that are used in a wide
range of applications and are highly serviceable in the
field.
With this approach, the Soviets and East Europeans
eliminated many of the risks involved in undertaking
the development and production of a new series of
general purpose computers, and saved considerable
amounts of manpower and time. Since the early 1970s
the Soviets and East Europeans have legally pur-
chased ,ore than 3,000 minicomputers, some of
which now being used in military-related organi-
zation, Furthermore, they are also developing mini-
computers that are direct copies of Western models.
Soviet and East European development of computer
systems has been aided by all available means?legal
and illegal, including clandestine--for acquiring the
needed technical know-how.
Thus, the Soviets and their Warsaw Pact allies have
derived significant military gains from their acquisi-
t'ions of Western technology, particularly in the stra-
tegic, aircraft, naval, tactical, microelectronics, and
computer areas. This multifaceted Soviet acquisitions
program has allowed the Soviets to:
? Save hundreds of millions of dollars in R&D costs,.
and years in R&D development lead time (see inset).
? Modernize critical sectors of their military industry
and reduce engineering risks by following or copy-
ing proven Western designs, thereby limiting the
rise in their military production costs.
? Achieve greater weapons performance than if they
had to rely solely on their own technology.
? Incorporate countermeasures to Western weapons
early in the developmentiof their own weapon
programs.
These gains are evident in all areas of military
weapons systems. While difficult to quantify, it is
clear that the Western military expenditures needed
to overcome or defend against the military capabilities
derived by the acquisition of Western technology far
outweigh the West's earnings from the legal sales to
the Soviets of its equipment and technology.
Soviet Intelligence Officer Reveals
Technology Acquisition Saved Soviet Military
Hundreds of Millions of Rubles
A former Soviet intelligence officer revealed that
information on Western military-related technology
acquired by the Soviet intelligence services saved the
Soviet military industry hundreds of millions of
rubles. The acquisition of Western technology oper-
ationally was assigned the highest priority for collec-
tion by local residencies in key West European
countries because of the relatively easy access to
much US and Western technology in Europe and the
praise being received by the services for their acquisi-
tion efforts.
These acquisitions were directed by the military
manufacturing industries under the Council of Minis-
ters, and there was intense competition between the ?
intelligence services to acquire Western technology
needed for weapons development programs. Of par-
ticular need by Soviet weapons designers has been the
acquisition of knowledge on special materials, nota-
bly the weaving of carbon filaments in a three
dimensional configuration which the services were
tasked to acquire. The end products from this 3-D
carbon-carbon weaving technology are useful for ab-
lative heat shields for high velocity reentry vehicles -
(the warhead part of ICBMs and SLBMs) and for
other portions of rocket motors for large missiles.
The Soviet acquisition of some of this technology is
likely to enable them to eventually gain a capability
for increased military options against the West?a
capability that otherwise would have taken them
several additional years to develop themselves. The
intelligence services also worked closely with scien-
tists from the Soviet military manufacturing indus-
tries and even planned joint operations against West-
ern Trade and Equipment Fairs in order to acquire
needed Western technology.
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Outlook for the 1980s
The Soviets military R&D and weapon test-and-
evaluation efforts are continuing at a rapid pace.
Several hundred development projects for weapons
systems and major system elements are now under
way, and it is expected that through the 1980s the
number of new or modified advanced Soviet weapon
systems emerging from these projects into production
and deployment will remain at the high levels of the
last two decades?some 200 weapon systems per
decade.
Soviet military manufacturing capacity increased by a
significant 80 percent during the 1960s and 1970s,
and new plant expansion now under way at one-fourth
of their key weapons manufacturing facilities will add
considerably to their capabilities. These new facilities
will be ready to produce weapons in the next four to
10 years. Plant expansion is in the following areas:
ground warfare vehicles, including new tanks; avi-
ation, including facilities for a new B-1-type bomber
and a new long-range military transport aircraft
having strategic airlift capabilities; naval shipbuild-
ing, including submarines for ballistic missiles and
cruise missiles, as well as full-size aircraft carriers for
high-performance aircraft capable of competing with
the United States in global operations; and electronic
and microelectronic manufacturing facilities through-
out the USSR. The development and production of
new Soviet weapons at these facilities is sure to be
more complex and costly than during the 1970s.
All of this military development and plant expansion
activity, however, is taking place at a time when the
Soviet economy has reached its lowest level of growth
since World War II. Soviet annual GNP growth may
well be limited to an average of Ito 2 percent by the
mid-1980s. Stagnation in industrial sectors that are
key to both the civilian and the military sectors will
make it increasingly difficult for the Soviets to satisfy
the needs of both. Thus, Soviet leaders will have to
make tough choices among defense, investment, and
consumption; the competition among rival claimants
for resources will become intense. Under these condi-
tions, it may be impossible for the Soviets to maintain
current growth in military production without hurting
the civilian economy.
11
19
?
Despite these economic difficulties, there are no signs
that the Soviets are shifting resources away from the
military sector or slowing down development of weap-
on systems that will be entering the production stage
by mid-decade. New generations of Warsaw Pact
weapons will require selected critical component and
modern manufacturing technologies. It is in these
areas that Soviet illegal acquisitions of Western tech-
nology, complemented by legal acquisitions, are most
likely to be concentrated over the next five to 10
years.
Among the more important technologies are micro-
electronics, computers, and signal processing. Micro-
electronics will play a very significant role in advances
in computers and signal processing, and all of these
technologies will be important in developing advanced
Soviet missile, aircraft, naval, and tactical weapon
systems, and associated detection systems. Additional
projected Soviet technological needs related to such
systems are presented in the appendix.
As the result of both tactical and strategic force
modernizations, Soviet and Warsaw Pact military
manufacturers are increasingly pressed by large-scale
production requirements and the related need to
control manufacturing and materials costs. Thus,
particularly critical for the 1980s are Soviet needs to
improve their manufacturing capability. To a large
extent, the level of manufacturing technology in Sovi-
et plants determines the Soviets' capability to move
new technology from R&D into military applications.
Manufacturing technologies play a significant role not
only in the development of advanced component tech-
nologies, such as microelectronics and computers, but
also in the actual production of modern military
systems.
Future Soviet and Warsaw Pact acquisition efforts?
including acquisitions by their intelligence services?
are likely to concentrate on the sources of such
component and manufacturing technologies,
including:
? Defense contractors in the United States, Western
Europe, and Japan who are the repositories of
military development and manufacturing
technologies.
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? General producers of military-related auxiliary
manufacturing equipment in the United States,
Western Europe, and Japan.
? Small and medium-size firms and research centers
that develop advanced component technology and
designs, including advanced civil technologies with
future military applications.
The combination of past Soviet acquisition practices
and projected Soviet military needs indicates that the
United States and its Allies are likely to experience
serious counterintelligence and related industrial se-
curity and export control problems over the next five
to 10 years.
The task of stopping Soviet Bloc intelligence oper-
ations aimed at Western military and industrial tech-
nologies already poses a formidable counterintelli-
gence problem, both in the United States and abroad.
But that task is likely to become even more difficult in
the future as several trends identified in the 1970s
continue into the 1980s:
? First, since the early 1970s, the Soviets and their
surrogates among the East Europeans have been
increasingly using their national intelligence ser-
vices to acquire Western civilian technologies?for
example, automobile, energy, chemicals, and even
consumer electronics.
? Second, since the mid-1970s, Soviet and East Euro-
pean intelligence services have been emphasizing
the collection of manufacturing-related technology,
in addition to weapons technology.
? Third, since the late 1970s, there has been increased
emphasis by these intelligence services on the acqui-
sition of new Western technologies emerging from
universities and research centers.
The combined effect of these trends is a heavy focus
by Soviet Bloc inteliigence on the commercial sectors
in the West?sectors that are not normally protected
from hostile intelligence services. In addition, the
security provided by commercial firms is no match for
the human penetration operations of such foreign
20
intelligence services. But the most alarming aspect of
this commercial focus by Soviet Bloc intelligence
services is that as a result of these operations the
Soviets have gained, and continue to gain, access to
those advanced technologies that are likely to be used
by the West in its own future weapons systems.
The Soviet intelligence effort against Western defense
contractor firms poses a serious problem in itself.
With more than 11,000 such firms in the United
States and hundreds of subsidiaries abroad, US coun-
terintelligence efforts are stretched thin. Protection of
US firms abroad from hostile intelligence threats is
the responsibility of host governments, but they too
are feeling the burden of well-orchestrated Soviet
Bloc efforts. The Soviet intelligence threat and the
illegal trade problem appear to be severe in Japan. It '
appears that Western industrial security?both de-
fense and commercial?will be severely tested by the
Soviet intelligence services and their surrogates
among the East European intelligence services during
the 1980s.
Western industrial nations also can expect increased
Soviet Bloc intelligence activities directed at the
acquisition of their key industrial technologies. West-
ern export controls are presently being updated and
broadened; the CoCom allies have recently agreed to
strengthen controls and to enhance their enforcement.
Moreover, serious hard currency shortages, along with
generally increased restrictions on Soviet S&T visitors
to the United States, will make the Soviets even more
dependent on intelligence and other illegal efforts to
acquire the goods and equipment they will need.
The massive, well-planned, and well-coordinated So-
viet program to acquire Western technology through
combined legal and illegal means poses a serious and
growing threat to the mutual security interests of the
United States and its Allies. In response, the West
will need to organize more effectively than it has in
the past to protect its military, industrial, commercial,
and scientific communities.
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Appendix
Projected Soviet Technological
Needs and Acquisition Targets
Through the 1980s
Given the dynamic nature of their collection program,
it is expected that the Soviets will continue their
attempts to acquire a broad range of Western technol-
ogies. Certain areas, however, represent priority col-
lection targets for them; these areas are critical to the
Soviets' enhancement of their weapons capability.
Over the past decade, the Soviets' most pronounced
improvements in strategic weaponry have been in the
development of a MIRV ballistic missile capability
and a significant improvement in the accuracy of their
ICBMs. The former capability was made possible
largely through the introduction of onboard digital
computers and the latter through the improvement in
the quality of the missile guidance systems and the
procedures used to calibrate them. Technology acqui-
sitions from the West contributed significantly to
these improved capabilities.
The Soviets probably will continue to make their
highest priority the acquisition of Western microelec-
tronics and computer technology for in-flight guid-
ance computers. This acquisition effort will be moti-
vated by a desire to overcome reliability problems and
also to provide the on-board processing capability
required for the development of new guidance options
with the potential for extremely high accuracies.
The Soviets will also give top priority to acquiring
information on the latest generation of US-inertial
components upon which the MX ICBM and the
Trident SLBM guidance systems are based. Despite
the past accuracy improvements of Soviet ICBMs,
these two US systems incorporate technologies be-
yond present Soviet technological capabilities. More-
over, their SLBM accuracies are significantly behind
those of US systems. In addition to information on
hardware, the Soviets are expected to seek calibration
software algorithms which, as the guidance instru-
ments themselves reach their practical performance
limit, would allow for continued improvement in
weapon system accuracy.
13
21
Western solid rocket propulsion technology also will
be a high-priority Soviet acquisition target in the
1980s. While the Soviets have vast experience with
the liquid-propellant systems which represent the bulk
of their ballistic missile force, they are shifting their
emphasis to solid propulsion systems, which have
practical advantages over liquid systems in a variety
of applications. At the fame time, the Soviets have
had only limited success with the progress of their
solid-propulsion program. They probably will pursue
the acquisition of information on solid-propellant pro-
duction procedures, and propellant grain design, mo-
tor case, and rocket nozzle technologies.
The Soviets' ABM R&D effort has continued apace
since the 1960s. As a result, they have gained consid-
erable expertise in the development of large fixed-site
radars for early warning, tracking, and engagement,
and their interceptor technology has also improved
substantially over the years. Areas remain, however,
in which the Soviets will still seek and would benefit
from sophisticated Western ABM technology. These
include signal processing for detection, discrimina-
tion, target assignment, and sensor technology, par-
ticularly in the long-wave infrared portion of the
electromagnetic spectrum applicable toward improv-
ing their launch detection capability.
Priority Soviet targets in the aircraft area will include
Western materials technology, particularly composite
materials to allow weight-efficient designs. The Sovi-
ets would also benefit from the acquisition of certain
engine technologies, in particular those critical to the
development of high-bypass turbofans for large strate-
gic airlift type of aircraft. While, in general, Soviet
avionics technology appear adequate, the Soviets have
yet to demonstrate a capability to deploy reliable,
accurate airborne inertial navigation systems for long-
range navigation and weapons delivery. Thus, while
long used in the West, these systems are still prime
candidates for acquisition.
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Very high priority probably will be given to the
acquisition of computer-aided aircraft design technol-
ogy, an area in which the Soviets are clearly im-
pressed by US progress. In general, they also will
continue to benefit from the acquisition of efficient
aircraft production technology from the West to
reduce costs.
While the Soviets have a strong indigenous air defense
radar and missile technology, their general lag in
microelectronics and microprocessing will direct them
to attempt wherever possible in the West the acquisi-
tion of advanced signal-processing hardware and
software.
The Soviets will continue to emphasize the acquisition
of naval-related technologies applicable to improving
their antisubmarine warfare capabilities, an area in
which much Western technology is superior to theirs.
Thus, a significant effort to acquire acoustic sensor
technology can be expected, in particular that tech-
nology applicable to the development of large towed
aconstic arrays that would assist the localization of
Western submarines in open waters. They probably
will also target the acquisition of Western signal-
processing hardware and software required to fully
exploit the detection capabilities of these sensors.
Another critical problem area to which the Soviets
will direct acquisition is that of submarine quieting.
Here also the Soviets lag the West significantly. As a
result, not only are their submarines more vulnerable
to detection, but the self-generated noise reduces the
effectiveness of their own acoustic sensors.
An area in which the Soviets have historically lagged
behind the West is precision submarine navigation?
in particular, in the development of submarine inertial
navigation systems. The need for improvements here
will become more pressing as the Soviets develop long-
range cruise missiles for land attack which require
precise knowledge of launch location.
The Soviets also will continue to target technologies
related to the design and construction of large aircraft
carriers (for high-performance aircraft) to reduce the
likelihood of p,or design choices that would arise in
what is for them an entirely new type of construction
program.
22
Much of the Soviet acquisition effort in the area of
tactical weapons is likely to be targeted against seeker
and sensor technology for tactical missiles and preci-
sion-guided munitions. The Soviets will apply consid-
erable effort in particular to acquiring advanced
Western electro-optical technology including that re-
lated to antitank weapons. As in other weapons areas,
the signal processing and microelectronics technol-
ogies supporting tactical weapon systems will also be
priority acquisition targets. Technical documentation
on entire weapon systems, if obtained, will be u.ged to
develop countermeasures.
In the microelectronics area the USSR is now at the
stage of implementing its LSI (large-scale integration)
technology to high-volume production. Despite the
large acquisitions of Western technology and produc-
tion equipment over the past 10 years which have
brought them to the LSI level, additional acquisitions
from the West are needed for the more sophisticated
weapons projects of the future. Ever-increasing needs
for higher precision Western equipment will extend at
least through the 1980s.
In addition, the Soviets will require considerable
expansion of their microelectronic material base to
support continued expansion of integrated-circuit pro-
duction. In this regard, the USSR is seeking Western
help to build two or three poly-silicon plants that will
more than double current Soviet capacity for military
applications. Also, with increasing advances in the
technology, the USSR already will be seeking addi-
tional Western assistance in key complementary tech-
nologies such as packaging and printed circuit board
production.
The USSR is expected to focus its future acquisitions
efforts on the emerging technologies related to very-
high-speed integrated circuits (VHSIC) and very-
large-scale integration (VLSI). It is important to note
that, while VHS1C is thought of as a military devel-
opmeut program, and VLSI as a civilian technology,
there is little difference between the two as far as
Soviet production needs are concerned. The same
materials, production, and test equipment will be used
to produce both. In both of these technological areas,
the USSR has developed effective means for illegally
acquiring Western advanced products.
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Prime Soviet collection efforts in computer technology
through the 1980s are likely to include large-scale
scientific computers such as the US-built CRAY-I
Computer. Computers of this class offer significant
improvements over Soviet models in weapons-systems
design and simulation and in the processing of nu-
merical data for many military applications. Other
hardware targets will include: very dense random-
access memory chips; high-capacity disk drives and
packs; the so-called "superminicomputer" class of
machines; and the latest in general purpose computer
technology. All of the above targets offer opportuni-
ties for significant performance improvements and
represent technologies of substantial Soviet lag.
In computer software, the Soviets will continue to
attempt to collect IBM programs and programs of
other vendors written for these machines because of
past Soviet decisions related to copying IBM comput-
ers. The large and growing number of IBM-compati-
ble computers in the USSR means that collection
activity in this area can be expected to increase. The
compelling attraction of computer networks also
should spur great Soviet interest in acquiring net-
work-control software and other programs related to
networking.
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Chairman ROTH. Senator Cohen.
Senator COTTEN. Mr. Chairman, I have a prepared statement which
I would ask your permission to insert in the record.1
Chairman ROTH. Without objection.
OPENING STATEMENT OF SENATOR COHEN
Senator COTTEN. I agree with Senator Nunn that while he and
Senator Jackson may have some dispute on strategic airlift, there
is no dispute about the strategic vulnerabilities brought about by
our lack of control over the export of technology to the Soviet Union
and to other Warsaw Pact countries.
The subcommittees interest in this issue has been a bipartisan
effort. As Senator Nunn pointed out, Senator Jackson began the
investigation in the early seventies and as a member of the subcom-
mittee. I can recall, he also had a series of hearings in 1980. One of
the issues that has been of great importance to me is one touched
upon by Senator Nunn in his opening remarks; that is academic
exchanges. It makes very little sense to me to undertake a program
of controlling the flow of goods and materials to the Soviet Union
and their Warsaw Pact countries, if, in fact, we allow them into our
universities and colleges to obtain the information itself. It is for
that reason that I asked Dr. Perry during those hearings in 1980
for a list of all the U.S. students studying in the Soviet Union and
a corresponding list of those Soviet students who were studying in
the United States.
It is contained in this record of our hearings, February 20, 1980.
I will just take a moment to cali attention to the disparity that cur-
rently exists. For American students studying in the Soviet Union,
I will just list three or four topic areas: Ideas about the Russian
east in the 19th century Russia and the role of p-eographical science
in shaping them; debates of democratization of the military from
1866 to 1881; the musical genres in Russian music from the last half
of the 16th century to the first half of the 18th century: administration
of the Russian Empire under Catherine the Great, 1762 to 1796; and
a study of the linguistic basis of Pushkin's Iambic Tetrameter.
It is interesting to note the comparison of what the Soviets are
studying here,. There are some 45 listed, so T will only list one or two:
Research in the theory and applications of measuring computing sys-
tems for automation of scientific experiments and testing power engi-
neering objects; research of the effect of various technological and
constructive parameters on the properties of thin film covers: research
of interaction of ions and plasmas to solid surfaces, especially with
compound surfaces which are used as construction material for vacuum
chambers of fusion devices; research in the field of automatic control
as applied to space ships; and development of recurrent methods for
navigation in space and optimal filtration of hindrances; and the list
(roes on and on. You can see there, is in fact a double standard that is
practiced ITS far as acquisition of information concerning our respec-
tive societies. I would submit this is an area where we ought to focus
more seriously as we proceed with these hearings.
See p. 313 for the prepared statement of Senator Cohen.
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Thank you very much, Mr. Chairman.
Chairman ROTH. Senator Jackson.
Senator JACKSON. Mr. Chairman, I would like to ask consent to have
my entire statement in the record together with two letters, a letter to
President Reagan on March 8 and a letter to President-elect Reagan
on November 14, 1980, together with a speech that I made on February
11 of, this year, at an appropriate place in the record and that my
statement be included as read.'
Mr. Chairman, I want to commend you as chairman for following
through on the excellent work that Senator Nunn was able to accom-
plish as the previous chairman of this subcommittee, pursuing this all-
important area of technology transfer.
Senator Nunn played a critical role in the evolution of the studies
and investigations that are now underway.
I. would point out that documents and other information made
available to the Senate by the Select Committee on 'Intelligence, of
which. I am a member, as is the distinguished chairman of the sub-
committee, Senator Roth, established that the Soviets are pursuing
a purposeful and determined campaign in this field. Their activities, as
the chairman knows and members of the subcommittee know, are
diverse, numerous, and well funded, and they have in too many cases
been successful.
We now know, and I believe these hearings will further demonstrate
that in many ways the United States has in effect, been supporting the
metastasizing power of the Soviet Union. As I stated in remarks to
the Senate several weeks ago, there is no longer doubt that our tech-
nology has materially aided Soviet expansion. It has improved Soviet
weapons. intelligence devices and economic leverage. The need for a
clear and comprehensive technology transfer policy is urgent. Yet our
Government still has a long way to go. And I want to reiterate what
Senator Nunn said, and that is that this is a bipartisan problem. It is
a problem that has been present in previous administrations as well
as a problem for the present administration.
And may I just conclude on one point here that I think is vital. Our
President is going to be sitting down with Mr. Brezhnev, or an ap-
propriate designee, we hope very shortly, in negotiations of strategic
consequence. One of the tragedies is that our President will not at this
time be able to say to President Brezhnev, "We will be glad .to help
make for a more peaceful world. We will help make it possible for
your country to enjoy some of the benefits of our technology if you
will only cooperate in these other areas." In other words, our President
will not have the bargaining power, the leverage which he should
have in negotiations, because the Soviets have been able to obtain our
technology by larceny, where they are not able to get it openly. This
gives them an enormous edge both economically and militarily over
what they could accomplish otherwise. This should not be the case,
and I do want to emphasize the timeliness of this hearing and the
importance of this investigation as we deal in the broad strategic area
affecting negotiations between the two countries. We have lost a very
valuable bargaining chip worth billions of dollars in commercial terms
but of even bigger consequence in terms of diplomacy, in terms of
I See p. 315 for the prepared statement of Senator Jackson along with the two mentioned
letters and copy of Senator Jackson's speech of Feb. 11, 1982.
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national security and in terms of trying to reach an agreement that
will make for a more peaceful world.
Chairman ROTH. Thank you, Senator Jackson.
Senator Rudman.
Senator RITDMAN. Thank you, Mr. Chairman.
I don't have an opening statement this morning.
Chairman ROTH. Senator Chiles.
Senator CHILES. Mr. Chairman, I would like to ask permission to
put my opening statement in the record.
Chairman ROTH. Without objection.
[The statement follows:]
OPENING STATEMENT OF SENATOR CHILES
Senator CHILES. I do want to take this opportunity to thank Senator
Jackson who started calling attention to this problem a number of
years ago and to thank Senator Nunn and his staff. They did a tre-
mendous amount of work to get prepared for this hearing.
I think this hearing is something we have needed to do for a long,
long time. We have been allowing our technology to go to the Russians.
It allows them to take a shortcut, and to be able to use their money
and to put their money into developing technology for weapons and
some of the other items and even using the technology they are getting
from us, even in the weapons field, but to cut across and not to spend
tho research and development money, and that is something that has
been going on for a long time.
We have known that technology was leaving this country. At the
same time, so far we have done very little about it. One example of
Soviet bloc efforts to obtain U.S. technology for military purposes
took place in my home State. A Federal grand jury in south Florida
indicted a Mr. Carl Heiser and another man and charged them with
acting as agents for the Soviet Union and East Germany. He was con-
victed of conspiring to export, without licensing and authorization,
an inertial navigation system and a large capacity advanced com-
puter. Both of those products have directed military applications and
although both men were found guilty in a jury trial, they were able
to overturn their convictions on appeal. This particular case is only
one example of Soviet efforts to obtain our most advanced technology.
I think while there are some laws on the books, enforcement has
been very lax and the Commerce Department have not taken the kind
of steps we have needed. I hope that these hearings are going to lead
to a new policy and to a tightening of controls so that we are not ex-
porting this technology. I am delighted to see these hearings are being
held.
Chairman ROTH. Thank you, Senator Chiles. We will now call our
first witness, Joseph Arkov. He is a former Soviet engineer now living
in the United States.
Mr. Arkov, under our rules, we require each witness to take the
oath. We will not require you to stand, but if you will raise your right
hand.
Do yon solemnly swear that the testimony you give before this sub-
committee will be the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. ARKOV. I do.
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TESTIMONY OF JOSEPH ARKOV (ASSUMED NAME FOR FORMER
SOVIET ENGINEER)
Chairman Rani. You may now proceed.
Senator NuNN. Mr. Chairman, may I make a brief statement on this?
Our first witness is Joseph Arkov, the assumed name of an emigre
who, as an engineer in the Soviet Union, worked on various projects
to copy or use American technology.
Mr. Arkov is testifying behind a screen because he is concerned about
his relatives still living in the Soviet Union. I want to stress Mr.
Arkov is here voluntarily. When subcommittee staff contacted him
early this year, he was cooperative and forthright and said he would
try to assist us in any way he could.
Mr. Arkov, I want to thank you on behalf of every member of the
subcommittee for being here and testifying and I want to make it plain
that he is using an assumed name for his family's protection.
Chairman ROTH. Please proceed.
Mr. ARKOV. My name is Joseph Arkov. I am a Russian emigre who
currently resides in California. I have been in the United States for
2 years. I am employed as an engineer.
I make this statement gladly as a demonstration of my wish to co-
operate with the Congress in gathering information about the Soviet
Union's efforts to obtain, duplicate, and utilize high technology ma-
chinery and information from the United States. At my request, my
true name, as well as specific references to my life in the Soviet Union
have been deleted from this statement, in order to protect my true
identity and to prevent possible harm to my family or me.
I was born and raised in the Soviet Union. My first 8 years of edu-
cation were spent in ordinary public elementary schools. In my ninth
year of education, when I was about 14 years old, I came to the atten-
tion of my teachers as being gifted in science and engineering. I was
then enrolled in a special school sponsored by the department of phys-
ics at a well-known university in the Soviet Union. Following that 1
year program of study, I was allowed to attend an engineering school.
I was a student in the engineering school for 6 years. During this
period, I was also required to receive military training in a program
similar to ROTC studies offered college students in the United States.
After graduation from the engineering school in 1970, I went to
work in a research institute. A primary ajective of the research in-
stitute was to develop highly sophisticated cameras for use in military
applications. The institute's activities are examined closely by the So-
viet defense ministry. I worked in the institute for about 6 years, from
1971 to 1977.
In 1977, I was assigned to work in another research institute. In this
plant, as in many other engineering research and development facil-
ities in the Soviet Union, the major emphasis is on military pursuits.
i
However, there often s a small section of the military-related in-
stallation set aside for the development of civilian and commercial
products. Civilian and commercial product development sections are
not high priority projects.
If, for example, a new American computer has been obtained by the
Soviets, they will make a military application of it, rather than a
civilian application. The institute used a sophisticated American com-
puter in its military operations. Officials at the institute were very
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proud of it and even provided tours for employees to see it. It was in
such a civilian and commercial section where I was assigned to work.
The Soviet Government wants to develop its own ability to produce
high technology equipment similar to that manufactifted: hi the West
and Japan. But once such products are made in the Soviet Union,
the people of the Soviet Union still do not have confidence in them.
They prefer goods from the West.
A special premium is placed on products produced in the United
States. Goods made in Japan also are considered particularly desir-
able. Given the choice, the people of the Soviet Union do not prefer
their own country's products. There is no patriotism in department
stores.
The Soviet Government wants more high technology from the
United States. Each technical institute is allocated a certain amount of
money to be used for the purchase of "Western, particularly, American
technology.
The Soviet Union has two goals in mind when it seeks to obtain high
technology machinery from the "West. One objective is to study the
equipment with the intention of imitating or duplicating it.
The second objective is to use the machinery, particularly to use it in
the manufacture of other high technology components. The second
goal?the use of the machinery?is, by far, the most important to the
Soviets.
In my work in the second research institute, I had the assignment of
copying Western and Japanese high technology. One of my tasks, for
example, was to develop a system design for the production of color
television cameras for video tape recorders. In this pursuit, my super-
visors made no attempt to be deceptive about what they wanted me to
do. I was not to conduct any original research and development. I was
given television components produced in Japan and I was told to copy
them.
The Soviet Government benefits to a certain extent from its pro-
grams aimed at duplicating Western technology. But the results have
been, and will continue to be, limited. Soviet authorities have come to
the realistic conclusion that their country's level of technology is too
far behind the "West for them to make great strides through copying.
They do not have the human resources or the fine-tuned equipment
required to produce the high technology machinery they try to copy.
Once they know what makes a given piece of machinery work, they
find that they do not have ,the technical know-how and equipment to
produce the product themselves. That is why they want Western high
technology machines that will enable them to produce the products.
And the Western products they desire the most are those produced in
the United States. That is why they want American high technology
machines with which they can produce the components for high tech-
nology products.
By using?not copying?the American high technology products,
they move closer to their goal of technical self-sufficiency. Whether
they will ever become self-sufficient in high technology is a debatable
point. My own view is that this course of action gives them quick gains
but, over the long run, it will result in their being permanently behind
the United States, forever having to rely on American products to
manufacture their own.
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However, being behind us in technology is a relative condition. The
Soviets can make progress in a technical sense and, at the same time,
trail the United States but, by their standards, they will have achieved
much. Their accomplishments will have been made with limited cost to
them because the basic research and development will have been paid
for by the Americans.
To repeat, then, the Soviet strategy in obtaining American high
technology products includes efforts to copy and duplicate but the
Soviets' primary objective is to obtain machinery which they can use in
the manufacture of their own high technology equipment.
This distinction?the difference between copying of technology and
the use of it?is an important one because it provides the United States
with a key insight into which products the Soviets are the most anxious
to obtain. It also can influence American policymakers in deciding
which products the United States can afford to sell the Soviet Union,
and which components should not be sold to them.
Soviet strategy in using American products can be seen in the fol-
lowing illustration. Let us say, for example, that the Soviets have 100
plants involved in producing components for use in space flight. Each
of the plants could use a certain kind of American computer. But they
cannot obtain 100 computers; that is, one for each plant. Instead, they
are able to obtain three or four American computers of the desired i
type. They use the computers as best they can n those three or four
plants where they can do the most good. They are not inclined to use
them as nonproducing models to be studied in a laboratory for the
purpose of copying.
Moreover, if the American product obtained in another transac-
tion?if, for example, the product is a sophisticated oven used in the
heating of microchips?then they are even less interested in copying or
imitating. They will use the oven to produce microchips. There is no
civilian use for equipment used to manufacture integrated circuits or
semi-conductors.
The Soviet Union obtains American high technology in ways other
than copying or utilizing machinery. The Soviets make the most of
American technical journals and Government documents.
In the free society of the United States, there is not much that can
be done to prevent the Soviets from getting hold of technical journals
and other private publications. But it is my opinion that the U.S.
Government is following an unwise policy in making public as much
military data as it does.
rAt this point, Senator Jackson withdrew from the hearing room.]
Mr. Amoy. From my own personal experience in the research in-
stitutes, I know how the Soviets wasted no time in distributing infor-
mation from the U.S. military. In a military refresher course fol-
lowing my graduation from college, I was part of a group that was
shown films of U.S. military equipment such as tanks, artillery, and
amphibious vehicles. One film showed the internal layout of one such
vehicle. The blueprints revealed their publication date, a time only
2 months prior to the date of the refresher course. That indicated to
me that the Soviets had obtained and made informational use of the
design of the vehicle before it went into production. In addition, one
of my duties in the research institute was to read American technical
journals and U.S. Government publications. A special team of Eng-
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lish- speakingSoviet linguists was employed to provide us with prompt
translations into Russian of the journals and documents.
In most fields of technical research, development and production
which I am familiar with in the Soviet Union, the overwhelming
majority of resources are invested in military applications. If, in the
area of high technology obtained from the United States, one much
prized oscilloscope is obtained from the United States, it will be turned
over for military application in virtually every instance. This strength-
ens the position of the U.S.S.R. armed services but it is done at the
expense of the civilian sector.
The oscilloscope might have been used in the development of a con-
sumer product but rarely are such high technology devices ever utilized
to benefit the Soviet citizen as a consumer.
As a matter of fact, the Soviet industrial capacity is so completely
overburdened with military production that the Soviets could not make
a civilian or commercial application of certain high technology prod-
ucts even if they wanted to.
For example, there is almost no possible way the Soviets could make
a civilian application of laser technology. Any laser component they
obtain from the United States will go into the military sector. The
Soviets have no other use for it. There is no commercial market for
high technology equipment to the U.S.S.R. People cannot afford such
luxuries yet the Government displays it for propaganda purposes.
Most equipment is used by the Soviet military industry.
In my engineering jobs in the Soviet Union, I frequently was as-
signed to attend trade fairs where Western nations, including the
United States, displayed their high technology equipment. I was seen
as a potential buyer. But, in fact, I was not there as a would-be con-
sumer. I had not been sent to the trade fair to buy anything. I was
there to obtain information about Western technology concerning air-
craft and missiles as well as other technical areas. I discovered many
valuable technical ideas at trade fairs and reported on them to my
supervisor back in the Soviet Union.
Aside from learning and inspecting the wares displayed in trade
fairs, Soviet visitors have been known to steal products and their com-
ponents. I know a man in Russia who had been assigned as a security
guard at a trade fair in Moscow. This assignment was the turning
point of his career. In league with the KGB, the man used his position
as security guard to steal several pieces of high technology equipment.
He was rewarded handsomely for his thievery. Not an especially
intelligent man, he could never have earned on his own the Ph. D.
degree he subsequently was awarded. He was then made director of
a department in a research institute, a position for which his training,
experience, and ability left him totally unqualified.
Senator NuNN, Might I interrupt while you are taking a break.
You are saying this individual stole equipment from a trade fair
where he was a security guard and he was rewarded for that with a
Ph. D. degree?
Mr. ARKOV. Yes.
Senator NuNN. Was it an honorary degree or do they have such a
thing in the Soviet Union?
Mr. ARKOV. It is an honorary degree and it is awarded not only aca-
demically, but materially.
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Senator Ntrisrisr. It is an honorary degree for thievery?
Mr. ARKOV. Yes.
Senator COHEN. It is called the "Peter Principle" in this country.
Mr. ARKOV. In my college days, neither I nor any of .my fellow
students were given the opportunity to study in the United States
under a student exchange program. Normal students were never con-
sidered for such programs. Those who got to study in the United
States usually were not even students in the usual sense of the word.
They were much older than we were and often they were well estab-
lished in their technical or scientific fields. Frequently they were
professors who had already obtained their Ph. D. degrees.
One of my supervisors at a research institute visited the United
States to work with the National Aeronautics and Space Administra-
tion in Houston on the Apollo space program. His duties at the
institute related to its military operations and I am sure that he was
instructed by Soviet officials to obtain and bring back any information
he learned while working on the space program.
The Soviets considered college age students to be too young and
unpredictable to be trusted to attend universities in the United States.
Equally important, we had not yet advanced far enough in our studies
and knowledge to obtain the high level of information Soviet authori-
ties desired.
Soviet authorities selected participants in the student exchange
programs from science and engineering. Conversely, American
exchange students might be from the humanities; they might come
to the Soviet Union to study Dostoyevski. But the Soviet students did
not go to the United States to study Faulkner. Their purpose in the
United States was to obtain American technology. In the engineering
classes I took in college, I met students from Cuba, North Vietnam,
and Hungary but no Americans.
As a youth, I was fascinated by Marxist ideology and believed in
the society the Soviets were trying to build. But by the age of 19, I
was becoming disillusioned. What contributed to my growing disen-
chantment with Soviet life was my realization of the extent to which
the government put out false or distorted information.
In the Soviet Union, the government has a monopoly on truth.
Officials lie about so many things that it is possible to slip into a frame
of mind in which nothing the government says is believed.
Senator NuisTN. Mr. Chairman, may I ask one other question at this
point?
Do you think you were the exception in this regard in distrusting
the government or was this pervasive in the young people of your age?
In other words, were you one person who was skeptical? Were there
a lot of people skeptical about the Soviet propaganda?
Mr. ARKOV. Yes; that is true. There are a lot of people who are
skeptical but not everyone.
Senator Nuivisr. Could you hazard a guess? What is the order of
magnitude of people who really believe their own government is lying?
Mr. ARKOV. I would say most of the population feel that what gov-
ernment says is not true. But they don't have the source of other in-
formation and they cannot compare it.
Is it true or not? The Soviets have, a feeling that it is not true, but
they don't know what the truth is.
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Senator NuNN. Are you saying a very large percentage?
Mr. ARKOV. Very large, most of the population.
Senator Ntrxx. More than half the people are really skeptical?
Mr. ARKOV. Yes; especially young people.
Senator NUNN. Young people particularly?
Thank you.
Mr. ARKOV. Besides my objection to the many official lies, I was also
deeply troubled by the relatively low income I was receiving and could
hope to receive in the future. While engineers enjoy a social status of
some consequence in the U.S.S.R., they are paid very poorly. It is an
odd contradiction on Soviet society that the government wants very
badly to compete technologically with the West but rewards with
meager pay the engineers whose job it is to make the country competi-
tive. Moreover, the fact that I am Jewish was an additional barrier to
any improvement in income.
All these factors?the official lies and distortions, the lack of pro-
fessional opportunity, the anti-Semitism and, most important of all,
the absence of freedom?combined to lead me to conclude that I had
had enough of the oppressive Soviet regime. In the late 1970's, I con-
cluded that I had no choice but to try to get my family and myself out
of the country.
I applied for an emigration visa. I knew that authorities might
quickly take punitive steps against me. I have a friend in Russia who
applied for an emigration visa. A trained engineer, my friend was
promptly fired from his technical job and was never given permis-
sion to leave the Soviet Union. Unable to find another professional
position, he was forced to take any job that came along. The last I
heard of him he had been reduced to working as gatekeeper.
I do not know why some applications for emigration visas are ap-
proved and why others, such as that of my friend, are consistently
denied. But some applications do get through and, for reasons un-
known to me, my family's and mine were approved. Although I was
immediately fired from my job when I petitioned for the visa, after
a wait of 4 months, we received permission to leave the country.
We have settled in Los Angeles County and I have found satisfying
employment as an engineer in an optical firm. Things have worked out
in a satisfactory manner for my family and me. We are thankful and
proud to be living in this great nation.
Thank you.
Chairman ROTH. Thank you, Mr. Arkov.
I, too, want to join Senator Nunn in thanking you for your willing-
ness to come before us and your fine cooperation throughout the
hearing.
The subcommittee will limit the first round of questioning to 5 min-
utes. I would point out to my colleagues that we have, I think, five wit-
nesses this morning so that it is important that we move as expedi-
tiously as possible.
Mr. Arkov, what would you consider to be the most important steps
for the United States to adopt to prevent the flow to the Soviet Union
of modern technology and equipment.? Would you list several meas-
ures that you think are important to protect our valued secrets?
Mr. ARKOV. It is a difficult question.
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First, we have to study thoroughly what kind of fruits the Soviets
obtain from the information and technology supplied to them. We have
to analyze all of the information published.
Chairman ROTH. Why do you think that the U.S.S.R. prefers to
obtain Western technology rather than concentrate more on research
and development whether intended for commercial or military
purposes?
Mr. ARKOV. Trying to obtain Western technology, they don't dismiss
conducting their own research. They would rather try to be independ-
ent in their own way.
Chairman ROTH. Do the Soviets have the talent to advance in tech-
nology like the United States and other Western nations?
Mr. ARKOV. They do have an intellectual potential, but in most cases
they are limited in the technological support in which to yield the
high quality and quantity of products. There is also a lack ,of organiza-
tion within the government system which prevents them from pur-
suing high quality achievements.
Chairman ROTH. Do you know a any instances where the U.S.S.R.
obtained Western technology from U.S. allies or from Eastern Block
nations?
Mr. ARKOV. Yes; the U.S.S.R. received a vacuum coating technology
used in optic filters from Lichtenstein. The institute and the U.S.S.R.
who received this sophisticated technology did extensive military
research.
Chairman Rom. Senator Nunn.
Senator NuNisr. Thank you, Mr. Chairman.
What particular areas of technology and information were consid-
ered most important by the Soviets based on your experience?
Mr. ARKOV. Semiconductors, solid state devices, microelectronics,
fiber optics, systems of communication, space technology, subsea
technology, and surveillance and detection systems.
Senator NuNN. Where would you go in our society to obtain critical
use technology
Mr. ARKOV. First. I would try to establish contacts with people
involved in the business of my interest. The best places to do this
are at technical symposiums and meetings where people are less formal
and more willing to talk.
Senator NurN-N. Do you believe that the United States is putting
too much emphasis on technology transfer to the Soviet Union? Do
you think we are engaging in a degree of paranoia?
Mr. ARKOV. No, not at all. You should take first steps to prevent
our technology from slipping to the Soviet Union.
Senator Nuismt. How do you gage the United States and the
U.S.S.R. in terms of technological advance? Are we far ahead of
the Soviets? Are we somewhat ahead of the Soviets? Or are they
gaining on us?
Mr. Amoy. I feel that they are behind us but they can gain a lot
using our technology if they can obtain it. And even then, they try
to reinforce their labor force and manpower used for military
purposes.
Senator NUNN. You understand we are an open society and that is
one of our strengths. When you look at what the Soviets' obtained
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from us in technology and look at our open society, how do you
balance those two in terms of importance?
Mr. ARKOV. I wouldn't trade anything for freedom but it is very
difficult to analyze how to trade them. It is a very difficult question.
Senator NUNN. It is a difficult tradeoff. You understand that one
of the strengths of our technological development is that we do have
an open society, freedom of exchange, and so forth with our
information.
Let me ask you another way:: Do you think the Soviets closed
society actually impedes their technology development?
Mr. ARKOV. No.
Senator NuNN. You do not?
Mr. ARKOV. I do not.
Senator NuNN. What is the major problem with the Soviet technol-
ogy? Why aren't they further ahead than they are with the Soviet
technology?
I am speaking in terms of the commercial and industrial sectors, not
just the military.
Mr. ARKOV. First of all, it is a lack of organization.
Senator NUN N. A what?
Mr. ARKOV. A lack of organization. They cannot organize the society
as well as the United States. But they do have intellectual potential.
They have some smart people.
Senator NUNN. You say they do have intellectual potential?
Mr. ARKOV. Yes; but they do not have the organization which can
help them to utilize the intellectual potential.
Senator NUNN, Mr. Chairman, I will come back after Senator
Cohen.
Chairman ROTH. Senator Cohen.
Senator COHEN. I just have one or two ouestions. Your statement
concerning the comparison between studying Dostoyevski and Faulk-
ner, I think, is a good one. It reminded me of the double standard that
we have even in our athletic competitions.
For example, our amateur, at least, true amateurs in this country,
have to compete against what I believe to be true pro ressionals in
the Soviet Union for the Olympic games. Unfortunately, that is the
way the rules are written. But it seems to me drawing from your state-
ment about the disparity of students studying in this country and our
students studying in your country or former country, that the Soviets
are never going to allow our students to study anything much beyond
the humanities.
Is that a fair statement?
Mr. ARKOV. Yes, very fair.
Senator COHEN. It is also clear that the Soviets are never going to
allow young Soviet students to come to this country to study humani-
ties or even physics or any other courses because they are considered to
be too unprofessional, too unskilled for the purposes for which the
Soviet Union would seek to use them.
Mr. ARKOV. Yes; this is true, especially the analogy of Faulkner is
very good.
Senator COHEN. What is the option open for the United States? Is
it to bar Soviet students from studying subjects which could be con-
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verted to military purposes, or useful in developing military tech-
nology?
What is the option for a free society such as the United States?
Mr. ARKOV. I think that is a great idea to let our students study
around colleges but they should let their own Soviet students to study
the same things here, but not in high technology.
Senator COHEN. So we should have a so-call two-way street that
since we allowed to study Soviet Russian culture, Soviet students
should be allowed to study American humanities?
Mr. ARKOV. Yes; it should be done on an equal basis.
Senator COTTEN. That is all I have, Mr. Chairman.
Chairman ROTH. Senator Rudman.
Senator RUDMAN. Thank you, Mr. Chairman.
Mr. Arkov, I notice in your statement that you spent 6 years work-
ing in what was called a research institute dealing with optics and
cameras and used by the Soviet military, is that correct?
Mr. ARKOV. Well, it's correct.
Senator RtumA-N. Did that institute, have any great independent
research arm of its own or was it mainly aimed at obtaining tech-
nology from the Far East and from this country and essentially copy-
ing their technology to develop products that the Soviets would use in
their military forces?
Mr. ARKOV. Well, the task of copying Western technology?it is part
of the job they assign to them. The major application of their assign-
ment was for military. Is that the question?
Senator RUDMAN. Yes; let me just follow that up. You spoke in your
prepared statement about the use of sophisticated American com-
puters in various Soviet military operations, and also about the use
of semiconductor technology. There are those in this country who
feel that had we not transferred that technology legally to the Soviet
Union?we sold them certain semiconductor technology and certain
sophisticated computer technology in the late sixties and early seven-
ties?the Soviets would not have achieved the advantages in mis-
silery which they have made in terms of the enormous throw weight
and precision of their guidarce systems. Do you agree with that as-
sessment? Do you think that the sale of those semiconductors and
those computers has given them a tremendous step forward in their
technology in the defense area from your background and your
knowledge?
Mr. ARKOV. Yes; I think so. I can't tell exactly. It's hard to estimate
the degree of advantage they got. But they gained there using Ameri-
can computers and American semiconductors.
Senator RUDMAN. In your research institute, I assume you had
computers. Were there computers in the research institute for your
use?
Mr. ARKOV. Yes.
Senator RUDMAN. There were computers. Were they Soviets com-
puters or were they American computers?
Mr. ARKOV. Most of them were Soviet computers, but they also did
have American computers and they used both and we tried to establish
computerized system resembling the American one.
Senator RUDMAN. Would you repeat the last part of that for me.
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Mr. ARKOV. They tried to copy a computerized, a test system, using
the American computer.
Senator RUDMAN. Did you find in your work in that institute, of
those Soviet computers and American computers that the American
computers were more advanced, easier to use, and could do more
things?
Mr. ARKOV. Yes, it was, especially the minicomputer and the Soviets
at that time didn't have minicomputers.
Senator RUDMAN. You are talking about microprocesses and mini-
computers?
Mr. ARKOV. Yes.
Senator RUDMAN. Thank you, Mr. Chairman.
Chairman ROTH. I have just one question. From your background
and experience, do you think people in the Soviet Union believe that
it is easier to secure technical information from the United States or
from Japan and Western Europe? Which area has possessed the best
security in protecting technological secrets?
Mr. ARKOV. I think, for instance Japan publishes less than the
United States.
Senator NuNN. Publishes?
Mr. ARKOV. Publishes less technical information. First, they publish
information in Japanese and maybe develop the same, but they really
publish less.
Chairman ROTE. I gather from your testimony that much valuable
information comes from military and Government journals themselves,
U.S. military journals?
Mr. ARKOV. Well, not only military but other professional
magazines.
Chairman ROTH. Other professional.
Senator Nunn.
Senator NUNN. You mentioned two or three times Soviets placed
their top priority in actually utilizing American technology as opposed
to copying it. Do they do both?
Mr. ARKOV. They do both.
Senator NuNN. But they actually utilize it. What happens when an
American cnmputer or other technology breaks down, if that computer
has been obtained by illegal means? How do they repair it?
Mr. ARKOV. They probably don't. They study it thoroughly trying
to copy it because they can't repair it. They don't have spare parts.
Senator Nu-NN. How good is the Soviet reverse engineering? How
good are they at copying or reverse engineering, taking American
pieces of equipment and then making their own?
Mr. ARKOV. There is a big gap between engineering knowledge
and?
Senator NuNN. Big gap between engineering knowledge and what?
Mr. ARKOV. Big gap between engineering knowledge and their man-
ufacturing ability. They do know how to make, but they cannot make
it because there is a lack of technology.
Senator NuNN. So they have difficulty with reverse engineering, is
that what you are saying?
Mr. ARKOV. That's right.
Senator NuNN. They do it, they work at it, they try to do it but it is
very difficult?
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Mr. ARKOV. Even if they do know how to make it, in many instances
they cannot make it. So they still would be trying to obtain more and
more technology.
Senator NUNN. Thank you,
Mr. Chairman.
Chairman ROTH. I want to thank you, Mr. Arkov, for coming before
us, for your loyalty to this country. I would say to our people attend-
ing this hearing that it will be necessary to clear the room to protect
the security of this witness. So I would ask the security people now to
clear the hearing room.
[Hearing room cleared at this time.]
Chairman Roam. The subcommittee will please be in order. I thank
the people attending the hearing for their cooperation.
At this time, we will call forward Mr. William Holden Bell. Mr.
Bell, please come forward.
Mr. Bell, will you please stand, raise your right hand. Do you
solemnly swear the testimony you give before this subcommittee will
be the truth, the whole truth, and nothing but the truth, so help you
God?
Mr. BELL. I do.
Chairman ROTH. Please be seated. Mr. Bell, you may proceed with
your testimony.
Mr. Bell is represented by an attorney who is out for just a moment
and will return.
Mr. BELL. Can I proceed?
Chairman ROTH. We will wait until your attorney comes in.
Senator NUNN. Mr. Chairman, while we are waiting, can I ask the
witness a couple of background questions to lay a foundation?
Chairman ROTH. Sure, please proceed, Senator Nunn.
Senator NUNN. Mr. Bell, are you now serving a prison sentence?
Mr. BELL. Yes, I am.
Senator NUNN. Where are you serving?
Mr. BELT, Sprinqfield Camp, Springfield, Mo.
Senator NUNN. What was the crime you were convicted of?
Mr. BELL. For passing defense data.
Senator NUNN. Mr. Chairman, Mr. Bell has an attorney here this
morning. According to our rules, he is permitted to consult with his
attorney at any point. I want to be sure, that he and his attorney recog-
nize that. He is entitled to consult with you if you would like.
Mr. KinsTn. Thank you.
Chairman ROTH. Mr. Bell is under oath. Please proceed.
TESTIMONY OF WILLIAM HOLDEN BELL, PRISONER, ACCOMPANIED
BY ROBERT LANDON KIRSTE, COUNSEL
Mr. BELL. Mr. Chairman, I am grateful for the opportunity to ap-
pear before this subcommittee and provide whatever information that
I can. I have worked in the international field for more than 20 years
and have first-hand experience in the transfer of technology to West-
ern Europe and to the Soviet bloc nations.
In the way of background. I was born on May 14, 1920, in Seattle,
Wash. After leaving school and working for my father as a teenager
to support the family, I joined the Navy at the age of 18'. The destroyer-
minesweeper to which I was assigned swept the channel at Pearl Har-
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bor during the attack on December 7 and was preshipped to sea. I also
participated in civil operations throughout the world and was hos-
pitalized following injury in an underwater explosion in Iwo Jima.
I married my first wife after receiving an honorable discharge. We
have two sons and one daughter.
I completed my high school education by correspondence school
while in the Navy. I attended the University of Southern California
and the University of California Los Angeles where I received a bache-
lors degree in applied physics. In 1950, I was employed by Hughes
Aircraft Co. as a test technician and the following year became ac-
cepted as an engineer and member of the technical staff.
During my 30 year career at Hughes Aircraft Co., I held a secret
clearance classification and had many technical and managerial posi-
tions. I continued my education through research, experiments, semi-
nars, symposiums, and constant reading of scientific literature. I was
and am an expert in the military application of radar in tactical op-
erations and weapons systems.
Since 1962, I have been directly concerned with the transfer of U.S.
technology to Europe and the Middle East. From 1962 to 1965. I was
manager of a European program for Hughes Aircraft Co. and from
1974 to 1976 I was manager of radar operriions for Europe and the
Mideast. In connection with these assignments and otherwise, I per-
sonally traveled extensively through Europe and the Middle East.
A number of personal events combined to set the stage for my re-
cruitment by the Polish Marion Zacharski, my overseas assignments
were financial nightmares, although they are touted as glamorous and
lucrative. My wife and I were divorced in an extended proceeding. My
assets were tied up and. I was paying her $200 a week alimony.
I was pursued by four separate IRS offices for back taxes on dis-
allowed deductions primarily arising out of my overseas assignments.
I returned from Europe to find a younger group at Hughes and I
shunted off to a quiet back room.
My youngest son, Kevin, to whom I was extremely close, died need-
lessly from burns sustained in a camping accident in Mexico. While I
waited with an ambulance at Los Angeles International Airport, a
Mexican Airlines pilot ejected him from the plane in Mexico prevent-
ing him from receiving prompt and adequate treatment.
I married a young Belgian citizen, Rita. We tried to build a new
life with her young son in her Playa del Rey apartment complex.
I was forced to file bankruptcy and name my employer on the
schedules, however. I continued to pay or reaffirm most of my debts.
Zacharski and his wife moved into the apartment complex and he
and I began to play tennis on a daily basis. He slowly became my
best friend. He was about the age of my oldest son who had been
close to his mother and quite distant from me since our divorce. When
you are sent to Europe, you are told to expect attempts by foreign
spies, but whoever would expect it to happen here at home?
Zacharski was the west coast manager of a Polish-owned American
company, Polamco, which is a Polish-American receiving company.
He had an extensive expense account and gave away various items
out of their public relations funds. He was interested in what I did
and enlisted my aid in making contacts in the industry for the possible
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sale of Polamco machine products. He suddenly delivered $4,000 to
me for my very minimal efforts in that regard.
He expressed an interest in having Polamco hire me as a con-
sultant after I retired from Hughes Aircraft Co. In order to impress
him I showed him a sample of some work I had done of which I was
quite proud. Although I showed it to him on the tennis court, he took
it to his apartment for reading. It was classified secret.
At this time, the apartments were being converted into con-
dominiums at the cost of over $80,000. Zacharski asked me if I were
going to buy one, as his company was buying his. He knew I didn't
have the funds. In view of my prospective employment by Polamco,
he thought he could help me. Subsequently, he appeared at my door
handing me envelopes of cash. With this money I paid the IRS and
made a down payment on the condominium. I signed a receipt for
the money and concealed the source from my wife.
Zacharski furnished me with a movie camera. He instructed me to
make a setup to photograph documents by using a single frame device.
He told me that we would be making a trip to Europe but when it
was time to go he did not accompany me. The primary purpose of the
trip was to negotiate.
Even as I went to Innsbruck, Austria, I was rationalizing and
kidding myself that the persons I would meet were representatives
of Polamco, that this was just the kind of industrial espionage that
goes on all the time.
This meeting started by my turning over film of documents that
I had previously shown to Zacharski. I was paid $5,000 in expenses
for the trip in cash. All of the cash that I was given was always
in $50 or $100 bills. I talked with two men the FBI had since referred
to as handlers. A man later identified as Paul and the younger guy
whose name I cannot recall. Under the guise of discussing methods
of payment to me, they took great care to describe where I lived
and shopped in frightening detail. They also showed me pictures of
my family, my wife and my young boy, and told me that there were
only six persons involved.
They told me that if anyone caused a problem, they would be
taken care of.
I was assigned the code name of Jackson and given a phone num-
ber in Poland. I signed a receipt for the money. There was no ques-
tion of what I was getting into. I made one more trip to Innsbruck,
another to Lintz, and a final one to Geneva, Switzerland. On the last
two trips, I traveled with films of American secret technology in
my luggage. They had provided me with black and white high-resolu-
tion film which had 8 to 12 feet of regular color home movie film
attached to the ends in case it was inspected.
A young guy asked me to design a low-level-based radar which
would detect planes coming into Poland from 200 meters above the
sea. Both Zacharski and my handlers gave me extensive lists of docu-
ments to be obtained. They knew exactly what they wanted?right
down to the company identification numbers. They even asked if I
could go to work for a different American company, DARPA, to get
what they wanted. DARPA, incidentally, is the Defense Advanced
Research Projects Agency, an organization funded directly by the
Department of Defense.
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They fund advance technical programs, technology programs, types
of things the military would ordinarily handle but they would have a
high payoff if they were successful.
Zacharski told me that he could go to any town in the United
States and the local chamber of commerce would direct him exactly
where to go and who to contact. He delivered additional cash in gold
coins to me at my condominium. It was always the same. He would
come to my door when I was alone, hand it to me with a smile and
walk away, or place it in my tennis bag as we walked to the tennis
courts.
He made constant trips to Chicago and in fact traveled extensively
throughout the United States for the company?Polamco.
My financial burdens, of course, were resolved overnight. However,
I was afraid when I could not, or would not, deliver more classified
documents I would be liquidated or, much worse, my family would
be endangered.
My third trip was to Lintz, Austria
Senator NuNN. Did he ever tell you that or was that something you
feared?
Mr. BELL. Yes, sir, I did. On one of my trips into Austria, on the first
trip and the second trip, a man by the name of Paul threatened me on
both trips. It was a very clear threat. He threatened me by showing
me pictures of my 8-year-old son, my wife's son, whom I raised since
he was 31/2. He showed me pictures of my wife. It was very clear there
were tenors of threat. Incidentally, it is a horrible feeling when you
are operating on the wrong part of the law.
I am sure it is horrible to anyone who has their family threatened,
but when you are on the wrong side of the law, it is horrible.
My financial burdens, of course., were resolved overnight. However,
I was afraid wl- en I could not or would not deliver more classified in-
formation, I would be liquidated.
My third trip was to Lintz, which is only 50 miles from the Czecho-
slovakian border. I was particularly frightened on this trip. I met the
young guy and walked with him to a small restaurant. There was only
one other patron, a roughly dressed man who appeared to be a laborer.
The weather was stormy and the city dark and foreboding. The young
guy seemed totally at ease. He took the film from me openly and dis-
appeared into the. kitchen. He returned and we drank coffee, making
small talk, then left and walked about 100 meters to another restaurant
where we drank more coffee.
Leaving the second cafe, we walked an inclined path lined with
hedges up into a wooded area. After we had gone up some distance and
stopped to talk, I suddenly saw the rouely dresed laborer which I
had seen earlier pearing over a hedge or bush. He ducked down as I
looked at him. I thought for a moment that I would be killed. The
young guy simply smiled about it and told me that it was his man
watching him because he carried a lot of money.
They constantly wanted me to go to Mexico City and I kept making
excuses. I knew a man at DARPA who I respected and trusted. I
thought if I could confide in him he might help me out of my dilemma.
On a trip east, I tried to see him but he was out. I don't know if I would
have actually had the nerve to tell him, but that was my intent. It is
the closest I ever came to giving myself up.
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Zacharski told me that he was being followed. From the way he
described it, I couldn't believe it. He claimed that he was being open-
ly harassed and I assumed it had something to do with some labor
union rather than the FBI or likewise. Or some problem with Polamco.
One day when we went to play tennis, he told me "There they are." He
pointed out two cars in the parking lot. I went back to my apartment
and got ,my camera. I photographed each of them, afterward laying
my camera on the ledge. Then I went to each car and confronted the
person in each car. I demanded to know who they were and what they
were doing. They refused to tell me anything and departed. When I
returned to the ledge, the camera was gone. To this day, I do not know
what became of it.
The FBI tapped Zacharski's phone. I was told they also tapped
mine. It didn't matter because Zacharski has told me never to talk on
the phone. Although I was unaware of it, I was also being followed.
On my final trip to Geneva, I took film of the LPIR or quiet radar.
I was followed all the way. When I arrived Geneva, an innocent
American in a turtle neck sweater engaged me in a conversation and
a drink at the hotel. He happened to b from my birthplace in Seattle,
Wash., and I understood that 6 months were invested in ascertaining
that he had nothing to do with me. I went to the Arizona Museum a
day early and noticed a man with a black hat, coat, and briefcase
wearing dark glasses, looking at me.
I walked to a newsstand or a moment and left. He walked to the
same newsstand. The FBI showed me/photos of these men. The fol-
lowing day I gave away the film on the quiet radar to my handler in
the elevator at the United Nations building. I was no longer being
surveiled when I did this.
On this trip, I was instructed to go to Mexico City on the next trip
and meet a new contact at another museum. I was to carry an airline
bag and respond to the code phrase "Are you interested in the Aztec
exhibit?"
By replying, "No, I'm interested in the Mayan calendar" I was
shown a key chain with a black medallion bearing a silver P for
Poland, which my contact would display. I never went. The FBI in-
terviewed me first. I told them everything. There is little left of my
life now but I feel I am freer in prison than I was with Zacharski.
I have set down the circumstances of my recruitment by Zacharski
in detail so that similarities of what goes on in industry can be recog-
nized. Within the avionics industry, it is a common practice for all
comprnies to obtain the secrets of their competitors by the same tech-
nique Zacharski used with me.
Senator NUNN. You mean by that that it is such a common practice
in the industry, that when industry people are approached, they are
not going to be assured if it is a Soviet company or American
company?
Mr. BELL. No, I?
Senator NI7NN. You were not under any impression this was another
American company?
Mr. BELL. Absolutely, yes, for the first 11/2 or 2 years. I considered
Polamco, it was a Chicago-based company operating in the United
States under the full support of the 'U.S. Government, under their
auspices. Yes, I considered them an American company but I certainly
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did not when I started to get into this, I certainly did not. When I
was offered a job as a consultant engineer for Polamco, I was inter-
ested in getting that job. It was a solution to all my problems.
They were successful, they were clever, very clever.
I sat down the circumstances of my recruitment by Zacharski in
some detail so that the similarities of what commonly goes on in the
industry can be recognized. Within the avionics industry, it is common
practice for all companies to obtain the secrets of their competitors by
the same technique Zacharski used with me.
An engineer from one company is interviewed by the management
of another. Considerable benefits are dangled in front of the engineer
in terms of increased earnings and better position. He is asked to pro-
duce samples of his work?do you want me to repeat?
Senator NUNN. That is all right. Please talk directly into the mike.
Mr. BELL. An engineer for one company is interviewed by the man-
agement of another. Considerable benefits are dangled in front of the
engineer in terms of increased earnings and better position. He is asked
to produce samples of his work and this is normally done without re-
gard to their security classification. He may also be asked to provide
specific documents directly. Sometimes the engineer is hired.
More often he is not. This is generally tolerated because, of course,
both companies are American. And they are in competition with each
other.
When American companies compete to make sales to friendly for-
eign governments, a considerable amount of technology is passed in
order to make the sale. The companies themselves classify the tech-
nology in many cases which they develop under the authority of the
Department of Defense. There is a clear conflict of interest between
the security responsibility of classifying technology and information
and the economic interest of the companies trying to market their
products.
A well-known example of this problem occurred with the inter-
national competition for the replacements of the aging F-104 NATO
tactical fighter aircraft. A memo of understanding was issued by our
Department of Defense at this time. It was largely considered by the
industry as a license to offer the highest American technology to the
Europeans in order to win the contract.
While I was in Europe, I became aware of the impact of the various
Communist Parties particularly in France and Italy. This dates clear
back to 1958, 1957. I passed through many picket lines of red flags to
reach my office at Dassault Aircraft Co. in St. Cloud, France. Many of
the employees there were quite frank to tell me that they considered
Americans as rabblerousers who had a mania about communism. I was
prevented from attending a meeting at the Sylvania facilities in
Naples, Italy, by a picket line of red flags. American technology passed
to European industries is most certainly the target of Communist
infiltration, as well as here.
[At this point, Senator Cohen left the hearing room.]
Mr. BELL. During the international fighter program, including
Hughes Aircraft Co., delivered 'hundreds of drawings, specifications,
photographs, and process specifications plus technical operation and
performance documents. Thousands of man-hours of technical engi-
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neering assistance was provided and teams of European specialists
were brought to California for briefings.
All of this transfer was done for the purpose of submitting a planned
purpose proposal in pursuit of the contract and to dazzle the Europe-
ans with their technology.
Look down-shoot down radar systems both by Westinghouse and
Hughes Aircraft Co. were proposed to the NATO countries, Sweden,
Switzerland, Spain, Iran, Israel, Turkey, and Saudi Arabia. Briefings
for the proposed sale and construction took place in 1974 through 1975
and following. This, incidentally, was more extensive than the infor-
mation I passed to Poland 6 years later.
I would like to add the F-14 look down-shoot down radar was de-
livered to Iran and is still there undoubtedly compromised to the
Soviet Union.
On other occasions, the Department of Defense is bypassed. Hughes
Aircraft Co., for example, invented a system for very accurate bomb-
ing through a TV camera system which could be locked onto a target.
This was sold to the U.S. Navy who rightly refused Hughes Aircraft
Co.'s application to export it to interested European buyers.
Martin-Marietta, for example, transferred comparable technology
to a French company for overseas productions and sales. I was told
this was managed by ignoring the Department of Defense and operat-
ing directly through the Department of State, after the fact, which
they were free to do since they did not have the Department of
Defense contract.
Polamco operates openly in the United States as do other Eastern
bloc corporations. Zacharski once told me he could ship a radar the
size of a small desk to Poland in a machinery case. Incidentally, this
is radar weighing 500 to 800 pounds. He had complete access to money
and traveled anywhere he wished. Although his phone was tapped and
he was constantly watched, the FBI agents never saw him do anything
more than run a red light and change lanes illegally.
In light of all my financial and personal problems and my friend-
ship with Zacharski, all of which the company was aware of, my se-
curity clearance surely should have been rejected or should have been
reviewed. In California, you must renew your driver's license every
3 years. My clearance was 28 years old.
It also seems to me that a random imprint of a coded line running
diagonally through a classified document could deter their reproduc-
tion. It would serve as a fingerprint to identify the person who is
charged out to it and could be read automatically. This certainly would
have deterred me. A security oriented classification review should be
imposed on the transfer of technology during the sales process. The
responsibility for security and profits should be effectively separated.
Every person employed in a security job should know what I did
to myself, my loved ones and my country and realized how easy it is
to get trapped.
Chairman ROTH. Mr. Bell, did Zacharski represent to you that Po-
lamco was a client of McDonnell-Douglas? If so, why?
Mr. BELL. Yes. Mr. Zacharski showed me a letter that he had on
McDonnell-Douglas stationery which was addressed to some sub-
contractors and I think to whom it concerned, which encouraged the
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subcontractors to do business with Polamco, to buy the machinery and
was a glowing report on Polamco, I might add that I learned later
that the reason for that letter was that McDonnell-Douglas was com-
peting to sell the DC-10 for LOTT Airlines which was a Polish air-
line. This was part of the sales campaign.
Chairman ROTH.. Were the Polish agents interested in the tech-
nology of any other Western nation?
Mr. BELL. Yes. I should add on the last one that Zacharski also had
access to the atomic energy facilities in Nevada and various naval
shipyards, all of which he had access to or installation of equipment,
large machinery, for maintenance of the machinery and for training.
Some of this was done through subcontractors, but his people from
Polamco had the access.
May I have the last question?
Chairman ROTH. Let me ask you a followup question.
So what you are saying is that despite the fact that it was common
knowledge that Polamco was a Polish-owned company, it was free
to compete in this kind of operation, even though it involved tech-
nical and classified information?
Mr. BELL. That is true. Polamco was operating in this country under
the auspices of the U.S. Government and they are still operating.
They have offices in Chicago, their main office, they have offices
in Detroit, they have an office on the west coast in the Los Angeles
area. They not only have the freedom to operate this way, it permits
them to have people travel under the Polamco treasury to wash the
money, if you will and it gives them access to various companies
around the country operating under the guise. of Polamco.
Chairman ROTH. So despite your experience with this organiza-
tion as far as you know, there has been no limitation or change in the
way Polamco operates?
Mr. BELL. As far as I know, that is correct.
Chairman ROTT-T. Were the Polish agents interested in the tech-
nology of any other Western countries?
Mr. BELL. Yes. They asked questions that were directed toward the
technology in West Germany.
I believe the reason for this was they told me that they considered
Germany as their historical enemy but also they were in economic
competition with them and they wanted to maintain a par with their
technology. They asked particularly about radar and weapons sys-
tems and my company developed and sold the large radar systems.
Chairman ROTH. Did Hughes Aircraft ever participate in joint
projects with companies of other nations involving technology trans-
fer? Was technology transfer an important consideration?
Mr. BELL. Yes. We had on many occasions. Probably the best ex-
ample of it would be the international fighter program that took place
in the 1974-75 time period in which they were looking for replace-
ment of the NATO F-104 fighter bomber aircraft. There were several
companies competing for that.
The U.S. companies were narrowed down to General Dynamics and
Northrop, the European companies were Dassault Aircraft Co. in
France, and one in Sweden.
There was a British company, also.
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As part of that program, there was a consortium established by the
Department of Defense which consisted of Norway, the Netherlands,
Belgium, and Denmark, and the United States, five-country consor-
tium. A memorandum of understanding was negotiated and issued
which guaranteed an offset program of 60 percent of the equipment
we manufactured in Europe and all of the technology. That is the
main point, all the technology would be transferred. This was taken
by the industry as a license to reveal all of our technology.
We were encouraged to dazzle the Europeans with our technology,
with our advanced technology.
Chairman ROTH. You were encouraged by whom?
Mr. BELL. We were encouraged by the prime contractors under the
full knowledge of the Department of Defense. I believe it was right
for us to interpret this as a license to move out and discuss our tech-
nology. I don't believe anybody?I think we all used integrity. They
didn't want to cause any harm. But when you get in the heat of com-
petition, engineers are engineers, they are proud of what they do.
They meet with their counterparts and they talk. They do talk. Much
data was transferred. There is a climate. In this case, a requirement
was to produce 60 percent of the system in Europe. Therefore, we
had to price it. We could not price it unless they had the information
to price. This required us to transmit a great deal of data and a great
deal of information to conferences and so on; not only by the winner,
but by the losers, as well, and all the subcontractors that were com-
peting to get the award for the airplane.
This was one example. There are many others. This is one example.
Chairman ROTH. Senator Nunn.
Senator NUNN. Mr. Bell, is Polamco still operating in this country?
Mr. BELL. They were operating before I came in mid-December.
I understand they are still operating here.
Senator NuNw. How many people do they have working for them?
Mr. BELL. They do somewhere between $30 and $50 million a year
in business. In the Los Angeles area I have met and seen perhaps
a dozen of their employees, anywhere from technicians up to senior
personnel. However, it is important to note that senior executives
from Polamco, people who traveled in the guise of senior executives,
came to the United States, the Los Angeles area, a guest of Polamco,
Polamco was their reason for being here. It was a gimmick to provide
direct access in this country for technical people in Europe.
As an example, a good example, I believe, early during the days,
perhaps a year and a half after I met Mr. Zacharski, he tried to
arrange for a meeting between me and the professor from the Uni-
versity of Warsaw. This meeting was to take place in Santa Barbara.
The meeting didn't take place. This didn't take place. I saw no reason
why I should meet with the professor from the University. I didn't
see how he would be associated with Polamco.
After I became involved, I was again requested on more than one
occasion by the agents overseas, they tried to set up a meeting with
the professor from the University of Warsaw. Incidentally, the data
that I provided, I was assured was going to be held in one place at
the University of Warsaw and would have, the access to it would be
limited to about six people.
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Chairman ROTH.. Do you consider Polamco a legitimate company
doing business in this country or do you consider it simply as a guise
for Soviet spy activities through their proxy?
Arr. BELL. My feeling from what I have seen is that both are true.
T think the most important one is this latter one. To me I was con-
vinced when I realized that Polamco was not, perhaps it is?well,
it is a Chicago-based company, but when T discovered absolutely for
certain that it was under the control of the Polish Government and
that they use it as a cover for their secret service operations, there is
no question in my mind what they are here for, what they are doing.
[At this point Senator Roth withdrew from the hearing room.]
Senator NUNN. Do you know of any action they have taken against
Zacharski since he was convicted of spying?
Mr. BELL. Polamco? Polamco, as a matter of fact, we just heard
recently, I heard it?as a matter of fact, through my attorney?is
that we have people that are in contact with Barbara, his wife, a
lovely lady. She is still receiving the Polamco paycheck.
Senator NUNN. In other words, a Polish company is licensed to do
business in the United States. One of their employees has been con-
victed of spying. He has gone to jail. Yet he is still on the payroll and
in iail. Is that true?
Mr. BELL. That is true.
I wouldn't want to restrict it to just one executive. I believe it is
deeper than that. As a matter of fact, one of the things which was
going to happen the week after Zacharski was arrested, he was going
to get me in contact with a follow-on contact. He was leaving for
Chicago, moving to Chicago, as president of the company. He was
g,omg to get me in contact with somebody who would replace him in
the Los Angeles area, which I assume?I, of course, cannot prove this,
but my thinking was he would be from Polamco. But certainly
Polamco was part of the whole thing.
Senator NUNN. I assumed Zacharski was not president. I-Te was
just an employee is that right?
Mr. BELL. Competition for presidency of that company to replace
the man that was president in the fall of last year took place in
Poland.
Zacharski was one of the competitors. There was one other man
competing. This took place in Poland. In talking to the agents in
Europe, I know that this discussion took place witl,in the government.
So the government is putting the executives into Polamco.
Senator NUNN. Are you saying the spying efforts of Polamco in-
clude people all the way to the top?
Mr. BELL. I am sure of it. Yes.
Senator NUNN. Did Zacharski have any knowledge of the internal
affairs of Hughes Aircraft separate from what you may have com-
municated to him?
Mr. BELL. Yes. I was surprised on several occasions he would know
things I didn't understand how he would know about his aircraft
company. Like for example, when my boss was changed, he knew that
I had a new boss. I don't know how he ever found that out. But more
important than that, that he would ask for data, drawings, and the
data would be identified in many cases by the identification numbers,
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through that identification number; not just Hughes, but one was from
another company, such as Westinghouse.
He would have the identification numbers there also.
Senator NuNN. So you knew precisely what they were
Mr. BELL. They knew precisely what they were. After I knew. They
asked me for things which was impossible for me to deliver. As a
matter of fact, most of the stuff I delivered was not asked for. I just
delivered stuff, things that were available.
Senator NuNN. What kind of technology were they most interested
in? What were the military applications?
Mr. BELL. The last thing, for the last few months they were very
much interested in the cruise missile; a particular piece of the cruise
missile.
I should say I don't know. I don't know anything about the cruise
missile. I can only surmise as an engineer. They were asking for what
they described as a video c,orrelator. I don't know if I should surmise
in this meeting, but except to say that I can see how it would be used
on the cruise missile if it is on it. But they were very much interested
in it, thinking it was at least a part of the cruise missile, and they
thought that maybe Hughes was a manufacturer of that missile equip-
ment.
I don't know if they were or not.
Senator NuNN. Did they ask you to seek employment in other firms
so as to broaden their source of information?
Mr. BELL. Yes, they did on more than one occasion, but especially
on one occasion. They asked me if I could leave my company and go to
work for another company in the United States. They mentioned
specifically not a company, but an organization within the Department
of Defense. I have already told you what DARPA is. It would be a
real key for them where they could have somebody in DARPA, where
all the advanced technology work is being done.
They also, on the companies involved, it is my understanding, from
previous conversations we had, conversations that led right into them
asking me what they were interested in?in the way of companies was
Boeing Aircraft Co. and perhaps Westinghouse.
Senator NUNN. Boeing and Westinghouse?
Mr. BELL. Yes. Boeing would be, I am sure, because of the cruise
missile. I am not sure why Westinghouse.
Senator NuNN. Did they ever ask you about your level of security
clearance
Mr. BELL. Yes, they did. As a matter of fact, they asked me if I had
a top security clearance. They have asked me more than once, but on
one occasion they asked me if I had a top secret security clearance and
I told them. Died to them. I said I did.
Senator NErNx. At that time, you did not, though?
Mr. BELL. I did not.
Senator N-uNN. Did you give them any information that was labeled
top secret?
Mr. BELL. No. I did not. I gave them some secret information on the
last two trips.
Senator NuNN. Did you ever turn over to them what is classified as
top secret information?
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Mr. BELL. No, I never did. It was not available to me. I suppose may-
be there is some way of getting it. I don't know. I never tried.
Senator NUNN. Did you try to go beyond your own clearance?
Mr. BELL. No, I did not.
Senator NUNN. Are you suggesting that if every piece of classified
information had some special designation Liat this would have a de-
terrent effect?
Mr. BELL. Yes, with modern coding techniques you could put ran-
dom vertical lines through the paper when you print it, before the
paper is delivered to the companies so they type on it.
Three or four lines, if they are randomly through there, then you
can identify each document with the counter, like you see in a depart-
ment store or a drug store, this scans over these lines and tells the ratio
of distance between them. So they would have a fingerprint. They
would know which document, the document signed out by me by the
Document Control Center, would have my fingerprint on it. If I tried
to pass it, I couldn't photograph it, there is no way of removing those
lines without removing the print, it doesn't matter if it is blown up,
made smaller, the ratio of distance between the lines still remain the
same. If I knew that, if the person knew that, he would think twice
before he would do something like this.
Senator NUNN. How would that work on the copies?
Mr. BELL. The same way. The copies, all that can happen is you
could make it bigger or smaller, 'but the ratio of the distance between
the lines remains the same.
Senator NUNN. Would you know where the copy came from in
terms of the original?
Mr. BELL. You would know where that particular copy came from.
I believe?I thought about it extensively?I believe it is something
that could be done economically. And I think it should be done.
Senator NUNN. Did you offer to obtain an entire radar system
for the Polish agents?
Mr. BELL. Yes, I did, in a sense. They were interested in obtaining
a TWT which is a special high-powered radar transmitter, anywhere
from 30 to 50 pounds in weight. They wanted one. They were going
to ship it back to Poland by machine crates. It has something to do
with the Polamco shipping plant, to move equipment back and forth.
So I offered them, just testing, to see what they can ship, "Could you,
would you be interested in a total system, which would weigh 500 to
800 pounds? It would be the size of a desk." They became very excited
about it. Yes, they could handle it. So it shows you the flexibility they
have and the power they have, having a company like that operating
in the States.
Senator NUNN. Did you carry through on that offer?
Mr. BELL. No; I never delivered any equipment.
Senator NUNN. Did they mention to you how they would handle
the equipment, how they would get it out of this country? Was there
any discussion of the mechanism if you delivered it, what they would
do with it?
Mr. BELL. We had some discussion around the subject where I know
they were talking about using Polamco shipping crates or the Polamco
shipping channels. Incidentally, this may not be directly associated
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here, maybe it is, but they were bringing in vodka and they are bring-
ing it in in the same way. They put it in the machinery. This gives
you an idea.
Senator Nurnc. Did they tell you how they repair equipment that
they may have gotten illegally from the United States or other West-
ern nations?
Mr. BELL. How they would repair it?
Senator Nurnsr. Yes.
Mr. BELL. No; they didn't.
But I could add a few lines on that if you don't mind.
Senator NuNic. Your opinion? Yes.
Mr. BELL. I know in transferring technology to Europe, any engineer
in the industry will verify this, in order to transfer technology to an
industry in Western Europe, I have to assume it would be more difficult
than Russia, or any Soviet bloc country. It takes thousands of draw-
ings, specifications, it takes a huge amount of data and that is to de-
liver enough data for them to reproduce it, put it in production. It
takes a huge amount of data. Not only that, it takes thousands upon
thousands of hours, man-hours of support once they have this data
to get the stuff in production. We have had much experience doing
this in Western Europe. How in the world the Soviet Union can put
something into production when they receive only small amount of
data on a sales brochure or even if they had all the drawings, I don't
see how they would ever get it into production in the Soviet Union
without having at least thousands of man-hours of support.
I believe that if you talk to anybody knowledgeable in this field?
Senator NtrNN. You say reversing engineering is very difficult and
time consuming even if they have the equipment itself, and all the
plans and specifications?
Mr. BELL. To put it in production. That is true. You can get a lot
of valuable information off of it. But to put that equipment into
production, even if you had what I said, they do not have the com-
ponents. That is the key to the whole thing.
The best system engineer in the world, that is what we do in system
engineering, is only as good as the elements he has to work with. They
do not have the components in the Soviet Union. I base that on two
things, on what I have seen in Western Europe, I conducted a survey
for Hughes Aircraft Co., throughout the industry in Western Europe,
and Australia in 1970. I know what they have. They are a generation
behind the United States, but they are coming up fast on Western
Europe.
I have seen the Soviet Trade Show in Los Angeles. I saw what they
had in the way of components and they were 2 years behind. This was
maybe 5 years ago. But I have no reason to believe that the Soviet
Union component technology is any further advanced than Western
Europe.
Senator Nuisrx. What do you think is the most damaging informa-
tion that you gave to them? How would you rate it?
Mr. BELL. The most damaging information I gave them was the
OPIR, quiet radar data. I gave them a brochure. We were developing,
not developing our radar, what we were doing, we had a radar
which Hughes has developed on their own money, which DARPA
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put money in to modify, to demonstrate the technology which is a
quiet radar technology. That is the radar that can operate without
being detected by another passive receiver. The document, the sales
document that went forward to get that contract I handed over on
the last trip to Europe. To me that was the most damaging one,
the one I am most ashamed of.
Senator NUNN. What steps would you recommend, based on your
own experience, for both Hughes Aircraft and for the Federal Govern-
ment? I say "Hughes," I don't mean them exclusively, but any com-
pany dealing in high technology? What steps other than the ones you
have now outlined about the fingerprints, and so forth, would you
recommend?
Mr. BELL. I think that when they have people that are in access to
classified material, at the level I was, that they should be reviewed
more often. I don't think they should be fired. Perhaps we can help
them with the problem, all the signals are there, everything. All the
classical reasons, a guy is in trouble. I had them. They knew about
them. I don't want to pick on Hughes Aircraft. It is a great company.
This is true throughout the industry.
Senator NUNN. You are saying the industry should do a lot more
themselves if they had more thorough periodic reviews of access?
Mr. BELL. Yes: I think yes: I definitely feel that is true. I believe on
the Government's side it is clear, you know. We don't want to be, as
Americans, suspicious of our neighbors. We certainly don't want to
do that, but gentlemen? the way things are going, if you don't have
more control of people coming in 7acharski was a good example. He
was given a visa in Poland in 1977, I believe it was. Given a visa when
I was told that they knew full well that he was a highly trained Polish
intelligence officer.
Senator NUNN. Who knew that?
Mr. BELL. The FBI knew that. They told me that the CIA knew it
and the visa was issued. Maybe they had good reason for it. Maybe
they wanted to follow it. That sure puts us at a disadvantage. He was
placed under surveillance the clay he arrived in the United States and
when he arrived in California, he was under continuous surveillance
there.
As a matter of fact, he was under surveillance before I was guilty,
before I had done anything, other than I was in the process of being
entrapped.
It would have been so much easier to warn me.
Senator NUNN. But you are saying this passing of very valuable
information took place right under the nose of our own law enforce-
ment agencies who had in effect targeted both Zacharski and yourself
before the information was passed. Is that right?
Mr. BELL. Yes.
Not only that, it took place over the period of time, on the last trip
to Geneva, where I carried the most sensitive data, they followed me.
They had a girl, FBI lady follow me into Paris. stay in Paris the few
days I was there. They had an agent pick me up in either Paris or in
Zurich, follow me to Geneva. But they lost me the day that the thing
went down.
Senator NUNN. Did you know they were following you? Did you
know they lost you?
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Mr. BELL. I only knew after the fact, after they told me. I believe I
mentioned two gentlemen they had pictures of, that took place the clay
before. I went up to the area where the contract was to be, just to look
it over, as I was concerned. I was really concerned about as soon as my
usefulness became negligible, that I would be eliminated. It is a nat-
ural, normal thing, and I was concerned about that. I wasn't particu-
larly concerned in Geneva. I didn't think they would do it there. But
I still went up 1 day ahead to look over the contract area. They fol-
lowed me on that. They had pictures of the two gentlemen.
Senator NuNN. But you didn't know at that time?
Mr. BELL. I didn't know at that time.
Senator RUDMAN [presiding]. Mr. Bell, although you haven't said
so in your testimony, you certainly, I think, have inferred that Polam-
co is something more than a commercial enterprise that recruited
you.
Mr. BELL. I will say it. If I didn't say it directly, I will say it now.
Yes. I am certain of that.
Senator NuNN. So it would be naive for this subcommittee or the
public to feel that because you were the only one who was apprehended,
you were the only one that they recruited?
Mr. BELL. When I was apprehended, they came to contact me about
Zacharski and I knew, like I say, other times I considered it myself,
I had to come to an end some way. I was concerned about doing it in
the Los Angeles area because of the rest of my family, because they
knew so much about where my family went to school, where we shop.
So when they contacted me, it took me a couple of hours to finally do it,
but then I told everything, I provided all the evidence, and so on. But
with the idea that we would go after the entire operation and shut
them all down. That was my understanding. I was assured that was
the understanding by some of the agencies I was working with. But
then at the last minute they decided because Zacharski was moving to
Chicago, he had been appointed, promoted to president of the company.
Senator NuNN. President of which company?
Mr. BELL. He had been promoted to president of Polamco. He was
moving. to Chicago to take over that position. He was already in Chi-
cago. He had been there for 2 weeks. He had come back on the week-
ends. His wife was packing up, everything was packed, she was plan-
ning on leaving in a week or two and Zacharski was going to come back
the following weekend and that would be his last trip when he lived
there.
He would be coming back.
Senator RUDMAN. That was at about the time he was apprehended?
Mr. BELL. That is when he was apprehended.
Senator RUDMAN. I would assume that the area you lived in, the
apartment complex that you and he chose to live in, housed many
employees of Aerospace Co.?
Mr. BELL. Yes.
Mr. Zacharski settled down in the Playla Del Rey apartment com-
plex, which has about 525 apartments in there. There are many em-
ployees of the defense industry in those apartments. I don't know all
of them. I know some of them. He was constantly trying to meet other
ones. I don't know if he was successful or not. I don't know if he moved
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in there, I have always thought about this. I would like to know some
day, whether he moved in there to get to me or whether it was an
accident. We happened to be living there.
Senator RUDMAN. I would assume it was no accident, Mr. Bell.
Mr. BELL. All the signals are there. In fact, when I discussed with
the agents in Europe, they were aware that I filed bankruptcy. They
had all the information.
Senator RUDMAN. That company is still operating as an agency of
the quasi-official agency of the Polish Government?
Mr. BELL. That is correct.
Senator RUDMAN. It has employees in Chicago?
Mr. BELL. That is correct.
Senator RUDMAN. It has employees in Los Angeles?
Mr. BELL. That is correct.
Senator RUDMAN. It has employees, I assume, in other major Ameri-
can cities?
Mr. BELL. In Detroit, for sure.
Senator RUDMAN. Do you know how many employees this Polamco
has?
Mr. BELL. No, I don't.
Senator RUDMAN. Would you assume they have a fairly large num-
ber or small number? Was it less than 100, do you know?
Mr. BELL. If I had to guess, I would say something over 100.
Senator RUDMAN. The president of this company was indicted,
convicted?
Mr. BELL. That is correct.
Senator RUDMAN. He presently is serving time in this country?
Mr. BELL. That is correct.
Senator RUDMAN. Yet, he has been replaced and to your knowledge
that company continues to operate?
Mr. BELL. That is correct.
Senator RUDMAN. It is your testimony here this morning, that in
addition to legitimate purposes of building markets for Polish prod-
ucts, machinery products in particular' that you believe that his com-
pany is devoted to industrial espionage?
Mr. BELL. Yes, they do. As a matter of fact, I may put that first.
Senator RUDMAN. So you think their primary reason may be indus-
trial espionage with the selling of legitimate Polish products and
the buying of legitimate American products to export to Poland as
being secondary?
Mr. BELL. That is what I believe.
Senator RUDMAN. That is your belief?
Mr. BELL. That is my belief.
Senator RUDMAN. You had more to do with them than anybody
else we could talk to. So your belief is important.
Mr. BELL. I want to add that doesn't mean every employee there
is involved in this. Certainly the company is the umbrella, is the
supperting element that makes it possible for them to do this.
It is under the control of the Polish Government.
Chairman ROTH. Zacharski is still on the payroll of that
government?
Mr. BELL. That is correct.
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Senator RUDMAN. By virtue of the nature of certain products that
they sell and under our country's policy of encouraging free com-
petition, they have access to a number of American defense contrac-
tors and in fact a number of American defense installations?
Mr. BELL. Any company which manufactures using machinery is
a potential customer to Polamco. They have a reason to go there and
to talk to them; to have cocktail parties, to do the things you do when
you are trying to talk them out of it.
Senator RUDMAN. It is bad enough that you might have a legitimate
Polish company infiltrated by their intelligence people who might
have access. We actually give access to a Polish-sponsored company
and by virtue of what they sell. They have access at some level to a
whole range of American companies?
Mr. BELL. I would certainly believe that to be true. Yes.
Senator RUDMAN. I would certainly say to Senator Nunn that that
is something which requires some further looking into.
Mr. BELL. I would, you know we are talking here about Polamco,
I would be surprised if it doesn't go further than Polamco.
Senator RUDMAN. I am sure every Soviet bloc country, in fact I
know of a number of them which have trading companies.
As a matter of fact, they are moving from the area of which we
are speaking. There are a number of other countries with trading
companies that do indulge in industrial espionage that has nothing
to do with national defense. It has to do with simply other trade
secrets. That, of course, is a well-known fact.
Mr. BELL. I believe anything to do with technology involves the
national defense, particularly component technology. I think that is
where our advantage is over the rest of the world, not just militarily,
but economically. We are the leading nation and the reason we are
the leading nation is because we have the technology, that is the
component technology; the tools of the trade.
Senator NUNN. I might add that tomorrow we will be getting into
other companies of this nature, including one Soviet company, direct
Soviet company. So it is not just the including
case that we are
dealing with. We are dealing with a good many of them.
Senator RUDMAN. I only have one other question unless Senator
Nunn has other questions, and after that we will probably dismiss
you as a witness today. You stated that companies tended to draw
on the employees of other companies in terms of seeking employment,
back and forth, and asked them to disclose documents that they had
worked on, process, procedures and in fact people would bring classi-
fied documents to show the kind of work that they did. Is that correct?
Mr. BELL. That is correct. I think it is well known.
Senator RUDMAN. Common practice even though theoretically the
whole security system is based on a need-to-know basis?
Mr. BELL. Right. This is not a?it is a violation of security, but not
necessarily illegal.
Senator RUDMAN. Did you have any problems whatsoever of bring-
ing documentation that was labeled secret out of your plant at Hughes
to your home for photographing?
Mr. BELL. I'm sorry?
Senator RUDMAN. Did you have any difficulty in removing it from
the premises?
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Mr. BELL. I did not.
Senator RUDMAN. Was that illegal
Mr. BELL. That is illegal.
Senator RUDMAN. You were not supposed to remove it?
Mr. BELL. Not supposed to remove it.
Senator RUDMAN. But you never were checked?
Mr. BELL. To be fair with the company, I was a trusted employee.
I had been there 30 years. I know I was never checked.
Senator Mammy. Obviously, it is the trusted employees that people
recruit because of the very nature of what you were doing.
Mr. BELL. Unfortunately.
Senator RUDMAN. Senator Nunn.
Senator NUNN. Thank you very much, Mr. Bell.
We appreciate your cooperation. I think you have made a major
contribution to these hearings.
Senator RUDMAN. Thank you very much, Mr. Bell.
The subcommittee now calls Dr. Lara H. Baker, Jr.
Raise your right hand. It is the policy of this subcommittee to ad-
minister the oath.
Do you swear the testimony you are about to give in the course of
this hearing shall be the truth, the whole truth, and nothing but the
truth, so help you God?
Dr. BAKER. I do.
TESTIMONY OF DR. LARA H. BAKER, JR., ASSISTANT OFFICE
LEADER, INTERNATIONAL TECHNOLOGY OFFICE, LOS ALAMOS
NATIONAL LABORATORY, UNIVERSITY OF CALIFORNIA
Senator Ittromu.r. Identify yourself and if yon would like to proceed
with a summary of your statement, all of which will be included in its
entirety in the record.
Senator NUNN. Mr. Chairman, I have a brief introduction of Dr.
Baker. Our next witness is Dr. Baker, who has just taken the oath.
He is employed by the Los Alamos National Laboratory. He is one
of our Nation's foremost experts on the subject of Soviet computing
and Soviet technology in general.
Dr. Baker gives advice to the U.S. military services and intelligence
agencies in technical matters. He teaches computer science at the grad-
uate level. He is certainly one of the most informed men in this country
on these technology transfer issues.
We are delighted to have him here this morning. We have a much
longer resume which I would ask to be admitted to the record.'
Senator RUDMAN. Without objection.
Dr. BAKER. Thank you.
In my testimony today, I would like to followup on Senator Nunn's
opening statement in which the Senator constructed, for purposes of
discussion, a composite of a department within the Kremlin whose
sole function is to obtain strategic and dual-use technology from the
United States, Japan, and from other Western democraeies.
See p. 338 for the statement of Dr. Lara H. Baker, Jr. His resume and related material
follow the statement.
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In an interview on March 8, 1982, the Director of Central Intelli-
gence, Mr. William Casey said:
We have determined that the Soviet strategic advances depend on Western
technology to a far greater degree than anybody ever dreamed of. It just doesn't
make any sense for us to spend additional billions of dollars to protect ourselves
against the capabilities that the Soviets have developed largely by virtue of
having pretty much of a free ride on our research and development.
They use every method you can imagine?purchase, legal and illegal; theft;
bribery; espionage; scientific exchange; study of trade press, and invoking the
Freedom of Information Act?to get this information.
We found that scientific exchange is a big hole. We send scholars or young
people to the Soviet Union to study Pushkin poetry; they send a 45-year-old man
out of their KGB or defense establishment to exactly the schools and the pro-
fessors who are working on sensitive technologies.
The KGB has developed a large, Independent, specialized organization which
does nothing but work on getting access to Western science and technology.
They have been recruiting about 100 young scientists and engineers a year for
the last 15 years. They roam the world looking for technology to pick up.
Back in Moscow there are 400 or 500 assessing what they might need and
where they might get it?doing their targeting and then assessing what they
get. It's a very sophisticated and far-flung operation.
Thus, Senator Nunn's composite is basically accurate. There are
offices and bureaus within the Kremlin, throughout the U.S.S.R. and
throughout the Soviet bloc, whose principal purpose is to transfer high
technology from the West to the Soviet sphere of influence.
I will describe several of the vehicles the Soviets use in their efforts
to obtain our strategic technology, and then give some examples of
how successful they are.
Classical espionage is one of those vehicles. The newspapers are full
of accounts of how Soviet and Soviet bloc individuals, some of whom
have diplomatic immunity, have been involved with traditional hand-
in-the-safe spy rings.
We live in a free society and are proud of that fact. One of our
greatest strengths is the information transfer that our Constitution
allows and that we encourage among our own people.
Tapping into this information flow is an extremely fruitful tech-
nique for the Soviets to use. Also of high importance is the fact that
they have been able to tie up a significant quantity of U.S. Government
resources. These resources are dedicated to answering Freedom of
Information Act requests, checking for downgrading and classifica-
tion of documents, and evaluating national security implications of
compilations of documents.
In our society, one of the most treasured freedoms is free speech.
This reaches its epitome in the freedom of organizations to produce
periodicals covering whatever they wish to talk about. Information
suggests that the Soviets place a very high priority on Western tech-
nical journals. We heard that this morning in the first testimony.
Consider the areas of student exchanges.
As part of the spirit of detente, the United States and the Soviet
Union entered into student exchange programs. This was a particular
coup on the part of the Soviets, since the best technology transfer
organization in the world is the U.S. university system. In the U.S.
universities, a very large number of highly qualified, highly moti-
vated, superbly trained people spend their working lives trying to
come up with better ways to transfer technology to their students.
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These people are called university professors. It's their job. and they
do it very well.
Currently, approximately one-half of the graduate students in the
United States are not U.S. citizens. The non-U.S. fraction for many
science and engineering programs is higher. This is particularly worri-
some when one considers the quality of graduate education available in
the United States.
While there are U.S. Government restrictions on Soviet participa-
tion in graduate programs, these restrictions are not applied as strin-
gently to Soviet bloc students, that is, Eastern European students.
Thus, the best in U.S. graduate studies is available, albeit indirectly,
to the Soviets. This helps alleviate the Soviet problems with training
really first-rate engineers.
At several U.S. universities, including MIT and Stanford, one can
start a particular program in electrical engineering with a blank note-
book; at the end of 1 year, the successful student will leave this par-
ticular set of courses holding in his hand a microprocessor chip, a
microprccessor being a computer on one integrated circuit.
During that year, the student will have used computer-aided design
to design the microprocessor, he will have used computer-aided layout
to lay out the processor on silicon, manufactured the chip either in
the laboratory or in collaboration with a manufacturer, tested the
circuit, packaged the circuit, mounted the microcomputer on a printed
circuit board, and made the resulting computer work.
Thus, in 1 year, the student will have been exposed to an intense,
carefully orchestrated program covering the U.S. integrated circuit
industry.
I find in teaching, many people are not familiar with integrated
circuits. I went out this morning to an electronic supply house in
Maryland and bought some. I have these available if the subcommittee
would like to take a lcok at them.
This particular kind of circuit is called an Erasable Programable
Read Only Memory circuits. If you look inside the window on top of
it, you see a three-sixteenths inch square piece of silicon. That square
is the circuit.
The small lines leading from that circuit out to the rest of the
package are gold wires. There are 24 of those wires bonded to that
circuit and bonded to the other end of these prongs.
As you handle these, be careful. 'The prongs are sharp.
In the area of foreign-owned corporations, the tangled web of
ownership of many U.S. corporations obscures the identity of their
true owners. Eastern bloc or Soviet-owned corporations can be recipi-
ents of U.S. technology without the donors of that technology realiz-
ing that the information is going to a foreign government.
In the area of scientific exchange, again, as part of d6tente, the
United States entered into several bilateral agreements with the Soviet
Union on various scientific and technical subjects. As part of these
agreements, the United. States furnished technical information and
equipment. such as a superconducting magnet for a Soviet magneto-
hydrodynamics?MHD system.
This magnet was Oroduced with state of the art U.S. .machining and
quality control equipment, and was far beyond anything the Soviets
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could build for themselves. It was loaned to the Soviets as part of an
exchange agreement in return for participation in the MHD experi-
ments.
The loan of the magnet to the Soviets was approved after review
by the DOD, the DOE, and various agencies.
[At this point, Senator Rudman withdrew from the hearing room.]
[The letter of authority follows:]
U.S. SENATE,
COMMITTEE ON GOVERNMENTAL AFFAIRS,
SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,
Washington, D.C.
Pursuant to Rule 5 of the Rules of Procedure of the Senate Permanent Sub-
committee on Investigations of the Committee on Governmental Affairs, per-
mission is hereby granted for the Chairman, or any Member of the Subcom-
mittee as designated by the Chairman, to conduct open and/or executive hear-
ings without a quorum of two members for the administration of oaths and
taking testimony in connection with hearings on the Transfer of United States
High Technology to the Soviet Union and Soviet Bloc Nations, to be held May 4,
5, 6, 11, and 12, 1982.
Wxnuem V. ROTH, JR.,
Chairman.
SAM NUNN,
Ranking Minority Member.
Dr. BAKER. It was felt that the United States would acquire experi-
ence operating the magnet in a facility whose equivalent would not
exist in the West before 1986 or 1987. Since all of the U.S. technical
reviewers agreed that the Soviets could not reverse-engineer the mag-
net to acquire the critical manufacturing techniques, the loan was
approved.
We did receive return from the exchange but also provided a source
of technical equipment to the Soviets.
Business intermediaries: As an area for consideration, business in-
termediaries, that is, U.S. corporations that act as intermediaries for
bloc firms without the manufacturers being aware of such arrange-
ments, are a major source of Soviet covert technology acquisition. The
use of these companies provides an open conduit, lubricated by greed,
for transferring immense quantities of materiel and technology to the
bloc.
The best known?and certainly one of the most successful for the
Soviet Union, and perhaps one of the most damaging to the United
States?was a business intermediary syndicate headed by a 34-year-
old West German named Werner J. Bruchhausen.
I will refer to this as the Continental Technology Corp. or CTC
Organization. The CTC scheme was based on his ownership of more
than 10 electronics firms in southern California and West Germany
and his close ties to other firms elsewhere in Western Europe. The in-
dividuals involved would meet with Soviet and Soviet bloc high-tech-
nology customers, they would discuss what the Soviets needed, and
then would ship the goods, illegally, out of the United States into
Western Europe. From there, they were transshipped into the Soviet
sphere.
In 1981, part of the syndicate was immobilized and two of its prin-
cipals brought to trial.
Of particular interest to me in the Bruchh,ausen case is the informa-
tion it gives us about Soviet intentions. We delude ourselves if we
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think the Soviets enter the black market in search of strategic com-
ponents in a helter-skelter style, buying up dual-use commodities
without rhyme or reason.
The truth of the matter is that the Soviets and their surrogates buy
nothing they don't have specific, well defined need for. They know
exactly What they want?right down to the model number?and what
they want is part of a carefully crafted design.
Among the strategic components that Bruchhausen directed his
accomplices at the Continental Technology Corp. in southern Cali-
fornia to buy for the Soviets were the following:
The information on this laboratory memorandum, I believe' is
available. It was made available to your staff yesterday. Included on
this list is a summary of the information I sent to Customs.
The U.S. Customs Service and the U.S. attorney in Los Angeles
prosecuting the CTC case needed a technical expert to assist them.
They chose me. I sent them an expanded version, it turns out to be
GO pages, of this. The defendant's lawyer apparently felt he did not
want me on the stand because he stipulated to this information at the
trial.
Included in this description are microcomputer development sys-
tems, microcircuit test systems, microcircuits, as I have showed you,
that sort of thing.
Senator NUNN [presiding]. We will make that part of the record
without objection.1
It seems that the Soviets are highly organized in their overall
espionage, covert-type activities in securing American technology.
But we have heard testimony this morning that one of the big prob-
lems they have in producing their own technology is their lack of
organization.
How do you explain the ability of the Soviets to be well programed,
well-informed, know the details of everything they want, have a
master plan about how they are going to get it and yet they are not
capable enough in their own country of organizing, if that is true., to
pr(duce the technology themselves.
Dr. BAKER. I believe their problems in producing the technology in-
cludes organization, but I think their main problem is people. There
is no incentive in the Soviet bloc to produce quality products. Some-
one who works in a factory works to generate products; their quality
is of secondary importance.
For comparison purposes, the people in the United States who make
integrated circuits like this?I have been through their factories
where they work?those people are as close to fanatical about the care
and precision they use to do their job as any group I have ever seen. I
believe there may be basic cultural blocks in the Soviet Union that
prevent the motivation of large numbers of factory workers to take
this kind of care.
When I ask, how U.S. managers motivate these people, how much
they have to pay them, the U.S. mana-2;ers said it wasn't really money;
they said they had to find people who wanted to do a good job and get
out of the way.
I See p. 351 for the material referred to by Dr. Lara Baker, Jr.
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Senator NUNN. They must have some incentive systems with the
KGB Lecause they are pretty diligent in their work.
Dr. BAKER. The KGB are the elite, as far as I can tell. They get the
best people. They do motivate them. They do reward them and thereby
get the collection done very well. That is how. They find very good
people; they do reward them; that doesn't happen in the rest of the
bloc.
Someone who gets in the KGB is well rewarded with high privileges,
high status, everything.
Senator NuNN. If they had the incentive system for their engineers
that they have for the KGB, they would not have to steal as much tech-
nology and could develop their own.
Dr. BAKER. I think that is very true, Senator.
This list of Soviet acquisitions has 60 or so examples but is by no
means exhaustive. The equipment is a fraction of the exports; I ex-
amined about 400 air waybills. This is the result of 60 examinations.
The Soviets are having serious problems developing their integrated
circuit/microcomputer industry, mainly in the areas of process control
and quality assurance. The above-mentioned items significantly con-
tribute to the Soviet availability of hardware for developmental and
production systems.
There is no question in my mind that the major pieces of hardware
purchased from Continental Technology Corp. over the last 4 years
of the corporation's operation, taken together, include at least one
complete integrated circuit processing plant. This conclusion is in-
eluctable when you examine the totality of information available on
the case. The Soviets purchased everything they needed for such a
plant, including: saws for cutting silicon crystals, equipment for mak-
ing masks for integrated circuit production, plotters to draw the cir-
cuits, basic computer-aided-design systems for integrated circuit pro-
duction, scribers for separating integrated circuits on wafers, testers
for testing integrating circuits on wafers, bonding equipment for
bonding connecting leads to integrated circuits, and packaging equip-
ment for putting the circuits in final packages. As a result, they have
purchased clandestinely all the hardware they need for equipping a
good integrated circuit production plant. They showed no interest in
purchasing production equipment that .was not state of the art. They
showed very good taste.
High-quality integrated circuits are the basis of modern military
electronics. Integrated circuits form the basis for military systems
which are more flexible, more capable, and more reliable than systems
using discrete electronic components. The production tooling and
equipment obtained by the Soviets will significantly improve the
Soviets' capability to produce such circuits.
The Soviets purchased everything they needed for their plant. The
sequence in which they purchased things and the quantities indicate
the production plant would be of medium size and should be capable
of delivering a high-quality product.
Because of the CTC. the United States gave up technology, much of
which the Soviets could not have obtained elsewhere. It would have
taken them considerably longer to equip the plant, if they could have
equipped it at all, with indigenous capabilities.
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What is lost is lost; we cannot get it back. But there is a positive side
to the case: It is in what we can learn from it. There is a wealth of
intelligence to be learned from the Bruchkausen case. It tells us much
about Soviet shortcomings and Soviet strengths and their long-term
strategic objectives.
As background for this statement, I would like to talk about tech-
nology development.
In general, the development of technology can be broken into
several areas: Theoretical research, applied research, development,
and production.
I would like to look at those areas separately.
The Soviets have historically spent a large amount of their efforts
supporting theoretical research. As a result, they have the theoretical
basis for almost any technology they wish to exploit. ,
Experimental research has very slightly less support in the Soviet
Union than theoretical research but still, by 'Western standards,
extraordinarily good support. Like theoretical research, experimental
research in the West is done by people who are advancing the cause
of science and, for that and personal reasons, want to and do, publish
extensively. The Western literature is available to the Soviets.
Although their literature is carefully censored, much of it is avail-
able to us. In the theoretical and experimental research areas, to vary-
ing degrees, the two countries support each other.
In the area of development, this lead is enhanced by the flexibility
inherent in the Western political and economic system.
Western countries are encouraged, by tax advantages and simple
self-interest, to do research into appropriate areas in Oder to increase
their profits. In the Soviet system, on the other hand, the incentive
for doing broad-ranging and possibly risky research is low. The
penalty for failure is high. The penalty for failure in the United
States is economic and professional, at worst. It isn't always even
that, of course. The ready availability of components and technology
in the West encourages wide-ranging develo2mental efforts. There
is a true pyramiding effect?we build on eac.a other's work.
The Soviet system in preproduction can manage to produce a few
of almost any product they want, provided they are willing to devote
the resources to it. The best example of this would be the Soviet
"civilian" space program, in which they managed to put people in
orbit before the United States did, but at a high cost.
In the area of serial production, that is, the day-to-day production
of large quantities of a product, the differences between the two sys-
tems become most obvious. The United States is world renowned,
and justifiably so, for the quality of its serial production facilities.
Other parts of the world, notably Japan, are approaching the United
States quality and quantity in this area. The Soviet bloc, however,
is not.
Serial production is the Achilles' heel of the Soviet bloc. Especially
in high technology areas, the big problem the Soviets have is quality
assurance. As I said, they count products, not quality products. This
is the area where the Soviets exhibit weakness and need the most help.
As a secondary part of this, they have serious problems manufactur-
ing the tools to manufacture the equipment. This is what the CTC case
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helped alleviate by providing a full complement of high quality work-
ing production equipment.
In the area of available manpower, one of the serious problems af-
flicting the Soviet economy is the lack of qualified, highly trained,
technical people in the areas of computers and microelectronics. One
cause of this is the lack of enough computing and electronic equipment
to train the next generation of scientists and engineers. They simply
don't have enough equipment to allow students sufficient "hands-on"
practice at an early stage in their education. The Soviets are trying to
alleviate this problem by producing large, for them, numbers of
RYAD computers?copies of the U.S. IBM System 360's and 370's.
Many of the export license requests, both in the United States and
elsewhere, are for computer systems going to universities or scientific
research institutes in the Soviet bloc. It is difficult to turn such requests
down on the basis of end-user since such organizations support the
Soviet war machine only indirectly. Cases like the Bruchhausen orga-
nization are more obvious. Yet, when I brief various parts of the exec-
utive branch on Soviet bloc computing' I find a surprising lack of
knowledge of the CTC case. Thus, one of the few public examples of
effective compliance action is not widely understood.
Senator NuNN. What do you mean by "effective compliance?"
Dr. BAKER. This is a case where, someone actually was exporting
equipment, was caught, was convicted, and, most effectively, was put
in jail.
Senator Ntrxx. They did succeed in getting virtually everything
they wanted before that punishment took place, did they not?
Dr. BAKER. Yes and no. They got a complete plant, and I think they
got everything they asked for up to the time. As far as I know, at the
time the organization was shut down, the organization was still going
full steam ahead. There was no evidence the Soviets tapered off in
their attempts to acquire equipment through this firm. It just hap-
pened that the records we had information on-2 or 3 years?showed
a complete circuit plant.
Senator RUDMAN. You believe they are capable of maintaining and
repairing that equipment and keeping it operative?
Dr. BARER. For a time. I think they can maintain it, depending on
what goes on, for a while by putting very good engineers on it. They
are going to have a problem with spare parts. You might consider the
equipment as having a half life. That is, after a while, half the systems
in the field are going to fail.
Usually four of everything were shipped to the bloc. I suspect two
were used in production, two for spare parts. That will help in main-
tenance quite a bit because they have a working model to go from.
It is necessary that the U.S. intelligence community coordinate in-
formation derived abroad with data that surfaces here in the United
States. We can discern Soviet objectives in the area of strategic com-
modities. We can than product with a satisfactory level of accuracy
where the Soviets will be trying to tap into technology.
A recently formed interagency committee devoted to this problem
will assist in this area.
One cannot prevent the dissemination of data forever; one can only
slow down a transfer and thereby make it more expensive for the ad-
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versary to acquire the data. Eventually, the adversaries get any in-
formation they want badly enough.
In the United States, the most advanced technology is often used
in the civilian sector. Fielded U.S. military equipment is often many
years behind its civilian counterpart because of the need for greater
reliability, delays in the acquisition process, or for other reasons. On
the other hand, the Soviet military gets the best, most modern equip-
ment as soon as it is available. Thus delays in the transfer of high
technology to the Soviet bloc affects the military more seriously than
it affects the civilian sector. I -would like to emphasize that there
is no real civilian sector in the Soviet economy?it is all a state enter-
prise. The military gets the cream of all the production.
The fact that, in the long run, the information will be transferred
does not mean we should not control it. Any obstacle we can place
in the path of technology transfer increases the amount of resources
the Soviet bloc must devote to acquiring the information and de-
creases the total quantity of information they receive. Such increases
in demand on resources, albeit increases on the seemingly inexhaustible
resources of the Soviet intelligence apparatus, are a drain on the
Soviet system.
The Soviet system has difficulty in flexibly responding to new in-
formation. As a result, the longer information is delayed, the harder
it is for the Soviets to integrate it into their production cycle.
.Their planning goes on many years in advance, and the inclusion of
new technology does not automatically cause a revision in the plan.
It may cause an addition to the plan but not necessarily a reduction
in other, less productive areas. The highly structured environment in
the Soviet Union often has a self-defeating result: Factories or enter-
prises will produce obsolete equipment because they were ordered to
although they have the ability to produce more modern equipment
and know about the demand for that equipment but have no authority
to produce it.
When we know better what the Soviets are attempting to acquire,
we can more effectively prevent them from succeeding.
Senator RUDMAN. Again you are making an important distinction
in the Soviet system. You said that when they stole this equipment,
or detained it by covert means that they were going after state of the
art; they knew what they were going after, they had a list of it, they
had very good taste, in your words. But you are saying in their own
production, in their own capabilities internally, they are not going
after state of the art because the system just doesn't work that way;
is that right?
Dr. BAKER. Yes, that is my judgment, that is what I see in the open
literature and the other information. Serial production for the civil-
ian economy is very low on the totem pole and the military economy
suffers somewhat from the same inflexibility.
Many of our control efforts seem to be based on the assumption that
we can control everything. We cannot. A more thoughtful enforce-
ment approach is to decide which items are most important to the
Soviets and focus our attention and resources on those items.
A key ingredient in the Soviet acquired integrated-circuit manu-
facturing plant is a high-pressure oxidation system. One model of this
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kind of system is called by the trademarked name "Hipox." It pre-
cisely controls the atmosphere and temperatures involved in the con-
version of a wafer of crystalline silicon into a wafer containing
several hundred integrated circuits,
Most high-technology components wear out over time. This is where
I got my phrase in answer to your question a while ago, "half-life."
In general, the higher the technology involved in the system, the
shorter the half-life and therefore the greater the demand for spare
parts.
The Hipox systems, so essential to the new Soviet integrated circuit
factory, should be requiring parts by now. If this system and other
critical systems in the plant cannot be serviced the factory will be
slowed down or be otherwise negatively affected.
That tells us that the Soviets will soon be in the market for spare
parts for the Hipox systems, among others. Only a very few com-
panies in the world manufacture high-pressure oxidation systems.
They are all in the West. Each of these companies could be put on
notice to be on the alert for false documentation and other signs of
CTC type business in their intermediary business.
Senator RUDMAN. Do you see any sign that our Government has
organized to do this? You made two important points here, indeed
many important points, but two that stand out. You are talking about
instead of trying to control everything that involves high technology,
they try to have a select group of items they are most in need of and
really bear down on that.
Do you see any signs our Government is organized in that direction
to make that kind of effort?
Dr. BAKER. There are two encouraging signs in that direction. The
first is the Technology Transfer Intelligence Committee which was
formed to find out what their real problems are. The second sign is the
Militarily Critical Technologies List?MCTL?effort in the Depart-
ment of Defense, Department of Energy, and other agencies which is
an effort to put together a compilation of what technologies are, in
fact, critical to us so that we can be alert on what technologies they are
going to be after later. Also, later on the MCTL, we can find out the
so-called civilian uses, in our case real civilian uses, of certain tech-
nologies, and be on the alert for purchases of that kind of civilian
equipment which contains military technology. For example, very
small turbine engines are used in auxiliary power units for jet aircraft,
which is not in itself a critical area, but the technology is very similar
to that used on military small turbines.
I do not mean to imply by earlier remarks that many, or even more
than a few, of the U.S. industrial manufacturers are venal or unpatri-
otic enough to close their eyes to this kind of technology theft. How-
ever, they are very busy; given prima-facie evidence of respectability,
they do not often investigate further. I have every reason to believe
that, given a proper warning, the companies would report suspicious
inquiries promptly and effectively. In addition, suppliers to these com-
panies can be alerted to potential unusual requests.
This kind of precision targeting for export control requires the avail-
ability of accurate technical evaluations of the components and sys-
tems involved in an export or diversion. The expertise needed for these
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evaluations is a scarce commodity. It is for this reason that the De-
partment of Commerce continually calls upon technical experts from
other agencies to review complex export cases.
The Assistant Secretary for Defense Programs, Department of
Energy, provides technical expertise and policy guidance to other reg-
ulatory agencies with regard to export control matters; this service
was also provided by the DOE's predecessor agencies. For example, I
am the chairman of the technical task group that is responsible for re-
writing the -U.S. proposals to the coordinating committee for interna-
tional control of exports of computers. Other national laboratory ex-
perts chair other committees. My group is devoted to computers and
directly related items. Also, Department of Commerce licensing offi-
cers call laboratory experts, on a regular basis, to request technical ad-
vice on complex export cases.
In other forums, I have proposed the establishment of a center of
expertise to provide a source of technical information for the various
government agencies involved in technology transfer/export control
activities. This will go far to help alleviate the scarcity of available
technical expertise.
Senator NUNN. Where would that center be housed?
Dr. BAKER. I would like to see it housed in one of the national
laboratories which executive department is not critical as long as the
center is in a working, thriving, laboratory so the people involved
in making the export determination are in a state-of-the-art tech-
nical environment where they can maintain their skills and not become
technically obsolete.
Senator NUNN. How many people and how much money are you
talking about?
Dr. BAKER. The first estimate was on the order of 20 people, about
$5 million.
Senator NUNN. Per year?
Dr. BAKER. Yes, sir.
Senator NUNN. This would be the center where all the other de-
partments and agencies could go for their advice?
Dr. BAKER. The intent would be to set up a center that provided an
honest technical answer. It is not the intent to suggest the center would
answer policy questions. That is the. province of the executive depart-
ments themselves, but it would be 'useful if there were a place where
anybody who needed it, Customs, Commerce, Energy, Defense, could
pick up the phone and get an honest technical answer promptly.
With 20 people, there is no way you can cover the field of all dis-
ciplines necessary for that kind of a center but you can cover the field
well enough to find out who should be asked, so the Government can
call one spot and know that the question will be forwarded to the
proper person. For things like computers, lasers, the common ques-
tions, obviously people should be in the center itself.
In any decision to allow or prohibit the export of a piece of equip-
ment, or a technology, three factors come into play.
First, are the procedural considerations: Are the forms filled out
correctly? Are proper concurrences received? Are the overall charac-
teristics of the equipment within appropriate limits, et cetera?
Second, is the technical evaluation of the item to be exported. Is the
system truly appropriate for the stated end-use? Are the statements
about the end-use/end-user true?
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As I have previously stated, the technical evaluation of an export
case is a very complex task requiring a particular expertise. The tech-
nical evaluation is best made by an individual who is technically com-
petent in the field and who understands the state of the art in the West
and in the Soviet bloc. Such individuals are rare.
The third factor in implementing export controls is policy. The
policy sets the rules: What we are allowed to export, what we are not
allowed to export.
The key consideration among the three factors?procedure, techni-
cal, and policy?is the technical evaluation. In fact, policy is usually
the result of technical evaluation. For example, a policy that includes
a prohibition against the export of certain oscilloscopes is based on
the technical evaluation of what national security uses the adversary
could make of oscilloscopes. The United States is frequently criticized
for having a poorly articulated policy on export controls or, at best, an
uncertain policy.
The point may not be as clear as I would like to make it. Let me try
to say. it another way. I cannot overstress the importance of having an
effective system of technical evaluation. To achieve the goal of such an
effective evaluation we must optimize three functions.
First, we must be able to look closely at a commodity and be able to
assess its capabilities in both the commercial and the military sectors.
Obviously, the knowledge of its military uses is critical. That ques-
tion can be answered only by competent technical evaluation?imply-
ing an evaluation done by a technically competent analyst.
Second, we must decide whether or not the stated end-user is who
the purchase documents and export documents purport him to be.
For example, is the end-user really a tractor factory or is it a tank
factory? That question can be answered only with competent intelli-
gence data. The analysis of such intelligence data requires intelligence
expertise as well as technical expertise.
Third, we must assess the adversary's capability to use the commod-
ity in a manner that could harm us. That question can be answered
only with detailed technical knowledge and competent intelligence
data about the adversary's system.
I would like to conclude my prepared testimony with the recom-
mendation that, in evaluating export controls, the subcommittee take
into account the very important distinction between strategic and
dual-use equipment versus strategic and dual-use know-how.
Even if our investigative and enforcement capabilities were near
perfect, they would still be directed primarily against equipment. In
both the law and in the Federal regulations, controls should be
strengthened with reference to the know-how that accompanies a
product.
If the Soviets clandestinely acquire. a piece of equipment, and the
equipment works, they have acquired a capability that presumably
they did not have before. Along with that equipment, especially if it
is high-technology equipment, they need the technical data that goes
with it. They need the technical manuals that support the product;
they need the technical art that enhances the equipment.
In many ways it may be difficult to control the shipment of technical
manuals that accompany manufactured equipment. However, I believe
that we can control the art and the support that goes with legally ac-
quired equipment. Showing the Soviets how to make the rope with
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which to hang us does not strike me as a reasonable approach for the
United States to take.
I thank you very much for the opportunity to testify and I hope
that my testimony has been useful to you. I would be happy to try to
answer any questions at this time.
Senator NuNN. Thank you, very much. Your testimony has been
very useful and we thank you very much for your help.
John Marshall, who will testify after you, talks rbout the Soviets
first equipping the semiconductor plant with manufacturing equip-
ment in 1975.
Mr. Marshall says that by 1977, they will probably be ready to start
equipping or testing equipment. Does that square with what you
know?
Dr. BAKER. Precisely, sir. In the CTC invoices I saw for the 1978-
79 timeframe, they were requiring production equipment and in the
1979-80 time period, they were principally working on test equipment
such as complete integrated circuit test systems, handling complete
systems and equipment for the plant. Mr. Marshall's data is quite con-
sistent with my information.
Senator NUNN. Why did Assistant U.S. Attorney Wu and the U.S.
Customs Service seek you as a technical adviser in the Maluta-title
prosecution?
Dr. BAKER. I believe they sought me because of my technical exper-
tise and the fact that they needed help in a very short time. I was
called through unconventional channels on very short notice and asked
to help support the Customs people.
Senator NuNN. Does the Commerce Department have people avail-
able for this kind of technical advice?
Dr. BAKER. I believe so.
Senator NuNx. Was it your understanding that the prosecution's
inability to get the needed technical assistance what caused a serious
delay in the Government's efforts? Was that one of the reasons you
were called?
Dr. BAKER. I would recommend you ask that question of Mr. Wu
when he testifies. I was told at the time that they had a serious statute
of limitation deadline and were about to be unable to prosecute the
cases.
Senator NuNN. What kind of technical assistance was needed for
that prosecution?
Dr. BAKER. They needed really two kinds. First, they needed some-
one to go through the list of equipment that had been shipped over-
seas and determine which of them were, in fact, illegal shipments; that
is, which required licenses and which didn't. That is in essence a licens-
ing officer's kind of decision.
Second, they needed a decision as to the military importance of the
equipment being shipped. They needed to have someone who was
willing to say, and willing to testify in court to the fact, that a particu-
lar shipment or set of shipments was of military importance to the
Soviets and made a difference in their military capability.
Senator Num.r. What is the difference between the talents you
brought to that prosecution in terms of technical expertise and what
the Commerce Department could have brought today?
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Dr. BAKER. I can only answer that in terms of the Commerce De-
partment licensing people and experts I worked with and have worked
with for about the last 9 years. Those people are very good at making
decisions about whether or not something requires a valid export
license.
They could have done the first half of the evaluation quite well and
told the customs people which equipment was improperly exported and
which wasn't, which did or did not require a license.
For the second part of the evaluation, involved with the military
significance, I do not believe the expertise exists in the parts of Com-
merce I have seen.
To my knowledge, the people from the licensing branch could not
have answered that question.
Senator NUNN. Is it your opinion that there is no question as to
where the ultimate destination of that equipment was supposed to be
in the CTC case.?
Dr. BAKER. There is absolutely no question in my mind; it went to
the Soviet Union. My source for that kind of information was the
invoices I saw marked to the principal electronics import-export firm
for the Soviet Union in Moscow.
Senator NUNN. In the CTC invoice evaluations, you note the fact
that a piece of machinery is either ahead of the state of the art of the
Soviets or at least equal to what the Soviets have. What is the sig-
nificance of that?
Dr. BAKER. To me the significance is that they are buying equipment
that they cannot make themselves. They are buying equipment obvi-
ously to try to produce in this case integrated circuits, that their cur-
rent equipment will not make. They were trying to improve their long-
term capabilities, they were spending a large amount of very rare hard
currency to get the equipment.
It indicates to me that they were trying to improve the military
potential by acquiring the production line.
Senator NUNN. Dr. Baker' based on your experience working with
the Commerce Department, do you believe that they have access to
enough intelligence to properly perform their job?
Dr. BAKER. I would recommend that question be asked to the Com-
merce people, but the people I work with in Commerce do not have
access to all?source intelligence and do not, as a general rule, have
access to intelligence at all. I work with licensing people and people
who handle cases.
Senator NUNN. Are you familiar with the Commerce Department's
own intelligence group?
Dr. BAKER. This last weekend I was given an opportunity to read
the staff study before these hearings. Up until I read that staff study,
I had no idea Commerce had an intelligence group.
Senator NUNN. You follow this whole area very closely, do you not?
Dr. BAKER. Yes, sir.
Senator NUNN. Does that indicate that since you didn't know that
the Commerce Department had an intelligence unit in the compliance
division that most other people in this field probably aren't aware of
it either?
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Dr. BAKER. Certainly the people I work with in the export control
of electronics and computers do not or have shown no evidence of being
aware; I have never heard it discussed, mentioned, inferred, anything.
I was going to say I am also, as an employee of a DOE labora-
tory, part of the intelligence community. As a result, I work with
intelligence agencies and have never heard it mentioned there either.
Senator NUNN. Does that indicate that the intelligence unit itself
is so small or so unknown that it probably is not getting the kind of
information it needs from others to have that capability or would
you conclude that?
Dr. BAKER. It would appear that the intelligence unit needed to
gather information in this field should be larger than the one I saw
mentioned at Commerce. Again both CIA and DIA are putting to-
gether the units to study this problem.
Senator NUNN. You testified about the intelligence value of the CTC
Maluta case; that is, what the United States can learn from the con-
duct of Maluta and the others.
You are an expert on the technical considerations of the CTC
case.
Have you ever been approached by an intelligence person who
asked for an evaluation of the CTC case?
Dr. BAKER. No, sir.
Senator NUNN. Do you know anyone else who has? Do you know
whether they have really studied that case?
Dr. BAKER. No, sir.
Senator NuNN. If they have, you don't know about it?
Dr. BAKER. If they have, I don't know about it. As I say, I was
the technical expert for the U.S. Customs Service and U.S. attorney
in this case.
Senator NUNN. You are saving that that case has a wealth of
information for our own intelligence experts?
Dr. BAKER. I believe SO.
Senator NUNN. So you are certainly recommending that they study
that in detail?
Dr. BAKER. Yes, sir.
Senator NUNN. Do you know whether the Commerce Department
has had anyone studying that in detail?
Dr. BAKER. I don't know.
Senator NUNN. If they have, you don't know about it?
Dr. BAKER. Correct, sir.
Senator NUNN. Under the best of circumstances if our Govern-
ment were organized to make good use of technology transfer intelli-
gence, what should have happened as a result of that case?
Dr. BAKER. In the best of circumstances it would have been useful
if there were a place for a person like me to go, a single place to
explain what I thought had happened and to provide a way to get
this information down to the street level, enforcement agencies,
quickly in order to get things stopped and/or to draft my decision,
follow up a different way. But there was no place to go to that I
know of.
Senator NUNN. You referred to the half life of the Hipox oven
as being a clue as to when the Soviets expect to be back in the Hipox
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marketplace. When should they arrive and what should we do to
anticipate it?
Dr. BAKER. I think they ought to be here now. I expect they are try-
ing to get parts for it right now. I would think the best procedure
would be to notify the manufacturer and suppliers of that kind of
equipment to expect shipments to people they don't know. The inte-
grated circuit business is a surprisingly close knit group.
Most people in that group, because they attend the same parties, go
to the same beaches, that sort of thing, know who the suppliers are and
would know when the potential diversion could be occurring.
Senator NuNisr. Do we have anyone in Government now who is re-
sponsible for 'performing this task; that is, of anticipating what the
Soviets may be after next in dual-use technology? Do we have any-
body who is primarily responsible for that in Government who should
be informed about the CTC-Maluta case? Do you know of an agency
or group of people designated for that purpose?
Dr. BAKER. I am not aware of any.
Senator NuigN. That is what you are suggesting, are you not?
Dr. BAKER. Yes,
sir.
Senator NUNN. You are suggesting some reverse engineering in the
espionage area by the United States in the sense of determining in
advance what would be most useful for the Soviets, what they need,
what they are most likely to go after and disseminating that knowledge
to those who need to know?
Dr. BAKER. Yes, sir. That is a good way to put it.
Senator N-cricw. Is nuclear nonproliferation also one of your respon-
sibilities at Los Alamos?
Dr. BAKER. Yes, sir.
Senator NuNx. Has this half life concept worked in our efforts to
curtail potential nuclear proliferation problems?
Dr. BAKER. Yes, sir. In one particular instance we had reason to
believe that a country would be acquiring some commodities that would
be of use in their efforts. The Department of Energy went to the sup-
pliers, mentioned to them "if you get any strange requests for this
kind of commodity, please let us know.' The suppliers cooperated
beautifully. The equipment was not shipped.
Senator IsTuNN. Dr. Baker, you probably know as much about this
subject as anyone we will have before us, perhaps more than anyone.
In summary, what are we doing correctly as far as preventing or
delayinfr the amount of technology going out of this country to the
Soviet Union? Where would you give the Federal Government high
marks?
Dr. BAKER. I understand. A couple or three areas I would give the
highest marks to DOE's long-standing efforts in technology transfer
control, and the efforts by the CIA and DIA to get into the tech-
nology transfer arena much more strongly than they have in the past.
Again they are reflecting a requirement of the administration; they
work for it, the law requires it; they are going into this area very
well. I think they have very good people.
The above refer to analysis and forecasting. In the area of enforce-
ment, the efforts of the U.S. Customs Service, in cooperation with the
Justice Department, should be encouraged.
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Senator NUNN. CIA and DIM
Dr. BAKER. CIA, DIA, DOE, and other parts of the intelligence
community, are going into it and I think have good people working
on it. The militarily critical technologies list will be helpful to us
in trying to figure out what areas we need to pay most attention to on
our part. If the Soviets are going after something that we don't care
about, simply charge them a lot of money, and let them have it. If
they are going after something we do care about, we should protect it.
I think'' these hearings will be useful in publicizing the problem.
Most manufacturers I think will be quite interested and quite effec-
tive in helping control this problem but many, many people don't
believe there is a problem.
Senator NUNN. Where would you give us low marks? You have
already talked about your primary suggestion, but how else would
you summarize what the Government needs to do?
Dr. BAKER. I would suggest and again this is not my field, I am a
technologist, not a Government organization specialist. But working
in the field, the lacks I see are the lack of centralized technical support,
a lack of, a place to bcro to get prosecutions done in this kind of a case
easily, some place perhaps to gather the information for prosecutions
in cases like this and the lack of a mechanism whereby the information
that may become available through intelligence or other sources could
be quickly gotten to people who need it, to get something done effec-
tively.
Senator NUNN. SO it is lack of a concentrated pool of people who
have technical capability serving as a central source and as a primary
source and also as a clearinghouse source to point to where the knowl-
edge exists if they don't have it. Is that right?
Dr. BAKER. That is correct, sir, either in technology, or in prosecu-
tion, or in intelligence. As I say, the intelligence organizations are try-
ing to solve the problems on the intelligence side.
Senator NUNN. You are saying that one area that ought to be
looked at is perhaps a national laboratory like Los Alamos?
Dr. BAICER. Los Alamos has done a lot of work in the area; but there
are other laboratories who do work in the area. The main thing in
providing a technical center, is to get it out of Washington, into areas
where there is a high technology environment so you attract the people,
keep them busy.
Senator NUNN. Would there be approximately 20 new people and
approximately 55 million of new money per year?
Dr. BAKER. That is what I was anticipating. I would expect in the
long run that there would be no actual saving of money by the Gov-
ernment in doing this because the people involved in evaluating cases,
technically now, would begin evaluating them in their own specialties.
For example, the military who have to evaluate cases technically
could now not worry about that, but could worry about the military
implications.
Senator NUNN. Would there be a lot of people who could be able to
feed into this process who would continue in their existing jobs?
Dr. BAKER. That is correct, sir.
Senator NUNN. So you would be having access to a lot more people?
Dr. BAKER. There would be access, more than that number of
people; yes, sir. Another reason for putting this center in something
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like a national lab, if you need an expert in a particular field, you
can go down the hall and get him. Again, this is simply having it away
from Washington.
Senator NUNN. Dr. Baker, thank you very much for being with us.
Thank you for your testimony and your splendid cooperation and we
hope we can continue to call on you as a resource as we frame our
recommendation.
Dr. BAKER. Thank you, sir.
Senator NUNN. Our next and final witness of the day is Mr. John D.
Marshall. We had planned to have staff statements today but the Sen-
ate is going into closed session on the military authorization bill at
2 :15, so we will defer our staff statements until tomorrow's hearing.
Mr. Marshall, if you will hold up your hand, I will give you the
oath. Do you swear the testimony you will give before this subcom-
mittee will be the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. MARSHALL. I do.
Senator NUNN. Thank you. I know you have a statement. We would
like to get your statement. Could you give us a little bit of
background?
TESTIMONY OF JOHN D. MARSHALL, BUSINESSMAN, SANTA CLARA,
CALM
Mr. MARSHALL. I have been in the electronics business since 1961.
I am a chemist by education, I have been involved in the formation of
a number of businesses, both manufacturing of integrated circuits
and companies to build the equipment for the integrated circuit
industry.
Senator Ntricisr. Thank you.
Could we have the subcommittee room in order, please?
Mr. Marshall, if you would wait. In just a minute, we will have
quiet in the room and you can go ahead.
Senator Nrrimr. Mr. Marshall.
Mr. MARSHALL. I am a chemist and have been in business in Santa
Clara County in a variety of scientific and engineering pursuits since
the early 1960's.
One of the businessmen in Santa Clara County whom I had dealings
with was Carl Storey, president of II Industries. I had known Carl
since 1964. At the time, I had recently sold a business I owned, and
planned to start a new enterprise in the near future. But, when I met
Mueller, I was more or less between assignments and was supporting
myself by working for several firms as a consultant.
Storey told me that Mueller was setting up some kind of semicon-
ductor plant in Hamburg, West Germany. A short time la ter I learned
that Mueller was less interested in actually building a factory but that
his main goal was to sell equipment to European semiconductor com-
panies.
Mueller told me that he was doing business with the Soviet Union
in regard to equipment for electronic watch production.
In the winter of 1975, I made two trips to Moscow with Mueller. On
both trips, the Soviets treated Mueller with special deference. Clearly,
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he was someone they had had dealings with before and someone they
wished to cultivate.
On the first trip, Mueller and I met briefly with a Soviet named
Pavlov. It was hardly more than an introduction, however, and I did
not learn much about him. The trip was not very productive.
On the second trip, we met several Soviets who purported to be
technical people. They were not very well trained and were not famil-
iar with sophisticated technological thinking. But it was apparent to
me by the questions they asked and the subjects they discussed that
the Soviets had built a semiconductor manufacturing and assembly
plant and they were anxious to equip it. They wanted American semi-
conductor manufacturing equipment and they had detailed literature
on the precise kind of equipment they wanted. They also wanted me to
obtain for them certain semiconductor components. It was clear to me
that Mueller had deceived me as to the Soviets' intentions, that it was
not merely electronic watches that the Soviets wanted to manufac-
ture. It seemed to me they had in mind the manufacture of any num-
ber of high technology products, including computers.
I realized that for me to provide such equipment for them would
have constituted questionable or illegal conduct on my part. I wanted
to play no role in such activity and refused to participate further and
left.
Senator NUNN. Did they offer you money or were they just going to
use your services and pay you? What was the offer?
Mr. MARSHALL. They really didn't offer me money. Supposedly I was
Mueller's employee as a consultant. Mueller offered to pay me my
standard consulting fee.
Senator NUNN. You were actually working for him?
Mr. MARSHALL. I was working for Mueller.
Senator NUNN. Did he pay your expenses on the trips?
Mr. MARSHALL. He was supposed to. He didn't pay me.
Senator NuNN. He was supposed to?
Mr. MARSHALL. That's right, he was supposed to pay me and pay
my consulting fee. What I really learned through the whole thing,
Mueller was trying to prove to the people there that he had some tech-
nical expertise and when they started going into areas that were defi-
nitely sensitive and I got the drift of really what was going on., I told
him I wanted no part of it. And got out.
In addition to the questions the Soviets asked me' I began to better
understand certain conversations I had overheard between Mueller
and persons he was meeting with during our trips to Moscow. It be-
came apparent to me that Mueller and these persons were involved
actively in a relatively substantial effort to buy American semiconduc-
tor manufacturing equipment for illegal shipment to the Soviet Union.
Among the persons I met during this association with Mueller was
another West German named Volker Nast, who was introduced to me
as being one of Mueller's partners. I met Nast in Germany as we were
enroute to Moscow. In Hamburg, I met an English or Canadian sub-
ject whose name I cannot recall whose mission was to supply the So-
viets with semiconductor technology; that is to say, he was to show
them how to make integrated circuits and how to use properly the
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equipment they would be obtaining. In Moscow, I met a woman who
spoke English with a German accent who was planning to ship certain
American-made photolithographic materials to the Soviet Union via
East Berlin. I do not remember her name.
In 1975, the United States was preeminent in the field of semi-
conductor technology. It is my view that the Soviets had built their
manufacturing plant, or plants, to specifications for American-made
equipment-_for the manufacture, assembly and testing of integrated
circuits. Now that the facilities were constructed, they were, in the
winter of 1975, confronted with the next step, which was to equip the
facilities.
In 1975, their primary interest in equipment would have related to
the manufacture and assembly phases of semiconductor production.
By 1977, they would probably have been ready to begin equipping the
facilities with the test equipment; and with software development
equipment.
Senator Numsr. Thank you very much, Mr. Marshall. We appreciate
your being here and your cooperation. We also appreciate your being
alerted to what was about to go on and getting involved in that. That
is a good example for a lot of other business people who may be exposed
to the same thing. Do you know whether Mr. Mueller was ever charged
with any crime in this country?
Mr. MARSHALL. I believe he was charged with a crime. In fact, as I
mentioned, the gentleman that introduced me to Mr. Mueller was sub-
sequently brought to trial for shipping equipment illegally to the
Soviet Union.
Senator Nuismr. Is that Mr. Nast?
Mr. MARSHALL. That was Mr. Storey.
Senator NUNN. Mr. Storey, so Mr. Storey was actually indicted and
tried?
Mr. MARSHALL. And tried.
Senator N17NN. Was he convicted?
Mr. MARSHALL. I testified at his trial, he was convicted. Apparently
there was an incompetent reporter at the trial and so, I guess they
negotiated a plea after that. They went to retry. He was convicted at
the trial.
Senator NuNx. How about Mr. Mueller, he never has been?
Mr. MARSHALL. Mr. Mueller, I think is a German citizen. I believe
he has been indicted but I don't think he is going to come back into
the country and I guess you can't extradite from Germany.
Senator NuNN. How about Mr. Nast?
Mr. MARSHALL. Same situation.
Senator NuNN. Indicted?
Mr. MARSHALL. I believe so.
Senator NuNN. In other words, we can't extradite them on those
charges as far as you know?
Mr. MARSHALL. In fact that is the information I got from your
investigators because I asked these questions of them. They are very
aware of the situation.
Senator Nuicx. Mr. Asselin, are you familiar with this or Glenn
Fry? How about taking the stand and let's complete this part right
now.
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TESTIMONY OF GLENN W. FRY, STAFF INVESTIGATOR, PERMA-
NENT SUBCOMMITTEE ON INVESTIGATIONS
Hold up your right hand, do you swear the testimony you give in
this case will be the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. FRY. Yes.
Senator NUNN. State your name and present position.
Mr. FRY. My name is Glenn Fry, staff investigator for the minority.
Senator NUNN. How long have you been investigating this case?
Mr. FRY. Approximately 1 year.
Senator NuNN. Would you tell us what the status legally is of Mr.
Mueller we heard testimony about and Mr. Nast?
Mr. FRY. Richard Mueller is a West German and he initially started
to procure American equipment as early as 1974.
Senator NUNN. I don't believe that mike is on. I can't hear you.
Mr. Fay. Is this all right?
Senator NUNN. That is better.
Mr. FRY. Richard Mueller is a West German who as early as 1974
was attempting to procure semi-conductor manufacturing equipment
from the United States, specifically two companies on the west coast,
II Industries and Kasper Electronics. He tried at first through an in-
dividual in Germany named Luther Heidecke who worked for Honey-
well A.G. in West Germany. His attempts in this area failed. The next
time he was heard of was when he was dealing directly with II Indus-
tries and Kasper Electronics.
Senator Ntri.tx. Did he get indicted in this country?
Mr. FRY. Yes; he did.
Senator NUNN. Has he ever been tried?
Mr. FRY. No; be hasn't.
Senator NUNN. Why riot?
Mr. FRY. He and Volker Nast both flew to Germany.
Senator NUNN. Both been indicted?
Mr. FRY. Both hove been indicted.
Senator NUNN. Has our Government tried to extradite him?
Mr. FRY. There is no way to extradite him for these charges.
S-nator NrrNN. Why is that?
Mr. FRY. The West German Government is just not sympathetic.
Senator NUNN. Let's say he was a murderer in the United States,
what would happen if he fled to West Germany then?
Mr. FRY. I am not that familiar with the extradition laws, but I
assume something of that severity
Senator Ntrivx. I ask you to have the staff look into this as soon as
possible and get us the status of the law as to why this is not an ex-
traditable offense. Your understanding is that it is not an extraditable
offense?
Mr. FRY. This is the information we received from Justice and
Customs.
Senator NuNx. And the offense he was charged with was violation
of the U.S. Export Administration Act?
Mr. FRY. Yes, sir,
Senator NUNN. What about espionage, would that have been an
extraditable offense? If you don't know, you can furnish it in a
memo
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Mr. FRY. I don't know.
Senator NuNN. I would like to have that in the record. You are
going to be testifying tomorrow. Perhaps you can get it by then.
Mr. FRY. All right.
Senator NuNN. We are engaged in a military alliance with West
Germany as one of our prime partners. We are spending billions and
billions of dollars. The efforts that were being made in this case that
you related, Mr. Marshall, were aimed at improving the Soviet mili-
tary capability. We charge people involved with the crime and they
flee to one of our prime allies that we are helping to defend against
the Soviets and we can't get them back. Does that strike you as being
somewhat of a paradox?
Mr. MARSHALL. It certainly does. I was dumbfounded with the fact
we couldn't do anything because I went to the Custom's people and
cooperated with the Custom's people in prosecution of this case and
found out at that time, too, there was nothing they could do to Mueller.
Another thing I found out during the same time was apparently
the Russians are also getting a lot of semi-conductor integrated circuit
technology from Japan and apparently there is no problem in them
obtaining this very sensitive technology from the Japanese and now
the Japanese have made very, very substantial strides over the last
10 years and now are just on about a par with our existing technology
and seems to me if the Russians want something they can go to the
Japanese and get it, no questions asked.
Senator NuNN. Another one of our allies.
Mr. FRY. Japan?
Senator N-uNN. Yes.
Mr. FRY. It is.
Senator NUNN. In the defense budget on the floor today, we are
spending so much money on our own allies, yet we didn't exercise
much effort in terms of agreeing to extraditable offenses with them.
If we have I don't know about it. I would like a staff analysis of that.
[At the request of the subcommittee, Dr. Edith Palmer, a senior
legal specialist in the European Law Division of the Library of
Congress, prepared a report on "Problems of Enforcement of National
Security Export Controls Involving Illegal Conduct Abroad." The
report follows.:]
PROBLEMS OF ENFORCEMENT OF NATIONAL SECURITY EXPORT CONTROLS INVOLVING
ILLEGAL CONDUCT ABROAD
Diversions of controlled technology are at times carried out through compli-
cated schemes involving interim exports to West European countries, particularly
the Federal Republic of Germany, in conjunction with various forms of transit
through neutral countries such as Austria and Switzerland before the goods
reach their final destination in the Soviet Bloc.
These schemes hamper enforcement of our national security export controls in
two major ways. First, they often involve the participation of forcign nationals
operating from abroad who cannot be brought to justice beciuse they are neither
extradited to this country nor punished in their home countries. Second, they
make discovery of illegal conduct very difficult in that the cooperation of several
European countries is required in investigating the facts. This cooperation works
well with regard to the Federal Republic of Germany, but the Swiss authorities
have in such cases refused assistance. It is also questionable whether coopera-
tion could be obtained from Austria.
An example of the impunity 'with which foreign nationals violate our export
controls is the ease of Volker Nast, a national resident of the Federal Republic
of Germany. In April of 1976, Volker Nast was indicted by a Federal grand jury
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713
in San Francisco for violation of 18 U.S.C. ? 371, conspiracy to violate the Ex-
port Administration Act.' Even though his conspirators in the United States were
prosecuted and convicted, Volker Nast could not be brought to trial because his
extradition was not obtained.
In 1980, Volker Nast again participated in a scheme of illegal exports of 'U.S.
technology in violation of the Arms Export Control Act.' Through the diligent
efforts of the U.S. Customs Service, the illegal export of the controlled item, a
Microwave Surveillance Receiver System, was forestalled. Two co-conspirators
in this scheme, one a U.S. citizen and the other a German citizen, were appre-
hended in New York City and were tried and convicted. On May 26, 1981, Volker
Nast was charged with a two-count indictment in Baltimore, Maryland, for con-
spiracy in violation of 18 U.S.C. ? 371, and with aiding and abetting an attempt
to violate the Arms Export Control Act, in violation of 18 U.S.C. ? 2 and 22 U.S.C.
? 2778. But because of his German residence he could not be tried.' Given Volker
Nast's conduct to date, it is foreseeable that he may continue his profitable activi-
ties unless ways and means can be found to deter him in the future.
The most effective deterrent for offenders like Volker Nast would be to obtain
their extradition to the United States. However, this often will not be possible
for various reasons, the most compelling being that the offender is a national of
the country that is requested to extradite. In fact, in the Federal Republic of
Germany, the extradition of a German national is ba-red by a constitutional pro-
hibition.' This constitutes a preclusion of law justifying the refusal of extradition
as provided in Article 7 of the Extradition Treaty between the United States and
the Federal Republic of Germany.5
Aside from the issue of German nationality, it is not clear to what extent the
Federal Republic of Germany under the Extradition Treaty now in force would
grant extradition of a U.S. citizen or a citizen of a third country to the United
States for violations of U.S. export controls. If the offender were a U.S. citizen,
the issue would turn on a finding of double criminality for the conduct.
The intent of the parties is to interpret the Extradition Treaty broadly in
order to avoid any possible gaps in the prosecution of crimes." The Treaty
obligates the Federal Republic of Germany to grant extradition for any Federal
offense under U.S. law that is punishable in the United States and in the Federal
Republic by imprisonment for more than one year.' It would seem that a good
faith interpretation of ?the Treaty would warrant a German finding of double
criminality because German export control laws make the unauthorized export
of certain controlled materials punishable by imprisonment up to three years.'
However, it is by no means assured whether or not a German court invoked to
examine the allowability of extradition would come to this conclusion, since
German export control laws are not nearly as comprehensive as those of the
50 U.S.C., app. 2401-2420.
18 U.S.C. ? 2; 22 U.S.C. ? 2778.
Affidavit of April 5, 1982, of Michael Dolphin, Special Agent. U.S. Customs Service,
stating these facts to Glenn Fry and Jack Key of the Senate Permanent Subcommittee on
Investigations, Committee on Governmental A `fairs.
4 Art. 16, para. 2, of the Basic Law of the Federal Republic of Germany (Grundgesetz fur
die Bundesrepublik Deutschland vom 23. Mai 1949, Bundesgesetzblatt [official law gazette
of the Federal Republic of Germany. BGB1.], p. 1.
5 Treaty Between the Federal Republic of Germany and the United States of America
Concerning Extradition [US-FRG Treaty], signed at Bonn. June 20, 1978, entered into
force August 29, 1980, T.I.A.S. 9785.
6 H. Grtitzner and P. Piitz, Internationaler Rechtshilleverkehr in Strafsachen H V 10,
p. 26. note 2 (Hamburg. 1955- ).
'Articles 1 and 2, US-FRG Treaty- Article 2 also incorporates as extraditable an enum-
eration of offenses contained in the Appendix. In the German interpretation of the Treaty,
this enumeration prevails only for requests from the United States that are based on of-
fenses under state law, whereas for offenses under the Federal laws of the United States,
extraditability is determined by double criminality plus the punishment threshhold. The
numerated offenses, however, are indicative of the intent of the Treaty as to the types of
crimes covered. Number 27 of the Appendix specifically includes :
(a) Offenses against the laws relating to importation, exportation, or transit of goods,
articles, or merchandise.
(b) Offenses relating to willful evasion of taxes and duties.
(c) Offenses against the laws relating to international transfer of funds.
The only category of offenses that is excepted from extradition is that of political
offenses. According to Article 4 of the Treaty, the requested State determines whether or
not an offense is political. While a German finding of political intent with regard to U.S.
export control violations would seem unlikely, given the obvious commercial motives under-
lying such transactions, violations of U.S. espionage laws would almost certainly fall under
the political offense exception.
Sees. 34 and 7, Aussenwirtschaftsgesetz vom 28. April 1961. BGB1. 1. p. 481, as
amended, in conjunction with secs. 5, 38. 40, 45, and 70, Aussenwirtschaftsverordnung vom
22. August 1961, BGB1. I, p. 1381, as amended.
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United States. Criminal sanctions in the German export control system are
viewed as exceptional, in view of the free-trade orientation of German foreign
economic relations legislation, and most infractions of it are punishable merely
by administration fines.'
If the United States were to request the extradition of an offender who is a
national of a third country for U.S. export control violations, the Federal Repub-
lic might refuse extradition if tl-e illegal conduct occurred entirely outside the
territory of the United States, since the Treaty, with regard to non-nationals
of the requesting country, requites that the requested country must in its own
laws have jurisdiction over the type of offense when committed extraterritori-
ally." German criminal law, however, does not list export control violations
among the offenses for which it prosecutes foreigners for acts committed
abroad."
With regard to persons who are not German nationals, the United States
might at times succeed in obtaining extradition when the violators of the U.S.
export control laws commit other offenses as well that are extraditable under
the Extradition Treaty with Germany. Fiscal offenses and perjury might fall
into this category. However, the rule of specialty would limit U.S. prosecution
to the offenses for which extradition was granted."
The refusal to extradite nationals is a concept that the Federal Republic
shares with many European countries," and this principle is frequently defended
by its proponents with the argument that these countries will exercise jurisdic-
tion over their nationals for offenses committed either in their territory or
abroad and that they will punish them according to their domestic laws." How-
ever, this argument fails to be convincing when, as in the case of export viola-
tions, the ccnduct of the person whose extradition is sought is not punishable
in the requested country.
It is a well-recognized principle in international law that a state refusing to
extradite a criminal should punish him according to its municipal laws. This
principle has been expressed in numerous international conventions dealing with
the suppression of crimes, and these agreements frequently contain clauses ob-
ligating the member countries to make the reprehensive conduct punishable ac-
cording to their own laws and to establish jurisdiction in their laws over offenders
whose extradition is refused.' Whereas these conventions deal with universal
crimes for which there is a broad consensus that they need to be suppressed, this
may not be the case with regard to U.S. export controls. However, the protection
of these controls might well constitute an obligation among the members of the
North Atlantic Treaty " to protect their mutual security by adopting laws to
enforce these controls.
The difficulties of investigating violations of U.S. export controls abroad be-
came especially apparent in 1980, when Theodore Wai Wu, Assistant United
States Attorney, traveled to West Germany and subsequently to Switzerland to
Investigate massive schemes of diverting U.S. controlled technology to the Soviet
Bloc involving exports to the Federal Republic of Germany and various forms
Aussenwirtschaftsrpcht 1975, at 33 (Frankfurt, 1975).
"Art. 1, US-FRG Treaty.
"Sees, 5 and 6 of the German Criminal Code, i.e., Strafgesetzbuch in der Fassung vom 2.
Januar 1975, BGB1.. p. 1, as amended.
la Art. 22, US-FRG Treaty.
13 Austria bars the extradition of nationals by a constitutional provision: sec. 12,
Auslieferungs- und Rechtshilfegesetz vom 4. Dezember 1979, Bundesgesetzblatt [official law
gazette of Austria], No. 529/1979. Switzerland bars the extradition of nationals by legisla-
tion: Art. 7, Rechtshilfegesetz vom 20. Marz 1981, Bundesblatt [official law gazette of
Switzerland] I, p. 791.
'1l. Wise, "Some Problems of Extradition," 15 Wayne Law Review 715 (1969).
"Obligations to provide Jurisdiction and criminal provisions to punish offenses for which
extradition is not granted are contained In: Convention for the Suppression of Unlawful
Seizure of Aircraft, done at The Hague, December 16, 1970, entered into force for the
United States October 14, 1971, T.I.A.S. 7192, the Convention for the Suppression of
Unlawful Acts Against the Safety of Civil Aviation, done at Montreal, September 23,
1971, entered into force for the United States January 26, 1973, T.I.A.S. 7570; Con-
vention on the Prevention and Punishment of Crimes Against Internationally Protected
Persons Including Diplomatic Agents, done at New York, December 14, 1973, entered into
force for the United States February 20. 1977, T.I.A.S. 8532; Single Convention on Nar-
cotic Drugs, done at New York, March 30, 1961, entered into force for the United States,
June 24, 1967, T.I.A.S. 6298. Most European countries are also bound by such an obliga-
tion according to the European Convention on the Suppression of Terrorism, done January
27, 1977, BGB1. 1978. II. p. 321.
la Arts. 3 and 4, North Atlantic Treaty, signed at Washington, April 4, 1949, entered into
force for the United States August 24, 1949, T.I.A.S. 1964.
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of transit through Switzerland and Austria." The West German authorities were
very cooperative and their assistance, granted under a bilateral customs agree-
ment,' was instrumental in discovering the complex schemes of diversion. But
the Swiss authorities denied assistance on the grounds that the country's political
neutrality barred assistance for U.S. export control enforcements that are viewed
by the Swiss as involving political considerations. They also denied it on the
grounds that the Swiss business secrecy laws prohibited certain inquiries. Mutual
assistance in criminal matters is granted to the United States by Switzerland
under the Mutual Assistance Treaty of 1973." Whereas this U.S.-Swiss Treaty
contains broad obligations of assistance, refusals of the type described above
are possible because of discretionary clauses contained in its Articles 3 and 10.10
Mutual assistance between Austria and the United States is granted on the
basis of reciprocity in the absence of a treaty. It is possible that the Austrian
authorities would also refuse assistance to the United States for the investigation
of export control violations, since the Austrian Law on Extradition and Mutual
Assistance contains a general reservation precluding assistance when it would
violate essential Austrian interests.' Austrian neutrality and business secrets are
prime examples of such protected interests in the intent of the Austrian
legislature.'
National security export controls of the United States cannot be enforced
effectively as long as these difficulties in prosecuting foreign offenders and
investigating operations abroad continue to exist. These factual problems and
the legal situations on which they are based should be taken into consideration
by the U.S. Secretary of State in consultation with the Secretary of Defense, the
Secretary of Commerce, and the heads of other appropriate departments and
agencies when negotiating with other countries regarding cooperation in restrict-
ing the export of goads and technology under the Export Administration Act, as
provided in 50 U.S.C., app. ? 2404 (k ).
Senator NUNN. Mr. Marshall, during your exposure to Richard
Mueller, can you recall the circumstances that led you to believe he
was illegally diverting United States technologies to the Soviet
Union?
Mr. MARSHALL. While I was with him I began to overhear a lot of
conversations he was having with other people and conversations he
was having on the telephone which definitely indicated that he was
doing this. In fact, as I mentioned, I was a witness for the prosecution
of the people in the Ii Industries case because I had sonic direct knowl-
edge and I guess it was my testimony that was key in getting a con-
viction.
Senator Nui.rx. Did Mueller appear to know exactly what United
States technology he was to obtain for the Soviets?
Mr. MARSHALL. I believe so.
Senator NUNN. How do you gather that?
Mr. MARSHALL. He was after certain things. In fact, during this time
he wanted me to get involved, he was trying to get me to supply, or
wanted me to supply some very sophisticated maskmaking equipment.
I told him he was nuts, but it was some very sophisticated equipment.
He was saying he was going to buy it from West Germany and then
move it from West Germany into the Soviet Union.
17 Statement of Theodore Wal Wu. Assistant United States Attorney, Criminal Division.
Central District of California, before the Permanent Subcommittee on Investigations, United
States Senate. May 5, 1982.
18 Agreement Regarding Mutual Assistance Between the Customs Services of the United
States and the Federal Republic of Germany, signed at Washington. August 23, 1973, en-
tered into force June 13. 1975. T.I.A.S. 8098.
10 Treaty Between the United States of America and the Swiss Confederation on Mutual
Assistance in Criminal Matters, signed at Bern, May 25, 1973, entered into force Janu-
ary 23, 1977, T.I.A.S. 8302.
20 Article 3 of the Treaty gives the requested state discretion to refuse assistance that is
likely to preiudice its sovereignty, security, or similar interests. Article 10 makes the dis-
closure of business secrets by Switzerland subject to the approval of the Swiss Central
Authority.
.1 Sec. 2. AHRG. supra note 13.
28 R. Linke and H. Epp, Internationales Strafrecht 19 (Wien, 1981).
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Senator Ninrx. He was making no bones about that?
Mr. MARSHALL. That's right.
Senator NUNN. Did he tell you it was illegal?
Mr. MARSHALL. It was obviously illegal.
Senator NUNN. He knew it was illegal and no question about it?
Mr. MARSHALL. Sure.
Senator NUNN. Did he mention whether money was available for
this purpose?
Mr. MARSHALL. Not really. He mentioned they wanted the equipment
and I guess he was being rewarded very handsomely by the Russians.
He was spending a lot of money, bought two new Mercedes, was in the
process of building a very large home in the countryside around Ham-
burg. So he obviously was doing very well financially.
Senator NUNN. Did he do other things or was he primarily engaged
in trying to obtain equipment for the Soviets?
Mr. MARSHALL. I think that was his major job. What he was doing
was trying to work under the guise of being a manufacturer's repre-
sentative for some sophisticated equipment in Europe, and using that
as really a guise to obtain the equipment to ship to the Soviet bloc.
Senator NUNN. You gave testimony in a trial involving II Indus-
tries and Kasper Electronics, two Silicon Valley firms which pled
guilty to violations of the Export Administration Act. Were you
familiar with the nature of the equipment that was being shipped for
the Soviets?
Mr. MARSHALL. Yes, I was.
Senator NUNN. What was it to have been used for in your opinion?
Mr. MARSHALL. It would have been used for the production of the
integrated circuits. It was part of the photolithography process used
to make integrated circuits.
Senator NUNN. What about the military applications?
Mr. MARSHALL The circuits certainly have military application; the
equipment has no military application.
Senator NUNN. This is primarily industrial? -
Mr. MARSHALL. For production circuits used to print the patterns,
the microscopic patterns on the silicon?
Senator NUNN. Does that mean once they produce these they would
have been using it for commercial purposes?
Mr. MARSHALL. Commercial Or military.
Senator NuNrr. Or military?
Mr. MARSHALL. Yes.
Senator NUNN. Members of the minotity staff showed you a list of
equipment that has been illegally exported to the Soviets over the pe-
riod 1976 to 1980; is that correct?
Mr MARSHALL. Yes.
Senator NUNN. These illegal exports were valued at about $10 mil-
lion. Have you looked at that list?
Mr. MARSHALL. I have seen the list; yes.
Senator Nuisrx. What type of equipment was this and how would
it have been used, in your opinion?
Mr. MARSHALL. Most of the equipment there really broke down into
two categories. One category was mainly test equipment, for testing
integrated circuits. Another area was software development for de-
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veloping software for a particular microprocessor chip, 8080 micro-
processor chip. There was, I guess, one piece of equipment there that
would be used for the processing of the integrated circuits which was
really more advanced than anything that existed during 1975 when
Mueller was talking to me. This is a relatively new piece of equipment,
the Hipox machine.
So it sounds like maybe they, have something going and they are
continuing to facilitize it and update it with modern equipment just
like a U.S. manufacturer would.
Senator NuNN. Mr. Marshall, based on your experience, do you have
any suggestions for the Federal Government as to how to curb tech-
nology transfers to the Soviet Union and the Eastern bloc?
Mr. MARSHALL. I listened to Dr. Baker's testimony and his idea
about limiting, taking key segments away from them and spare parts
for those segments just would be. I think, a very effective way to con-
trol it because I think with the proliferation of semiconductor tech-
nology as exists in the world today it would be hard to control every-
thing, but I think there are a few key areas that if controlled it would
seriously limit their ability to continue to modernize the technology.
Senator NtrNN. So you agree with Dr. Baker's suggestions in that
respect?
Mr. MARSHALL. Yes, sir.
Senator NuNN. Is there anything else you would like to offer to the
subcommittee this morning?
Mr. MARSHALL. No.
Senator NUNN. We appreciate very much your cooperation, Mr.
Marshall. Thank you.
The hearings of the Senate Permanent Subcommittee on Investiga-
tions on Technology Transfer will continue on Wednesday, May 5,
which is tomorrow, at 9 a.m. We will start at 9 o'clock in the morning
and catch up with some of the additional information from the staff.
We will hear from Jack Vorona,, Director, Scientific and Technical
Information, DIA; Theodore Wu, assistant U.S. attorney, Central
District of California; John Maguire, president of Software A.G.,
Reston, Va.; Theodore Greenberg, assistant U.S. attorney, Eastern
District of Virginia; and Douglas Southard, assistant district attor-
ney, county of Santa Clara, Calif.
We will start with our own staff which has an important analysis of
their investigation.
The subcommittee will adjourn.
[Whereupon, at 1:30 p.m. the hearing was recessed, to reconvene at
9 :05 a.m., Wednesday, May 5, 1982.]
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TRANSFER OF UNITED STATES HIGH TECHNOLOGY
TO THE SOVIET UNION AND SOVIET BLOC NATIONS
WEDNESDAY, MAY 5, 1982
U.S. SENATE,
PERMANENT SUBCOMMLL IEE ON INVESTIGATIONS
OF THE COMMIrrLE ON GOVERNMENTAL AFFAIRS,
Washington, D.0 .
The subcommittee met at 9:05 a.m. in room 3302, Dirksen Senate
Office Building, under authority of Senate Resolution 361, dated March
5,1980, Hon. Sam Nunn presiding.
Members of the subcommittee present: Senator Sam Nunn, Demo-
crat, Georgia; and Senator William S. Cohen, Republican, Maine.
Members of the professional staff present: S. Cass Weiland, chief
counsel; Michael C. Eberhardt, deputy chief counsel; Katherine Bid-
den, chief clerk; Eleanore J. Hill, chief counsel to the minority; Greg-
ory Baldwin, assistant counsel to the minority; Jack Key, Glenn Fry,
and Fred Asselin, staff investigators to the minority; and Kathleen
Dias, executive secretary to the minority chief counsel.
[Senator present at time of convening: Senator Nunn.]
[The letter of authority follows:]
U.S. SENATE,
COMMITTEE ON GOVERNMENTAL AFFAIRS,
SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,
Washington, D.C.
Pursuant to Rule 5 of the Rules of Procedure of the Senate Permanent Sub-
committee on Investigations of the Committee on Governmental Affairs, permis-
sion is hereby granted for the Chairman, or any Member of the Subcommittee as
designated by the Chairman, to conduct open and/or executive hearings without
a quorum of two members for the administration of oaths and taking testimony
in connection with hearings on the Transfer of United States High Technology
to the Soviet Union and Soviet Bloc Nations, to be held May 4, 5, 6, 11 and 12,
1982.
WILLIAM V. ROTH, JR.,
Chairman.
SAM NUNN,
Ranking Minority Member.
Senator NUNN. The subcommittee will come to order.
Our first witnesses this morning will be Mr. Fred Asselin, staff in-
vestigator, and Mr. Glenn Fry, staff investigator.
If you all would take the stand.
Mr. Fry has been sworn but let's both take the oath again.
Do you swear the testimony you give before this subcommittee will
be the truth, the whole truth, and nothing but the truth, so help you
God?
Mr. ASSELIN. I do.
Mr. FRY. I do.
(81)
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82
TESTIMONY OF FRED ASSELIN AND GLENN W. FRY, STAFF IN-
VESTIGATORS, PERMANENT SUBCOMMITTEE ON INVESTIGA-
TIONS
Senator NUNN. I believe both of you have statements this morning
and we will ask you to proceed with those.
Mr. ASSELIN. Mr. Chairman, I Am Fred Assel in. I am an investi-
gator on the minority staff of the Senate Permanent Subcommittee on
Investigations.
I have shortened considerably my prepared statement. I request that
my entire 32-page statement be printed in the hearing record.'
Senator NUNN. Without objection, your statement will appear as if
read.
Mr. ASSELIN. I also have a summary of the CTC-Maluta case that I
would request be inserted in the ?hearing record.
Under the Export Administration Act, the U.S. Department of
Commerce, through its Office of Export Administration, has juris-
diction over most nonclassified exports from the United States.
Enforcement of the Export Administration Act is carried out by
the Compliance Division of the Office of Export Administration.
The Compliance Division has three Branches?Investigations, In-
telligence, and Facilitation?Inspections.
The minority staff of the subcommittee has made an evaluation of
the effectiveness of the Compliance Division. An assessment of Com-
pliance Division resources and procedures was made. The minority
staff interviewed current and former executives of the Division, and
current and former special agents of the Division. Also interviewed
were law enforcement personnel from other agencies, Government in-
telligence officials and officials of agencies whose mission brings them
in contact with the Compliance Division.
Uppermost in mir minds as we made this evaluation were the na-
tional security implications of the responsibility vested in the Com-
pliance Division. The Export Administration Act itself spells out that
national security responsibility.
The minority staff also evaluated the Compliance Division in terms
of its being a law enforcement entity.
The information that; the minority staff has gathered about the Com-
pliance Division was compared to official pronouncements which the
Department of Commerce has made about the Division in testimony
before Congress and in annual renorts to Congress.
The investigation, which lasted more than 1 year, resulted in a series
of preliminary findings. which are now submitted to subcommittee
members for their consideration. It is our recommendation that subse-
quent witnesses to these hearings from the law enforcement and
national security fields be asked tocomment on the minority staff's
preliminary findings wherever appropriate.
In reports to Congress, the Commerce Department has portrayed
the Compliance Division as if the Division were competently organized
See p. 366 for the prepared statement of Fred Asselin.
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and adequately staffed to enforce the Export Administration Act
export controls provisions. By contrast, our investigation found that
the Compliance Division is not effective. It is an understaffed and
poorly equipped and, in certain instances, undertrained and unquali-
fied investigative and intelligence unit.
According to Commerce Department congressional testimony,
Department officials "regard the enforcement program as an integral
part of the export control system," and say their policy is to "marshal
our limited resources to exact maximum compliance with the law."
It is useful to note the reference to limited resources because the
staff also will underscore the limited nature of the Commerce Depart-
ment's commitment to enforcing export controls. Moreover, the staff
inquiry concluded that the Department's commitment to export con-
trols enforcement is so limited, in fact, that it is impossible to expeet
"maximum compliance with the law." It is optimistic to expect very
much compliance at all.
Our staff investigation revealed the number of inspectors for the
entire Nation is five or six?and five of them are located at the John F.
Kennedy International Airport in New York. On a rotating basis, one
of the five inspectors is on travel much of the time, trying to conduct
inspections for the rest of the Nation. Some airports and seaports never
are visited by Commerce Department inspectors in the course of a year.
Other exit ports are visited 1 week a year. A sixth inspector is in the
Washington, D.C. area.
The Commerce Department's testimony provided this description of
the Intelligence Branch of the Compliance Division:
The Intelligence Branch is staffed with criminal investigator intelligence
reporting officers and other support personnel who develop and maintain intel-
ligence information regarding possible export control violations. Branch per-
sonnel review all incoming allegations, voluntary disclosures and referrals from
the Facilitation Branch to determine whether referral to the Investigations
Branch is warranted.
The testimony suggests a much larger operation than actually exists.
The Intelligence Branch has a Chief, a Deputy Branch Chief, two full-
time professionals and one detailee from the Drug Enforcement Ad-
ministration.
The Intelligence Branch Chief, who is unique among the three
Branch chiefs because of his considerable background in law enforce-
ment, told the staff in a prehearing interview that his office is so over-
whelmed with its workload and so understaffed that it is impossible
for him to provide the kind of intelligence analysis needed for the Di-
vision's national security and law enforcement mission.
The Intelligence Branch is supposed to be able to process and assess
sensitive information. Yet, the Branch has no secured telephone. None
of its professionals has access to sensitive compartmented information;
that is, sensitive intelligence data.
Intelligence Branch personnel often are bogged down in relatively
insignificant assignments and do not have the time to collate and syn-
thesize information in an effort to anticipate violations.
In its testimony before the House Committee, the Department went
on to describe the Investigations Branch of the Compliance Division
by saying it "is also staffed with criminal investigators and conducts
full-scale investigations into alleged violations.'
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The use of the adjective full scale to describe investigations suggests
a substantive effort. However, the subcommittee staff was informed
by the Chief of the Investigations Branch and by a former Director
of the Compliance Division that a full-scale investigation can be a
phone call or a letter.
Both, the fiscal year 1980 and 1981 reports to Congress, speak of "full
field investigations."
In 1980, Compliance Division special agents conducted 61 full field
investigations; and in 1981, an undisclosed number of full field in-
quiries were made, according to the two reports to Congress. The
Branch has abvut eight investigators. With such limited resources at
its disposal, the Compliance Division would be very Lard pressed to
conduct 61 full field investigations in a 12-month period.
The Chief of the Investigations Branch told the subcommittee staff
that 61 full field investigations might not have been the meaning that
the report to Congress intended to convey and that there might have
been a misunderstanding due to poorly constructed writing in the
report.
The testimony also noted that "A principal focus of the Investiga-
tions Branch is preventive enforcement. -We try to thwart illegal trans-
actions before they occur to avoid possible irreversible harm to na-
tional security."
Our investigation revealed that, preventive enforcement is far re-
moved from the realistic objectives of the Investigations Branch. The
Branch has about eight special agents, some formerly trained in tradi-
tional law enforcement, some untrained. Most of their work they do
on the telephone or by mail. There is some travel but the bulk of the
work is done in the Washington headquarters of the Commerce De-
partment. Investigative support is provided by a three-man field office
in New York.
In law enforcement, the term "preventive enforcement" suggests
something quite different, than an eight-member Investigations Branch
that does most of its work from the office. Preventive enforcement
means sending agents into the field, staving in close and frequent con-
tact with the many segments of the affected community.
Senator NUNN. Let me ask you a question right there. You talked
about several different branches. You mentioned the Inspection
Branch. Is that one separate branch?
Mr. ASSELIN. Yes, it is known formally as the Facilitation Branch.
Senator NUNN. Intelligence Branch is another branch?
Mr. ASSELIN. Yes, sir.
Senator NUNN. That is two separate ones there?
Mr. ASSELIN. And Investigations is a third.
Senator NuNN. There is an Investigations Branch?
Mr. ASSELIN. Yes.
Senator NUNN. How about a Compliance Branch?
Mr. ASSELIN. That's it.
Senator NUNN. It's all under one?
Mr. ASSELIN. The Compliance Division has the three branches?in-
vestigations, intelligence, inspections.
Senator NUNN. How many people are in the Intelligence Branch?
Mr. ASSELIN. They have a chief, a deputy chief, two full-time ana-
lysts and one detailee, so that's five.
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Senator NUNN. How many people are in the Intelligence Branch?
Mr. ASSELIN. That's five.
Senator Nu/cc. Inspection Branch?
Mr. ASSELIN. They have a chief and a deputy chief here in Wash-
ington. They have five or six inspectors' five at JFK in New York.
Senator NUNN. How many is that all together, eight or nine?
Mr. ASSELIN. Eight or nine professionals.
Senator NUNN. How about the Investigations Branch?
Mr. ASSELIN. Approximately eight. There is also a three-man in-
vestigations office in New York.
Senator NUNN. Which one of those branches is responsible for goods
that are going out of the country at the point of departure, like the
terminals, the airlines?
Mr. ASSELIN. Inspections presumably, but they are only located
at one airport.
Senator Ntrivx. Are they working with Customs, is Customs sup-
posed to feed information to them?
Mr. ASSELIN. From time to time,
they have had a working agree-
ment with Customs. One year they had two Customs people assigned
to them. I think that contract has terminated. I think now they are
back on their own again. They are supposed?
Senator NUNN. That is patently absured to believe eight or nine
people can
Mr. ASSELIN. It is. It is also absurd to locate them all at one airport.
Senator NUNN. What possible good can you do to visit an airport
once a year?
Mr. ASSELIN. That is a very good question. I don't know what they
expect to achieve with these random visits.
Senator NUNN. Is it a public relations visit, what is it?
Mr. ASSELIN. We weren't able to establish that, sir, what it is they
do when they go to these places.
Senator NUNN. They do not tell you what they do? When you ask
the question, what is it you do when you go to the Atlanta Airport
or the Miami Airport once a year, what is it you do there?
Mr. ASSELIN. They are supposed to go through shippers' export
declarations. They are supposed to carry out?
Senator NUNN. Those that have already gone or those that are
going?
Mr. ASSELIN. Those that are going at that moment.
Senator Nurrx. That day?
Mr. ASSELIN. Right.
Senator NUNN. It's a random sample, then?
Mr. ASSELIN. Yes, they claim they saw, and it's apparently a viable
statistic 230,000 in fiscal year 1981, which sounds like a lot, but it
isn't when you consider there are 9 million SED's filed a year, which
means they are missing 8.7 million they do not see.
They see 230,000 and they do not see 8.7 million.
Senator NUNN. That is the written paper, the shipper's export
declaration, right?
Mr. ASSELIN. Yes, it's one sheet. It is possible for 5 to 7 men to go
through 230,000 of those a year, I guess. They say it's possible and
other people have said it's possible.
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Senator NUNN. Do they have a computer operation that that is run
through, that triggers----
Mr. ASSELIN. hey thumb through them. They go to the site and
they thumb through them.
Where we wondered about the validity of that figure is in this
regard: They also claimed that in fiscal 1981, they found 10,000 dis-
crepancies in those 230,000 SED's. Of the 10,000 or so discrepancies,
they actually opened cargo on about 10,000 discrepancies. To do that,
they have to first of all call back to Washington to establish whether
or not a validated export license is needed?in other words, they have
to do some inquiry to check on why there is a discrepancy. Then you
begin to wonder how they did 230,000 because it comes down to about?
you start dividing 5, or 7 persons into 230,000, you get an awful la
of individual shipper's export declarations they went through and at
the same time opening up 10,000 pieces of cargo. So they are a very
busy group of people.
It is also interesting to note two or three of them are working 32-
hour weeks. They are not full-time employees. I don't doubt their
statistics. It just seems to me they work terribly hard, those inspectors.
They are grades 5, 7, and 9. Another statistic that may be useful is that
50 percent of the cargo in this category goes out of JFK, which means
50 percent of the Nation's exports in this area are not being seen to
the extent that 50 percent at JFK are being seen.
Senator Nu/sr'," Go ahead.
Mr. ASSELIN. In law enforcement, the term "preventive enforce-
ment" suggests something quite different than an eight-member in-
vestigations branch that does most of its work from the office. Pre-
ventive enforcement means sending agents into the field, staying in
close and frequent contact with the many segments of the affected
community. Preventive enforcement is aggressive policework.
Equally important, preventive enforcement means having an imagi-
native and resourceful intelligence capability as well. The Compliance
Division has none of these.
The official pronouncements of the Commerce Department reports
to Congress and congressional testimony are sharply different from
the views expressed by experienced law enforcement personnel who are
familiar with the operations of the Compliance Division.
One special agent currently employed in the Compliance Division
had served for more than 20 years as an Army criminal investigator
and has well established credentials as an agent. He said the Com-
pliance Division is totally ineffective in preventing dual-use tech-
nology from being shipped to the Soviet Union. He said the Kremlin's
spy organization, the KGB, could not have organized the Compliance
Division in a way more beneficial to Soviet interests. This agent's view
was not contradicted by persons in the law enforcement and national
security field. Unfortunately, it was virtually impossible to persuade
these persons to speak for attribution.
Senator NUNN. Why is it you have a department that seemingly does
not have the personnel, has been given a vary large mandate, an ad-
ministration that is very concerned about this problem and yet they
do not seem to be willing to admit they have a problem ?
Mr. ASSELIN. They won't admit it and it's the worst kept secret in
the executive branch.
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Everybody knows the inadequacies of the Compliance Division, yet
no one will come forward and tell the Congress and speak for attribu-
tion in this regard.
As I note later on. we asked the preeminent law enforcement orga-
nization in the United States, the FBI, to please help us evaluate this
organization. The FBI refused. As recently as last night we asked the
Justice Department to please assist us in evaluating this organization.
The Justice Department refused. They even insisted on not even being
asked the question in open session. I 'don't know why, to answer your
question.
The result of this reluctance to criticize constructively the Com-
pliance Division in public session leads to the current situation in
which the only evaluation the Congress hears is from the Commerce
Department, which houses the Division and which is less likely to make
a candid and forthright evaluation of the shortcomings of one of its
own components. For that reason it seemed important the minority
staff that Congress be informed of the widespread dissatisfaction that
exists in the executive branch concerning the Compliance Division
and the principal reasons for that dissatisfaction.
The Department of Commerce has as its major focus the promotion
of domestic and international trade. It is the finding of the minority
staff, based on interviews with officials of the Department and other
agencies, that Commerce is not comfortable with the task of limiting
the sale of anything, whether it is dual-use technology or some other
commodity.
The Commerce Department has devoted insufficient resources to the
Compliance Division. In 1961, for example, the intelligence branch of
the Division had six or seven professional analysts. Today-15 years
later?the intelligence branch has two analysts and one detailee from
another agency.
The Department of Commerce, therefore, has reduced its commit-
ment of resources in the intelligence field at the very time when the
problem of technology diversions has become more pressing for the
country.
Senator NuisTN. The Reagan administration and high levels of gov-
ernment are complaining about this problem and saying they are going
to really begin to restrict it. Doesn't it seem to be a paradox that the
agencies responsible for carrying it out are not able to tell the top peo-
ple in the Government, including the congressional committees that
they have a major problem when the President, their executive branch
leader, is apparently very concerned about this problem, very inter-
ested in trying to do something about it
Mr. ASSELIN. Yes, I agree with that and, as I will note later on in
the testimony, this has real consequences when a President thinks he
has the capability, as we will see on the grain embargo section of this
presentation.
The highest leaders of our Nation are led to believe we have an
export control capability when, in fact, we don't ard they make policy
based on a mistaken premise we have the capability, yet we don't
have the capability. I will get to that in a moment.
The minority staff is not the only entity that has questioned the
depth of the Commerce Department's commitment to regulating tech-
nology transfers. In introducing legislation to create an Office of
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add.
Strategic Trade, Senator Garn said the Commerce Department can be
criticized for its work as "lead" agency in combating diversions. Sena-
tor Garn said the Commerce Department has shown itself to be pre-
occupied with the goal of more and more trade with the Soviets to such
an extent that the Department has become blind to national security
considerations stemming from the sale of certain kinds of high tech-
nology data and machinery.
The result of the Commerce Department's inadequacies in control-
ling diversions has been a historic erosion in American technological
preeminence, Senator Garn said.
The Commerce Department has limited tradition and limited ex-
pertise in traditional law enforcement. Yet the Compliance Division
is perceived and described by the Department as being a law enforce-
ment organization. Its personnel include special agents, whose titles
alone suggest law enforcement assignments. The special agents are
classified as series 1811 Federal criminal investigators.
The Compliance Division asserts its "lead" role in enforcing export
controls for the entire Government. The Division undertakes exercises
requiring specialized law enforcement skills and capabilities such as
the conduct of surveillances of suspected export controls violators.
But, because of its lack of tradition and expertise in law enforce-
ment, the Commerce Department does not require that its special
agents meet established standards of formal training. "On-the-job"
training is common at the Commerce Department; yet there is no re-
quirement that newcomers to the investigative ranks undergo formal
training in the enforcement of export controls or in the most funda-
metal aspects of police work.
The Agent's Manual is a basic instructional document in most law
enforcement organizations. Each agent is given a copy of the Agent's
Manual and is expected to study it and be fully and currently
informed about it.
The Agent's Manual describes proper procedures for the agent in
every aspect of his professional life?on points ranging from proper
dress to the opening and closing of cases to the writing of reports
of investigation.
We asked for a copy of the Compliance Division's Agent's Manual.
Its status is not clear. We asked the Acting Director of the Division if
we could see it. He gave us a bulky, loose-leaf binder arid explained
that it was the only such document in the building. We did not think
that it was suitable for distribution to and retention by his Special
Agents for frequent referral and updating; he concurred.
Another executive of the Division, asked if there was an Agent's
Manual, described it as "a semblance of an Agent's Manual."
The absence of a comprehensive, compact and readily available
Agent's Manual is reflective of a procedurally uncertain law enforce-
ment environment in the Compliance Division.
Executives in the Compliance Division have had insufficient law
enforcement background and training to be supervising investigators
on how to proceed in their inquiries.
The Director of the Compliance Division from 1963 to 1979 was a
former Customs Appraiser in Chicago with limited experience and
limited formal training in law enforcement before he got the job.
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He told the minority staff that he did not believe experience or formal
training were required for law enforcement work.
He was replaced in the Office of Director of the Compliance Divi-
sion by a person who also had limited traditional law enforcement
experience.
At this time, the position of Director of the Division is formally
vacant. It is being filled on a part-time basis by William Skidmore,
whose permanent position is Director of Anti-Boycott Compliance.
Mr. Skidmore has limited traditional law enforcement experience.
The former Director of the Compliance Division told the minority
staff that on several occasions from 1979 through the first quarter of
1982, she recommended to senior officers of the Commerce Department
that steps be taken to increase the effectiveness and numerical strength
of the Division. The Department rejected many of her recommenda-
tions, she said.
Compliance Division inspectors have limited resources at airports
and seaports to detect the export of controlled high technology com-
modities. The chief of the facilitation branch told the subcommittee
staff that the number of inspectors?five or six?was insufficient.
Compliance Division inspectors are not authorized to search and
seize suspected cargo. They must rely on U.S. Customs service person-
nel. Similarly, unlike Customs agents and inspectors who have kindred
and formalized working relationships with Customs employees
throughout many parts of the world, Commerce inspectors have no
counterparts on any foreign soil.
Compliance Division Special Agents working in the investigations
branch are not required to have any formal training in investigative
techniques, law enforcement or the Export Administration Act.
The approximately eight professional members?the Special
Agents?of the investigations branch have varying degrees of law en-
forcement background. Some have extensive law enforcement back-
ground. That would number about three of them. Others have limited
background in law enforcement. One Special Agent's previous job ex-
perience was secretarial.
Most of the investigative work of the investigations branch is done
in the office. Agents are expected to conduct inquiry on the telephone
and by mail. The most frequent response to allegations of violations of
the Export Administration Act is to send the alleged violator a letter
of warning.
The subcommittee staff tried to find out the size of the branch's back-
log. That was not possible. The chief of the investigations branch
said he was not sure how large it was. The previous Director of the
Division said the backlog was possibly as large as 300 or 400. The new
acting director said he thought it was about 200 cases.
The staff inquiry concluded that a backlog of 200, 300 or 400 cases
with an investigative staff of 8 agents seemed to be inordinately
large. So many cases hanging over a relatively small investigative staff
could create pressure on Special Agents to close cases without sufficient
inouiry.
The intelligence branch also has a significant backlog of unfinished
business. The chief of the intelligence branch said he had a backlog of
about 600 cases. He said that by the end of the calendar year, he could
have a backlog of 1,000 cases.
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He told the minority staff that he did not believe experience or formal
training were required for law enforcement work.
He was replaced in the Office of Director of the Compliance Divi-
sion by a person who also had limited traditional law enforcement
experience.
At this time, the position of Director of the Division is formally
vacant. It is being filled on a part-time basis by William Skidmore,
whose permanent position is Director of Anti-Boycott Compliance.
Mr. Skidmore has limited traditional law enforcement experience.
The former Director of the Compliance Division told the minority
staff that on several occasions from 1979 through the first quarter of
1982, she recommended to senior officers of the Commerce Department
that steps be taken to increase the effectiveness and numerical strength
of the Division. The Department rejected many of her recommenda-
tions, she said.
Compliance Division inspectors have limited resources at airports
and seaports to detect the export of controlled high technology com-
modities. The chief of the facilitation branch told the subcommittee
staff that the number of inspectors?five or six?was insufficient.
Compliance Division inspectors are not authorized to search and
seize suspected cargo. They must rely on U.S. Customs service person-
nel. Similarly, unlike Customs agents and inspectors who have kindred
and formalized working relationships with Customs employees
throughout many parts of the world, Commerce inspectors have no
counterparts on any foreign soil.
Compliance Division Special Agents working in the investigations
branch are not required to have any formal training in investigative
techniques, law enforcement or the Export Administration Act.
The approximately eight professional members?the Special
Agents?of the investigations branch have varying degrees of law en-
forcement background. Some have extensive law enforcement back-
ground. That would number about three of them. Others have limited
background in law enforcement. One Special Agent's previous job ex-
perience was secretarial.
Most of the investigative work of the investigations branch is done
in the office. Agents are expected to conduct inquiry on the telephone
and by mail. The most frequent response to allegations of violations of
the Export Administration Act is to send the alleged violator a letter
of warning.
The subcommittee staff tried to find out the size of the branch's back-
log. That was not possible. The chief of the investigations branch
said he was not sure how large it was. The previous Director of the
Division said the backlog was possibly as large as 300 or 400. The new
acting director said he thought it was about 200 cases.
The staff inquiry concluded that a backlog of 200, 300 or 400 cases
with an investigative staff of 8 agents seemed to be inordinately
large. So many cases hanging over a relatively small investigative staff
could create pressure on Special Agents to close cases without sufficient
inouiry.
The intelligence branch also has a significant backlog of unfinished
business. The chief of the intelligence branch said he had a backlog of
about 600 cases. He said that by the end of the calendar year, he could
have a backlog of 1,000 cases.
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The agent said that for the most part, the majority of his investiga-
tive work was from the office, as he relied on long distance telephone
calls, cables to American Embassies overseas and assistance from the
USDA and Customs.
Senator NUNN. You mean to testify that based on your investigation,
the grain embargo that resulted after the Soviets invaded Afghanistan
had one person in the Commerce Department checking on violations?
Mr. ASSELIN. Yes, sir.
Senator 1I7NN. Was any other agency responsible for checking on
violations?
Mr. ASSELIN. I spoke with the Agriculture Department official who
was chairman of the high level interagency group which monitored
the agricultural exports during the grain embargo. He said the group?
was formed early in 1980 when it became apparent that the Commerce
Department was committing insufficient resources to assembling infor-
mation about compliance and investigating allegations of violations.
He said it was his understanding that "one or two" persons were
representing the Commerce Department in this task and that he saw
that as a "terribly limited" dedication of personnel. He said informa-
tion assembled by the high level interagency group reflected a much
broader base than the Commerce Department could supply. He said,
however, that "the hard core business of proving violations"?that is,
the actual investigation?was the responsibility of the Commerce
Department.
He said members of the interagency group he chaired talked openly
of the unsatisfactory commitment of resources by the Commerce De-
partment. He said he recalled that the Commerce Department sent
representatives to the interagency group meetings whose security clear-
ances were not high enough to enable them to be there. He said in
certain instances the Commerce Department representative had to
wait outside the room until more sensitive issues were discussed.
Senator NUNN. So you have a major decision by the President of the
United States on a major foreign policy issue involving the United
States and the Soviet Union, involving all our allies, involving the
credibility of our foreign policy and economic policy around the
world and you have the Commerce Department assigning one indi-
vidual for enforcement purposes.
Mr. ASSELIN. That's right.
Senator NUNN. And that individual didn't have security clearance
high enough to even get in the room when they were talking about
high level classified information.
Mr. ASSELIN. He had a secret clearance.
Senator NUNN. He was not cleared for top secret information?
Mr. AssEu/sr. No. In fact, the first person Compliance sent over was
a Deputy Director of the Division. They refused to even let him in
the room until he got a higher clearance.
Senator NUNN. Who is they, the other people?
Mr. ASSELIN. The people at this high level group. The minority staff
inquiry found that the inadequate response of the Compliance Divi-
sion in enforcing the grain embargo demonstrates the serious govern-
ment operations problem in which the most senior officers of the
executive branch, from the President on down shape policy and pro-
mulgate directives on the mistaken premise that the affected agencies
95-q?eia - -
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have the necessary means to turn the policy and directives into reality.
Senator NUNN. That really means that the grain embargo in effect
was a voluntary program and it was enforced virtually on the honor
system, was it not?
Mr. ASSELIN. To the extent it was enforced. I don't mean to suggest
there were not USDA and others monitoring, but they found no viola-
tions, no one was prosecuted, you had 100 percent compliance in a
sense with the grain embargo.
Senator NUNN. If they found a violation, if anybody found it, it
would have been up to the Commerce Department to investigate it and
they had one person to investigate the whole Nation.
Mr. ASSELIN. Yes; that is the point. And the Commerce Depart-
ment's commitment was so inadequate right from the very start that
that led USDA and others to take a more aggressive role because they
were unsatisfied with what Commerce was doing.
President Carter's grain embargo speech might have been received in
a different light had he also announced the Commerce Department
would assign one man--a GS-12 in the Compliance Division?to in-
vestigate alleged violations.
Senator NuNN. Did you find any evidence that the Agriculture De-
partment or the Commerce Department or anyone had informed Presi-
dent Carter that this was the degree of priority Commerce Department
was giving the grain embargo?
Mr. ASSELIN. I don't think Presidents are ever told things like that.
Senator NUNN. It's like President Reagan now, when he starts talk-
ing about the export of technical equipment that aids the Soviet Union,
nobody tells him that they have eight inspectors covering all the air-
ports and ports of the country in enforcing the Export Adminis-
tration Act; do they?
Mr. ASSELIN. This is precisely the point. The very existence of a
Compliance Division sounds as if somebody is there to do the work.
Senator NUNN. Would you say the Commerce Department is fair to
both Republican and Democratic Presidents, they treat them pretty
much alike?
Mr. ASSELIN. Yes; of course, this goes back about 30 years, that the
Compliance Division has been in operation. We have had Presidents of
both parties in that period.
Senator NcrNN. Of course, you had a great emphasis on it in the last
4 or 5 years. You had two Presidents who expected their major for&gn
policy decisions would be eminent; have you not?
Mr. ASSELIN. Yes; in fact, the grain embargo was a debated issue in
the last Presidential campaign. GAO found that the Soviet Union was
largely inconvenienced by the grain embargo. That would be about
the extent of it.
Senator NUNN. So really now today we do not have anyone in the
Government, any agents in the Government, who can tell us whether
the grain embargo was complied with by exporters or not.
Mr. ASSELIN. I think we had 100 percent compliance according to
the statistics.
Senator NUNN. But no one was exporting any grain they weren't
supposed to.
Mr. ASSELIN. According to the statistics, yes. The agent had 17 cases
he looked into. I think there may have been one or two letters of
warning.
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Perhaps the Commerce Department can fill us in on the extent of
the violations, but we found no criminal violations of the embargo.
A lack of close cooperation existed between the Compliance Division
and the U.S. Customs Service. The result was that effective enforce-
ment was reduced.
In Customs and in other offices of the executive branch?both in law
enforcement and in national security affairs?there is an unwillingness
to say anything critical in public about the effectiveness of the Com-
pliance Division. The reluctance to criticize the Compliance Division
exists amid a widespread sense throughout affected areas of Govern-
ment that the investigative capabilities of the Compliance Division
are inadequate.
The failure not to criticize the Commerce Department ignores the
fact that because of the inadequacies of the Compliance Division sig-
nificant amounts of dual-use technology that contribute to Soviet mili-
tary strength are being shipped to the Soviet bloc.
The minority staff should not be the only entity to make an evalua-
tion of the effectiveness of the Compliance Division. It was our hope
that other law enforcement organizations would come forward and
critique the Division in a constructive and professional manner. In this
pursuit, we were met with resistance. Working agents and senior offi-
cials alike would be candid, while insisting on their anonymity.
As I said, we asked the FBI to help us, they are the preeminent
law enforcement organization in the United States, their views would
be most helpful. The Bureau refused. they even insisted on the ques-
tion not being asked in open session. They said for the Justice De-
partment to answer it. So we asked the Justice Department, "Will you
evaluate these people for us?" "No; it's not for us." That is as recently
as last night, Senator. So there you are, we are stuck with it. We
welcome the opportunity. But the professionals in the field should be
asked to make a contribution, too.
Senator NuNN. So the attitude generally is what the President of
the United States doesn't know about the inability of his Commerce
Department to carry out his own policy doesn't hurt him, right?
What the Congress doesn't know doesn't hurt them.
Mr. ASSELIN. That is a fair surmise, yes, sir,
The subcommittee staff did obtain a:copy of a memorandum writ-
ten by a senior Customs Service officials who was critical of the Com-
pliance Division's procedures. The memorandum. written by William
Green, Deputy Assistant Commissioner in the Office of Border Opera-
tions, was critical of the Commerce Department on several points, in-
cluding alleged lack of trained personnel and an alle,ted counterpro-
ductive determination to involve itself in customs work overseas.
The many shortcomings of the Compliance Division as a law en-
forcement organization are apparent in the investigation of a syndi-
cate of businesses, known as the CTC group. owned, controlled, or
utilized by a West German named Werner J. Bruchhansen. Mr. Chair-
man, I have prepared a summary of the CTC ease which was drawn
from information provided the minority staff by Commerce Depart-
ment agents, Customs Service agents, the Department of Justice, and
other sources.
It is rather lengthy. I request that it be printed in the hearing
record as if read and that I be allowed to give a brief description of
what occurred in the CTC case.
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Senator NUNN. Without objection, it will be printed as if read.1
Mr. ASSELIN. From 1977 to 1980, the CTC network of companies
in the United States and Western Europe bought dual-use technology
under false pretenses in the United States and then exported it to the
Soviet Union and Warsaw Pact. As has been shown in yesterday's
testimony by Dr. Lara Baker, the CTC syndicate of companies was not
buying up high technology equipment at random. They had been given
a precise shopping list by the Soviets. As Dr. Baker pointed out, the
equipment the CTC syndicate bought was for the specific purpose of
building and equipping a semiconductor plant in the Soviet Union.
Testimony will show that as early as 1975 such a semiconductor plant
had been built in the U.S.S.R. and the Soviets were in the process of
equipping it with American-made machinery.
The existence of the CTC network of companies was first brought to
the attention of the authorities in 1977 and 1978 when two anonymous
letters were received at the American Consulate in Dusseldorf. The
State Department translated the letters into English and referred
them to the Compliance Division in Commerce. The letters were re-
ceived by the Compliance Division in 1978 and insufficient effort was
made to investigate the allegations.
After receipt of the letters, two U.S. producers of dual-use tech-
nology reported to the Commerce Department that they were suspici-
ous of the CTC companies. Insufficient inquiry was conducted in re-
sponse to the first letter.
A Commerce Department special agent did interview CTC's prin-
cipal executive in Los Angeles, a naturalized Russian-born American
citizen named Anatoli Maluta, also known as Tony Mainta and Tony
Metz. Maluta told the special agent from Compliance that he did not
know anything about export controls, or the need to have validated
export licenses to ship certain controlled commodities. But, Maluta
said, because of the agent's interest, he was canceling the suspicious
order.
No further investigation of the CTC network was conducted until
a second letter arrived at the Compliance Division, this time from
another high-technology producer who also voiced suspicions about
the CTC companies.
'Early in 1980, a second Compliance Division agent, Robert Rice,
was assigned to the case and conducted the kind of comprehensive
preliminary inquiry that was called for. Rice, the most senior agent in
the Division, came upon considerable information indicating wide-
spread violations of export controls.
He presented the evidence to the Office of the U.S. attorney in Los
Angeles in March 1980. A major inquiry was begun by the U.S. attor-
ney's office, under the direction of Assistant U.S. Attorney Theodore
W. Wu and the U.S. Customs Service. Customs ultimately assigned
about 15 agents to the case in California, Texas, New 'York, and
Western Europe.
Compliance Division Special Agent Rice was the only Commerce
Department representative assigned to the case on a regular basis.
Indictments were brought against Bruchhausen and Dietmar
Ulrichshofer, both of whom remained in Europe and are fugitives
I See p. 390 for the summary prepared by Fred Asselin on the CTC case.
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from American justice, and two Los Angeles accomplices?Maluta
and Sabina Dorn Tittel. Maluta and Tittel both were convicted.
The CTC case demonstrated technology diversions of about $10
million and is considered by law enforcement and national security
specialists to be one of the most important export control cases ever
brought to trial.
The inquiry showed that:
First, the Compliance Division did not move quickly to establish
the value of the anonymous letters.
Second, the Compliance Division did not connect the anonymous
letters to the allegations that were reported by two U.S.
manufacturers.
Third, when Compliance Division Agent Rice turned over the
results of his inquiry to Assistant U.S. Attorney Wu in Los Angeles,
it was apparent to Wu that considerable expenditures of resources
would be needed. Trained investigators would be required to conduct
interviews, evaluate shipping documents, surveil suspected violators,
and carry out other aspects of a traditional law enforcement full-scale,
full field investigation.
Commerce's contribution to that effort was Agent Rice, a competent
investigator in whom Wu had confidence. But he needed more than
one agent. He enlisted the assistance of the Customs Service. Later
assistance was provided by trained criminal investigators from the
IRS.
Senator Numv. So the individual Commerce had working on this
was according to all the opinions, a competent, good investigator?
ASSELTN. Yes; according to all reports he is one of their best,
if not the best.
Senator Nuisrx. What is his name?
Mr. ASSELIN. Robert Rice.
Fourth, at an early point in the inquiry it was necessary to seize
shipments. Commerce had neither the authority nor the manpower
to seize shinments, Customs did it.
Fifth, at another point in the inquiry it was necessary to search the
premises of CTC companies and the quarters of certain of its em-
ployees in the United States and Europe. The Compliance Division
had insufficient resources to implement simultaneous search warrants.
The Compliance Division had no law enforcement capabilities in
Western Europe to work with German customs in coordinating the
searches abroad. Customs executed the warrants in the United States
and, through its agreements with West German customs, arranged for
the execution of the warrants in Germany.
Sixth, to substitute sand for one of OTC's shipments to Moscow, a
sizable expenditure of funds was needed. The Compliance Division
balked at the shipment substitution strategy and refused to pay the
cost of recrating the sand and airfreight. Customs officials approved of
the substitution and agreed to pay the cost.
Seventh, extensive overseas coordination, in addition to the search
warrants was called for with West German Customs and other
foreign Officers. Commerce Department's Compliance Division had no
overseas law enforcement contacts. U.S. Customs' contacts were used.
Eighth, extensive surveillance was necessary. Armed Customs
agents and armed Internal Revenue Service criminal investigators
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and an unarmed Compliance Division Special Agent Rice provided
it. Two suspects under surveillance had firearms in the back seat of
their car. The firearms were not used. But it was an important law
enforcement advantage for the agents on surveillance to be armed
as well.
Ninth, experienced supervisors with law enforcement background
and training were needed to direct the inquiry in the field. The Office
of the U.S. Attorney for the Central District of California, working
with supervisorial personnel in the Customs Service, provided the
needed direction. Contact with supervisorial personnel in the Com-
pliance Division' who remained in Washington, was made on the
telephone and the persons who worked on the case in California did
not consider such communication to be satisfactory.
Tenth, When the appropriate time came to apprehend Anatoli
Maluta and Sabina Dorn Tittle, IRS agents made the arrests. Customs
agents, like the trained IRS criminal investigators, are authorized to
make arrests. Even had the Compliance Division dispatched sufficient
numbers of agents to assist in the inquiry, they could not have
arrested the suspects.
The CTC case does not qualify as a Commerce Department investi-
gation. Customs Service agents did most of the work; and executive
supervision was provided by Assistant U.S. Attorney Theodore Wu
and Kenneth Ingleby, the Chief of the Customs Service Investiga-
tions Office in San Pedro.
In participating in the inquiry on a full-time basis and in conduct-
ing himself in a competent, professional manner, Compliance Division
Special Agent Robert Rice was handicapped in not being able to do
the things Customs agents can do routinely?search and seize suspi-
cious freight, make arrests, and carry a weapon.
Capable and resourceful as he was, Rice cannot be considered to
have been essential to the CTC inquiry. It could have succeeded with-
out him. It could never have succeeded without the Customs Service.
Customs contributed necessary manpower and fundamental law
enforcement tools. Commerce's contribution was Robert Rice.
After the CTC case was brought to Wu, the Compliance Division
played no essential role in the inquiry. That recognition leads to the
minority staff's final finding, which is that the Commerce Department
should not have the enforcement function under the Export Adminis-
tration Act.
It is the finding of the minority staff that the national security im-
plications of enforcement of the Export Administraticn Act are too
important to be entrusted any longer to the Commerce Department as
presently organized.
For three decades the enforcement function has resided in the Com-
merce Department?through administrations controlled by Democrats
and Republicans.
Three decades is sufficient time to allow reasonably capable officials
to perfect the most challenging task. But serious procedural and oper-
ational problems still exist in the Compliance Division. We find the
conclusion inescapable, therefore, that effective enforcement of the
Export Administration Act is beyond the institutional capabilities of
the Commerce Department. Moreover, from a Government operations
and executive organizational standpoint, the mere existence of the
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Compliance Division is an impediment to efficient and effective en-
forcement cf the act.
[At this point Senator Cohen entered the hearing room.]
Mr. ASSELIN. Understaffed, flagrantly short of resources, the Divi-
sion cannot do the job effectively; but, by its presence, prevents other
components of Government from taking on the task.
It is our view that two solutions?one short term, one long range?
are available.
Immediate relief could be found if the Compliance Division were
abolished and all its functions placed in Customs. This action would
insure that competent, professional agents, trained in formal, tradi-
tional law enforcement procedures, would be assigned to investigate
alleged violations of the EAA ; that they would work under the super-
vision of executives who also would have formal, traditional law en-
forcement backgrounds; and, perhaps most important of all, the entire
function would exist in a Cabinet-level Department with lcng-time
experience in and commitment to traditional law enforcement. It is the
staff's recommendation that subcommittee members consider that con-
cept as an immediate solution as these hearings proceed.
In addition, in terms of longer range considerations, it is our recom-
mendation that subcommittee members consider the proposal put
forward by Senator Garn to create an independent Office of Strategic
Trade that, in summary, would absorb the Commerce Department's
Office of Export Administration and its components.
Mr. Chairman, that concludes my portion of the staff presentation.
I have a series of 27 documents I request be received as exhibits. They
start with exhibit 2. I request exhibit 10 be printed in the record.
Senator NuNN. Without objection.
[The documents referred to were marked "Exhibits 2 through 28,"
for reference, and may be found in the files of the subcommittee. Ex-
hibit 10, as requested, follows:]
EXHIBIT 10
DEPARTMENT OF THE TREASURY,
U.S. CUSTOMS SERVICE,
October 30, 1980.
MEMORANDUM
To: Robert L. Keuch. Associate Deputy Attorney General, Chairman, Inter'
Agency Working Group on Export Control.
From: Deputy Assistant Commissioner, Office of Border Operations.
Subject: Response to Request for Assessment of the Inter-Agency Working Group
on Export Control (WGCE) Subcommittees' Reports.
In your memorandum dated October 10, 1980. you requested the various WGCE
members to comment on the four subcommittee reports which were attached.
Given below are my comments, together with some general remarks on particular
export control matters which you may wish to consider.
Concerning the subcommittee reports. I have no comments concerning the
Intelligence Coordination and Prosecutive subcommittee's reports; except to
say that I believe they fairly portray the present situation. I am in agreement
with the conclusion and recommendations. The Administrative and Regulatory
Procedures subcommittee report also. I believe, fairly portrays the current situ-
ation and I support their recommendations. I would, however, like to add two
further recommendations. I recommend that a review of the present Arms
Export Control Act of 1976 be made with the view in mind of recommending an
increase in the penalty provisions and secondly, an addition to the Act empow-
ering Customs officers to make warrantless arrests for export violations.
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The present statute provides for a maximum penalty of $100,000 and/or 2 years'
imprisonment. Since most of the more sophisticated investigations involve viola-
tors who are major corporations, agents of unfriendly foreign powers, inter-
national munitions brokers, or members of revolutionary/terrorist groups, the
maximum penalty is far too lenient to match the possible severity of the crime.
For example, a member of a terrorist group who exports explosives to his com-
patriots is only subject to 2 years' imprisonment, even though the explosive could
cause loss of life and bring about dire political consequences.
Addressing the question of warrantless arrests for export violations, at the
present time Customs officers do not have Federal warrantless arrest authority
for export violations but must depend on the various state citizens arrest statutes.
Fortunately, there is judicial precedence for these warrantless arrests (citizen
arrests) for export violations. However, if the authority existed by statute, it
would eliminate suppression hearings and result in a savings of time in connec-
tion with prosecutions involving warrantless arrests by Customs agents.
It should be noted that both of the above points were discussed in the Ad Hoc
(0'Mally) Committee final report and it was recommended that appropriate
lobbying for legislative action should take place.
Concerning the final report prepared by the Law Enforcement Coordination
Subcommittee, I again find that generally the report fairly portrays the existing
situation. There are, however, several observations I would like to make concern-
ing the current enforcement program of the Export Administration Act of 1979.
Throughout the report reference is made to the lack of present-day coordina-
tion and the need to improve same. What is particularly significant is Com-
merce's (CEA/CD) continued action to impede cooperation in investigations
even while it states that it wishes to fully participate in all cooperative ventures.
Commerce continues to take unilateral and uncoordinated action concerning
either joint or Customs initiated investigations by requesting foreign inquiries
through various U.S. embassies and consulates without consulting with either
Customs Attaches or Headquarters. Such action is causing serious problems.
These problems are not limited to hampering instant investigations, but also the
compromising of U.S. Customs and foreign government sources, damaging the
previously close and long relationships between U.S. Customs and their foreign
counterparts, and directly impacting on national security.
These unilateral actions taken by Commerce are not limited to investigations
initiated solely by Commerce and being worked only by them; but more impor-
tantly, include investigations initiated by Customs and now being either jointly
worked by both agencies, or by Customs alone. What is particularly significant
is that these unilateral actions have taken place while the Law Enforcement
Coordination Subcommittee deliberated and even after the final report was pre-
pared. Attached as an appendix are representative examples of Commerce's
action.
While Customs acknowledges that, under the Export Administration Act of
1979, OEN/CD is the agency primarily responsible for administration and en-
forcement of the Act, 0EA/CD is not at this time adequately staffed to enforce
the Act. CEA/CD has stated that it is planning to establish foreign offices, to-
gether with adequate staffs, and assume those duties related to export control
enforcement which the EDO's and Customs Attaches now perform. Once again,
OEA/CD is not adequately staffed to assume these duties and does not have ex-
perience concerning the conduct of investigations abroad. OBA/CD is also at a
distinct disadvantage in that they have no foreign counterparts with whom they
can relate and/or work. They will not have access to Customs mutual assistance
agreements on which they can rely to gain access to investigative data and/or
other desirable information. nor is it anticipated they will be able to establish
such agreements. The U.S. Customs Service is in a much better position to con-
duct export control investigations and inquiries abroad because we do have for-
eign counterparts with whom we work and relate: we do have formal and in-
formal agreements with our foreign counterparts; we have established foreign
offices with a staff of experienced investigators and have conducted export con-
trol investigations and inquiries abroad since at least before 1900.
Finally. Customs has maintained a neutral position over the past 2 years on
the question of who should assume primacy in the export control enforcement
field. It was Customs position that should they state they could do the job better
than another agency, the deliberations between the various agencies may de-
generate. However, neither Customs nor Treasury ever stated they would be
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unwilling to assume additional duties in the export control enforcement area.
In fact, Deputy Secretary of Treasury Carswell, in a memorandum to Mr.
Brzezinski on February 8, 1980, in response to the Ad Hoc NSC Technology
Transfer Group, states ". . . Ideally, a single agency should have all the respon-
sibility and resources for administering the Export Administration Act, includ-
ing strong enforcement of its criminal provisions. Under current law, this would
be the Commerce Department. If, however, the United States desires to intensify
and improve criminal enforcement of this statute, then it must look to an agency
with worldwide posts and substantial criminal investigative resources already
established. Customs has these capabilities. It has offices with investigators in
eight major foreign cities; it has experience in performing this function for the
State Department under the Arms Export Control Act; and it has a widely
dispersed group of agents in the United States For these reasons, transferring
the criminal enforcement functions under the Act to Customs is the most realistic
alternative if we want to enhance performance in this area, at least as it relates
to high technology exports. . . ."
Before any final recommendation is submitted to policy bodies, such as the
NSO, concerning who should do what in the field of export control enforcement,
I would like to offer several points for thought:
1. Is Commerce (OEA/CD) really equipped today or will they be in the
future if they receive their requested additional slots, to conduct sophisticated
investigations involving critical technology transfer? Are their investigators
trained and as experienced as Customs special agents? Perhaps more important,
how long will it take to train them to bring them up to the level that now exists
at Customs?
2. Does Commerce contemplate asking for legislative authority to give them
powers to arrest, to execute search warrants, to make seizures, and to conduct
Customs searches? As you are aware, they do not have such powers now and
must rely on Customs.
3. Does Commerce anticipate opening offices in most major cities, which Cus-
toms has presently established, so they can quickly respond to matters ccncerning
export control?
4. Would it not be wiser and would it not be more efficient for government
operation, to transfer the enforcement functions of the Export Control Act of
1979 solely to Customs, with the licensing and administrative provision remain-
ing with Commerce?
This is not a new concept to Customs as it already does the enforcement duties
for the Arms Export Control Act of 1976. State Department (Office of Munitions
Control) administers the Act.
The only answer is a single-agency concept for all export control enforce-
ment. While not faulting Commerce in its attempt to increase its enforcement
posture, it should be noted that Customs already has the necessary authority,
has a foreign presence that has been in place for at least 80 years, has over 60
domestic offices, has over 500 experienced criminal investigators, and has had
experience in export control matters since early in the history of our country.
Concerning additional resources, it has been stated that if Customs should
assume the entire export control enforcement program it would need approxi-
mately 25 additional slots. While this figure may change due to exigencies such
as workload, source development, and foreign liaison, it should be noted that any
new personnel gained because of the resource increase would not be initially
assigned sophisticated critical technology cases, but would be assigned to experi-
enced investigators. The new agents would take up the slack caused in lesser
areas of the Customs enforcement program.
WILLIAM GREEN.
Senator Nuisrisr. Does Senator Garn's bill, the Office of Strategic
Trade, set up a separate department for that or is it under an existing
department?
Mr. ASSELIN. As I understand it, sir, it would be comparable to
Office of Special Trade Representative. It would be independent. It
would not operate within an agency.
Senator NUNN. So what you are saying is, the Commerce Depart-
ment as the agency to carry out the enforcement of the Export Admin-
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istration Act has proved itself inadequate for the task over a long
period of time?
Mr. ASSELIN. Yes, sir. As will become apparent when we hear from
Commerce and others, they are now opening an office in Los Angeles
and an office in San Francisco, each of them to have six slots with
supervisors. So they are adding 12 or 13 personnel. That will help.
Tile same people who gave us the Compliance Di vision as presently
organized are the same people who are giving us the two offices in Los
Angeles and San Francisco. I think that is a cosmetic attempt to look
as if they are enlarging and expanding their capability when it is still
inadequate.
Senator NuNN. If Customs took this on, would they have to have a
whole new group of people or could the same people in Customs that
are working now with some organization also have this responsibility?
Mr. ASSELIN. According to the Green memorandum of 1980, that we
read into the record this morning, Customs would have to add 25
persons. They will have to add more than that. However, the capa-
bility is there. That is the point, the law enforcement capability. How-
ever, they have overseas people, they have trained investigators. 'rhe
cost will never be the same, will never equal the amount Commerce
SenatorNuNic. In other words, if Commerce were to do this job
right, they would have to add hundreds of people, they would have
to add administrative staff that knew about law enforcement, they
would have to have top people in the Commerce Department who were
trained for law enforcement which is not the case now. You are simply
saying the Customs agents and Customs Service can do it much more
effectively and sufficiently and utilize what they already have out
there now?
Mr. ASSELIN. Yes, sir, everywhere you have to put this enlarged
Commerce operation, Customs is already there. You would have to
put Commerce people overseas.
Senator NUNN. So Commerce would have to duplicate Customs
to?
Mr. ASSELIN. Almost in every instance. Where there is a Customs
man now, you would have to have Commerce. Why do you have two
agencies in the field even if they were doing a good job, when one
agency would suffice?
Senator NuNN. You are saying there are some good people in the
Commerce and Compliance Division that could be shifted over?
Mr. ASSELIN. Yes; that is certainly true and Rice is certainly one of
them. He would be a good contribution to customs.
Senator NuNN. Senator Cohen; we just had a complete staff state-
ment which is very explicit on the problems in the Commerce Depart-
ment in enforcing this act with a recommendation from the minority
staff the Compliance Division be abolished and put in the Customs
Service. Do you have any questions or observations?
Senator COHEN. What are the total number of inspectors we have
available now?
Mr. ASSELIN. In Commerce?
Senator COHEN, In Commerce.
Mr. ASSELIN. Five.
Senator COHEN. Five inspectors.
Senator NuNN. I think you ought to make a distinction now be-
cause there are three separate parts of the Compliance Division.
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Mr. ASSELIN. The Compliance Division has three entities in it. It has
an Inspections Branch which has five or six. It has an Investigations
Branch which has 8 to 11 persons and it has an Intelligence Branch
which seems to have 3 to 5. That is the extent of the professional en-
forcement capability of the Commerce Department.
Senator NUNN. Five or six of all their inspectors are in New York.
Mr. ASSELIN. At the JFK airport.
Senator Ntri.mr. The others they don't visit other ports?
Senator COHEN. How many exit points do we have in the United
States?
Mr. ASSELIN. I don't know, Senator. It is more than they could ever
handle with five.
Senator Cousiv. I understand. I am trying to draw it in its
dramatic?
Mr. ASSELIN. I don't know the answer to that.
Mr. FRY. The customs started a program called Exodus to enforce
violations of the Export Administration Act. It is my understanding
they have a minimum of 7 to 10 special agents at the 10 major ports
throughout the United States assigned to this type of operation. I am
not certain as to the number of inspectors but the inspectors are per-
manently located at these 10 major ports.
Senator COHEN. How many international airports, for example, do
we have?
Mr. ASSELIN. I don't know. I do know these figures: They say 50
percent of the traffic goes out of JFK, so it is not surprising they put
their principal focus at JFK. But they cover no other airport.
Senator NuNN. You have more international airports now than you
did. They are expanding. A lot of international flights go out of At-
lanta, out of Boston, they are out of Dulles, they are out of San Fran-
cisco, Los Angeles, and Chicago.
Senator Con-Eisr. Bangor.
Senator N-crmsr. Bangor is next on the list.
Mr. ASSELIN. There is a paragraph I deleted in shortening my
statement, if I may read it. The Acting Director of the Compliance
Division acknowledged to us there were problems in the operation of
the Division. He said the problems could be corrected but that such a
process takes time. Elaborating on this point, he said the Government
has slowly changed. He said the Compliance Division was organized
more than 30 years ago at the time when the challenge of export con-
trols is not as great as it is today. But he said as export controls became
more of an urgent problem to the United States in recent years, the
Compliance Division tended to remain about the same.
We asked the Acting Director if the Nation could afford to wait
while the Commerce Department and its Compliance Division adjusted
to the new challenges in export controls. He had no answer to that in-
quiry but he did say it was a valid question. So it is true, the problem
has risen and gotten much bigger but Commerce has not risen with the
problem.
Senator NtmTN. Senator Cohen, one other interesting thing I found
astounding when I first heard about it several months ago and I kept
asking the staff to check on it and check on it because I couldn't believe
it. Staff testified today that the Commerce Department, which was re-
sponsible for investigation of violations of President Carter's grain
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embargo, had one person working on that and it turns out there was
100 percent compliance with the grain embargo according to statistics.
If we could get that one guy over there in the Internal Revenue
Service, we could balance the budget.
Senator ConEN. Well, he may have had the same inflated reporting
system we have as far as projecting what the inflation is, I believe. Let
me just ask one other question since I don't know whether the staff
covered this in your presentation, are there any restrictions on what
can be labeled as protected under diplomatic pouch?
Mr. ASSELIN. Senator, we didn't get into that. I don't know the an-
swer to that.
Senator COHEN. It seems to me I have been seeing some reports
about how easy items can be shipped under the protection of diplo-
matic pouch. I just wonder if you had any information on that?
Mr. AssEinic. I don't know the answer, sir.
Senator COHEN. That is all.
Senator NUNN. Mr. Fry?
Mr. FRY. Mr. Chairman, my name is Glenn Fry, staff investigator
for the minority. I would like to summarize my statement if I could
but I would request the entire statement be entered into the hearing
record as if read.'
Senator NUNN. Without objection.
Mr. FRY. The Commerce Department's ineffective response to the
challenge of technology transfer is an illustrative example of the fail-
ure of the Government, in general, to organize itself effectively to
remedy this national security problem.
We have learned of the shortcomings in the Commerce Department's
efforts to investigate violations of the Export Administration Act
thereby causing a serious deficiency in its abiity to enforce the statute
and its regulations. The law enforcement effort, although critical, is
only a part of the overall effort to prevent the harmful flow of U.S.
technology. Even if the law enforcement operation were professionally
administered with sufficient resources, its effectiveness would continue
to suffer due in part to deficiencies within other executive branch
agencies.
The Commerce Department is mandated to administer and enforce
the Export Administration Act; however, matters concerning this act
which involve national security interests, require the consultation of
the Department of Defense, and the intelligence community as well as
Commerce. Ineffective control of the transfer of U.S. technology and
the enforcement of export laws will prevail if the Department of De-
fense and the intelligence community continue to provide less than
their best efforts to support this national security mission. Despite
several previous congressional investigations and hearings conducted
on these matters, dating back to 1974, the responsible executive branch
agencies continue to have difficulty in organizing an effective
operation.
Technology transfer can occur through the illegal export of con-
trolled or embargoed commodities; however, it can also occur with
See p. 426 for the prepared statement of Glenn W. Fry.
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equal damage, because of inadequate control and protection of critical
information and through ineffective handling of legiLimate export
licensing cases. The minority staff has made preliminary findings that
the technology transfer programs of the Department of Defense and
the Intelligence Community contain basic deficiencies which impair the
Government's overall effort to control the flow of critical American
technology.
The following are areas within the Defense Department's program
that demand attention and ultimate resolution if the Government
intends to control the flow of U.S. technology:
First, the Freedom of Information Act is a legal tactic available
to U.S. citizens, foreigners, and even Soviet surrogates to obtain
critical dual-use technology. Dual-use technology, which can be used
commercially and militarily, is not excluded from Freedom of In-
formation Act requests. There is no protection or means to control the
harmful transfer of technology that does not fall within the exclusions
prescribed by the Freedom of Information Act.
Second, there have been instances where classified information has
been prematurely declassified in accordance with an automatic declas-
sification schedule. In other instances, critical technologies which
have military significance are never classified. In either case, the end
result is that such information, although not readily distributed, be-
comes available to anyone.
The Department of Defense's Office of Research and Engineering
and International Security Policy are responsible for the review of
export licensing requests for national security interests. Presently,
Defense reviews predominantly those export cases involving the
Soviet Union or Warsaw Pact nations. There is very little review of
free world license requests except for cases involving very advanced
computer technology. The program presently administered within
the Department of Defense suffers from several fundamental
deficiencies.
First, on August 26, 1977, the Secretary of Defense issued an
interim policy statement for the export control of U.S. technology.
Today in 1982, there has yet to be any followup to this interim
policy. This is representative of the weak overall priority afforded
the technology transfer issue throughout Government. Sources within
Defense has indicated that there is ambiguity regarding which DOD
office has overall accountability for technology transfer decisions.
Second, the Office of Defense Research and Engineering does not
have an adequate number of permanent staff specialists to effectively
conduct its technology transfer mission. Temporary personnel have
been assigned to this office; however, there is an annual turnover.
Consequently, much valuable time and resources are continually used
to train and familiarize new personnel rather than attend to its
primary responsibilities.
Third, military and Department of Defense research laboratories
who are tasked by Defense Research and Engineering to review licens-
ing cases lack a charter delineating export control or techifology
transfer responsibilities. There is also no specific funding for this type
of operation. Consequently, technology transfer issues are not a prior-
ity and do not receive appropriate attention.
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Fourth, there is no adequate data base of information available
to all participants in the technology transfer program within our
Government. This deficiency is analogous to prosecutors working with-
out the benefit of a legal library. There has to be a centralized reposi-
tory of information that maintain available data relevant to the deci-
sions to grant exports.
Fifth, the Department of Defense does not review a sufficient num-
ber of free world export license cases. Exports to free world nations
many times are improperly or illegally reexported or diverted to East
bloc nations. This has been demonstrated by recent export violations
involving nations such as Switzerland and West Germany that were
used as conduits for the illegal reexport of high technology commod-
ities to the Soviet Union. The United States trades with many nations
such as India and Pakistan who have open trade policies with the
Soviet Union. To blindly export critical technologies to nations such
as those without the benefit of the DOD's review could run the risk
of having U.S. technologies end up in the Soviet Union.
Sixth, Defense Research and Engineering has not devoted sufficient
resources to the program which reviews foreign technical visitor pro-
grams. Defense Research and Engineering is responsible for determin-
ing militarily critical technology that requires export control. This
effort is being done in concert with U.S. industry. In this light, De-
fense Research and Engineering has devoted tremendous resources to
the development and understanding of new dual-use technologies;
however, there is not an adequate operation within D.R. & E. to assess
what areas visitors are concerned with and what technology is ob-
tained by these visitors. Therefore, due to this inadequate oversight,
Defense Research and Engineering has little control over the potential
loss of U.S. technology. Consequently, there is no way to assess what
critical technologies have been obtained by our adversaries thereby
making it virtually impossible for the intelligence community to
determine how the loss impacts on our national security.
The effective control of critical dual-use technology is largely
dependent on the proper gathering, dissemination, analysis, and use of
intelligence. It is the view of the minority staff that the Soviets, in
many cascs, are precise about what technology and equipment they
want from the United States. It follows then, that if the United States
can determine what the Soviets desire, where they are deficient, what
they need and what direction their technological efforts are aimed, we
are in an improved position to prevent them from obtaining our tech-
nology which may meet their needs.
At the very least the United States could create delays in the Soviets'
efforts which will impede their progress and maintain our lead time in
critical areas of technology. Testimony will be given which describes
the Soviets as having an enormous, systematic and organized effort to
obtain United States and other Western technology. The United
States, however, does not have a mechanism equal to the Soviets' task.
There has been no overall coordinated, systematic and organized pro-
gram in the United States to effectively prevent loss of our technology
to the Soviets.
Intelligence is the key to anticipating the technology on the Soviets'
"shopping list." U.S. law enforcement authorities can mount effective
enforcement strategy directed toward illegal exports when they are
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apprised of what the Soviets are looking for. Department of Defense
and Commerce representatives who review export licensing cases would
be in a better position to render proper decisions based on national
security interests if they had the most available intelligence. But, after
reviewing information obtained from law enforcement and technology
specialists in the executive branch, the minority staff has reached the
preliminary finding that the U.S. intelligence effort regarding export
controls is insufficient. Coordination among affected agencies is inade-
quate. Commitment of needed resources is lacking. The intelligence
community is not organized to use information to block prohibited
diversions.
Specifically, the minority staff found the following deficiencies
within the intelligence operations of the technology transfer control
effort:
First, the Export Administration Act mandated Commerce to deter-
mine the foreign availability of critical dual-use technologies. The
foreign availability of technologies is an important ingredient in the
decisionmaking process for granting or denying export licenses. How-
ever, authorities within the executive branch assert that current for-
eign availability determinations are not adequate.
Second, the intelligence community has not been utilized sufficiently
by either Commerce or the Department of Defense. Sources within the
intelligence community state that they have virtually no communica-
tion with Commerce's Compliance Division regarding ongoing inves-
tigations of export violations. One representative of the intelligence
community indicated that there is little feedback from Commerce
regarding the intelligence information it provides. The information is
submitted to Commerce's Office of Intelligence Operations and it is not
known whether it is disseminated to the Compliance Division or other
divisions as well. Conversely, the Compliance Division rarely seeks the
expertise of the intelligence community regarding investigations.
Moreover, once the intelligence apparatus is strengthened, then
methods should be devised that enable sensitive information to be sani-
tized and passed on to law enforcement personnel in a form that will
assist them. Several experienced law enforcement investigators pointed
out that frequently intelligence on technology transfers has such a
high classification that many agents working export controls cases
cannot set it.
Third, Defense Research and Engineering tasks the Defense In-
telligence Agency to conduct end user investigations. Essentially, De-
fense Intelligence Agency is to determine whether the end user of an
export is not a national security risk. Defense Intelligence Agency per-
forms this task as a support function to Defense Research and Engi-
neering?its license review procedures. Historically, DIA has been
utilized infrequently in this capacity. Within the last 18 months DIA
has been tasked more frequently; however, it does not have sufficient
resources to conduct end user determinations that are necessary.
Fourth, there is no mechanism or organized program which con-
ducts followup investigations of foreign exports or reexports of U.S.
technology. In fact, there is no adequate system to accurately deter-
mine what has been exported, reexported, where it is used, and how
it is used. There is no way to accurately determine the adverse impact
to the United States of that dual use technology that has been obtained
by our adversaries.
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Officials working in the technology field are troubled by the fact
that our Government has difficulty determining a current assessment
of the state-of-the-art of American technology. Given such a fact, the
difficulty in assessing what technology has been lost and its impact
on U.S. national security seems almost insolvable given the current
resources and policy.
In summary, the U.S. Government, at present, has no high level in-
teragency task force or entity comprised of senior Cabinet-level of-
ficials addressing the problem of export control and technology
transfer. All past and current efforts along this line have been done
by lower echelon Government officials who can merely make recom-
mendations rather than needed changes.
Senator NUNN. Thank you very much, Mr. Fry.
I want to thank you and Mr. Asselin for not only your testimony
this morning but your investigative efforts over a long period of time.
You have both done an excellent job. We appreciate it very much.
Senator Cohen, do you have any questions?
Senator COHEN. Just one question.
Has anything at all been done since we held the hearings on Sen-
ator Garn's bill on September 24, and 25, 1980? It seems to me, Mr.
Chairman, we are going over the same issues time and time again for
the past 3 or 4 years. We keep talking about it, but nobody does any-
thing about it.
Mr. FRY. Senator, that was our finding, that very little has been
done. They have made some efforts. The interim policy, to the credit of
theD i
epartmentof Defense, is the only policy n this area of export
control technology transfer put out by any executive agency.
However, it is still an interim policy.
Senator COHEN. Do you come to the conclusion that we ought to
create a separate office of strategic trade, an independent power such
as the Federal Reserve Board?
Mr. FRY. I think it is a viable alternative.
Senator COTTEN. Because the essence of that is, as far as Senator
Garn is concerned, that there is a tremendous bias within Commerce
to promote exports and sales. The State Department has its own diplo-
matic or political biases or preferences that it might seek to achieve
and then you have the responsibility of the Defense Department.
So, we have three major departments each having perhaps a differ-
ent objective. If you left it up to DOD, they may say don't export
anything.
If you left it up to the State Department to have the final decision,
they would say it depends on what we are trying to achieve in a period
of detente or no detente.
If you leave it up to the Commerce Department, then you would
promote the sales in order to invigorate our own domestic industry.
It seems to me that our whole process is caught in a crossfire between
these three separate departments with Congress sort of on the side-
lines having some interest, but only peripheral at best, in terms of be-
ing able to do anything about it. So, I would think, based on what I
have heard, Senator Nunn, that something ought to be done in terms
of consolidating the responsibility of the jurisdiction in one office that
can weigh the conflicting pressures that are inherent in our system.
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Frankly, this whole issue of dual use goes back to the Kama River
Plant, in terms of whether or not that sale should have been author-
ized. I am sure you can certify that practically any item that is subject
to classification under this act you can be excepted based upon foreign
availability. Given these problems, I would suggest that some initia-
tive ought to be taken to consolidate responsibilities into one office and
perhaps really enhance and increase the enforcement capability of
that office.
Senator NUNN. We need to look at the licensing function in a dif-
ferent vein from the enforcement. I think there is real merit in creat-
ing a strategic trade office and Mr. Asselin had the recommendation
that the Gain bill be considered. Is that what you recommended?
Mr. ASSELIN. We recommended that members of the subcommittee
certainly consider that. As a long-term solution, it is the best thing
we can think of.
Senator NuNN. But you also are saying, from the way I read your
conclusions, that we may very well want one group to do the licensing
and another group to do the enforcement. If Customs already is out
there in every port of exit in the United States, the question must be
asked of whether it makes sense to have anybody else out there en-
forcinfft' the law. Enforcement and licensing are two different func-
tions. Under the Arms Export Control Act, the State Department
does the licensing, Customs does the enforcing. It seems to me there
is a real case to be made for the approach like Senator Gam has, in
the case of the licensing and have the Customs agency do the enforce-
ment.
Does that make sense?
Mr. ASSELIN. Yes, sir. It was our recommendation that for the short
term, the problem is serious and requires immediate relief. It will take
some time if the Congress in its wisdom Wants to create the Office of
Strategic Trade.
In the short term, the problem is serious enough. That is why we
recommended for immediate relief that the Compliance Division be
abolished and the Customs have the enforcement function very similar
to what they have in the Arms Export Control Act.
Senator NUNN. But until something like a Garn bill passed, you
would recommend that the Commerce Department still do the licens-
ing? Somebody has got to do the licensing?
Mr. ASSELIN. Yes; that is the point. That will leave the licensing
in the Commerce for the time being.
Senator NUNN. Temporarily unless something like the Gam bill
passes?
Mr. ASSELIN. Yes; I don't think Customs wants the licensing func-
tion.
Senator NUNN. You are also implying congressional wisdom takes
time; right?
MT. ASSELIN. Yes, sir.
Senator NUNN. What is the day of the Gam hearings?
Senator COHEN. The days of the Garn hearings were September 24
and 25, 1980.
Mr. ASSELIN. I spoke with a member of Senator Garn's staff who
said the Senator was planning to reintroduce the bill sometime either
95-999 n _ P9 _ p
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just before our hearings or sometime after them. I don't know if he
has done it yet.
Senator Nurric. The problem is always whether you need to create
a new agency and the proliferation of agencies, you run into that
argument over and over again. The question is whether there is any
other logical thing to do.
Senator COHEN. The other issue you raised during those hearings,
as I recall, is that if we don't have a fundamental restructuring of the
classification system, a definition of exactly what we are about, it
doesn't make any difference if we create a new office. With all of the
same conflicting standards and rules and exceptions, you really have
not accomplished anything other than consolidating the mess all in
one place.
It seems to me we have got not only to have a new structure institu-
tionally but we have got to define classification.
Senator Nunn, you mentioned this yesterday how we classify items,
how we determine which ones will in fact be put on a list. Should
we have the Cocom list, for which historically the United States
has requested more than 50 percent, closer to 60 percent of all the
exceptions for Cocom.
So we can hardly expect our European allies to be following a
hard line and not exporting items of national security importance
to the Soviet Union and Warsaw Pact countries.
The other issue is, should we include all Warsaw Pact countries if
we are going to prohibit the sale and distribution to the Soviet
Union; does that not include by necessity putting a restriction on all
countries under the Soviet bloc?
Senator NUNN. I guess the other question that I would like to get
your opinion on here, Mr. Asselin, and Mr. Fry, what about putting
the export licensing function under the State Department? State
already has arms export licensing. In other words, put both licensing
functions in the same agency.
Mr. FRY. I don't want to address that.
Senator NUNN. Do you have any idea about that? If you don't
just say so.
Mr. ASSELIN. No; I would be against that. I think Commerce is the
proper place for the licensing function if the Department were prop-
erly organized. But we interviewed the present Acting Director of the
Compliance Division. He was formerly the Chief of the Office of Ex-
port Administration for 1 year. His name is William Skidmore. He
admitted that there were problems in the Compliance Division.
He acknowledged, yes; there are problems there but when he was
head of 0EA, he spent all his time trying to straighten out the licens-
ing section. Our staff didn't look into the licensing section. All we
looked into was the Compliance Division. We found that to be inade-
quate, to say the least. If he felt his real problems were in licensing and
he thought it was more important to straighten out licensing than it
was Compliance, then that gives you an idea what an inadequate oper-
ation licensing possibly may be.
Senator NUNN. Even under the best of circumstances as Senator
Cohen pointed out, licensing is always difficult because you have dif-
ferent views. I think the point that was made yesterday about having
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an assessment of what the Soviets are really after is the beginning
point.
It seems to me that your policy needs to be driven somewhat by that.
We are right now trying to review everything, instead of going down
the list to those items they really need in their technology. As the wit-
ness testified yesterday from Los Alamos, the technical capability to
really analyze what it is the Soviets need weuld be a good starting
point for aLy licensing procedure.
Mr. ASSELIN. Yes. Dr. Baker made quite a point of the fact that the
Commerce Department is very good in licensing to this extent. They
are very good at saying whether a particular piece of equipment needs
a validated export license. Where they are not very good, were they
are not very adequately trained is in the determination of what uses
that piece of equipment can be put to overseas in the hands of an ad-
versary. That is where the technical expertise falls short in Commerce.
That was his basis for his recommendation for that center of technical
expertise.
Senator COHEN. Along those lines, given the jurisdiction to the
State Department over arms sales, what would be done about ceramic
tiles, for example? Ceramic titles might seem fairly innocuous and
have a nice household use. The first witness yesterday, however, indi-
cated that very little if any technology that is transferred to the Soviet
Union ends up in the household. Ceramic tile is also important in terms
of the Epace shuttle.
To what extent could you put a prohibition?I see a gmtleman in the
audience shaking his head. But the fact of the matter is we have some
rather extensive improvements in the field of ceramic tiles which
Rockwell does in fact use for the space shuttle.
It is very difficult to classify that as being an item of strategic value
in the abstract. So I think it lends more support to what can in fact
be converted because almost any item that we export could be con-
verted to another use.
Senator N17NN. I certainly agree.
Whatever the situation is with licensing, you have concluded with-
out any doubt that compliance is beyond the Commerce Department
institutional capability?
Mr. ASSELIN. Yes; very definitely.
Senator NuNisr. Do you agree with that?
Mr. FRY. Absolutely.
Senator NUNN. Thank you both.
Our next witness is Dr. Jack Vorona, Director, Scientific and Tech-
nical Information, Defense Intelligence Agency, Department of
Defense.
Dr. Vorona, we appreciate your being here. We swear all of our
witnesses in.
Do you have anyone accompanying you?
Dr. VORONA. Alone.
Senator NuNN. Will you hold up your right hand?
Do you swear the testimony you will give before this subcommittee
will be the truth, the whole truth, and nothing but the truth, so help
you God?
Dr. VORONA. Yes, sir.
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TESTIMONY OF DR. SACK VORONA, DIRECTOR, SCIENTIFIC AND
TECHNICAL INFORMATION, D:EFENSE INTELLIGENCE AGENCY,
DEPARTMENT OF DEFEASE
Senator NUNN. Dr. Vorona,, why don't you go ahead?
Dr. VORONA. Thank you, Mr. Chairman.
I welcome this opportunity to talk to the issue of technology trans-
fer and its principal beneficiary, the Soviet Union. Because truth like
beauty is in the eyes of the beholder, I will say at the outset that my
views are conditioned by over 20 years in scientific and technical intelli-
gence, most of which time was devoted to assessing Soviet military
capabilities.
One of the basic tenets of my profession is never to mirror image?
unless, of course, all else fails. That is, one must refrain from a mind-
less attribution to others of capabilities developed and sought by the
United States. What is becoming more apparent, however, is the delib-
erate, massive, and longstanding effort by the U.S.S.R. to acquire
Western technologies for direct incorporation into their military and
defense-related industry.
It would appear they are hardly at all afflicted with the not-in-
vented-here syndrome, but, on the contrary actively seek out, acquire
and implement our developments to a degree, even today, not fully
appreciated.
If I were to characterize the Soviet effort to acquire U.S. technology,
I would say that it enjoys very high priority, is centrally directed,
specifically targeted, and employs every collection means imaginable.
All in all, a very comprehensive program.
Seen on this chart is the organizational structure of Soviet R. & D.
at the all-union level. 1 hose organizations marked in red are directly
involved in technology transfer.
[The chart referred to follows:]
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State
Construction
Committee
Communist
Party of the
Soviet Union
USSR
Council of
Ministers
State
Committee for
Science and
Technology
ORNT
State
Planning
Committee
GOSPLAN
USSR
Supreme
Soviet
,IMMININ=MMMM???????????111?0
State
Security
Committee
KGB
Higher
Attestation
Commission
State
Supply
Committee
Ministry of
Finance
Military-
Industrial
Commission
VPI(
Presidum of
USSR
Academy of
Sciences
State
Inventions
Committee
Ministry of
Defense
GRU
Defense
Industrial
Ministries
Civilian
Industrial
Ministries
USSR
Academy of
Sciences
USSR Ministry
of Higher and
Specialized
Secondary
Education
R&D Performer Organizations
Institutes
IResearch Higher Schools I Design Bureaus
Industrial Plants
ORGANIZATION STRUCTURE OF SOVIE; RaD
AT THE ALL-UNION LEVEL
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Niel'
II
III
IV
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Senator NuNN. What do you mean by "the all-union level"?
Mr. VORONA. At the national level, sir. You see that they reach the
highest political levels?a fact which underlines how importantly
Western technology is viewed from Soviet eyes.
I would like now to describe for you this program's basic modus
operandi. First comes their exploitation of the world's open scientific
literature. This involves tha annual acquisition and translation of about
35,000 publications from 125 different countries in 65 different lan-
guages?roughly 1.5 million articles. This massive effort clearly serves
as an excellent guide to the world's technical state-of-the-art, where it's
being done and by whom.
This data is at the disposal of the State Committee for Science and
Technology or GKNT---the organization responsible on the one hand
for ascertaining Soviet technological and industrial weaknesses, and
on the other, for their remedy. Thanks to the open literature, the
GKNT knows exactly where to go to overcome their deficiencies.
The open literature itself answers some of their needs; many others
are met by legal purchase. But they also invoke a wide variety of il-
legal maneuvers. These include evasion, diversion and the use of U.S.
chartered but Communist-owned firms to acquire material normally
denied them under export control laws.
Espionage is yet another tool--not only are the KGB and GRU
heavily involved in acquiring our technology, so are the intelligence
services of the pact nations, all centrally directed by the Soviet Union.
I would also mention the role of the Soviet Academy of Sciences in
this beautifully orchestrated effort to acquire critical U.S. and West-
ern technologies. There should be no doubt that this prestigious aca-
demic organization is a key and willing participant which, via such
mechanisms as scientific and student exchanges, contributes signifi-
cantly to the total take.
The Soviets in the post World War II period began a huge effort
to acquire the industrial and technological wherewithal to support
their military ambitions. For example, the impressive Soviet radar ca-
pabilities of today had, their genesis with World War II lend-lease
equipment sent them by the United States.
This along with the unclassified MIT radiation laboratory volume
on radar theory were the basic ingredients for the early generations of
Soviet radar design.
The Soviets are excellent radar theorists and have since added their
own refinements. I would note, however, that the acquisition of U.S.
microcircuitry very probably enabled them to package sophisticated
radar concepts into a weight and volume suitable for the militarily
critical airborne application.
I specifically refer to their look-down/shoot-down interceptor, the
modified Foxbat, whose entry into the Soviet inventory was no doubt
expedit ed thanks to acquisition of embargoed U.S. microelectronics.
Of course, we haven't begun to see the repercussions of the recent
espionage case involving Mr. Bell and the Polish Intelligence Service.
The classified data transmitted is no doubt right now being investi-
gated to further Soviet radar capabilities and countermeasure our
own.
Their initial chemical warfare capability came from Germany after
the war. They simply transported two nerve-agent factories from Ger-
many back to the Soviet Union.
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Their TU-1 bomber was a direct copy of our B-29. Their first jet
engine was from Rolls-Royce?the Nene?it powered their MIG-15
fighter.
The U.S.S.R. and East European family of general purpose com-
puters known as the RYAD series are based substantially on IBM
3ti0 and 370 computers that were illegally diverted into the U.S.S.R..
Their decision to emulate U.S. computer design eliminated the time
and risk associated with indigenous development.
It had the equally important effect of making available to them a
tremendous library of computer software that was RYAD compatible.
Since the early seventies, the Soviets and East Europeans have
legally purchased more than 3,000 microcomputers, some of which
are being used in military-related organizations. They are also pro-
ducing minicomputers that are direct copies of Western models.
Nuclear weapons design information clandestinely provided them
by Klaus Fuchs was undoubtedly a key ingredient in their achieving
workable weapon designs as early as they did. When the Soviets were
unable to produce the fissionable material, U-235, in the post World
War II period owing to inferior gaseous diffusion technology, they
brought in a German scientist, Peter Thiessen, who was able to rectify
their problem.
As a result, they were able to detonate their first 11-235 bearing
weapon years earlier than if left to their own devices.
These, and numerous other examples, we considered as but stop-gap
measures by the Soviets?until their burgeoning indigenous R. & D.
resources were able to pick up the slack. hat we are coming to rec-
ognize, however, is a continuing and deliberate program to acquire
Western technology which is integrated with or used in lieu of their
own.
The acquisition of Western technologies and developments is thus
a conscious Soviet policy which, in my estimation, has been extra-
ordinarily successful. They have derived significant military gains
from these acquisitions particularly in the areas of computers, micro-
electronics, signal processing, manufacturing, communications, guid-
ance, and navigation, structural materials, radars and sensors of
various types.
The extensive Soviet acquisition program has allowed them and
their allies to save untold hundreds of millions of dollars in R. & D.
costs alone and years in R. & D. development lead time, to reduce
engineering risks by copying proven western designs, and to develop
countermeasures to U.S. and western weapons, in some cases before
our weapons have been fielded.
Most of the technology of direct and immediate military conse-
quence has been clandestinely acquired by Soviet intelligence assets
and their East European surrogates. However, the bulk of their
acquisitions fall under the heading of dual use technologies, that is,
technology having both military and civilian applications.
Because of the primacy of Soviet defense industry over the civilian
sector, there is no doubt who will be the ultimate recipient, despite
Soviet assurances to the contrary. By purchasing these capabilities,
the Soviets are able to focus their own resources upon the strictly
military undertakings.
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For example, the Soviets recently bought two huge floating dry-
docks from the West which have already been put to use servicing
their Kiev-class aircraft carriers as well as nuclear submarines.
Senator NUNN. Were those bought from Japan?
Dr. VORONA. One was from Japan, sir, and one was from Sweden.
They are negotiating for others from those two countries.
Senator COHEN. I am sorry?
Dr. VORONA. They are negotiating for other drydocks from those
two countries.
Senator COHEN. I was under the impression that Japan had learned
the lesson about, on the one hand, complaining to the world that
they are concerned about the Soviet buildup off their shores and, on
the other, they have been providing them with the kind of assistance
that will allow them to have those ships off their shores.
Dr. VORONA. One of these 1,000-foot-long drydocks is in the North-
ern Fleet, one in the Pacific Fleet. There is no doubt they themselves
could have designed and constructed such a structure, but it would
have taken longer and used resources that could otherwise be devoted
to other needs.
However, despite their notable successes in acquiring Western tech-
nology, the Soviets for some time to come will be hard pressed to main-
tain their relative position to the West in the technical sophistication
of their weapons.
Therefore, they will continue to seek Western technology. The Soviet
Union will especially need equipment and technology for their elec-
tronics, aerospace, and shipbuilding industries. Future Soviet and
Warsaw Pact acquisition efforts are likely to concentrate on the sources
of such component and manufacturing technologies, including defense
contractors, general producers of military-related auxiliary manufac-
turing equipment, and small and medium size firms and research cen-
ters that develop advanced component technology and designs.
I believe this last category of small companies to be a specially en-
ticing target because it is where many of the emerging technologies are
first discovered. Because of their newness they have not yet been in-
corporated into military programs and are thus unclassified and
vulnerable.
In my estimation, the United States R. D. establishment is viewed
by the Soviets as a mother lode of important and very frequently,
openly available S. & T. information.
In fact, they tap into it so frequently that one must wonder if they
regard U.S. R. & D. as their own national asset. They have enjoyed
great success in this endeavor with minimal effort, primarily because,
as a nation, we lack the awareness of what they are about.
Senator NUNN: Let me ask you one question there.
Suppose we did have, let's say, reverse engineering on the Soviet
espionage, overt and covert efforts to acquire 'Western technology.
In other words, we had a group of scientific experts within the Gov-
ernment who sat down, looked at what we had, looked at what was
being developed, looked at what the Soviets had, their needs, spare
parts, so-called half life, things they have already gotten from us and
so forth and drew up a rather tight list of high priority items and sup-
pose the Government went out and, first of all, distributed those lists
within the. agencies and, second, went out on a periodic basis and dis-
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tributed those lists to the small businesses, the technical industries of
the country.
Don't you think that that in itself would alert a whole lot of Ameri-
can businesses who are basically honest and patriotic as to what kind
of technology would be most suitable to the Soviet Union?
Dr. VORONA. Yes. I certainly do. And, as a matter of fact, such an
effort is already underway.
As you are well aware, the Congress directed the Department of
Defense to develop a militarily critical technology list. This has been
done. I cannot say exactly when, but I suspect in the very near term it
will be distributed to people such as you just mentioned. This fist
should give them a (rood appreciation of what technologies are mili-
tarily critical to the '-'United States. Conversely, I would note that this
list also reflects what the Soviets are targeting.
Senator NUNN. Is that going to be a standing effort by the Depart-
ment of Defense to do this on a periodic basis to keep it updated or
is that a one-time effort?
Dr. VORONA. It will be periodically updated.
Senator NUNN. Does this include dual use technology or is it mili-
tary technology mainly?
Dr. VORONA. I believe it is primarily dual use technologies.
Senator NUNN. Dr. Baker from Los Alamos yesterday testified that
he thought it would be a good idea to put a permanent standing group
of 25 people at a cost of $4 million or $5 million a year in one of our
labs for highly technical evaluations that would do this on a continu-
ous basis.
Do you think that suggestion has merit?
Dr. VORONA. I would think that it ought to be done through a com-
bination of efforts involving the intelligence community and the De-
partment of Defense.
I cannot imagine a group of 25 people or so becoming expert in all
the fields necessary for this.
Senator NUNN. He wasn't suggesting that. He was suggesting it
was a clearing house a central location so that all the defense intel-
ligence community fed into there and that any inquiry, anything that
people asked for, they would either be able to produce it there or be
able to know where to get it.
In other words, a clearinghouse, not a comprehensive group.
Dr. VORONA. I would have to look at this proposal further, sir, to
look into its ramifications. However, I believe we will soon have this
capability within the intelligence community.
Senator NUNN. We would like to get your opinion on that as we
deliberate some of these suggestions.
Thank you.
Dr. VORONA. We know the Soviets receive each of the 80,000 Govern-
ment reports deposited with the National Technical Information Serv-
ice?NTIS--of the Department of Commerce-75 percent which are
from the DOD, DOE, and NASA.
In addition, classified Government research reports are subjected td
automatic downgrading and declassification, so that, barrin7g addi-
tional caveats, they are fully declassified in 6 to 8 years, inUnediately
sent to NTIS and released with no consideration given to the possi-
bility the report may still be of military significance.
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The recent Executive order will substantially rectify this situation
? by giving to the report originator the ability to determine whether or
not release should be made.
I should like to offer perhaps a less well known example, but one
which both highlights the lack of awareness issue and Soviet ability to
take advantage of it to our national detriment.
Specifically, two Soviet Embassy officials in 1979 went to the public
library in Milan, Tenn., to reproduce pages from an environmental im-
pact statement on file there concerning Government construction of a
plant to manufacture military explosives, in particular, RDX/HMX.
As a result of this episode, an investigation was conducted to deter-
mine what the Soviets might have gleaned from the environmental
impact statement. It was found that the document contained a wealth
of technical detail which, when combined with already published ma-
terial, would allow them to duplicate the entire manufacturing process.
This was clearly not the intent of writing the environmental impact
statement. However, an awareness of the efficiency of the Soviet tech-
nology vacuum cleaner could have precluded such an occurrence.
In the past several hundred years, the Russians have upon various
occasions imported "Western technology. These were sporadic attempts
to create an economy capable of supporting their foreign policy ambi-
tions. But these efforts were not sustained and the economy lapsed into
relative backwardness. Such is not the case today. The huge military
R. & D. infrastructure they are creating, expressed both in terms of
facilities and technically trained manpower, already the world's larg-
est pool of scientists and engineers, indicates they are in this for the
long haul.
And as the infrastructure matures, it becomes increasingly capable
of extracting from and building upon Western developments, not to
mention their own. For this reason, I believe it erroneous to conclude
as some have, that Soviet efforts to acquire our technology somehow
relegates them to a position of inferiority.
In closing, I would simply say that the Soviet leadership appre-
ciates and has ofttimes noted tile casual relation between science and
technology and strategic superiority. To them, technology transfer is
an important means to that end.
Mr. Chairman, this concludes my statement.
Senator Nuivi.r. Thank you, very much, Dr. Vorona.
We appreciate all of your cooperation and we hope to keep in touch
with you as we try to develop our recommendations growing out of
these hearings which I hope will be in the very near future.
Senator Cohen.
Senator COHEN. Thank you, Mr. Chairman.
I assume you consider U.S. technology to be a national asset and
that you have indicated, I think, even beyond that that the Soviet
Union probably considers it to be their national asset as well.
Dr. VonoxA. That is correct.
Senator COHEN. What is your evaluation of the U.S. leadtime of
the Soviet Union in the area of technology?
Dr. VORONA. I believe in general the United States leads the Soviet
Union in technology and has a distinct advantage, measured in years,
in certain very critical military technologies, specifically computers,
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microelectronics, signal processing and in general, production know-
how.
This has to be maintained. Unfortunately, the Soviets through the
various mechanisms we talked about have made significant inroads
into this lead and one of these days we are going to find that the
technological superiority which we have taken for granted is no longer
going to be there.
Most importantly, once they acquire a technology, it is immediately
incorporated into their military forces or defense-related industry.
So, measured in terms of which sides military forces have the
superior technology our lead is diminishing even more rapidly and
might even reverse in some instances as we go into this decade.
Senator COHEN. There is an old expression that a pigmy standing
on the shoulders of a giant can see further than the giant. And, of
course, that expression has been used in the past in terms of each of us
being able to stand upon the accumulated body of wisdom from gener-
ations in the past. Therefore, we do not have to repeat the same errors
and mistakes or learn the same lessons of the past and are able to
look further into the future as a result of the benefit of collective
experience. And what you are suggesting is that this is being trans-
lated into a new dimension, namely that the pigmy is now standing on
the giant's shoulders, the giant being the U.S. technological develop-
ment and capability and will be able to see that much further into the
future by combining it with their own indigenous assets and
development.
Dr. VORONA. Precisely.
Senator COHEN. What in addition to the list that is being put
together, or has been put together, by the Defense Department can we
do to alert the private sector about the dimensions of the problem
and the extent to which they may be unwittingly contributing to it?
Dr. VORONA. As DIA's effort in that direction, Senator, we have
since 1977 given 220 briefings to various groups throughout the coun-
try, including those in the Department of Defense, Department of
Commerce, academic and industrial organizations. This was done in
the hope of increasing their awareness of just how serious the Soviets
are in this effort, how vulnerable we are, and the wide variety of mech-
anisms used by the Soviets to aquire our technology.
I believe that this effort has had some salutary effect.
Senator COHEN. The agencies who now have the responsibility for
managing our export control operation, what sort of a data base. do
they have, what sort of corporate memory do these agencies maintain?
Dr. VORONA. I am not at all sanguine about the comprehensiveness of
the data base resident in any particular agency concerning technology
transfer.
I believe this is one of our serious shortcomings. However, we are
making significant strides within the intelligence community and the
Department of Defense to rectify this very shortfall. But unless and
until we have the kind of data base to which you refer, any truly mean-
ingful assessment of technology transfer and its impact on the Soviet
military posture is merely arm waving.
Senator COHEN. What assessment do you make of our efforts to in-
vestigate the end users of the exports?
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Dr. VORONA. This may be contrary to the conventional wisdom or
some of the things that you have heard but in my estimation, our abil-
ity to determine whether or not dual-use technologies are being di-
verted for military purpose in the Soviet Union or in any closed society
is woefully inadequate.
Furthermore, I am not at all optimistic that even with additional
resources, could we significantly redress that situation.
Senator COHEN. Let me take it one step further.
Assuming you had the resources, significant resources to make that
kind of determination, in your judgment, would it make any
difference?
In other words, suppose you were to tell other countries, including
our own exporters, that this technology would have a dual use.
Whether it is the Kama River Plant, the Brazil plant or whatever it
might be, do you think that would really be an inhibiting factor to a
nation selling such technology to the Soviet Union?
Let me use Japan by way of example.
Do you think there is any doubt in the minds of the Japanese as to
what use the Soviets will put to that large drydock?
Dr. VORONA. I'll probably never know the answer. I do know that
the Soviets specified it was going to be for civil purposes. Of course
they immediately diverted it for military purposes.
Senator COHEN. Now you are telling me that the Japanese and the
Swedish Governments are considering selling even more?
Dr. VORONA. At least the Soviets have made overtures to them. I
Senator COHEN. guess what I am asking you is when it comes
down to the choice between profits and national security, what has
been the history that we have witnessed to date?
Dr. VORONA. It has not been terribly reassuring?it has been a
concern.
Senator COHEN. It is all well and good for us to sit up here and
talk about how we are going to possibly create a new agency to con-
solidate all the functions of analyzing the export value, commercial
value, the diplomatic value and the defense value for a particular
item. Then we talk about alerting the business world to the conse-
quences of allowing that technology to be exported beyond our own
boundaries. Then we have a more fundamental problem; that is, how
do we weigh that against the experience of nations in the clear face
of demonstrated conversion to military purposes since the motive for
profit for export has overwhelmed whatever doubts may have been
held by that particular firm.
I know time after time when Members of Congress have raised
concerns about sale of computer technology to the Soviet Union, those
companies will come to me and to others and say, how can you do
this? How can you prohibit the sale of this particular computer
technology to the Soviets where if we don't do it, the Japanese will
do it or the Germans will do it, the British, surely the French, who-
ever has an opportunity to start a stampede for this technology, will
pick it up. We will lose the profits from the sale of this system, the
profits of which we could then reinvest into greater R. & D. to keep
5 or 6 years ahead of the Soviet Union?
How are we going to measure up to that particular problem?
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Dr. VORONA. I don't know, Senator Cohen, but I would hope that
in making countries aware of what the Soviets are about and how the
technologies that they acquire are in fact enhancing Soviet military
posture would have some sobering effect.
Senator NuNN. Senator Cohen, on that point, I don't think there is
an easy answer to that. I think you put your finger on a very difficult
question. But I do believe within the NATO structure itself, the mili-
tary side of it, they ought to have a small group of people that inter-
relate to the backhome group so that NATO, when there is an impend-
ing sale, would be able to comment on it.
It is handled more or less at the Cocom level and it is not working.
I think the same thing; we have a standing group with the United
States-Japanese defense treaty of people that are in charge of making
planned programs there.
I think we need a smaller group there, that don't do anything but
alert the two nations. They have got to raise it to a decision level at an
early stage. But right now,/he Cocom arrangement simply isn't
working.
Senator COHEN. I agree with that, Mr. Chairman. I am not trying to
undermine the effort. I think you ought to be commended and I want
to support every effort that can be made to change the way in which
we do business. In another context, I am also perhaps realistic
enough?perhaps even cynical enough?to look at what is taking place,
for example, with the pipeline, which has nothing to do with the crit-
ical technologies list.
In my judgment, there is a classic case of where our European allies
are undertaking a venture which is going ultimately to be detrimental
to their future security because I believe that pipeline will be used as a
lever against NATO taking any trade action, diplomatic action or
potential military action. I have said this before and tried to pose it in
deliberately dramatic terms, but it is my judgment that our European
friends are marching toward the Berlin Wall with their eyes closed.
I think if we continue to follow the procedure they have, they will be
behind the Berlin Wall with their hands up.
That is the direction, I think, they are going. To me the Yamal pipe-
line closes in this most dramatic form exactly the point I am raising,
namely providing technology to the Soviet Union which it doesn't
have. Then you have to ask the question, why is the West 15 years
ahead of the Soviet Union in oil drilling or gas drilling capabilities
and technology?
The answer is pretty simple; they have been putting 15 percent of
their money into military uses. And so what we are doing in effect is
subsidizing their own domestic deficiencies or inefficiencies, allowing
them to continue to spend the money for drydocks or for SS-18's,
whatever it might be, while we supply the technology to ease their par-
ticular commercial difficulties. And I think given that sort of formula,
then there is little prospect of the United States breaking out of this
force which is almost centrifugal in the way in which it operates, pull-
ing all of the technology into the Soviet Union.
Let me ask you, Dr. Vorona, what is the working relationship that
you have, DIA and the Commerce's Office of Intelligence Operations?
Dr. VORONA. We do have a good working relationship with them,
although it's essentially a one-way street. We provide them with what-
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ever information they ask for. On the other hand, we have had precious
little interaction with the Compliance Division.
Senator COHEN. How many times have you been called upon to use
your own expertise with Commerce, Customs, or FBI to deal with
export cases?
Dr. VERONA. To my knowledge, once, and that was to provide an
analyst as an expert consultant to the Justice Department in the Spahr
Optical case.
Senator COHEN. Before I go any further, I would just like to clarify
something with respect to my comments about our European allies.
I don't think the United States, frankly, myself included, is in any
position to lecture the Europeans since we ourselves should b3 charged
with the same sort of avarice. or greed for consideration of our own
national markets. I point specifically to the grain embargo as an exam-
ple. It is very difficult for me to go to any of our allies in Europe and
say you are making a fundamental mistake building the pipeline when
in fact we are unwilling to forego the same sort of profits that we our-
selves are seeking.
I don't think I am in the position to lecture the Europeans when
we ourselves are unwilling to bear some of the pain that is necessarily
involved in dealing with the Soviet Union. It is still my opinion that
even if we were to shut off our supplies of grain, which I would sup-
port, that the Europeans at this point are still going to be buying gas.
I think that is almost irreversible at this point.
Had different action been taken earlier, we might have diverted that.
Any nation willing to feed the Soviet Union cannot lecture anyone
who wants to derive gas from them.
Senator NUNN. Thank you, Senator Cohen.
In an editorial of April 12, 1982, the New York Times commented
on technology transfer to the Soviet 'Union. The Times expressed the
opinion that lowering the barriers to the flow of technology to the
U.S.S.R. is not necessarily a bad thing. The Times editorial put it
this way, and let me quote directly from that:
A more relaxed policy would serve the West's best interests because a steady
supply of foreign technology saps the Soviet Union's incentives to develop its
own. It is better to have the Soviets stealing, copying and following a few steps
behind than working independently in becoming able to deliver a technological
surprise.
What is your response to that opinion in the editorial?
Dr. VORONA. Mr. Chairman, in a nutshell I think it is divorced from
reality. The Soviets are bent upon achieving world preeminence, domi-
nance, if you will, in science and technology and are building a huge
R. & D. infrastructure with that goal in mind. The technology they
are acquiring from the West is an important input to that process be-
cause it allows them to compare and build upon the best of both worlds,
and they do.
A more relaxed export policy, rather than condemning them to sec-
ond place as the editorial seems to imply, would only hasten their
achieving world class status.
As a separate but related matter, I would again point out that our
technological advantages may or may not find their way into military
hardware but you may rest assured that if the Soviets go to the trouble
to acquire a particular technology, it will post-haste be translated into
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a military capability. As a result, the technological superiority we en-
joy in the civil sector is significantly eroded when military hardware
is compared. The concept proposed by the Times would exacerbate
that situation as well.
Senator Ntrismr. Thank you very much, Dr. Vorona.
Senator COHEN. Yesterday, Dr. Vorona, I mentioned my unhappi-
ness with the kind of rules under which we have to operate in terms
of international athletics, specifically that our amateur athletes have
to go up against the Soviet professionals, because they are, in fact,
professional athletes in the Soviet Union and Warsaw Pact coun-
tries. They are supported by the state whereas our own athletes do
come out of college and go into professional basketball or whatever
the sport might 13'3 and support themselves through their contracts.
It was suggested yesterday by our first witness that the Soviets also
have professional students who come into this country. You touched
upon this just briefly in your own testimony. In other words, we send
our amateur students to the Soviet Union to study humanities and the
classics while they send professional students, people who are mature,
would not be so taken in by what attractions our society might offer.
Furthermore the students and that they already are well trained
and are looking for certain technology.
Would you agree with that assessment, that in essence what they
are sending here are professional students who are interested in ac-
quiring the information from an academic institution that otherwise
might be prohibited for sale or distribution or export to the Soviet
Union?
Dr. VORONA. Yes, Senator, I completely agree with that assessment.
Senator COHEN. Thank you.
Senator NuNisr. Thank you very much. We would like to be able to
pose other questions to you for the record, if we may?
Dr. VORONA. Certainly, sir.
Senator NuNN. Thank you very much, Dr. Vorona.
Our next witness is John Maguire, president of the Software AG,
Reston, Va.
It is the Custom of this subcommittee to swear all witnesses appear-
ing before it.
Do you swear the testimony you give before the subcommittee will
be the truth, the whole truth, and nothing but the truth, so help you
God?
Mr. MAGUIRE. I do.
TESTIMONY OF JOHN MAGUIRE, PRESIDENT, SOFTWARE AG, OF
NORTH AMERICA, INC.
Senator NuNisr. I know you have a statement. Thank you for all your
cooperation. We appreciate you being here today. We look forward to
hearing your statement.
Mr. MAGuirtE. Mr. Chairman, Senator Cohen, as a member of Amer-
ica's high technology industrial community, I note with great interest
the subcommittee's concern over the increasing loss of American tech-
nological know-how to the Soviets. I am pleased to be here this morn-
ing to share with you my personal experiences in confronting this
problem in the computer software industry.
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I am currently both president and chairman of the board of Soft-
ware AG of North America, Inc., located in Reston, Va. Our company
focuses on the production and sale of computer software, as opposed
to computer hardware. Computer hardware, including microprocessor
chips, can be and has been reverse engineered. As a result of Soviet use
of that technique, Soviet hardware technology is now nearly equivalent
to U.S. hardware technology.
By contrast, software cannot be so easily deciphered and duplicated.
Software remains the key to future computer development as opposed
to hardware where Jordan is even ahead of us now. Yet given the
inability to reverse engineer, current Soviet efforts at software devel-
opment are antique by comparison to those in the United States.
Even the Japanese are many years behind the United States in devel-
opment of computer software. Last year I met with the Minister of
Information for Japan. I don't know how you would measure it, it is a
figure of 8 years behind the United States in computer software.
The United States undoubtedly has both an enormous investment
and a substantially important national resource in its technology lead
in the software field.
In that context, my company has proven itself as a leader in the
software field. Specifically, we have been responsible for the develop-
ment and manufacture of ADABAS, a Data Base Management Sys-
tem, we use the expression DBMS, which constitutes the present state-
of-the-art for this very important aspect of software technology.
DBMS is the implementation tool used by programers to implement
computerized information systems?with an increase in productivity
of approximately 1,000 percent?as compared to conventional com-
puter software technology. Between 1960 and 1980 I estimate over $1
billion has been spent on hundreds of projects to solve the DBMS
problem. The current ADABAS source code represents the highest
level of sophistication yet achieved in DBMS technology. It now
includes over 200,000 detailed instructions.
Like other software, ADABAS is not susceptible to copying by the
technique of reverse engineering. By analogy, one might consider
ADABAS as the Coca-Cola formula of the computer software in-
dustry. It is, deservedly, a closely guarded secret: Possession of the
source code, like the Coca-Cola formula, could only be obtained by
competitors by the quirk of an identical, independent invention, sale,
or theft of that source code itself.
Unfortunately, our task in guarding the source code as a private
company does not stem only from the economic rigors of the com-
petitive domestic marketplace. The most blatant and obvious attempts
to secure the secrets of ADABAS have come, not from our American
competitors, but from the Soviet Union.
Although the ADABAS source code is not classified, it is considered
to be sensitive technology requiring a validated license for export. My
story to you this morning will detail not one, but two, focused
attempts to secure our computer software know-how for use in the
Soviet Union.
In 1979 a Belgian national by the name of Marc DeGeyter con-
tracted our marketing representative in the State of California.
DeGeyter wanted the name of the most technologically expert individ-
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ual in our company. He was referred to Jim Addis of our Reston,
Va. office. Jim is one of two individuals in our company who have
access to the ADABAS source code. DeGeyter personally approached
Addis, offering him $150,000 cash for the purchase of the ADABAS
source code on behalf of the Soviets. Addis told DeGeyter that he
would have to discuss the offer with his superiors. When Addis told
me about the approach by DeGeyter, I immediately contacted the FBI.
At their request, I agreed to cooperate by personally dealing with
DeGeyter. As part of that cooperation. I agreed to the tape recording
of my conversations with Addis, DeGeyter contacted me, confirming
the original offer of $150,000 for the source code. He told me that he
had many business dealings with the Soviets in their country; in
order to insure continued good business dealing with them on other
matters. he needed to obtain the ADABAS source code for them.
Working with the FBI, I negotiated with DeGeyter for a period
of approximately 7 months. finalizing arrangements whereby I would
transfer the source code to him for a price of $150,000. During those
months. I had numerous telephone and personal discussions with
DeGeyter. I personally met with him in Washington, as well as tele-
phoning him in Belgium and vice versa.
There were a lot of calls around the United States?California, St.
Louis, Silicon Valley area. I spent a lot of time there.
I recall that, in at least one conversation, DeGeyter told me that
the Soviets had approached him with a specific "shopping list" of
technological items needed from American sources. He told me that,
as early as 3 years previously, they had included the ADABAS
DATA Base Management System on that list.
Since he could not at first figure out a way to obtain the code, De-
Geyter had initially bypassed it and gone after other technolocry items
on the list. The Soviets had evidently changed their priorities and
were now insisting that DeGeyter secure ADABAS on their behalf.
My own knowledge of DeGeyter was consistent with his description
of his efforts for the Soviets. I knew that DeGeyter had personally
approached software expert Charles Matheny- some 2 or 3 years pre-
viously, attempting to hire him to steal selected IBM technology on
his behalf. I later learned from a software representative in Amster-
dam that DeGeyter had been caught stealing trade secrets and prints
from their Belgian plant several years -earlier. DeGeyter had taken
the items while employed at the plant. Although he had been initially
charged in the Belgian courts, he was never convicted of the offense
in that country.
I also know that DeGeyter moved constantly in high technology
circles. During my negotiations with him, he traveled in and out of
California's Silicon Valley on numerous occasions. Certainly Silicon
Valley might well have been the home of many of the items on the
requested shopping list. When DeGeyter was eventually arrested at
Kennedy Airport, Federal agents searching his briefcase found, among
other things. numerous telexes from DeGeyter to individuals and com-
panies in Moscow.
One such telex dealt with a payoff to DeGeyter. In connection with
the payoff, the telex included nomenclature assigned to a new micro-
processor chip in the process of development at Intel in Silicon Valley.
95-929 0 - 82 - 9
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The chip was not, of course, publicly marketed at that time. In his
conversations with me, DeGeyter made no bones about his technology
efforts on behalf of the Soviets. He told me that he was not alone in
doing so; rather, technology transfer was simply their?the Soviets?
way of doing business.
In discussing the sale of ADABAS source code, I voiced to De-
Geyter my concerns that the source code might eventually be disclosed
to our American competitors, in addition to the Soviets. In the contest
of a highly competitive American market for computer software, it
was certainly realistic to treat the threat of American companies ac-
quiring ADABAS source-code knowledge as more economically
frightening than Soviet development.
DeGeyter assured me that the source code would not be coming back
to the States or to American competitors anywhere. He told me that
he was purchasing the code on behalf of Techmash Import, a Soviet
trading company and that the Soviets had no interest in furnishing
the code to my competitors.
During the course of my negotiations with DeGeyter, I attempted
to arrange for the delivery and sale of ADABAS source code to him
in the United States. A planned delivery in this country was necessary
in order to successfully prosecute DeGeyter under our export laws.
Unfortunately, he insisted that I fly to Brussels for delivery of the code
where he would make arrangements for payment of the cash price
through a Swiss bank account. When I voiced hesitation to him about
delivery abroad and, consequently, the entire transaction, DeGeyter
upped the case price from $150,000 to $200,000 plus some California
real estate, and later to $450,000. Of course, by comparison to the U.S.
investment of $1 billion in DBMS technology over the years, the So-
viets were still talking in terms of "bargain basement" prices.
Eventually, our negotiations broke down, due to his unwillingness
to agree to delivery in the United States. DeGeyter later contacted
Charles Matheny, the owner of a computer company in our building,
and asked him if he knew of any other way to secure the ADABAS
code on DeGeyter's behalf. The FBI again stepped in and, through
the use of undercover operatives, eventually arranged a planned de-
livery of a dummy source code in New York. As a result, DeGeyter
was eventually charged and sentenced for his efforts to steal the source
code. I understand that Mr. Greenberg, the Federal prosecutor in that
case, will describe that matter in detail for the subcommittee.
When the DeGeyter case ended, I assumed, perhaps naively, that
ADABAS was relatively secured from Soviet attempts to buy or steal.
In other words, keep it, in a 1,500-pound safe on the 11th floor of the
building out in Reston.
Senator COHEN. Don't tell us any more.
Mr. MAGUIRE. I forgot the combination.
The ADABAS was relatively secure from Soviet attempts to buy
or steal. In the spirit of American free enterprise, I even used the
fact of the Soviets' efforts for the potential economic advantage of
Software AG. We subsequently purchased magazine advertisements
boasting "ADAMS. The Russians weren't smart enough to invent
it?but they knew enough to want it."
A copy of that I will show you in a few moments.
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Senator NUNN. What would they be able to do with it once they
goi, it? You say reverse engineering is?
Mr. MAGUIRE. It is impossible. It hasn't been done yet. The source
code that the dttail micliine language and construction representing
the basic logic for handling automatically all the information in a
large data base, we take that source code and run it through the com-
puter, what is called an assembler process, to create the machine object
code which is just millions of bits and that is what we deliver, we sell
a license for that and it works and it runs on a computer but no one
can look at those millions of bits and figure out the logic.
What they wanted was the source code to understand the detailed i
logical steps n the logic, just like a chemical formula, the logic un-
derneath the technology. Once they understand that, they could bring
that logic to other computers or anything they want, but they would
learn what has evolved to be a very successful technology, a value, dual
use military and commercial.
Senator NuNN. Thank you.
Senator COHEN. It is subject to reverse engineering?
Mr. MAGUIRE. No, but you have to have the source code. You can
get a silicon chip and reverse engineer and just peel away those layers
and take a look at it with a microscope and there is the detail logic.
Senator COHEN. What the chairman was asking about, as I under-
stood it, is why would they want that if in fact they couldn't dupli-
cate it. If they get the source code which they attempted to pur-
chase, they could go back and reconstruct the formula and use it
to 'develop future systems.
Mr. MAGUIRE. It is worse than that. By having the source code, there's
the secret.
Senator NUNN. That is the formula?
Mr. MAGUIRE. That is the technology right there.
Senator NUNN. You say no reverse engineering is necessary if they
get back. What they can't reverse engineer, is what you sell?
Mr. MAGUIRE. That is correct.
Senator NUNN. Using the analogy of Coca-Cola, if you get the
Coca-Cola, you can't get the formula. If you get the formula, you
know how to make the Coca-Cola. Is that right?
Mr. MAGUIRE. Yes; we sell the license for $160,000 currently.
Senator NUNN. The FTC maybe ought to be called in on this. You
said $450,000. Your add says $500,000.
Mr. MAGUIRE. I was replaced by the F131 agent eventually and then
DeGeyter upped it up to $500,000. No; that is correct.
Unfortunately, despite DeGeyter's conviction, I soon discovered
that the Soviets still wanted ADABAS and our other software and
are, in fact, still trying to secure it. As with other technology com-
panies, Software AG participates in trade shows on a regular basis.
In 1981 a Russian diplomat named Georgiv V. Veremey visited the i
Software AG booth in at least two separate trade shows n the Wash-
ington area. Since he was registered with the show and also provided
us with his business card, we have a formal record of the trade show
contacts. In both instances, Veremey asked numerous questions con-
cerning ADABAS, internal logic of the system and the source code.
After the trade show contacts, Veremey personally visited the Soft-
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ware AG offices in Reston, Va. On September 25, 1981, Veremey
arrived, introducing himself as a member of the Soviet Embassy
stall in Washington, D.C., and requesting to see various documenta-
tion on our products. He spoke to Sunday Lewis, a senior executive at
the Reston office. He told Lewis that he wanted a complete bibli-
ography of all Software AG products and their documentation. He
disclaimed any particular purpose for the request, saying that he was
just interested. He was extremely vague about the nature of his work
with the Soviet Embassy. After Lewis gave him a standard bibliog-
raphy and an order form, he left.
On September 26, 1981, Lewis told me about the incident. I told
her that, as company policy, we would not sell products to the Soviet,
even the object code. Moreover, I told her that to do so without a
license was prohibited by Federal law.
On October '2, 1981, Veremey again arrived at the Software AG
offices. While waiting for Lewis to return from lunch, Veremey con-
tinually wandered in and out of the Software offices despite the recep-
tionist's request that he be seated. When Lewis arrived, Veremey gave
her an order for all of Software AG's documents. At a price of about
$400, the documents would fill about 12 boxes. This type of technical
documentation tells one how to use various systems produced by our
company. One would have no use for this unless you have the system
or are planning on acquiring it; or you are attempting to develop the
system via knowledge of user techniques.
In response, Lewis told Veremey that she could not sell him the
documentation. She added that, if he insisted, she would have to first
go to the appropriate Federal agency to secure the necessary licensing.
Veremey laughingly asked Lewis, "What license was issued for the
U.S.-U.S.S.R. wheat deal?" He left and, to my knowledge, has not
returned since.
Our experiences with both Mr. DeGeyt,er and, most recently, Mr.
Veremey, have increased my frustrations with the current lack of ade-
quate legal protections for American high technology. Despite the fact
that software technology is the recognized key to future computer
development?and we have the lead?the United States has no current
statute which, in my opinion, adequately protects this technology.
To the average businessman, the Export Administration Act and its
concomitant regulations are, simply speaking, a terrible hassle. Most
industry representatives know that a license is required for trade with
the U.S.S.R. Few, however, know which other nations, if any, require
export licenses from the Commerce Department. The U.S.S.R. is not,
of course, alone in efforts to transfer technology: Our own company
has also reecived inquiries on ADABAS from Hungary and Poland.
In both instances, we have declined to transact any business.
As for the controlling export lists, when approached by DeGeyter
I did not know if any of my products were specifically included on
those lists; I strongly suspected, however, that they might well have
been. The information currently available to business on U.S. export
laws, regulations, and policy in this area is negligible, despite the fact
that businessmen are the real key to detection and enforcement.
Senator NUNN. Based on your experience, do businessmen in this
area have much knowledge of what the Commerce Department is
doing?
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Mr. MAGUIRE. No; and I am very active in the Trade Association
and my knowledge is very limited but I deal with my peers and their
knowledge is negligible.
Senator NUNN. Do most of them know about the law limiting
export ?
Mr. MAGUIRE. Most of them. They know about the existence of a law.
While a few large firms like IBM may be extremely familiar with
the lists and regulations, those firms account for only 40 percent of a
software market of $2.5 billion annually?estimated 1985 sales of $8
billion?the remaining 2,500 companies have 60 percent of the market.
I suspect that representatives of most of those companies are no more
aware of these laws and lists than I was.
Last, when businessmen such as I do get involved in the enforce-
ment process, the results are oftentimes even more frustrating. In
the DeGeyter case I spent nearly 7 months dealing with a man openly
working for the case,
to purchase one of the most significant trade
secrets in the U.S. software industry. Despite that fact, he was even-
tually charged only with misdemeanors under commercial bribery
statutes. In my mind, it is entirely incomprehensible that the man was
finally sentenced to a jail term of merely 4 months.
By comparison, I read newspaper reports of a Celanese Corp. em-
ployee who in June 1979 was convicted and sentenced to a term of
40 years for selling trade secrets to Mitsubishi Plastics Co., a Japanese
competitor of Celanese. From the scant newspaper reports, I can
glean no evidence of national security interests or Soviet involve-
ment. In sum' a businessman receives 40 years for selling trade secrets
to a competitor while a Soviet agent receives 4 months for attempt-
ing to transfer one of our most guarded technology secrets to the
U.S.S.R. It is, indeed, a sad state of affairs if those cases accurately
reflect his country's priorities on technology transfer.
I would like to also point out in our industry the major trade
association is called the DAPSA and they have put together a paper
addressing the problem of trade secret protection and the difficulties
with the current U.S. Copyright Act. We are submitting that position
paper to the House Subcommittee on Courts and Civil Liberties, but
I would be happy to make it available to your staff also because I
think it is the kind of thing that we are looking for in terms of pro-
tecting?the basic problem is the new copyright law raises some issue
as to whether we really have protection under trade secrets and to
get a copyright we have to file the source card. Once you disclose,
then you lose your rights under the trade secrets laws.
I don't have it with me today but I will forward it.
Senator NuNN. We would like to see that. It will be very helpful.
Thank you very much, Mr. Maguire. You mentioned the Software
AG, your company, received inquiries on your source card from both
Hungary and Poland. Were those made after the DeGeyter incident ?
Mr. MAGUIRE. Yes. I have some thoughts on it. The Hungarian
attempts were threefold. Initially the Hungarian Embassy in Wash-
ifigton, D.C., contacted our Reston office. We declined their request to
purchase a license. I next learned that the Hungarian Diplomatic
Corps in Germany contacted our German branch. In Germany, the
Hungarians offered to pay up front the full license fee in advance for
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a copy for license of ADABAS. Our company refused to sell. Finally,
the Hungarian Embassy in Tokyo, Japan, contacted our Japanese
distributor and made the same request. The distributor, on my instruc-
tions, declined to sell.
.Senator NuNN. After that experience, was there any doubt in your
mmd the Soviets were working with the Hungarians and Polish in
this effort?
Mr. MAGUIRE. There is too much of a coincidence. In a concentrated
effort, this all happened within a period of 4 or 5 months, so when
we refused here, it popped up in Germany and a couple of months
later it popped up in Japan. The fact DeGeyter told me of the existence
of a priority list that the Soviets were after and the source code of our
program had been on there 3 years and the priorities just changed and
they were pressuring him.
Senator Nurric. Thank you very much.
Senator Cohen.
Senator Comic. Art observation, Mr. Chairman. What is so striking
about your testimony, Mr. Maguire, is that the fact the cynicism is so
deeply ingrained and almost richly deserved. Apparently the Soviets
and their agents, in this case, believed that you were prepared to sell
out your company in order to beat out your competition. In other
words, what I am saying is, you dangled out to Mr. DeGeyter the fact
you were concerned about not letting this information get out to your
competition. He apparently went along with you for some 7 months
during the negotiations under the belief that eventually you would
sell the ADABAS to the Soviet Union provided it wouldn't get out to
the competition in this country.
What I am suggesting to you is the cynicism is so deep in the Soviet
Union, to go back to the statement about they will sell us the rope to
hang us, it just struck me as I sat here listening to you. They were
under the belief that you would eventually sell out your country in
order to beat out your competition provided your competition didn't
get the system.
That is to me one of the most striking aspects of your testimony in
addition to your own honesty and patriotism which I commend you
for. We have seen, for example, another witness who did, in fact, sell
out his country in order to achieve some measure of personal gain and
you are to be commended for resisting that particular temptation.
Mr. MAGUIRE. Thank you.
Senator NUNN. Do you have any suggestions other than those you
have made in your testimony about how the Government can better
work with the private sector in protecting our technology?
Mr. MAGUIRE. The technology is changing very, very fast. It is very
difficult to keep up with it in spite of the discussion this morning here
about a group, a clearinghouse staying on top of it. But I think Gov-
ernment communication with high technology companies is the best
way to spread this information about the risk to the national security
and direct through trade organizations and specialized markets.
The computer industry happens?the ADAPS headquarters are
right over in Rosslyn. I doubt whether that headquarters has had any
dialog at all with Commerce.
Senator COHEN. I just make one other point, it is not only something
that afflicts small businesses within the field. If you really want an edu-
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cational experience, you ought to read the book called "The Snowman
and the Falcon" which details the activities of one Christopher Boyce
and friends of his who were successful in getting some of our most
treasured secrets. The Rhyolite and the the ARGUS, are two satellite
systems we spent a good deal of money on in terms of research and
development and they ended up in the hands of the Soviet Union
through their embassy in Mexico. That might be an educational ex-
perience to show you to what extent and how easy, how absolutely easy
it was to penetrate the so-called black vault at TRW, one of our major
companies in this field.
Mr. MAG calm. Thank you.
Senator NUNN. Thank you, Mr. Maguire. We appreciate all your help
and we commend you for your alertness and for your patriotism and
willingness to cooperate with not just this subcommittee but the execu-
tive branch in preventing this kind of transfer from taking place in
your case.
Mr. MAGI7IRE. Thank you.
Senator NUNN. Our next witness is Mr. Theodore Greenberg, Assist-
ant U.S. Attorney, Eastern District of Virginia, Alexandria.
Mr. Greenberg was the prosecutor in the DeGeyter case we just
heard about.
Mr. Greenberg, will you be accompanied by anyone else testifying or
just you?
Mr. GREENBERG. Yes. I have John L. Martin from the Internal Secu-
rity Section with me.
Senator NUNN. Of the Justice Department?
Mr. GREENBERG. Yes.
Senator NUNN. Will both of you be testifying? If so, I will have
both of you hold up your right hand.
Do you swear the testimony you will give will be the truth, the whole
truth, and nothing but the truth, so help you God?
MT. GREENBERG. I do.
TESTIMONY OF THEODORE GREENBERG, ASSISTANT U.S. ATTOR-
NEY, EASTERN DISTRICT OF VIRGINIA; AND JOHN L. MARTIN,
CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE
Senator NUNN. We heard about the DeGeyter case, and of course,
you were prosecutor in this case. I know you have got a long statement
which we will put in the record giving all the details on this case. We
would hope you would be able to summarize it, tell us what you know
about it, and then we will go to questions.1
Mr. GREENBERG. I have picked some significant parts of the state-
ment, Mr. Chairman, and I would like to point them out to you.
On May 22, 1979, the Federal Bureau of Investigation received in-
formation from John Maguire, president Software, A.G., Reston, Va.,
regarding the attempted bribery of one of his employees by Marc
Andre DeGeyter, a Belgian national, who stated that he was acting
on behalf of the Russian Government. DeGeyter wanted to steal Soft-
ware's trade secret, the ADABAS source code.
I See p. 432 for the prepared statement of Theodore Greenberg.
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An FBI investigation, which included the use of an undercover
agent and consensual monitoring, resulted in DeGeyster's arrest at
John F. Kennedy international Airport on May 18, 1980, when De-
Geyter gave an undercover agent a check for $500,000.
The investigation was monitored primarily by the Internal Security
Section of the Department of justice. Prosecution of the case was
directed jointly by the U.S. Attorney's Office for the Eastern District
of V.rginia, and the Internal Security Section.
The investigation was originally conducted as a foreign counterin-
telligence operation and then as a criminal investigation.
DeGeyter was indicted on June 9, 1980, for violating title 18, United
States Code, section 1952(a) (3), interstate and foreign travel in aid
of an unlawful activity; that is, commercial bribery, in violation of the
laws of the State of New York and the Commonwealth of Virginia.
Because of significant governmental considerations, DeGeyter was per-
mitted to plead guilty to misdemeanor violations of the Export Ad-
ministration Act and the Virginia commercial bribery statute. He was
incarcerated prior to the hearing in the Alexandria City Jail and
served his Federal sentence at the Federal Correctional Institution,
Petersburg, Va. He served a sentence of 4 months, was fined $500;
and as part of the plea agreement paid a $10,000 civil penalty to the De-
partment of Commerce.
Senator COHEN. Mr. Greenberg, we can almost get that amount of
fine and penalty for shooting a deer out of season in Maine.
Senator NUNN. I agree with that observation. You heard Mr. Ma-
guire's testimony about how frustrating it is to be working on this
problem for as long as he did, cooperating completely with the Gov-
ernment and DeGeyter ended up with a 4-month sentence.
We recognize there may be reasons that we do not know about in
that respect. Could you tell us what the reasons are for switching from
a felony to misdemeanor?
Mr. GREENBERG. There were significant governmental considerations
which I would be happy to disclose to the subcommittee in a closed
session.
Senator INTuNN. We will respect that and any further questions about
why we will go into closed session.
But I think it is very important for people like Mr. Maguire and
others who have cooperated to the maximum extent possible to know
what happened and whv. After all, they are out there protecting the
governmental secrets. He spent a lot of his time, and I am sure be felt
at certain periods of time it might have been at his own risk financially,
as well as otherwise, to bring this case. The Government has a lot of
interest. One area of overwhelming interest is to get businesses to
cooperate like Mr. Maguire did. So you have to weigh that against all
the interests that the Government has.
We certainly would be interested in hearing that in closed session
at the appropriate time.
Mr. GREENBERG. The interests were weighed. One of the things that
we look to, in prosecuting, is the sentence that is given; which in the
federal system is the sole prerogative of the district court. There was
a 1-year penalty which could have been imposed. The court declined to
do that. Nevertheless, there are other benefits from the prosecution.
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The public becomes aware of it. There is a deterrent effect arising
from the prosecution, and there is publicity and the public is
informed.
Senator COHEN. I am not going to delay this too long. I know we
have some time constraints. Frankly, I am aware of a young man
who is being charged with tampering with an automobile vehicle
right here in the District. He faces a $1,000 fine and 1 year in jail
just for taking a tire off an 'automobile. I would say there is a much
different level of threat to our society in terms of stealing an auto-
mobile tire and taking major trade secrets of this country.
You are not part of this, Mr. Greenberg, but Senator Nunn has
been sitting on hearings in front of this subcommittee for a number
of years now. We have had hearings on chop shops where we have a
vast network of organized crime operating in this eountry. We have
had hearings on illegal drugs coming into the country and we have
had hearings now on technology transfer and there is a commonality
of issues involved, Mr. Chairman, as you know. There is, very little
iisk of being detected, little risk of being apprehended in the com-
mission of a crime; even if you are apprehended and charged, there
is little risk of conviction; and when you are finally convicted, there
is very little risk of getting a substantial penalty, all of which has
contributed to the increase in crime in this country. It seems to me
we have the same situation here where you have got a major attempt
to acquire a very sophisticated system and you end up with a penalty
that is less than you would get for taking a deer out of season in
Maine.
Mr. GREENBERG. Senator, we share those concerns. The indictment
exposed Mr. DeGeyter to 40 years in prison, had he been convicted on
all counts, and a substantial fine.
As I indicated, in this case there were interests which required us
to dispose of the case other than through a trial.
Senator COTTEN. I understand. The same interests were also present
during Christopher Boyce's trial. There was very serious considera-
tion given to dismissing the trial altogether because they didn't want
to get into disclosing the ways in which they apprehended the individ-
uals. It is always the situation when you apprehend somebody who
is engaged in espionage in this country that you might disclose the
methods used to acquire that information. But it does not serve as
much of a deterrent I wouldn't think, to a responsible businessman
to spend 7 months, maybe more than 1 year of his time, cooperating
with the FBI. It would certainly be frustrating then to have this
individual who might have tempted somebody within his organiza-
tion or another company that had access to that software and to
realize that you can spend 1 year of your time and still see a fellow
come out of jail 4 months from now with a $500 fine. That is not much
of a deterrent.
Senator NUNN. Let me just add to that.
I agree with what Senator Cohen has said. I also recognize that in a
case like this the policy is made at higher levels and that you have your
own responsibility to comply with whatever the Department of Justice
decides.
I also recognize the Department of Justice has to coordinate with
other intelligence agencies.
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My frustration is directed toward the overall policy. When we get
into closed session, which we will, we will he looking very carefully at
that because I am sure that there are overriding reasons in many of
these cases involving perhaps sources, methods, and other things that
have to be kept secret. But if in the final analysis the citizens of the
country and the businesses of the country lose faith in the judicial
system then the damage done to the overall protection of America's
secrets and technology would probably be far greater than disclosure
of a particular classified bit of information at that time. So there has
been an overriding kind of protection of sources and methods or some
overriding intelligence reason in my view to warrant the kind of very
minimum sentence that came out in this case.
But again we repeat, .1 know that decision was not made at your level
and we will talk to you about it and we will trace it right on up the
line, see where the decision is made and we may agree with it when we
get through. But we very well may not. I think Congress has a role to
play in this overall kind of policy, too. Certainly not while the case
is going on, but certainly after it is over we do and as far as policy in
future cases.
Mr. GREENBERG. Senator, I would like to add, if I may, that there
was consideration given in our internal deliberations as to whether or
not the case should be dismissed in its entirety. We decided to proceed
as set forth in the plea agreement. So I guess on balance it is not a
total loss, as you would view it.
As I understand it, DeGeyter was the first individual to actually
serve a prison term for violation of the Export Administration Act.
Senator COHEN. If I had that choice, I would make it a tough one.
I would give him the maximum, just to make sure that the jail sen-
tence is a deterrent; don't give him a 4-month sentence, give him a
tougher one.
Mr. GREENBERG. The plea agreement did not permit the Government
to choose the sentence. That was left to the discretion of the court.
Senator NuNN. Speaking of that, what was the bail in this case? I
understand your original indictment was for a felony. Is that right?
Mr. GREENBERG. That is correct.
When DeGeyter was arrested in New York, the Government re-
quested that the New York magistrate set bail at $500,000. When he
was indicted in the Eastern District of Virginia, bail was also set at
$500,000. When DeGeyter was arraigned on the felony charges, that is,
the Travel Act, the bail was reduced over the Government's objection
to $100,000.
Senator NUNN. Would you give me the name of the judge in New
York? Was there a bail originally set in New York?
Mr. GREENBERG. Bail was originally set on the New York complaint.
Senator NuNiv. That was $500,{)00?
Mr. GREENBERG. Yes,.
That was set by a magistrate in New York, by the name of John L.
Caden.
Senator Ntricx. When bail was set, was it transferred to Virginia,
was this a separate account?
Mr. GREENBERG. In New York, they filed a Travel Act complaint. We
decided that venue was more appropriate in the Eastern District of
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Virginia; and we filed a complaint with the U.S. magistrate in Alex-
andria, Va. An arrest warrant was issued on that complaint; and bail
was set by the Virginia magistrate at $500,000. DeGeyter was afforded
a removal hearing in the Eastern District of New York; and ordered
removed to Virginia.
At arraignment on the indictment the U.S. district judged reduced
the bail upon motion of the defendant's counsel to $100,000.
Senator NUNN. Who was that judge?
Mr. GREENBERG. That was Judge Albert V. Bryan, Jr.
Senator NUNN. Was there a reason he gave for making that reduc-
tion to $100,000?
Mr. GREENBERG. He stated that the Government had not charged
DeGeyter with espionage and therefore he didn't feel that 000,000
was warranted.
Senator NUNN. What was the defendant charged with?
Mr. GREENBERG. The defendant was charged with eight counts of
interstate travel to carry on an unlawful activity, in violation of laws
of the State of New York and Virginia, that is, commercial bribery.
The underlying offense of commercial bribery in both New York and
Virginia is a misdemeanor. Nevertheless, the Federal statute provides
in part, that if you travel in interstate commerce to violate certain
State laws, including bribery, the travel constitutes a Federal felony.
We pointed out to the judge the circumstances of the arrest and the
fact that this individual was a foreign national with absolutely no ties
to the eastern district of Virginia or to any community in the United
States; and that he had no American national who would speak on
his behalf. Nevertheless, the judge made the determination that in his
view $100,000 was sufficient.
Senator NUNN. Did you reveal anything else to the judge?
Mr. GREENBERG. No, sir.
Senator Nu/cc. What is that?
Mr. GREENBERG. No. sir. Not at that time. Subsequent to the judge
setting the bail at $100,000 DeGeyter's attorney arrived, the actual
dates are set forth in the statement, arrived in the clerk's office with
a cashier's check for $100,000, just about the same time that I had re-
ceived information from the New York office of the FBI, that
DeGeyter had indicated that he was a KGB agent and that he would
flee the United States if he was able to raise bail money.
I went to the judge?
Senator NUNN. Where did you get that from?
Mr. GREENBERG. That came from the FBI, informant information
which was?the source of the information was never disclosed in court.
What I am telling you now is a part of the public record.
I arrived at the courthouse about the same time that the $100,000
check did. I asked the judge to hold what is called a "Nebbia" hearing.
Nebbia was a case decided by the Second Circuit Court of Appeals
which deals with a judicial inquiry by the court to determine the
sources of funds when cash is being used so that the court can assure
itself that the money is sufficient to insure that the defendant will
return for further proceedings.
The mere circumstances of somebody posting a large amount of cash
in an anonymous fashion raises questions as to whether or not he will
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flee the jurisdiction of the court. So there is a procedure to have a
hearing. We asked for the Nebbia hearing as well as an increase in
the bond.
The. judge denied our request for an increase in the bond and held
a hearing in winch he allowed Mr. DeGeyter to explain that he would
not flee the jurisdiction, but the judge would not permit me to make
the defendant prove what the source of his funds was.
All we knew is that it was cash.
Senator NUNN. What happened after he was told that you had the
informant or confidential source revealing DeGeyter himself was a
KGB agent?
Mr. GREENBERG. We had a hearing on that. I put on an FBI agent
who related that information to the court.
Senator NUNN. Before he got out?
Mr. GREENBERG. Yes.
DeGeyter took the stand, denied making the statement. The judge
let him go.
In this particular case DeGeyter remained within the jurisdiction
of the court and returned for further proceedings.
Senator NUNN. Are judges reluctant to grant those Nebbia hearings?
Mr. GREENBERG. It has been my experience in the Eastern District of
Virginia that the judges have not been granting our requests for full
Nebbia hearings.
Senator NUNN. Why is that?
Mr. GREENBERG. They don't feel that it is necessary. They really
don't give us a reason for the denials. But the Nebbia hearing is a good
idea. It would be my personal opinion?and the subcommittee might
want to study an amendment to the Bail Reform Act which would
require a judge to hold a Nebbia-type hearing where you have a foreign
national who may flee the United States. That is something you might
want to consider.
Senator NUNN. We certainly will consider that.
We have got a lot of legislation pending on that very subject. I don't
know whether you are finished summarizing or not. We interrupted
you.
Mr. GREENBERG. No; I didn't get very far. I wanted to set forth a
number of points which are in my statement. I will just go through
them quickly.
DeGeyter dealt both in the United States and outside of the United
States through a number of corporations; he primarily dealt with a
corporation called Commercial Engineering and Sales Agency, or
CESA. He listed himself as the president of the TVS Broadcast Sys-
tems. All DeGeyter's corporations, with the exception of two Califor-
nia cntities, which I will mention, are located at the same address in
Belgium.
So we have TVS Broadcast Systems; he listed himself as the presi-
dent of Afrabel, African-Belgium, a corporation from Brussels; man-
aging director of Softelectronics in Brussels, then in the United States
through investigation we determined that he was a partner in a joint
venture called In-Mark Associates, in Irvine, Calif., and another joint
venture called Invitee in Laguna Beach, Calif.
We have heard the testimony of Mr. Maguire. Just in summary, I
would say that DeGeyter constantly upped the ante, if you will, they
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started at $150,000, went to $250,000, talked about $400,000, DeGeyter
finally offered them $500,000. It is absolutely clear from reviewing all
of the evidence, including the transcripts of consensually monitored
conversations, that DeGeyter wanted Maguire to steal from his own
company and from himself a trade secret which we have determined
through discussions with Mr. Maguire was worth about $10 million.
For instance, on July 20, DeGeyter is talking with Maguire and
they are discussing how the payments should be made. He says "Want
a check in Zurich You got it. It's yours. I couldn't care less. I'm not
involved." Later in the same conversation, he says to Maguire, "It's
a one-time shot. No paper, no contract, nothing." Be straight, under
the table. What he was saying was that the source code was going to
Russia, that Maguire's competitors would never know about- it. He
insisted upon having the source code brought out of the United States.
He explained to Maguire that it would be examined or verd by a
Russian computer expert in Brussels, then the tape would be Sent to
Moscow.
Through subsequent investigation we determined that he said on
another occasion that he intended to give the tape either to a Russian
employee at the Embassy in Brussels or to an _Aeroflot employee for
direct transfer to Moscow.
He explained to Maguire that after the source code was verified
he would take Maguire to Switzerland and Maguire could have the
payment in any fashion he wanted it. He could put it in a bank
account, he could have cash, DeGeyter even suggested that he could
arrange for the transfer of land in California.
Anything that Maguire wanted, he would do. He suggested that if
Maguire wanted to, he could even negotiate through Techmashimport,
which is a Russian trade corporation which I will get into later, on
whose behalf DeGeyter said that he was dealing for.
Maguire constantly raised a concern about whether or not this was
a proper thing to do, the export of this source code and whether or not
it, could ever be traced to him. The transcript of one of the conversa-
tions, it is instructive on this point.
On August 7, 1979, there was a conversation between Maguire and
DeGeyter. Maguire says:
This source code, my understanding is that as far as moving something out of
the United States, you know is maybe an administrative technicality. Do you
know about the export licenses and everything? What if you get caught with that
source code?
DeGeyter responded:
I don't think there should be any problem in that. I would then take the whole
responsibility for that. You are not supposed to know where it goes to and what
I'm going to do with it.
MAGUIRE. OK, is there any way they can trace II
DEGEYTER. No.
MAGUIRE [continuing]. Back to us?
DEGEYTER. No, no way whatsoever. There is really no way, nothing. But you
know you have to trust me on it. I am telling you there is no way.
Then he goes on to say they will test it in Brussels and go to Zurich.
There comes a point in time where the negotiations between
DeGeyter and Maguire break down. This is toward the end of 1979.
The transaction is not going to take place. There is an impasse.
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On February 4 and 5, 1980, special agents of the Federal Bureau of
Investigation interviewed DeGeyter in his hotel room in New York
and told him that they were investigating possible violations of the
Foreign Registration Act.
Subsequent to that, DeGeyter changed his approach, if you will,
and he goes to an individual by the name of Charles Matheny, who is
in the same office complex as Maguire's software company. Matheny
is president, and chairman of the Board of CENTC, which is a Vir-
ginia corporation. Matheny immediately reports the contact to the
FBI. Like Maguire, he agrees to cooperate with our investigation by
recording conversations and meetings with DeGeyter. DeGeyter uses
a different approach this time. He now says that he is dealing with a
Saudi Arabian sheik, that he has become involved in an Arab bank,
and that they are going to implement a large-scale computer
operation.
Senator NUNN. Was this before or after ABSCAM ?
Mr. GREENBERG. This is before ABSCAM. In fact, there is no Arab
sheik. What he does is he changes his approach in order to mask his
efforts. He wants Matheny to act as a middleman. He wants Matheny
to go out and compromise one of Software's employees and he offers
Matheny a finder's fee, if you will., for doing that.
Matheny and Maguire sit down with the FBI and it is agreed that
an FBI agent by the name of Timothy Klund will pose in an under-
cover capacity as an employee of Software AG. Mr. Klund used his
own name, and posed as a computer expert working for Software.
Thereafter on April 16, 1980, April 18, and some additional dates,
Klund met with DeGeyter at various places in northern Virginia and
the same scenario, unfolds with Klund as had with Maguire. DeGeyter
starts to escalate the price, starting with $200,000, and as Klund indi-
cates his reluctance to go along, we finally have an offer of $500,000.
DeGeyter insists again that the transaction take place overseas. Klund
refuses.
It is finally agreed to meet in New York on May 18, at which time
DeGeyter is supposed to be arriving from overseas with $500,000 in
cash; although he had earlier expressed concern about coining through
customs with that much cash. But he tells Matheny that he will come
with the cash.
In preparation for that meeting, the FBI laboratory produced a
set of dummy computer tapes in order to make the exchange. On
May 18, DeGeyter arrived at JFK International Airport from
Brussels, Klund and DeGevter met. The meeting was surveilled by
other special agents of the FBI. The exchange was made, except in-
stead of $500,000 in cash, Mr. DeGeyter gave the agent a $500 000
check. Subsequent investigation showed that there was only $800 in
that particular account.
Again, a clear intent to steal, even from another thief, the source
code.
DeGeyter was arrested by the FBI and in my statement I set forth
the chronology of subsequent legal
Senator COHEN. Which account was that drawn on?
Mr. GREENBERG. That was drawn, it is attached as exhibit 1, I be-
lieve, to my statement., page 17. It was drawn on the Swiss Credit
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Bank and it is a personal check of Mark DeGeyter. He put a signature
across the front of the check to make it appear to be some sort of a
bank check or cashier's check. But it comes from his personal account
and when we made inquiries with Credit Bank's New York office, they
advised us that at the time of the transfer there was only $800 in the
account.
Senator Nuisrisr. I am going to turn it over to Senator Cohen.
I am going to have to break until 1 o'clock at which time L will come
back and Senator Cohen, if you could finish up Mr. Greenberg, what-
ever you would like to do, Mr. Southard is our next witness. I would
think if you have to leave at that time, it would be better if we could
come back at 1 o'clock for the next witness, Mr. Southard, deputy
district attorney from Santa Clara, Calif.
Just a couple of questions. Was the Commerce Department involved
in an investigation and prosecution of the DeGeyter case?
Mr. GREENBERG. No, Senator. They were not.
As I indicated before, the investigation was predicated first upon a
foreign counterintelligence interest; it then moved into criminal viola-
tions of the Travel Act and Registration Act. The Commerce Depart-
ment does not have jurisdiction under these criminal statutes. They did
not become involved until the plea was taken. The plea included a
provision for the Commerce Department to commence denial pro-
ceedings against DeGeyter.
Senator NUNN. Was the fine as part of the plea that Mr. DeGeyter
was supposed to pay, payable to the Commerce Department?
Mr. GREENBERG. Ultimately, yes. The plea agreement worked out
with the U.S. Attorney's Office, provided that he would pay a $10,000
fine. That was subject to the administrative mechanism of the Com-
merce Department, actually assessing that fine. He deposited with
the U.S. Attorney's Office a $10,000 check, payable to the Treasurer of
the United States. That was done in August. In December the Com-
merce Department formally assessed the $10,000 penalty pursuant to
their administrative regulations and the check was forwarded to
them.
Senator NUNN. So they did collect the money?
Mr. GREENBERG. Yes.
Senator NUNN. After how many months?
Mr. GREENBERG. Between December and?they collected it, I think,
December 24.
The money had been deposited, the actual documents are in my
statement, but my recollection is on or about August 1.
Senator NtrisTN. Did DeGeyter have to have an export license to
operate in the field he was operating in?
Mr. GREENBERG. It is my understanding that the source code would
have required a validated export license. It was not a classified item.
So he would not have needed a munitions control license to export.
But he would have had to check, because licensing is on an item-by-
item basis.
Senator NUNN. If a foreign citizen engages in the export, do they
have to get a personal account for an exporting license? Is he a licensed
export agent ?Js that the way he would be licensed, or is he licensed
at all?
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Mr. GREENBERG. I can't answer you directly, Senator.
Senator NUNN. Does the Commerce -Department have any kind of
list of export privileges.
Mr. GREENBERG. It is my understanding they have a published list of
people denied export.
Senator NUNN. For various reasons?
Mr. GREENBERG. Yes, sir. I never examined the list myself. I don't
know the form which it takes. I do know in this particular case, they
intended to put him on the denial list.
Senator NUNN. Do you know if they put him on the denial list?
Mr. GREENBERG. It is my understanding that as of April 22, 1982, he
has not been put on the denial list.
Senator NUNN. When was he co:avicted ?
Mr. GREENBERG. August 1, 1980.
Senator NUNN. That is what, a year and a half later?
MT. GREENBERG. Yes, sir.
Senator NUNN. And he is still not on the Commerce Department de-
nial list as of August 22, 1981.
Mr. GREENBERG. Yes, sir.
Senator NUNN. That means DeGeyter can come back into this coun-
try and begin doing business again, as far as you know?
Mr. GREENBERG. As far as I know, he could come back into the United
States. If he wanted to export something, he would have to apply for
an export license and he is not on the denial list so I assume they would
handle it in whatever procedure they follow.
Senator COHEN. What; if he just wants to steal something?
Mr. GREENBERG. If he wanted to steal something again?
Senator COHEN. Didn't you recommend he be deported from this
country?
Mr. GREENBERG. Yes, sir, I did.
Senator COHEN. What was the response to that?
Mr. GREENBERG. After he completed his sentence in Petersburg, he
was released to an Immigration and Naturalization detainer which had
been lodged because while he was incarcerated, his visa had expired.
I requested that he be immediately involuntarily deported. INS ad-
vised me that because he had been convicted of a misdemeanor offense,
not involving moral turpitude, that he was not required to depart the
country involuntarily.
Senator COHEN. And then reenter the country voluntarily.
Mr. GREENBERG. That is my understanding.
Senator NUNN. What is your experience in dealing with the Com-
merce Department in this whole area? Do you have any observations,
any personal viewpoint on that subject? Are they capable of handling
the Export Administration Act as now charged by law?
Mr. GREENBERG. I don't think I would be the proper one to answer
that, Senator. I just had the one case come up and I am currently
assisting on another Export Act case. I just don't have a sufficient
basis to answer that.
Senator NUNN. We have Justice Department representatives here
this morning. Does the Justice Department have any comment on
whether the Commerce Department is the right agency
Mr. MARTIN. No, MT. Chairman,
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Senator COHEN. Let me ask you what your experience is in dealing
with the Commerce Department as to whether the source code was even
on the list?
.No. 1, you were reluctant to prosecute the case under the Export
Control Act, weren't you?
Mr. GREENBERG. The initial decision to charge under the Travel? Act
was made because we felt that at that time it would give us the greatest
charging flexibility. During the course of the investigation, the penal-
ties under the Export Act changed. Part of the penalties changed from
a misdemeanor to a felony.
Senator COHEN. What did you originally charge him with initially?
Mr. GREENBERG. He was initially charged with violations of the
Travel Act which carries a penalty of 5 years imprisonment and/or
$10,000 or both. We felt at that time that gave us the greater flexibility
in terms of proving the case.
Senator COHEN. Why did you avoid proceeding under the Export
Administration Act?
Mr. GREENBERG. At the time the initial decision was made, we had
some concerns about whether or not there was a sufficient factual predi-
cate to show whether or not there was an export. As I say, the law was
changing, it was complex, we had a number of different factors going
at once and we just decided it was best to proceed under a different
statute.
[At this point, Senator Nunn withdrew from the hearing room.]
Senator COHEN [presiding]. Was there any question in the minds of
the Commerce Department as to whether or not the ADABAS source
code was on the list of controlled items?
Mr. GREENBERG. It is my understanding through the FBI, the Com-
merce Department had told us that?in order to export the ADABAS
source code, DeGeyter would have had to have a validated export li-
cense, and they make that determination on an item-by-item basis with-
in the broad rubric of the definition set forth in the Export Adminis-
tration Act which, as I recall, has a definition of technology, and so
they made a determination that the ADABAS source code was high
technology.
So to export it you would need a validated export license. If you look
down the list of things for which you need an export license, you don't
see the ADABAS source code, you see broad categories and then you
have to ask them to make a determination, licensing determination, if
you will.
Senator COHEN. Was there any hesitancy on their part to include the
ADABAS as part of the controlled items?
Mr. GREENBERG. I don't think there was.
Senator COHEN. So from the very beginning they said it was subject
to export license control?
Mr. GREENBERG. That is my understanding. When we in the investi-
gative family finally understood ourselves what the source code was,
the source code as opposed to the object code, the Commerce Depart-
ment indicated to us it would require a validated license.
Senator COHEN. As I understand it, the negotiations broke down on
the place of delivery, that it was to be delivered out of this country
rather than in this country. Obviously you had been in touch with Mr.
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Maguire to be sure he hesitated and refused to go along with that
aspect.
Why is that so?
Mr. GREENBERG. Once we decided that it should be pursued as a
criminal matter we made a determination that it would be necessary
to arrest him in the United States because if he left the United States,
we would then have to. deal with the problems of extradition; and
extradition would depend upon which country he went to and what
he was charged with. It is time consuming, and costs a lot of money to
get somebody back. The offense was complete when they met at the
airport and when the money was exchanged for the tape, we just de-
cided to arrest him at that time rather than chase him over Europe.
Senator COHEN. I think it has been said this morning that our export
laws are fairly outdated in view of today's level of technology. Spe-
cifically, it is very difficult to detect microchips. So assuming we create
a new Office of Strategic Trade, assuming we put the control for in-
spection in the hands of the customs officials, assuming we enhance our
inspection personnel at all exit points, what are the chances of those
personnel detecting something as small as this or the tape in the case
of Mr. Maguire?
Mr. GREENBERG. It is my understanding from talking with Maguire
and other computer experts that it would be virtually impossible for
anybody to detect the information contained in the computer tape
being taken out of the country. Obviously, if on exit from the United
States, a border officer opened the briefcase and saw the tape, he would
know that it was a computer tape, but he would have absolutely no
way of knowing what was on the tape. Even if he put the tape on a
computer, it still would have only shown him a series of numbers.
Senator COHEN. You seized some other items in Mr. DeGeyter's
possession indicating ties with the Soviet Union. What were those
items?
Mr. GREENBERG. I will submit Xeroxed copies to the subcommittee.
We seized, pursuant to search warrant, numerous items from his brief-
case. One including his Belgium passport which had a Soviet visa in it
which showed that he was traveling to the Soviet Union for commer-
cial purposes; that the agency sponsoring him was the "Ministry of
Internal Technology, Technical Machine Import," located in Moscow
and that it was valid until May 11,1980.
In addition to that, we found a number of telexes in his possession
mostly to an individual known as Bolshakov. in the Soviet Union.
Our understanding is that the telexes were directed to Techmash-
import.
For example, one of the telexes is,
Money has been received by my bank this morning. I need the money for
Item 6 as agreed in Switzerland no later than May 5th in order to guarantee
the replacements May 11. Best regards, Marc.
Another of the telexes sent to Mr. Bolshakov, read,
Dear Sir, due to the holidays your embassy will provide my visa only by May
14. I will arrive in Moscow on May 19. Hope to catch you for dinner as usual.
Best regards, Marc.
These were all in the time he was dealing with Maguire and Ma -
theny. Another telex, again to Bolshakov,
Dear Sir, 60 kilo samples will arrive May 15, flight."
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And he lists the flight number.
Freight to be paid by you. Best regards, Marc.
July 24, 1979, again to Bolshakov.
Dear sir, after my last visit to the supplier, could you agree to accept ilex
week? Release 3.1.4 regarding Item 4? Please confirm. Best regards.
And then there is one additional one, as I recall.
? We also seized from him a copy of a contract in English between
his company, CESA, on the one hand, and Techmashimport in Moscow
on the other hand, and it called for the delivery of certain pieces of
computer equipment. We seized from him what appears to be a credit
document from the Swiss Volksbank showing that on March 19, 1979,
in Zurich there was on deposit for his use $450,000 U.S. money.
We also seized from him what he called a "delivery acceptance
protocol" dated April 11, 1979, showing that certain items were de-
livered to Russia and that he was to be paid $250,000 for that.
We also seized from him a number of airplane tickets which con-
firmed his travel to Moscow. In fact, one dated April 15, 1980, showed
travel, Moscow to Vienna to Brussels to New York and to Washing-
ton.
Senator COHEN. Do you believe he was, in fact, a KGB agent?
Mr. GREENBERG. We will never know that, sir. All we know is what
the documents
Senator COHEN. I am just wondering. It seems to me kind of incon-
sistent, frankly, that any agent would be carrying these documents in
his possession.
Mr. GREENBERG. We know he was in contact with the Russians and
with this particular corporation. Exactly who or why they asked him
to get these items we were not able to discover.
Senator COHEN. What have you done with respect to the other com-
panies that are listed as his contacts?
Mr. GREENBERG. In going through his papers there were a number
of other corporations we discovered, in particular six.
Senator COHEN. Would you identify them?
Mr. GREENBERG. Tritel Corp. and Flair Leasing, formerly Compu-
file in Irvine, Calif. During the time of our investigation, DeGeyter
approached them and wanted to purchase what is called a Rolm,
R-o-l-m, computer which has been identified to us as a military specifi-
cation computer which is embargoed from export. He also wanted to
purchase a microprocessor chip, and was known by that company to
buy such things over the counter in cash, no sale was completed.
He approached Systems Magnetic Corp. in Anaheim, Calif., and
wanted to purchase from them magnetic tape recorders which we have
been told are used for satellite information retrieval. Each one of these
recorders sell for $90,000-some odd dollars. The sale was not completed
because the company was unsatisfied with his credit references.
He also approached a Keronix Corp. in Los Angeles, Calif. He ap-
proached Corland Corp. and Pay Television Corp. Both of those com-
panies cooperated. They immediately advised the FBI, cooperated in
our investigation and provided us with a taped conversation of a
meeting.
He also approached the Industrial Machinery Division of Pas-
sauant Corp. in Birmingham, Ala. That was for the purchase of a
magnetic tape slotting machine. My understanding is the corporation
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did sell that machine to the Soviet Union and one of their officials
traveled to Moscow and met with Techmachimport officials. DeGeyter
was not present at the meeting but received a fee. He also approached
the Intel Corp. in Norwich, Conn., and requested permission from
them to represent their corporation at a trade show in Moscow; they
declined.
Senator COHEN. With respect to each of those companies, I assume
you have since contacted them to alert them to further attempts by
people other than DeGeyter in contacting them for access to their
technology?
Mr. GREENBERG. Yes, sir.
Senator COHEN. In your dealings with those particular companies,
did DeGeyter indicate he was acting on behalf of the Soviet Union?
Mr. GREENBERG. He indicated he was acting for Techmashimport.
He was quite open about telling everybody that he was working for
this Russian corporation. What he made clear to Maguire, and I think
it is instructive, is that if Maguire did not deal with him, there would
be somebody else right behind him; somebody else coming along, and
dealing for the Russians, who wanted to buy the same things. De-
Geyter was saying, essentially, look, you might as well deal with me
because there is going to be somebody, next place, next time.
Senator COHEN. What seems too brazen about it all, why didn't he
just say he was representing a Belgium corporation or a Polish com-
pany or a Hungarian subsidiary?
MT. GREENBERG. I think what he wanted to do, especially with the
ADABAS code, about which he was talking about something that was
a priority item. It was clear there was no way Maguire was going to
release that thing in such a fashion so that it might fall into the hands
of his competitors. By playing upon the fact that he was taking it be-
hind the Iron Curtain, over to the Eastern Bloc, he sought to assure
Maguire that he didn't have to worry about it. I think that was his sell-
ing point. Look, fellows, you don't ever have to see this stuff again.
They are just going to use it over there and nobody will know about it,
because if it was thought it was Leing sold to one of -Maguire's com-
petitors, it is clear a deal wouldn't even have been a possibility.
Senator COTTEN. That is what I mentioned before about the cynicizan
being so deeply rooted that they would even approach it on this basis,
sell out your country to beat out your competitor.
Tell me quickly about the Techmashimport, is it? Are they regis-
tered with the Justice Department and bow does that operate?
Mr. GREENBERG. Yes, sir. Techmashimport is registered under the
Amtorg Trading Corp. The Amtorg Trading Corp. serves as an
umbrella for approximately 45 different Russian corporations.
Amtorg's head office is in New York City. Their most recent registra-
tion statement was filed in April 1974. That has been reported in the
Attorney General's submission to the Congress.
Techmashimport is listed on its registration statement as a foreign
trade corporation which imports equipment and machines of various
types. We can submit a copy of the registration statement.
Senator COHEN. Just for my own edification, are these private com-
panies or are they arms of the state?
Mr. MARTIN. They are Soviet corporations.
Senator COHEN. What does that mean?
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Mr. MARTIN. Corporations are independent entities formed under
the Soviet law, but for all practical purposes, they are formed by or
under the auspices of some of the ministries, the Ministry of Trade,
Ministry of Finance.
Senator COHEN. I was under the impression that accumulation of
capital wealth was not permitted in the Soviet Union.
Mr. MARTIN. I don't think they are capitalistic oriented, Senator.
They are entities for the purposes of carrying out business, such as the
export-import business.
Senator COHEN. But on behalf of the Soviet Union?
Mr. MARTIN. On behalf of the Soviet Union.
Senator COHEN. So, in fact, any company doing business with this
particular Soviet corporation or any one of the 46, whatever, should
be put on notice, in fact, they are doing business on behalf of theSoviet
State?
Mr. MARTIN. That's correct.
Senator COHEN. Those are all the questions I have, gentlemen. I am
just determining whether we need to hold you for any private briefing
of the staff or members on the plea bargaining aspect.
I am advised at some future time we would like to have the briefings
as far as the aspects involved in the plea bargaining but that won't be
necessary this morning.
The subcommittee is going to stand in recess until the hour of 1
o'clock.
[Whereupon, at 12:23 p.m. the subcommittee recessed, to reconvene
at 1 o'clock the same day.]
ATTER RECESS
[Member present after the taking of recess: Senator Nunn.]
Senator NuNN. The subcommittee will come to order.
Our next witness is Mr. Douglas Southard, deputy district attorney,
county of Santa Clara, Calif.
We appreciate you being here today. We appreciate all of your
help and all of your splendid work in this very important area.
I followed it with interest through the staff for some time. We
swear in all of our witnesses. So if you will hold up your right hand,
do you swear the testimony you will give before this subcommittee
will be the truth, the whole truth, and nothing but the truth, so help
you God?
Mr. SOUTHARD. I do.
TESTIMONY OF DOUGLAS SOUTHARD, DEPUTY DISTRICT ATTORNEY,
COUNTY OF SANTA CLARA, CALIF.
Senator Nuisrx. Thank you.
You have a statement.1 We will ask you to proceed.
Mr. SOUTHARD. Thank you, Senator.
My name is Douglas K. Southard. I am deputy district attorney for
the county of Santa Clara, Calif. I have been employed by the district
attorney's office, the chief prosecuting agency in that county, for a
period of 5 years. Prior to that I practiced general civil law for a
See p. 475 for the prepared statement of Douglas Southard.
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period of 2 years in a small law firm in the county. I am a graduate
of Stanford University with a degree in philosophy, and of Hastings
College of the Law, the University of California, having attained a
J.D. degree in 1975.
Like many people in law enforcement, I have no technical back-
ground in the area of semiconductor manufacture or electronics in
general, but have, of necessity, learned some of the basics of the indus-
try which was necessitated by my involvement in high-technology-
theft prosecutions.
In the district attorney's office, I have been assigned for a period
of 31/2 years to felony prosecutions. For the last 2 years, my primary
assignment has been high technology thefts, including trade secrets
thefts, integrated circuit thefts, electronic equipment thefts and the
investigation and prosecution of related criminal conspiracies.
In learning the technical necessities of this area, I have been greatly
assisted by numerous people in law enforcement and in the industry
itself; and particularly, have received training and assistance from
Intel Corp., Signetics Corp., National Semiconductor, Synertek Corp.,
Hewlett-Packard Corp., and the NBK Corp.
Investigation agencies with whom I have closely worked investigat-
ing and prosecuting these cases primarily have been the organized
crime and criminal investigation section of the Santa Clara County
Sheriff's Office, the Federal Bureau of Investigation, and the Santa
Clara County Police Department, with notable assistance from the Los
Angeles and Orange County Sheriff's Departments, U.S. Customs
Service and the Department of Commerce.
The preeminent police expert on these matters in our county is De-
tective Patrick Moore of the sheriff's office.
In the last 2 years, we have investigated literally scores of tech-
nology-related theft cases, resulting in numerous convictions, but also,
sadly, numerous unsolved thefts or thefts wherein the property was
never recovered.
Like you, we in local law enforcement are very concerned with the
national security implications of .the technology thefts that we have
seen. However, as our expertise Is in the field of investigating and
prosecuting these crimes, and not in the international ramifications
thereof, I will limit myself in my comments to the problem as seen by
the local investigator and prosecutor and some suggestions as to where
law enforcement has to go to help stem the tide.
Senator NUNN. I know we have Mr. Wu in the room. He has co-
operated with our staff. He was scheduled to be our witness. The prob-
lem is we have got to get out of this room at 1 :30. That means we will
not have another witness today.
I also understand the Justice Department has problems with cer-
tain questions that we had planned to ask Mr. Wu. For that reason,
I think what we will do is just put his statement in the record and we
will dismiss Mr. Wu from being a witness today or in this hearing.
Senator NUNN. We do appreciate your being here. We appreciate
your patience in waiting. I didn't want you to have to wait around
to no avail. I understand Mr. Wu just walked in. I was just saying
he was scheduled to be our next witness. We have got to give up. this
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room at 1 :30. Therefore, we will not have time to have but one wit-
ness and I understand .also the Justice Department had certain prob-
lems with questions we planned to ask Mr. Wu, particularly some of
his personal opinions.
I don't want to put him in an untenable position. This was contrary
to what my understanding was as far as his testimony. I think it is
also contrary to what we had discussed with the Justice Department
officials.
Nevertheless, I don't want to put Mr. Wu in that position. We will
put his statement in the record and we will not need him as a witness.'
Mr. MARTIN. Thank you, Mr. Chairman.
Mr. SOUTHARD. Senator, I assume that the subcommittee might like
to have some technical information regarding semiconductors devices.
I have included in my written statement the brief overview of the
processes.
For present purposes, however, I will omit that discussion. I would
however like to present to the subcommittee for their inspection a
board showing the brief example of the different types of materials
which are used in the integrated circuit manufacturing process.
I also have a photograph about 100 times magnification of a stand-
ard integrated circuit memory chip. I would point out to the Senator
the particular integrated circuit package that is in the bottom center
of that board. Significant numbers of these were stolen in a recent $3
million theft in Santa Clara County. Those particular parts are spe-
cifically made for military application.
The integrated circuit was invented in the late fifties and is a
uniquely American development. It was first marketed in 1961 com-
mercially and now the sales worldwide of this type of device are over
$5 billion per year.
Continued development of integrated circuit memory chips have
reduced the cost of information storage in computers 100-fold in the
last 10 years.
In the late 20th and early 21st centuries, integrated circuitry will be
as basic to industrial society as steel was in the 19th and early 20th
centuries. Leadership in this technology will be vital to any nation
who would seek to be a world leader of economic and military power.
In the wake of this new technology has sprung an industry centered
in what has come to be known as Silicon Valley, that is, Santa Clara
County, Calif., which is amongst the most fast moving and competi-
tive in the world.
An individual who can build a better electronic mousetrap using
this technology has potential immediate access to great wealth and
recognition. Companies oftentimes spring up overnight based on one
good idea and sometimes die just as quickly when that idea is overcome
in the marketplace.
In fact, the leading semiconductor manufacturers in this country
and in the world are often companies which didn't exist 15 years ago.
Now some are billion dollar corporations. 17p to now, in my view,
the rapid growth of these companies have prevented a proper assess-
ment of their security operations and has caused a substantial lag in
public and official appreciation of the national security implications of
the new technology.
2 See p. 510 for the prepared statement of Theodore Will Wu.
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According to the available evidence, in the past 5 years alone, a con-
servative estimate is that $100 million or more in electronic technology
and product has been stolen in the Santa Clara alone. We in law en-
forcement have only recently almost stumbled over the problem. At
the .time we were not totally prepared to deal with it. Now we are
beginning to make some headway.
Most of the thefts that we are talking about are perpetrated by or
with the assistance of employees. Cases we handle involve technicians,
inventory clerks, draftsmen and engineers. Quite commonly, security
personnel are involved. They steal circuit designs, process informa-
tion, precious metals and the chips themselves. There is also increasing
propensity finished goods such as computer disk drives and desktop
computers.
The modes of thievery are many. Sometimes burglary is resorted
to. Sometimes truck highjackings or even armed robberies. The most
common fashion is merely to walk out the door of one's company with
a tape or a set of glass plates upon which a chip designed is etched or
the chip themselves in one's coat.
The interesting thing here is that with, for instance, the reticles or
computer tapes, which depict these circuit designs upon them, a com-
pany or country which has not developed the technical expertise to
actually design these products effectively from scratch, such as Eastern
Europe, can get them by theft where otherwise, they would not be able
to make them at all.
The most common problem we have is much more crude and direct,
however, and this is the employee taking things out in his lunch bucket,
in the lining of the jacket or whatever. He sells to a marketplace which
has come to be known as the gray market. He can sell these parts that
are stolen from 5 to 50 cents on the dollar to numerous fly-by-night
independent distributors operating out of low-rent office suites, their
homes or even the back seats of their cars.
Usually, no questions are asked.
As often as not, the buyer purchasing the stolen parts is otherwise
respectable appearing businessmen. He uses his business as a front for
criminal activity or just cannot pass up the opportunity to make some
fast money.
In one recent case, in Santa Clara County, resulting in the convic-
tion of two persons, an u:ndercover officer offered to sell a local distribu-
tor purportedly stolen Intel memory chips which were in very high
demand.
The officer flat out told the businessman these chips were stolen.
After snapping up the parts for $10,000 in cash, which is the common
method of payment, the defendants in the same day shipped these
parts via air freight to Werner Bruchhausen, the nortorious interna-
tional chip broker.
The principle in this particular case is no back alley crook. He.is
the handsome three-piece suited president of a successful parts dis-
tribution firm and, all in all, a very typical American success story.
Yet here he was selling stolen integrated circuits to an internationally
known fence. The reason is the same as always, greed. Greed has
spawned what we think of as the gray market and to understand, I
think, briefly, we will talk about the hierarchy in electronics commerce.
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In between the manufacturer and the end user are middlemen.
Usually we are talking about franchised distributors which are rep-
utable firms dealing directly with the manufacturers but beneath the
franchise directors has grown a market populated by the independent
distributors.
They obtain their product either from a company which manu-
factures it when a surplus occurs or from franchised distributors or
even end users when they have surplus parts.
What is created by this system is an "anything goes" marketplace
where, especially in times of high demand and short supply, such as
occurred in the 1977 to 1980 time frame, speculation runs rampant.
It's really no different from pork belly futures. Brokers buy large
quantities of parts at fire sale prices, hoping to be able to turn them
over quickly if a need is found elsewhere. Numbers of these people
made a lot of money doing just this sort of speculation during the
parts shortage of 1977 to 1980.
An example of the gray market is a case which has been success-
fully prosecuted recently. This is the case of Larry E. Lowery. Larry
Lowery first came to the attention of law enforcement in January
1978. In that month an employee of TAM Electronics, a distributor,
was observed to steal $100,000 worth of late model circuits and trans-
port them to one, David Henry Roberts. Roberts in turn delivered
them to Lowery's house. Because of a series of miscues by law enforce-
ment, he escaped prosecution. But, again, in 1979, Roberts, the
middleman here was rearrested and convicted for two integrated cir-
cuit thefts. Again, he named Lowery as his instigator and fence but
the police were able to acquire evidence other than Robert's statement
with which to prosecute.
In April 1980, an undercover investigation was initiated which
ultimately led to the arrest of Lowery in the search of his premises.
Over 11,000 stolen integrated circuits valued at between $100,000 and
$150,000 was seized. Legwork and forensic examination disclosed that
the records that Lowery kept relating to his acquisition of these parts
were entirely phony. Handwriting experts determined that in fact
all the records were authored by the convicted thief, David Roberts.
While the prosecution was pending and just prior to a preliminary
i
hearing in the matter, a key witness n the prosecution was lured out
of his home, attacked and severely beaten.
Later on, the eve of the jury trial, Roberts himself, then under
subpena by the prosecution, was murdered execution style and his
body dumped in a shallow grave in the Santa Cruz Mountains.
Lowery was convicted in November 1981. Notwithstanding his
sentence to prison, however, while he was still out on bail pending
sentencing, another theft occurred from Monolithic Memories, Inc., in
Sunnyvale, Calif.
That theft occurred over Thanksgiving weekend in 1981?$3.4
million worth of late model high tech integrated circuits were stolen,
including a great number of the samples that you see on the board
before you. Senator.
Many of these circuits were specially designed units with direct
military applications. In all, about a ton of boxed, first line parts were
taken, necessitating at least two truckloads to make off with all the
booty.
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Ultimately, three subjects were arrested and evidence was seized
implicating both Lowery and his partner, Larry Kizer.
There was insufficient evidence to charge Kizer or Lowery.
The parts themselves have not been located or recovered and frankly
it is feared they have been already transported overseas, most likely to
a European location. It is worthy of note that Lowery had reportedly
bragged to associates of his .that he was the biggest fence in northern
California and the evidence suggests he also made new European con-
tacts with which to market his goods.
To date, the trial of investigation in this case is littered with dead
bodies, assault, sophisticated thefts, drug sales and more. Scores of
criminal conspirators appear to be involved. It represents the largest
case of consistent, habitual, organized criminal activity aimed at
Silicon Valley.
Another case worthy of note involves some characters already men-
tioned before to the subcommittee.
John Henry Jackson is a five-time convicted felon who, for the last
3 or 4 years, has been the proprietor of a P.C. board "stuffing" house
and aspiring computer maker, with a parts brokerage business in the
Santa Clara area.
Around November 1979, again, around Thanksgiving time, Intel
Corp., a maker of the state-of-the-art type products, suffered a million
dollar theft of approximately 10,000 units. These were state-of-the-art
memory devices in very high demand throughout the world at that
time.
After the theft, corporate inevstigators had no leads as to how these
items had been stolen but shortly thereafter, it came to their attention
a large number of these products had surfaced in Germany.
Specifically, Siemons A. G. of West Germany, a hugh electronics
manufacturer, and one of Intel's best customers, had apparently just
received a large shipment of 10,000 parts which were established to be
the stolen parts.
Siemons purchased approximately 10,000 parts from E.V.B. Corp. of
Munich, West Germany. E.V.B. received the parts from two sources,
Republic of Virginia, here in Arlington, Va., and another parts
broker, Mormac, Inc. of Torrance, Calif.
Each of these companies in turn purchased their portion of parts
from Space Age Metals in Los Angeles who obtained it from John
Jackson.
Luckily an employee of Jackson's came forward spurred in part by
continuing revelations in the press regarding the seriousness of the
stolen chip problem. The witness told, in a period of less than 11/2 years,
of having counterfeited tens of thousands of integrated stolen circuits
for Jackson, primarily, Intel products.
With the cooperation of this informant, an undercover operation
was instituted and eventually Jackson and one of his associates were
arrested. His associate had been an Intel employee.
Concurrent with these arrests, extensive search warrants were pre-
pared and served on various parties. In one business letter discovered
at Space Age Metals, a Republic vice president told a Space Age offi-
cial that he was amazed at the quantity and price of this product that
was being offered, given their scarcity in the marketplace, but that he
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wanted to close the deal and was not stupid enough to ask any dumb
questions.
The Jackson case points out the difficulty of proving knowing receipt
of stolen circuits, once we do uncover the theft case.
Although business records of the affected companies did indicate
transactions among them and the particular kind of product involved,
it is impossible to prove which particular items they sold to one another
and, therefore, the chain of circumstantial evidence is very strained.
The recordkeeping systems employed by the brokers are not suffici-
ently specific to be able to trace the particular part, nor are knowing
thieves likely to keep such records.
Another aspect of the theft problem which is potentially much more
serious for national security purposes is the trade secret thefts, since
such thefts provide the very means of obtaining the technology upon
which to establish an industry and develop competitive expertise. I
have heard authoritatively stated that the United States at one time
possessed a 10-year lead over the Soviet Union in microelectronics
technology, but that that lead has already shrunk to maybe 5 years
based primarily on the easy access the Soviets have to our technology.
I am not in a position to attest to the veracity of that proposition
but certainly what I have seen would not negate it. By their very na-
ture, trade secret theft is the most difficult type of theft to detect and
solve. What is taken is generally not a physical thing, but an idea.
Original documents, computer tapes, reticles, masks and technical
drawings can be easily copied by any number of photographic or
electronic means without anything corporeal ever being taken.
Hence, nothing is missed.
California, at least, is among the few States who have a criminal
trade secret theft statute. I set it forth in my statement but won't
repeat it here. I think it important to note a statute makes it a crime
either to take an article representing a trade secret or copy an article
representing a trade secret. It also makes it a crime to offer a bribe in
order to obtain a trade secret.
Unfortunately, very few States have criminal trade secret theft
laws.
I discovered that most of the Western States in this country where
significant semi-conductor and defense plants exist, have no trade
secret laws whatsoever.
I think this is a serious deficiency which perhaps can be addressed by
legislation.
An example of a trade secret theft case of some importance is the
case of Peter K. Gopal. Peter K. Gopal first came to the attention of
industry security personnel in approximately January 1978, in con-
nection with National Semiconductor Corp.'s unauthorized possession
of a computer data base tape containing the design for a late model
Intel microprocessor chip.
After an inconclusive investigation, the matter was put on the back
burner. Thereafter, however, in September 1981, one Andrew Moore,
an independent manufacturer's representative, indicated in conver-
sations to a national semiconductor employee that he represented a
principal who owned the original Intel design information available
for sale. The national employee immediately contacted his superiors
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and law enforcement authorities and an investigation ensued. During
undercover negotiations, Gopal indicated that he had past and con-
tinued access to proprietary Intel design via insiders within Intel
Corp. He stated he already sold his designs in Europe and customers
were quite satisfied with their performance and authenticity.
The undercover operation culminated in late September with
Gopal's arrest during a sale of Intel chip designs. Search warrants
were prepared and served leading to the seizure for Gopal's business
premises of hundreds of computer tapes, masks and other design
materials for Intel, National, Semiconductor, Zilog, and other
corporations.
The values of the items seized ran well into the millions of dollars.
Some of the items seized were still in the research and development
stage, and had never been marketed by their owners.
Also seized were personal and business record of Gopal's indicating
trips to Europe in 1977 and 1978, including trips to the Soviet Union
and Poland.
Business cards of numerous Soviet consular level and ministry offi-
cials dealing in technology exchange and purchase were found. I won't
try to list them all because they are contained in my statement on
pages 40 and 41. I will note there are two individuals there named
Pavlov, which is the same name mentioned yesterday. One card bears,
in Gopal's handwriting, the phrase: "Terms of contract negotiation."
Business records seized also indicated continuing international
transactions between Gopal and Austrian and Swiss firms. The pri-
mary Austrian firm, Sacher-Gesellschaft AG, of Vienna Austria,
was headed by Dr. Rudolf Sachem. He was also a one-half shareholder
with Gopal in Gopal's business, Semiconductor Systems, Interna-
tional, Inc. Subsequent investigation of the Swiss firms indicated they
were probably nothing more than shell corporations, serving as mid-
dlemen for the transactions in which they were involved. Efforts to
track the course of the transactions past the Swiss firms were fruitless.
Gopal has refused to cooperate with the authorities.
The investigation continued after Gopal's arrest, however, and a
business associate was located who told authorities that Gopal bragged
of having purchased certain integrated circuit testing equipment and
selling it to Poland via one of his Swiss intermediaries.
A check of business records confirms Gopal indeed acquired the
equipment in question and sold it, but it's ultimate purchaser could
not be determined,
My understanding is the Department of Commerce, after an investi-
gation, concluded that it was unable to prove a violation more serious
than a misdemeanor for which the only penalty was suspension of
export licensing privileges.
By that time, Gopal had been blackballed in the industry and his
license matter was rather moot.
Senator NUNN. Did Gopal ever go to jail?
Mr. SOUTHARD. He was convicted after a 6-month-long court trial.
He was sentenced to 2 years, 8 months in a State prison in California.
I might note his prosecution was unusually difficult. Neither the
prosecution nor defense was willing to risk a jury trial because the
issues were so complicated.
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At one point a judge threw out most of the physical evidence because
the police officer serving search warrants were so ignorant as to what
they were looking for they had to take technical people along with
them just to identify what was stolen and what was not. Thankfully,
the court of appeals reversed that, but the complexity of the case ne-
cessitated, for instance, actual court hearings and testimony being
taken in the computer room at National Semiconductor. We had to
adjourn and go to the massive rooms filled with computers just to view
the evidence.
He was sentenced to 2 years, 8 months in State prison. He is, how-
ever, currently free on bail pending appeal which does not seem to
be terminable in the foreseeable future. After a year and a half, the
court reporter hasn't even finished making the transcript.
I have addressed the suggested responses, some suggested responses
in my written statement, Senator. I won't reiterate those here except to
mention generally it is the feeling of myself, as a representative of the
law enforcement community in Santa Clara County, that we need in-
creased investigative personnel in export regulatory agencies and the
FBI to help us.
These matters are matters which are international in scope And just
are not appropriately dealt with by a local sheriff's office with its
limited background and limited resources.
I also believe the creation of a national regional high technology
crimes task force or at least the information clearinghouse would be
quite valuable in this context.
Senator NUNN. Do you agree with Dr. Baker's general suggestion
there or did you hear him testify?
Mr. SouTHARD. I did hear him testify and found his testimony very
enlightening and I do agree with his suggestion; yes.
I have also suggested a system of mandatory crime reporting which
would be similar to what currently exist in banking law as something
that might be helpful. I have noticed a reticence on the part of some
manufacturers to become involved in law enforcement.
Also, electronics broker regulation is a subject I think that should
be investigated, and the possible enactment of Federal trade secrets
laws to complement the Secrecy Acts, the Espionage Act. These, of
course, are suggestions on my part seen from my perspective. It is for
the subcommittee to put all the pieces of the jigsaw puzzle together
and come up with its recommendations.
Thank you.
Senator NUNN. Thank you very much. You have been helpful and
have a very impressive record in law enforcement particularly in this
area.
From what I am told, you have had probably more experience in
this area than most Federal people.
Mr. SOUTHARD. Unfortunately, I think that is true ? yes.
Senator NUNN. You are saying there really is clearly a Federal role
that is beyond the scope of what local law enforcement officials can
handle?
Mr. SOUTHARD. Absolutely. For instance, in the Jackson case, which
is still pending, if we were really going to go all the way to prove out
the chain of evidence, tracing the parts from Germany back to their
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theft source in California, it would require the exhaustion of entire
witness budget of my county for the whole year.
Frankly, the public, who is more concerned about violent crime,
doesn't want us chasing all over the world after white-collar crime.
Senator NUNN. Why would the mandatory crime reporting you sug-
gest be needed for the national clearinghouse? What would be the
advantage of this?
Mr. SOUTHARD. It is just a matter of gaining intelligence
information.
What we have found since we started an active investigative role,
which includes sting operations and continual undercover monitoring
efforts, is you have to establish patterns here and there to know what is
going on. I think it and mandatory crime reporting help us to estab-
lish patterns, recognize who the real thieves are, and therefore, estab-
lish priorities for enforcement.
Senator NUNN. How valuable and necessary is it for prosecutors,
Federal and State, to have a technological background when prosecut-
ing these advance technology type cases?
Mr. SOUTHARD. For someone in my position, it is not, certainly,
absolutely necessary. It might be desirable. I certainly would not have
the technological background. What you will find, however, is that
industry, once aroused, is very interested in helping and will provide
all of the training that is really necessary to understand what is basi-
cally a new vocabulary.
Senator NUNN. The general thievery amounted to $100 million in
the last 5 years in Santa Clara County from high technology firms?
Mr. SOUTHARD. That is correct.
.Senator NUNN. How much of it would you estimate comes from
foreign sources trying to gain access as opposed to just cutthroat,
unscrupulous competition of stealing secrets from competitors?
Mr. SOUTHARD. Frankly. I think most of the kind of thing over
which our county has jurisdiction comes from normal street level
thieves and a hierarchy of brokers who are criminally involved.
The important thing, however, is this provides a mode of acquiring
products for illegal export.
We have seen it on numerous occasions. Mr. Bruchliausen. for in-
stance, who was previously mentioned, had contact with three of the
people I previously mentioned.
Mr. Gopal was concerned almost exclusively with overseas export of
technology.
Senator NuNN. When you look at the overall problem. wouldn't it
be more effective to have a concentrated law enforcement effort at the
source, that is, at the manufacturer's level, rather than at the borders?
Mr. SOUTHARD. Obviously that would seem the simpler solution. We
have given a lot of criticism to industry in terms of the lack of self-
policing they have done. However, these products are designed for
the marketplace. They are going to get out into the marketplace one
way or the other. Therefore, if there were more security guards on the
doors of the manufacturers it wouldn't help.
We need an effort to keep these from going over the borders.
Senator NUNN. Is there any way businesses and companies can be
notified about people like Gopal, whose activities are known to law
enforcement and many times are not known to businesses?
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Mr. SOUTHARD. I think this is where the central clearinghouse or
task force idea will come in handy.
Of course, they can be notified. They have to be, discreetly. They
are not, so far as I know, on any regular basis.
Senator NuNN. What suggestions would you make to high tech-
nology businessmen who are patriotic and want to protect national
security?
Mr. SOUTHARD. I think we have seen some such businessmen testify
before this subcommittee.
You have got to question about the validity of the firm you are
dealing with, especially a foreign firm. Go to the FBI, ask questions.
The FBI has recently sought to publicize their efforts in this problem
in our particular area by putting up billboards similar to the World
War II type of thing about the walls having ears.
Senator Nuivrr. When you mentioned having an electronic broker's
license, what do you think the resistance level would be to this in
terms of business people saying this is just another Government
regulation, and so forth?
Mr. SOUTHARD. I'd sympathize with them if they said that. On the
other hand, the legitimate brokers are already doing business in a
proper fashion. I don't believe it would be unduly negatively influ-
enced by that kind of legislation.
What I am proposing is nothing different than the type of control
that is almost everywhere already imposed upon pawnbrokers. You
have to identify it as an area which is a type of enterprise which is
particularly easy to abuse. Once you have done that, I think you can
rationalize the controls.
Senator NuNisr. How does law enforcement have any way of protect-
ing lmowhow ? That being a very special part of what America has
today that the Soviets don't have, how in the world can you devise a
law enforcement mechanism or codify an overall approach to protect-
ing knowhow ?
Mr. SOTJTHARD. I don't know that law enforcement activity in that
particular area is what is most needed. In that particular area,
on-site
security by the manufacturers should be effective and, in fact, know-
how or trade secrets tend to be more closely guarded than actual phys-
ical product because you can insure the physical product against
theft. You can't insure the know-how. But the type of organization
proposed by Dr. Baker, I think, would be very helpful in giving the
Federal law enforcement community the appropriate technical input
to understand whether know-how is really involved.
Senator NuNN. Do you think the companies in the Silicon Valley
area are aware of the military significance of what they are developing
in most cases?
Mr. SouTHAan. I think somehow subliminally they are aware of it.
Frankly, most of the market is the commercial market.
Recently one of the leading minds and figures in the area, the vice
president of Intel was asked about that particular question, and his
basic response was, "Hey, we're in the chip-making business. That's
the Fed's problem to worry about where it goes afterwards." I was
kind of surprised at his relatively callous answer there, but I think
that may be somewhat representative of the field.
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Senator NUNN. What would the Soviet Union have done with the
technology Gopal was stealing? How would it be useful to them?
Mr. SOUTHARD. Nothing he had had direct military application.
The same kind of chip that can be used in a Pacman game can also
be used in a cruise missile. What was interesting about what he had
was lie had very voluminous design information about current memory
and microprocessor chips. What he had, if possessed by somebody else
with the appropriate equipment and process information that is the
chemical process type of magic that goes into making these chips?if
you had those two precursors and designs, you could have gone into
immediate mass production of these chips and modified them for spe-
cific military use.
Senator NUNN. You have been involved in this area a good bit. Have
you had any contact or liaison with the Commerce Department?
Mr. SouTHARD. Only with respect to the Gopal case. They sent an
agent out for a few days who went through records in my files. Evid-
ently he also made trips to Europe investigating the case, but they
were unable to find a felony violation.
Senator NuNN. Have they encouraged you to coordinate with the
internal information when you have it in this area?
Mr. SOUTHARD. There has been no encouragement other than this
one agent. There has been no communication officially other than that.
Senator NUNN. Mr. Southard, we really appreciate your good work
in this area. You are a credit to law enforcement; you are a credit to
prosecuting attorneys. You have been a great help to our subcommittee.
We appreciate the summary you gave considering the time elements
we were working against here today. We hope you will continue to
keep in touch with us and give us the benefit of your views.
Mr. SOUTHARD. I certainly will.
Senator NUNN. Thank you very much.
Mr. SOUTHARD. Thank you, Senator.
Senator NUNN. Tomorrow morning at 9 :30 we will resume the hear-
ing. At that time we will hear from the Honorable James L. Buckley,
State Security Assistance, Department of State; Edward O'Malley,
Assistant Director, Intelligence Division, Federal Bureau of Investi-
gation; Arthur Van Cook, Director of Information Services, Depart-
ment of Defense, Chairman of National Disclosure Policy Committee;
William Von Raab, Commissioner, U.S. Customs Service, accom-
panied by Mr. George Corcoran, Assistant Commissioner.
We will resume these hearings at 9 :30 a.m. tomorrow.
[Whereupon, at 1 :42 p.m., the subcommittee recessed, to reconvene
at 9:30 a.m., Thursday, May 6, 1982.]
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TRANSFER OF UNITED STATES HIGH TECHNOLOGY
TO THE SOVIET UNION AND SOVIET BLOC NATIONS
THURSDAY, MAY 6, 1982
U.S. SENATE,
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS,
Washington, D .0 .
The subcommittee met at 9:30 a.m., in room 3302, Dirksen Senate
Office Building, under authority of Senate Resolution 361, dated
March 5, 1980, Hon. Sam Nunn presiding.
Member of the subcommittee present: Senator Sam Nunn, Demo-
crat, Georgia.
Members of the professional staff present: Eleanore J. Hill, chief
counsel to the minority; Katherine Bidden, chief clerk; Gregory Bald-
win, assistant counsel to the minority; Jack Key, Glenn Fry, and Fred
Asselin, staff investigators to the minority; and Kathleen Dias, execu-
tive secretary to the minority chief counsel.
[Senator present at convening of hearing: Senator Nunn.]
Senator NuNN. The subcommittee will come to order.
[The letter of authority follows:]
U.S. SENATE,
COMMITTEE ON GOVERNMENTAL AFFAIRS,
SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,
Washington, D.C.
Pursuant to rule 5 of the Rules of Procedure of the Senate Permanent Sub-
committee on Investigations of the Committee on Governmental Affairs, permis-
sion is hereby granted for the chairman, or any member of the subcommittee as
designated by the chairman, to conduct open and/or executive hearings without
a quorum of two members for the administration of oaths and taking testimony
in connection with hearings on the transfer of U.S. high technology to the Soviet
Union and Soviet bloc nations, to be held May 4, 5, 6, 11, and 12, 1982.
WILLIAM V. ROTH, Jr.,
Chairman.
SAM NUNN,
Ranking Minority Member.
Senator NuNN. Senator Roth is going to be coming in later this
morning. He asked me to go ahead and begin the hearings.
Mr. Secretary, we are delighted to have you this morning returning
to the Senate. We are pleased to have your associates.
If you plan to have testimony from all three of you here today, I
will ask all of you to rise and take the oath. We swear in all of our
witnesses before the subcommittee.
Do you swear the testimony you will give before the subcommittee
will be the truth, the whole truth, and nothing but the truth, so help
you God?
Mr. BUCKLEY. I do.
Mr. JOHNSTON. I do.
Mr. BRYANT. I do.
95-929 0 - 82 - 11
(155)
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TESTIMONY OF JAMES L. BUCKLEY, UNDER SECRETARY OF STATE
FOR SECURITY ASSISTANCE, SCIENCE AND TECHNOLOGY, DE-
PARTMENT OF STATE, ACCOMPANIED BY ERNEST JOHNSTON,
DEPUTY ASSISTANT SECRETARY OF STATE FOR ECONOMIC AND
BUSINESS AFFAIRS, AND CLYDE BRYANT, CHIEF, SUPPORT SERV-
ICES DIVISION, OFFICE OF MUNITIONS CONTROL, STATE DEPART-
MENT
Mr. BUCKLEY. Thank you, Mr. Chairman.
I will be the only one giving the statement, but Mr. Clyde Bryant on
my right is thoroughly familiar with the munitions control apparatus
and Mr. Ernest Johnston on my left is familiar with some of the
technical details of Cocom.*
Senator NUNN. Good.
I know you have a statement, so we will be delighted to receive it.
Mr. BUCKLEY. Mr. Chairman, it goes without saying that I am de-
lighted to have this opportunity to testify on the role of the State
Department in controlling the transfer of militarily critical tech-
nology to the Soviet Union and the Eastern bloc. Whatever the record
of prior administrations, Republican as well as Democratic, it is clear
that this administration has placed a very high priority on improving
the effectiveness of the executive branch in enforcing export controls.
It has launched important initiatives which we believe will greatly
improve their overall effectiveness while sharpening the focus on
those elements of advanced technology and process know-how which
are of the most critical importance to the Soviet bloc.
We freely acknowledge that much more needs to be done; and we
are actively working with other agencies to improve coordination over
a range of issues.
It will take time, however, for all these efforts to take hold in
particular areas, especially because of the large amount of new data
that has had to be gathered by various agencies.
In your letter inviting me to testify, you asked the State Department
to respond to six specific questions. I have done so in the attachment
to my prepared statement, which I would appreciate your including
in the proceedings.
Senator NUNN. Without objection, they will be admitted into the
record as if read.1
Mr. BUCKLEY. National security export controls are a basic element
in overall U.S. policy toward the Warsaw Pact countries.
To put it plainly, these controls are a recognition of the fact that
the global objectives of the Soviet bloc are inimical to our own, and
threaten every value for which our Nation stands. Therefore, it is sim-
ply harmful for us to provide those nations with Western, militarily
useful technologies, to be turned against us.
As most of these sensitive technologies are not within the sole con-
trol of the United States, it has been essential from the outset to achieve
among the major Western industrialized powers fundamental agree-
* COCOM stands for Coordinating Committee for Multi-Lateral Export Controls?to
which Japan and all NATO countries except Iceland belong.
1 See p. 533 for Secretary Buckley's prepared statement with attachments.
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ment as to what technologies are militarily critical and how their
transfer to the Soviet bloc should be controlled.
The instrument that has been developed for this purpose is the co-
ordinating committee for multilateral export controls, or "Cocom"
to which Japan and all NATO countries, with the exception of Ice-
land, belong.
Cocom was created in 1949 by informal agreement among its mem-
bers, and has thus been in existence for more than three decades.
Cocom has three major functions:
The first is the establishment and updating of lists of embargoed
products and technologies. Although Cocom lists are not published,
they become the basis for the national control lists administered by
each member government. The member governments are now prepar-
ing for a major review of these embargo lists, which will begin in
October.
Second, Cocom acts as the clearinghouse for requests submitted
by the member governments to ship specific items to specified end users
in the proscribed countries. ( The Cocom-proscribed countries are the
the Soviet Union, the other Warsaw Pact countries, China, and the
other Communist countries in Asia.)
Third, Cocom serves as a means of coordinating the administration
and enforcement activities of the member governments.
The Cocom lists set up fairly specific limits on the technical char-
acteristics above which member governments agree that they will pro-
hibit exports to proscribed countries, unless Cocom itself approves
exceptions.
In agreeing to a national request to export items on one of the con-
trol lists, Cocom works on the principle of unanimity. No application,
in short, is approved if any member state objects.
One of the evolved strengths of Cocom is that in over 30 years of
operations, there have been very few cases in which a government has
exercised its sovereign right to go ahead with exports over Cocom
objections.
Senator NUNN. Mr. Secretary, when you say no application, in short,
is approved if any member state objects. Does this mean that no tech-
nology is left off the excluded list?
In other words, there is no restriction unless everybody agrees, or
does it mean just the reverse?
Mr. BUCKLEY. It means once a technology is on the list, any one
member nation has a veto over its transfer to a proscribed country.
Senator NUNN. I see. So it is really a veto that protects the export of
technology?
Mr. BUCKLEY. That is right.
Senator NUNN. One country can block all the rest.
Mr. BUCKLEY. With respect to those items on the list.
Senator NUNN. The crucial thing is what is on the list?
Mr. BUCKLEY. Exactly, yes.
This self-discipline is all the more remarkable given the absence of
any treaty or executive agreement undergirding the organization.
Over those decades, Cocom has generally been successful in inhibit-
ing the overt flow of strategic technology to our adversaries.
During the 1970's, however, in the honeymoon days of detente, the
United States and the West relaxed controls over a number of em-
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bargoed commodities. It was believed that wide-ranging trade would
somehow alter the international behavior of the Soviets and moderate
their military investment.
During this period, the United States went from being the least, to
the most frequent, seeker of exceptions to multilateral controls. Cocom
itself came to reflect such attitudes, and exceptions to the embargo
were allowed to thrive.
We now know this was a mistake. During the period of detente, the
world stood witness to the greatest military buildup in history, along
with the increased Soviet adventurism that grew out of an increased
self-confidence.
The Reagan administration came to power 15 months ago deter-
mined to stem the flow of the technology that the Soviet Union and its
Warsaw Pact allies were using to improve their already vast warmak-
ing capabilities. It was clear that the West's crucial qualitative edge
in military systems was being undermined by the Soviets' increasingly
aggressive efforts to buy or steal our militarily relevant technologies
and equipment.
More precisely, we saw this well-orchestrated acquisition program
giving the Soviets:
First, a very significant savings in time and money in their military
research and development programs;
Second, rapid modernization of their defense industrial infrastruc-
ture;
Third, the opportunity to accelerate the closing of gaps between our
weapons systems and theirs; and
Fourth, the chance to develop, with alarming speed, neutralizing
countermeasures to our own technological innovations.
As a consequence, the administration has initiated efforts to fill in
gaps in the multilateral export control system. At the Ottawa summit
meeting last July, President Reagan raised the problem of Western
technology transfer to the Soviet Union. An agreement at Ottawa to
consult on this issue culminated in a high level meeting in Paris dur-
ing January, the first ministerial level Cocom meeting since the late
1950's. The other Cocom governments have asked that the results of
that meeting be kept confidential, as indeed are all Cocom proceedings.
I chaired the U.S. delegation to that meeting, however, and I can
say that there was a concrete consensus that the member governments
should increase their effort to improve Cocom effectiveness. We have
been encouraged by what appears a new and more constructive atti-
tude of other Cocom governments, and feel that this meeting forms a
basis for a revitalization of the Cocom system.
Such a revitalization will take much hard work and it will take time,
among other reasons because Cocom depends on the national adminis-
tration of controls by 15 individual governments. But some specific
steps are under way. Effectiveness, for example, requires precise defini-
tions of many complex technologies. We have made progress toward
agreement on a number of specific, technical proposals in this area to
tighten the embargo.
Second, the United States is now working on proposals that will ex-
pand Cocom control lists of new priority industries. These include
gas turbine engines; large floating drydocks ; certain metallurgical
processes; electronic grade silicon; printed circuit board technology;
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space launch vehicles and spacecraft; robotics; ceramic materials for
engines; certain advanced composites; and communications switching
and computer hardware and software technology and know-how.
This process will continue into the triennial Cocom list review, which
will take place this October, when a general reappraisal of everything
on the control lists will take place.
Senator NUNN. Who is actually doing this reappraisal for our gov-
ernment, for instance? What group of people carry out our national
input into that process?
Mr. BUCKLEY. We have the military, of course, and we also had a
tremendous input from the intelligence services who are examining
new concepts of what is really critical, what are the choke points, and
what is it that the Soviets are most anxious to have. We also have a
great deal of cooperation from industry in helping us in this process.
Senator NUNN. Is there a central clearinghouse on this ? Is there
one location that everything feeds through, or is it a rather, diffused
effort?
Mr. JOHNSTON. No, sir. We have something called the Economic
Defense Advisory Committee which is chaired by the State Depart-
ment. Under this committee there are 12 technical subcommittees de-
pending on the kinds of products that we are talking about, that is
where the decisions will be made on exactly which products we will
try to have added to the list.
Senator NUNN. Are those people State Department employees?
Mr. JOHNSTON. Some of them are.
The chairman of the organization is. But there are members of the
Defense Department, the Commerce Department, and the intelligence
community.
Senator NUNN. So the central location is in the State Department,
but you are bringing in other agencies on that?
Mr. JOHNSTON. That is right.
Senator NUNN. Is that both for the items on the export control list
as well as export arms control list?
Mr. JouNszoN. No. The arms control list is controlled by another
section of the State Department. That is done essentially in collabora-
tion with the Defense Department.
Senator NUNN. So this is a group that deals with the
Mr. JOHNSTON. Export Administration Act.
Senator NUNN. Export Administration?
Mr. JOHNSTON. Right.
Mr. BUCKLEY. We have also developed workable proposals for har-
monizing the export licensing procedures of the 15-member states so
as to make Cocom decisionmaking more efficient. What we are seeking
are ways to bring national enforcement practices to a level of equal
effectiveness. These two matters will be addressed at a special Cocom
meeting which will convene in Paris later this spring?and the fact
that all partners have agreed to that special meeting is testament to
our shared goals.
We have been cooperating with our Cocom allies to improve
enforcement and investigative capabilities of illegal diversions.
The State Department, working closely with our intelligence and
investigative agencies, has been channeling appropriate information
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to other governments to alert them to potentially illegal activities
within their borders. We have also encouraged them to increase the
investigative resources and the sanctions available for export control
enforcement. Commerce, and in turn customs, have detailed officers to
the State Department to support this overseas compliance effort.
Cocom has thus, we believe, made measurable progress toward
strengthening strategic export controls since this administration came
into office. But it is also clear that the continuing revitalization process
will be long and hard.
In attempting to strengthen controls on strategic exports to the
Soviet Union and the other Warsaw Pact countries, we are faced with
the perennial problem of securing agreement with all the other Cocom
allies on just where to establish the technical cut-offs for commodities
and technologies under embargo. 'Determining in many scores of dif-
ferent technical areas what is sufficiently strategic to warrant control
is not an easy task. We do not always agree on what are militarily
critical technologies, yet the purpose of the organization is limited to
such technologies. Members exercise considerable care to avoid con-
trols whose principal impact would be economic rather than military,
and each has its own views and perspective.
Western European and Japanese economies would generally speak-
ing, be affected more than the U.S. economy by sweeping controls
on manufactured products. But such differences between ourselves
and our Cocom allies should not be over-emphasized.
We should remember that our allies have cooperated with us for
over 30 years to control significant amounts of equipment, material
and technologies through Cocom. That is, first and foremost, because
we share a common belief that such controls constitute an important
element in our mutual defense.
As you know, the State Department is also responsible for adminis-
tering munitions export controls which cover defense articles and
services. Munitions are not approved for export to Warsaw Pact
countries. Accordingly, the main issue in administering these controls,
relate to security concerns and our foreign relations with other
countries.
Your letter of invitation mentions that, in an executive branch more
effectively organized to shape and enforce export control policy. you
envisage a principal and expanded role for the Department of State.
We too, envisage such a role for the Department.
Upon taking office, this administration undertook a full review
of our policy concerning the transfer of strategic technology to the
Soviet Union and the other Warsaw Pact countries.
The State Department was a major participant in this review,
which culminated in the Cocom high 'level meeting. The State Depart-
ment led our delegation to that meeting. Since then, on a number of
other occasions, senior officers at the State Department have discussed
with our allies security concerns related to technology transfers.
We are persuaded that improved allied cooperation on sensitive
technology transfer issues is a realistic objective. There will, of course,
continue to be some differences on the details of controls and their
application to individual cases. But, with hard work to identify
clearly and to justify persuasively what needs to be controlled, and
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how controls should be enforced and administered, such differences,
we believe, will be the exception rather than the rule.
Senator NUNN. Thank you very much, Mr. Secretary.
We also appreciate your furnishing the material answering specific
questions at the end of your testimony. We will study this with great
care as we come up with any recommendations we may make for
improvement.
I have a few questions I would like to pose to you and I will be glad
for you to farm them out here in the particular area of expertise.
I will direct them to you. You handle it from there.
Are you generally satisfied with the level of cooperation we are
getting from Western Europe and Japan in high technology area
today?
Mr. BUCKLEY. Yes; we are.
One thing that we sensed was a really heightened awareness of the
part of those countries as to the impact of technology purchases on
actual military capabilities. And I would give high credit for that to
briefings conducted by the CIA at the various Cocom capitals, in which
highly classified detailed information opened lots of eyes to the impact
of technologies to which people were not paying any attention. I think
that has had the effect of increasing cooperation to a very significant
degree.
Senator NUNN. Is it necessary for the United States to always be a
leader in this respect? I am sure we want to be. But let's assume, for
instance, we get rather sloppy in our administration. Have we had any
instances of cases where the allies came to us and said, "Look, you are
transferring technology which we think is useful in military applica-
tion by the Soviet Union and we want you to crack down," or is it
always the United States who has to save our allies?
Mr. BUCKLEY. My institutional memory is rather short, in this case,
15 months. I do know I can speak of one ally, I can't give names, be-
cause of the Cocom ground rules, that has begun to take on a role of
leadership in these areas. The United States, I think, historically has
been the key. But Ernie, do you know of other instances?
Mr. JOHNSTON. It is essentially the United States. I think that is
right.
This subject comes up primarily in the review that we conduct. There
we have also had suggestions from other countries about items that
ought to be added to the list.
Senator NUNN. In other words, you could say it is a pretty general
rule that based on historical experience that export controls are not
going to be any tighter in any of the countries than they are in the
United States?
Mr. JOHNSTON. I think that is generally true.
Senator NUNN. We are the leader and we are going to have to con-
tinue to lead?
Mr. JOHNSTON. That is right.
Senator NUNN. The State Department is not a law enforcement
organization in the usual sense. When administration of the Arms
Export Control Act was handed to the State Department, why did
the Department give enforcement to the Customs Service?
Mr. BUCKLEY. First of all, customs is an organization in place with
the people at all the points of export. Second, there is a rather easy
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means of communication between bureaus and that is to require that
licenses that are issued be filed at the relevant customs office before
the actual shipment has taken place, and this facilitates the ability
of customs to match the documents against what is being exported.
Senator NUNN. What is the relationship between the Export Admin-
istration Act, which regulates nonmilitary-type technology, and the
overall Arms Export Control Act? Do you have two separate groups
of people dealing with that all together?
Mr. BUCKLEY Yes.
Mr. JOHNSTON. Yes. The Defense Department and the State Depart-
ment work together to decide what goes on the munitions list. This is
something defined, if you will, as an instrument of war or something
which is related directly to making war. However, there is always a
series of goods which could have a dual use. They can have a civilian
application, or they could have a military application for example,
computers. These are the main things controlled by the Export Admin-
istration Act.
Senator NUNN. Of coarse, Commerce is responsible for that?
Mr. JOHNSTON. Yes, sir.
Senator NUNN. How much input does the State Department have
with Commerce regarding the Export Administration Act?
Mr. JOHNSTON. On the list of strategic ffoods, which is essentially
what we are talking about, the Defense Department and the State
Department work very closely with the Commerce Department.
The Secretary of Commerce has the final authority, but the Defense
Department and the State Department work very closely both in re-
gard to deciding what gets on the list and what the licensing policy
ought to be.
Senator NUNN. The munitions list has to consider certain gray areas,
I am sure.
Mr. JOHNSTON. I would like to ask Mr. Bryant, who is our expert on
munitions.
Mr. BRYANT. In compiling the U.S. munitions list, we, the Depart-
ment of State, consult with the Department of Defense as required
by Executive order, to determine what should be on the munitions list.
There are occasions when there are debates as to whether or not a
specific item is on the list. The determination, generally speaking, is
made on the basis of what that item was specifically designed to do.
Senator NUNN. When you examine that munitions list, do you go in
the gray area, things that are really not what we would call conven-
tional munitions, but which do involve high technology?
How much overlap is there between the Export Administration list
and the munitions list?
Mr. BRYANT. There should be no overlap at all, either an item is con-
trolled under the Export Administration Act or it is controlled under
the Arms Export Control Act. In certain fields, particularly military
electronics, the basic technology involved in both civil and military
electronics may be the same.
For example, computer chips and the integrated chips are both used
in military and nonmilitary items. When incorporated into a military
item, the chips take on the characteristics of that item. The chips
themselves, when exported, are not subject to our control, unless spe-
cifically designed for inclusion in a military item.
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Senator NUNN. When you are getting your munitions list, your
arms export list, do you have feed-in from the Defense Department?
MY. BRYANT. Yes sir.
Senator NUNN. I.343 you have feed-in, from some of the intelligence
agencies?
Mr. BRYANT. Yes, sir.
Senator NUNN. The State Department makes the final decision?
Mr. BRYANT. That is correct, sir.
Senator NUNN. In the Export Administration Act, the Commerce
Department makes the final decision?
Mr. BRYANT. I have to defer to Mr. Johnston.
Mr. JOHNSTON. Yes, sir, except that I do think there is a pretty close
collaboration on a subject like this. The three agencies are working
very closely together.
Senator NUNN. Do the Defense Department and the State Depart-
ment both have a feed-up and input into Commerce on that?
MY. JOHNSTON. Yes.
Senator Nuisrx. Does the division in the State Department that deals
with the munitions list have a feed-in to the Commerce Department in
terms of the export list?
Mr. JOHNSTON. If an item is taken off the munitions list, and occa-
sionally there are bills in Congress which do this, we pick them up on
the list that is administered by the Department of Commerce.
Senator NUNN. What group in the State Department feeds into the
Commerce Department in terms of the Department's final decision-
making on the export control list?
Mr. JOHNSTON. It is the Bureau of Economic and Business Affairs.
Senator NiaNN. That is a separate group from the group on the
munitions list?
Mr. JOHNSTON. Right.
Senator NUNN. You say the Bureau of Economic Affairs?
Mr. JOHNSTON. Yes.
Senator NUNN. Does that group also feed into the Cocom delibera-
tive process?
Mr. JOHNSTON. Yes.
Senator NUNN. The same group?
Mr. JOHNSTON. Yes. It is essentially the same. It is the same office.
We have an Office of East-West Trade which devotes, I would say,
probably 75 percent of its efforts to this.
Senator NUNN. The State Department does not try to enforce the
Arms Export Act as such. You make the decision about what goes on
the list and then you leave the enforcement up to customs; is that
right?
Mr. JOHNSTON. That is correct.
Senator NUNN. The State Department does not have investigators
go'ng around to determine if compliance is taking place?
Mr. BRYANT. No, sir. Whenever we receive an allegation of willful
wrongdoing, we refer the allegation to the U.S. Customs Service for
investigation.
Senator NUNN. How does that work? Is that working well?
Mr. BRYANT. We find that that is working quite well.
Senator NUNN. Do you find any disadvantage, any big disadvantage
in having the enforcement of the Arms Export Control Act under
customs whereas the licensing is under State?
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Mr. BRYANT. No, sir. Rather we find it an advantage. Willful viola-
tions are investigated much more rapidly, we think, than would be
the case if we were doing our own investigations.
Senator NUNN. In other words, you think you are getting along
well with that divided kind of responsibility?
Mr. BRYANT. We think the coordination between the two offices is
excellent, sir.
Senator NUNN. What level of technical expertise do you need in
licensing at State in that function, in the Arms Export Control Act?
What kind of person and background do you have to have in that
function
Mr. BRYANT. The licensing officers are generalists, sir. We draw
upon the technical expertise of the Department of Defense whenever
we have questions as to the level of technology of an item.
Senator NUNN. Is there a certain group in the Department of De-
fense that you look to for that?
Mr. BRYANT. We have a central office to whom we refer everything
and then they refer out to the various services as the need arises.
Senator NuNN. So you do not try to provide all the technical experts
in the State Department and you have people with broad policy-type
experience?
Mr. BRYANT. No; in the Department of Defense we can draw on
defense research and engineering and the technical expertise in the
services.
Senator NUNN. Do you have a computerized operation in your muni-
tions function?
Mr. BRYANT. The present system is to some extent computerized and
we are now in the process of installing what is called a data-based
management system computerizing our whole operation.
Senator Nu-NN. When will that be operative?
Mr. BRYANT. It is hope that will be operative before the end of the
fiscal year.
Senator NUNN. What will that do for you?
Mr. BRYANT. Any application coming into our office will be assigned
a number, as it is now. That application enters through a terminal into
a minicomputer, and is tracked throughout its whole period of time in
the office where it is, what is being done with it, what problems may
have arisen with regard to that particular application and when it goes
out, what action we took with regard to that application and why.
Senator NUNN. What number of applications would you handle on
your munitions control, say, in a year?
Mr. BRYANT. 36,000.
Senator NUNN. That would be the gross number that you look at?
Mr. BRYANT. That would be the gross number of all types of
applications.
Senator NUNN. Of the gross number, how many different items will
end up being on the munitions list?
Mr. BRYANT. Approximately 95 percent of them, perhaps higher
than that.
We deal with a very small community.
The applicants come to us generally speaking, knowing that the item
that they are seeking to export is on the U.S. munitions list.
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Senator NuNTN. What does a manufacturer do if the item is not on
the munitions list? What is the difference in what they have to do if
it is on the list and if it is not?
Mr. BRYANT. If it is not on the U.S. munitions list, that he goes to
the Department of Commerce to seek authorization for export.
Senator NUNN. Then that would get into their function on licensing
export?
Mr. BRYANT. That is correct.
Senator NuNN. If it is on the list, they have to go through the State
Department?
Mr. BRYANT. They have to go through the Department of State.
Senator NUNN. What about the operation in the Bureau of Economic
Affairs? Is that computerized?
Mr. JOHNSTON. We do not really computerize the operations that we
do. I should explain to you that the Department of Commerce receives
very large numbers of license applications. I do not have the number,
but I think it is in the neighborhood of 50,000 to 60,000. They do not
call all of these cases to the attention of the State Department or to the
Defense Department. There are criteria which are set down and only
if those criteria are met are those license applications furnished to one
or the other Department. Accordingly, the number of specific licens-
ing requests that we look at is small compared to the number that the
Department of Commerce receives.
Senator NuNN. Has the State Department generally been able to
work well with the Customs Service in coordinating enforcement
efforts under the Arms Export Control Act, both in this country and
abroad?
Mr. BUCKLEY. Yes; we have.
As I mentioned in my testimony, they have assigned people to us
abroad. All of these mechanisms, of course, are under review to make
sure that we get the most effective enforcement possible.
Senator NuNN. Is the United States requesting many exceptions
from the Cocom list?
Mr. BUCKLEY. We have an odd phenomenon. Because the Commerce
Department put in a very special effort to clean up the backlog, we
have a bubble of items before the Cocom at the present time. This is
compounded by the fact that where we are most competitive in our
trade with the Soviet Union and in the Eastern bloc is in some of the
high technology level of dual uses, particularly the computer area.
So combining these two factors, we have a large number of excep-
tions relative to the number of cases that are up for discussion.
I would say this, though, that we do not ask for an exception except
where we have very good evidence to our satisfaction that it has. a
commercial end use and we have the knowledge that these items will
not be used for military purposes.
Senator NuNisr. Have we approached Cocom for any exceptions since
the Polish crisis came up?
Mr. JoHNsToN. Yes; we have, but not for the Soviet Union.
Senator NUNN. What countries are involved? Or is that a confiden-
tial matter?
Mr. JOHNSTON. No; it is not.
The Cocom control list applies to the Soviet Union, to the European
Communist countries, with the exception of Yugoslavia, and to China.
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We have approached the Cocom for exceptions in regard to those
countries other than the Soviet Union.
Senator NUNN. Briefly what countries are included in the restric-
tions for Cocom? In other words, if you have got a list of things that
Cocom agreed to, what countries are excluded from being able to
receive those items?
Mr. JOHNSTON. The countries to which the Cocom directs its efforts
are the Soviet Union, the Eastern European countries, China, and I
believe the other Asian Communist countries.
Senator NUNN. Those are the ones that are on the restricted list?
Mr. JOHNSTON. That is right.
Mr. BUCKLEY. Albania, North Korea, Vietnam, Kampuchea, and
Mongolia.
Senator NUNN. Do we have any agreement in Cocom on any non-
Communist country?
Mr. BUCKLEY. They are all Communist.
Senator NUNN. So the question of shipping goods to Libya, coun-
tries of that nature, would be strictly a national decision?
Mr. JOHNSTON. That is right.
Senator NUNN. Where is that national decision made on those kinds
of shipments?
Mr. JOHNSTON. The Export Control Act has three grounds for
refusing to let goods out of the United States. One is for strategic
purposes, and those are the items that we have been talking about.
Those are directed mainly toward the Communist countries. The sec-
ond is short supply, if we decide that we need a good to stay in this
country because we don't have enough of it. That is another possi-
bility. The third is for foreign policy reasons. It is the foreign policy
controls which you are talking about with respect to Libya. In those
foreign policy controls we have got a number of subdivisions. One is
if there is a regional problem because of some military activity that is
going on; the second one is human rights controls, if we think that a
country has not been behaving as well as it should on human rights:
a third is terrorism control.
Senator NUNN. Mr. Secretary, if you had to point out two or three
weaknesses in our present policies that you are most concerned about,
how would you list those? What areas of improvement are you most
concerned with?
Mr. BUCKLEY. I think that there is room for improvement in coordi-
nation and we are working on that. In fact, just yesterday we had a
meeting of a number of involved agencies, to address precisely those
questions. There are 12 different agencies in the Government involved
in this area, 42 groups. And a lot of them are very specialized.
We need to have a better idea of what each one of us is doing.
Another area, and this is what I had in mind when I referred to
some of the inevitable delays, is in having a better idea of what really
is critical. One of the dangers we have to avoid is that we put too much
into these lists. Then you have two things: First, you splinter time for
enforcement; second, you raise resistance on the part of our allies. An
innovative industrialist such as Fred Bucy of Texas Instruments has
been very useful in emphasizing the importance of things like manu-
facturing processes, not the goods, but how the devil do you make those
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goods?right. We have asked our intelligence services to focus in these
areas and also to focus on the techniques by which the Communists
sniff out what we are doing. Here is another area of a more precise
definition of what it is we should be controlling. Finally, an area we
have under discussion is the person to person transmission of ideas and
technologies, the visitors who come to this country and attend univer-
sities, and so on.
There is the leakage that comes out of businessmen going around
the world, not being conscious of how precious their concepts are. So
I think this is another area where we have to come up with procedures
and mechanisms for enforcing policies; in heightening the understand-
ing of the American manufacturing community and foreign manu-
facturing communities of the dangers of leakage through observation
of manufacturing processes and also trying to figure out that delicate
line between pure academic, research, science, and applied scien-te in
the potential military area. This thought leads me to a final area
where I think we have yet to come to grips with sufficient precision;
that is, identifying the emerging technology that usually starts out
with the commercial use but nevertheless predictably will have mili-
tary applications.
Senator NuNic. There was a suggestion earlier in the week in our
hearing by Dr. Lara Baker of Los Alamos that a group of technical
experts away from Washington could serve as a strictly technical non-
policy clearinghouse where everything could channel through there in
terms of technical questions without any reference to policy. I know
that there are some people in the intelligence and defense communities
doing that. I am not certain where that should be housed. There was
a strong opinion it ought to be done away from Washington so it
doesn't get caught up in the Department of Defense policy versus the
Department of State policy, or the Commerce policy on export versus
the others.
That is an idea that ought to be looked at. The feeling was there
wasn't any one central clearinghouse for technical expertise, not that
they would all be housed there, but that they would serve as the focal
point for that.
The estimate was it would take about 20 professional people and
about $5 million a year and that an awful lot of the expertise would
already be there in working in other areas.
There also was a suggestion made by Dr. Lara Baker exactly what
you just alluded to, that we ought to spend more time narrowing down
the list of what is critical to the Soviet Union; in other words, sort of
reverse engineering espionage efforts so that we would have a much
narrower list and try to do what we do well, rather than trying is
con-
trol too much and not controlling anything well. I think that s what
you are saying.
Mr. BUCKLEY. Yes.
Senator NUNN. I would bring that suggestion about one central
clearinghouse on technical information to your attention.
Mr. BUCKLEY. I would appreciate that.
Senator NUNN. I am not looking for another agency, but it might be
the voice for any policymaking kind of persuasion. DOD always is
willing to take a more restrictive approach. That is their job. Corn-
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fierce is going to take a more export-minded approach, which is nat-
ural. That is the business they are in. The State Department is going
to look from the foreign policy aspects.
All of these agencies, as good a job as they do, are very much in-
volved in the policy type application.
I would throw that out for your consideration.
Mr. BUCKLEY. It is a very interesting idea. We should follow up on
it.
Senator NUNN. Mr. Secretary, I want to thank you and your asso-
ciates for being here this morning. We appreciate the good job you
are doing. I know that this administration is very much concerned
about the policy in this area.
The purpose of these hearings is not so much to determine policy, but
rather to determine how it is we carry out that policy and how does the
Government work once the President makes his pronouncements.
One of the interesting things we had early in the week was a pretty
thorough examination of the Commerce Department's own internal
numbers of people dealing in each one of these agencies. They are try-
ing to revoke the license and enforce the law with a very small number
of people. Another thing you would find of interest is that after former
President Carter announced the grain embargo, the people responsi-
ble for going out and investigating violations and pursuing those
totaled one person in the Department of Commerce. Interestingly
enough, I guess it follows that having one person involved in that
whole investigative effort that there was 100 percent compliance, ac-
cording to the statistics. No one violated the grain embargo.
Mr. BUCKLEY. I think, Mr. Chairman, that this last, area is one that
ought to be looked at, the resources to do the job.
Senator Nuicx. Thank you very much.
Our next witness is Mr. Edward J. O'Malley, Assistant Director,
Intelligence Division, Federal Bureau of Investigation.
Mr. O'Malley, we swear in all witnesses before our subcommittee.
Would you hold up your right hand?
Do you swear the testimony you will give before the subcommittee
will be the truth, the whole truth, and nothing but the truth, so help
you God?
Mr. O'MALLEY. I do.
TESTIMONY OF EDWARD S. O'MALLEY, ASSISTANT DIRECTOR,
INTELLIGENCE DIVISION, FBI
Senator NuNN. We know you have a statement. We will ask you to
proceed with that.
Mr. O'MALLEY. Thank you very much, Senator.
I appreciate the opportunity afforded me to appear before you today
to review the FBI's role and responsibilities in the area of technology
transfer.
As you are aware, we covered some of this ground in our previous
correspondence with you. I will expand on those issues and respond to
any other specific questions you may have concering the FBI's role.
My responses and comments here today will, of course, be unclassified.
Much of the counterintelligence activity we engage in to counter the
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activities of the hostile intelligence services to acquire our tecnology
is classified. Therefore, to be more specific and responsive to your
interests, I have furnished to you certain written comments which are
classified.
We, in the intelligence community in general and in the FBI in
particular, are acutely aware of the legitimate concern of the various
congressional committees in this area of technology transfer and ap-
preciate the efforts you are expending to bring these concerns out
front and before the public.
We hope that by the additional exposure of this issue through these
public hearings the magnitude of this problem will be more fully
understood.
Basic to the understanding of this issue is the need to recognize and
acknowledge the nature of the U.S. society?a free and open society.
It is within the framework of this openness that the FBI must operate
to counter the activities of the hostile intelligence services to acquire
U.S. technology.
Our counterintelligence activities are conducted in accordance with
a recently signed Executive order?E.O. 12333?and within the frame-
work of the Attorney General guidelines which are currently being
revised.
There is nothing contained within the parameters of those two docu-
ments which adversely affects our ability to carry out our counter-
intelligence responsibilities. Being a law enforcement agency, our agent
personnel are thoroughly trained in the judicial process necessary to
successfully prosecute a case.
We realize the importance and necessity of obtaining sufficient evi-
dence to prosecute a case if that, in fact, is the ultimate objective of
a particular counterintelligence investigation. Prosecution resulting
from a counterintelligence investigation would normally be under the
espionage statute. Though the espionage statute does not stipulate that
only cases involving classified information can be prosecuted, legal
precedent has established such a requirement.
Diplomatic immunity, of course, precludes prosecution; therefore, in
those counterintelligence investigations involving officials with immu-
nity the counterintelligence objective against such officials would prob-
ably be to have the subject declared persona non grata.
Naturally the elements of proof for such action are not as stringent.
There are, of course, benefits other than prosecution and personal non
grata action that accrue from other counterintelligence investigations.
These include the identification of intelligence officers, their agents and
contacts, modus operandi of the hostile intelligence services, and their
targets?all meaningful counterintelligence objectives.
The Soviets correctly view the United States and several other West-
ern countries as a continuing source of important and openly available
scientific and technical information, to which they take every opportu-
nity to obtain access.
Some of the unclassified documents so acquired are previously classi-
fied materials which had been declassified through U.S. procedures pro-
viding for automatic declassification after a stipulated period. When
collected on a massive scale and centrally processed by the Soviets, this
information becomes significant because it is collectively used by Soviet
weapons designers and weapons countermeasures experts.
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The Soviets also regularly attend high-technology trade shows and
visit commercial firms in the West, particularly small- and medium-
sized firms that are active in developing new technologies. These ap-
parent trade promotion efforts often mask Soviet attempts to acquire
emerging Western technological know-how before its military uses
have been identified and Government security controls have been ap-
plied. Emerging technologies are particularly vulnerable to foreign
collection efforts of this type.
Because of the ease by which unclassified technology and proprie-
tary information is obtained, the gain is very substantial. Soviet ac-
quisition efforts are massive, involving many Soviets traveling outside
the Soviet Union.
Literally thousands of Soviet bloc persons enter this .country each
year?trade delegations, students and other academic exchange par-
ticipants, diplomats, and seamen--and all have the potential to collect
information/technology, most of it open source and unclassified.
Those efforts are well rewarded and in an open society such as ours
there will undoubtedly be no degradation of those efforts. The acquisi-
tion of classified information falls more to their trained and experi-
enced intelligence officers.
It is in this area that the FBI's counterintelligence activities are
mainly concentrated.
Illustrative of those collection efforts of unclassified information
is an incident that occurred Ely? Nev., in late 1979, and comments
which appeared in the Washington Post. (Additional information
concerning this is being made available to you in classified form.)
In October 1979, two Soviets, dressed in jeans and sport shirts and
almost 2,500 miles from their posts in Washington, D.C., visited Ely,
Nev., a potential basing site for some MX missiles. They identified
themselves as Vladimir'"Kvasov and Vladimir Militsyn, listed respec-
tively by the Soviet Embassy as a lieutenant commander/assistant
military attache and as a civilian employee of the attach? office. The
assistant librarian at the Ely Public Library was previously notified
by the FBI as to a possible visit by them. They showed up at the li-
brary dressed very casual and described themselves as travelers from
Washington.
The younger Russian went to the newspaper rack while his friend
asked for books on industry in Las Vegas. Las Vegas is a restricted
area for Soviet Embassy personnel because of its proximity to Nellis
Air Force Base and the Nevada nuclear test site.
After browsing, they both came back with a book on the Nevada
sites?a 300-page environmental impact statement for the Nevada site
where the U.S. Government conducts underground tests of its nuclear
weapons. They received permission to copy the volume which was done
at a cost of $47 at a nearby store. The Russian who did the copying
identified himself as an energy engineer from Washington. The two
Russians subsequently made several other stops inquiring about the
area and the kinds of industry in the area.
An important aspect of our counterintelligence approach to limit
or attempt to negate technology loss is the need to develop an aware-
ness of the problem?the threat posed by the activities of the hostile
intelligence services.
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We in the EBI have a dedicated program which we call DECA?
development of counterintelligence awareness?which was instituted
some 4 years ago to address this issue.
This awareness program is targeted at defense-related companies
involved in U.S. classified contracts?at the secret and top secret
level?some 11,000 throughout the United States. These firms are
identified to us through the Defense Logistics Agency. We work closely
with the Defense Contract Administration Services regions through-
out the United States in coordinating our awareness programs. Each
of our field offices has at least one special agent who is responsible for
this program.
The essence of the program is to alert company management and
security personnel of the possible threat to that company?because of
its classified contract?posed by the hostile intelligence services.
Senator NuisTN. Do you take the initiative in contaoting these com-
panies or do you go through trade associations?
Mr. O'MALLEY. We contact the companies directly. We have identi-
fied the companies in each one of our field divisions which have classi-
fied contracts and we then approach them directly.
Senator N17NN. What kind of cooperation are you getting?
Mr. O'MALLEY. It has been excellent. We are there in a sense that
we are not concerned about the legitimate approved trade they have
with the Warsaw Pact countries but to alert them to the threat posed
by the services especially the hostile intelligence services of these coun-
tries, their efforts to obtain illegally, clandestinely, their technology.
Senator NuNN. Do you have a list when your agents call on them?
Do you have a list of critical technology that may be involved?
Mr. O'MALLEY. It depends on the industry. We are aware of what
technologies the other side is looking for. If -we approach somebody in
the aerospace industry, we will alert them as to our knowledge of what
the other side is seeking which may be relevant to their particular
company.
It is hoped that the threat information imparted will be incorpo-
rated into the routine security briefings each of those companies is
required to give its employees. Additionally, articles such as one pre-
pared by the FBI entitled "Secrets, Spies and Citizens" are made
available to the company for distribution to its employees.
In addition to the field level participation, senior Bureau Head-
quarters personnel including Director "Webster and me address this
awareness issue in speeches to senior industrial management person-
nel throughout the country. A recent example was Director Webster's
comments to the Electronic Industries Association at Boca Raton,
Fla., in January of this year.
Electronic expertise in Silicon Valley is widely recognized in the
United States and abroad. Technology transfers within and from
Silicon Valley can occur in different manners. The Santa Clara Coun-
ty sheriff discovered a vast black market in stolen electronic chips.
Many of these stolen chips are sold and used in the United States,
but some find their way abroad. When illegal exports have been un-
covered in Silicon Valley, Federal agencies become involved in the
investigations.
Federal involvement can result in several ways. If the technology
is classified for national security purposes, the FBI will investigate
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charges of espionage. If unclassified technology, valued at more than
$5,000 is stolen and transferred across State lines, the FBI can inves-
tigate under Interstate Transportation of Stolen Property statute.
The U.S. Department of Commerce and the U.S. Customs Service
investigate violations of the Export Administration Act, which nor-
mally involve the sale and export of technology listed on the com-
modity control list without obtaining specific authorization from the
Department of Commerce. The U.S. Customs Service also investigates
violations of the Arms Export Control Act, which normally involve
the sale and export of arms, ammunition, weapons platforms and
special military equipment without obtaining specific authorization
from the State Department.
Although the FBI does not initiate investigations of violations of
the Export Administration Act or the Arms Export Control Act per
se, foreign counterintelligence and other authorized criminal investi-
gations can uncover violations of these acts. When a foreign counter-
intelligence investigations uncovers such a violation, it can be easily
integrated into the ongoing investigation. Our primary interest in
these cases is the activity of foreign intelligence services in the United
States.
Senator NuNN. What if the Commerce Department picks up the
phone and tells them they have an Export Administration Act viola-
tion, do you have jurisdiction over this?
Mr. O'MALLEY. It is clearly an export violation, we don't have any
jurisdiction.
Senator NUNN. Let's say they suspect it may eventually be going
to a Warsaw Pact country?
Mr. O'MALLEY. In that case we would have an interest from the
counterintelligence standpoint. We do have foreign counterintelligence
cases where we have developed information which would also be a
violation of the Export Administration Act.
Senator Nurrisr. Even if it is not classified, you still have jurisdiction
if it involves foreign?
Mr. O'MALLEY. If we investigate the activities of all hostile intelli-
gence services in the United States, we do not have to wait until there
is a violation of some law to initiative an investigation of these hostile
services. We are interested in whatever they are doing in the United
States and if it involves sensitive but unclassified technology we cer-
tainly would be interested in that.
Senator NUNN. Suppose it is a citizen of West Germany with a
legitimate export license, on a nonclassified, item. Commerce tells you
they suspect that eventually this may find its way to the Soviet Union.
What is your justification in that?
Mr. O'MALLEY. In a case like that we would be interested in the
sense of a counterintelligence investigation that the odds are that if
something is being transshipped, something that has been legally
exported to a Western European country is being transshipped to the
Soviet Union, the odds are that there is some involvement by a hostile
intelligence service. Within that context, we would certainly have
interest.
Senator NurNiv. When you say you have an interest in it, does that
mean you would actually pursue it, investigate it? Do you think you
have the jurisdiction?
Mr. O'MALLEY. Yes; we would. We would pursue that.
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We have an excellent day-to-day relationship with the Compliance
Division of the Department of Commerce.
Senator NuNisr. Are you saying the relationship is being upgraded
and expanded with the Commerce Compliance?
Mr. O'MALLEY. I am saying our relationship with the Compliance
Division, Department of Commerce, is being enhanced at the current
time. I understand that measures are being taken within the Compli-
ance Division to expand its own capabilities.
We also enjoy an outstanding working relationship with the U.S.
Customs Service.
In the Boca Raton speech, Mr. Webster called the William. Holden
Bell-Marian Zacharski case a "textbook example of espionage, or the
illegal transfer of technology."
The scenario of the "textbook example of espionage" as depicted by
Mr. Webster in his Boca Raton speech in general terms, was vividly
seen in the development of the William Holden Bell-Haman Zacharski
case.
The chance social meeting took place at the Cross Creek Village
apartment complex Playa Del Rey, Calif. in the fall of 1977. Both
Bell and Zacharski resided at this complex with their wives. A
personal friendship between Bell and Zacharski developed. A mutual
interest in tennis which resulted in almost daily sessions contributed
greatly to the relationship.
During the next few months Zacharski skillfully cultivated Bell,
a man 30 years his senior. This cultivation process was so thorough
that it even included their tennis activity. Zacharski insisted on play-
ing Bell regularly despite the fact he was a far superior opponent,
and he purposely adjusted his game to match Bell's lower level of
ability.
More importantly, he discovered that Bell had experienced a costly
divorce in 1976 and had declared bankruptcy the same year, making
him a most vulnerable recruitment target. During the sounding out
period, Zacharski learned that Bell was privy to a great deal of classi-
fied information concerning airborne radar systems and related mili-
tary equipment. Zacharski requested and received from Bell copies of
a Hughes Aircraft Co. newsletter entitled "Hughes News" and another
Hughes publication called "Vector," both publications unclassified
and available to the public.
The "moment of truth" for Bell occurred in late 1978, when the
apartment complex converted to condominium status. Because of his
precarious financial situation Bell was unable to produce a down pay-
ment to purchase his unit. At this point Zacharski offered to help in
the form of cash in return for more technical documents generated by
Hughes Aircraft.
Although reluctantly, Bell accepted the offer and the illegal transfer
of technology began. The rest of the story reads like a spy novel?
special camera provided by Zacharski to photograph classified docu-
ments, secret meetings between Bell and Polish intelligence officers
abroad, cryptic telephone contacts using code names and payment in
gold. Bell testified to having been paid almost $170,000?a sum for
which he sold out his company and his country.
I might add that it is my understanding that Mr. Bell testified
earlier this week that the FBI had sat around for 2 or 3 years and
watched him pass classified documents to the Poles. I categorically
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reject that. We would certainly not stand by and watch anybody pass
classified documents to any hostile intelligence service or to anyone
else for that matter.
In conclusion, I would like to state that the FBI will continue to
pursue the counterintelligence implications of technology transfer and
provide intelligence support to those law enforcement elements outside
the FBI that have statutory responsibilities for export control. Tech-
nology loss can be reduced through these concerted and coordinated
efforts even within the framework of our open society and current
operating procedures.
Senator NuNN. On that latter point, I think what Mr. Bell was say-
ing was that he was under surveillance at the time he passed certain
valuable information. Are you denying that?
Mr. O'MALLEY. I am not denying that he was under surveillance.
What I am saying is that it was our observation that he was not at any
time passing classified documents where we had no information at the
time of our surveillance that he had passed any classified information.
What we need, Senator, as you are well aware, is proof, hard proof that
he has passed those documents and the instant we had such proof, of
course, we prosecuted him and Mr. Zacharski.
Senator NuNrf. Of course only a law enforcement agency can make
that judgment. We are not here trying to make that judgment. We are
certainly not being critical of the FBI in the Bell case. But as I under-
stood it, what he was saying was that he was under surveillance while
he was passing that information. Also I understand there had been a
wiretap on him for some time during the period when he was passing
information. The wiretap doesn't necessarily tell us that he was
passing it.
Mr. O'MALLEY. There are ramifications of what you are asking now.
I would be happy to talk to you in closed session.
Senator NUNN. I am not even asking you. That is not a questionmark.
Nevertheless, I know it is a difficult thing in getting proof. The point
that he did make, though, that should have come through pretty loud
and clear is that there were all sorts of suspicious circumstances that
someone should have known during the entire period of time that this
was going on.
I think he was somewhat amazed with all the circumstances that he
wasn't caught sooner. I think it is a lesson to be learned. I don't know
by who. Perhaps the FBI did everything possible in the case. Perhaps
the private companies involved could do more in alerting law enforce-
ment on specific circumstances when it comes up.
I don't think there is any doubt about the fact though that Mr. Bell
did pass certain critical information.
Mr. O'MALLEY. No doubt at all.
Senator NuNrf. How important is it for the law enforcement agen-
cies, in cases like the Zaeh,arski case and the DeGeyter case, to have a
presence abroad and liaison with the foreign law enforcement
authorities?
Mr. O'MALLEY. It is absolutely crucial. We have had a long history
of such relationships with intelligence agencies and law enforcement
agencies abroad. I think it is particularly important in the area of
technology transfer, but I think it is well established that more and
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critically. in Europe, that more and more of the illegal technology
transfer is occurring through these European countries. Technology,
equipment, dual use products that may be legitimately licensed to
European countries are being diverted to Warsaw Pact countries. I
think with that in mind it is absolutely crucial that we have close re-
lationships with our counterparts abroad.
Senator NuNN. The FBI is primarily domestic in terms of the
overall jurisdiction and enforcement. What is the nature of your
relationship with the foreign governments and foreign agencies?
Mr. O'MALLEY. We have no investigative jurisdiction abroad, Sen-
ator, but we do have a legal attach?ystem and those individuals who
operate in our behalf in foreign countries have strictly a liaison re-
sponsibility. If we determine there is information say in the United
States that a certain crime has been committed or about to be ,com-
mitted in Europe we will furnish that information to our counterpart
service through our legal attache. He will conduct no investigation
himself but will furnish the lead, if you will, to the local service 'and
the results of that investigation will be furnished back to him to be
given to us if it involves U.S. interests.
Senator NuNN. You say you are very pleased so far with your in-
formational program to the business community. Do you think that
is working well?
Mr. O'MALLEY. Yes, sir. It is.
Senator NuNN. Could you furnish for the record some statistics
that would indicate the degree of briefings that go on between the
FBI and private companies?
Mr. O'MALLEY. Yes; for the record I can say that the 11,000 com-
panies that we identified which have or may have secret or top secret
contracts, we have so far have talked to 6,000 of them.
Senator NUNN. 6,000?
Mr. O'MALLEY. 6,000.
Senator NuNN. That is by personal visit?
Mr. O'MALLEY. Personal visit.
Senator NuNN. Do you try to contact people who are head of secu-
rity in those companies primarily?
Mr. O'MALLEY. Yes; particularly the security people or other senior
officers who are in the position to pay attention to what we say and
to listen to our suPgestions and implement them within the company.
Senator Ntricx. How many referrals of evidence indicating criminal
activity does the FBI receive from the Department of Commerce
Compliance Division in a year? Do you have any statistics on that?
Mr. O'MALLEY. I don't have any statistics at hand but I checked and
to my knowledge we have not gotten any criminal referrals from the
Department of Commerce in the past year.
Senator NuNN. In the past 12 months?
Mr. O'MALLEY. Yes.
Senator Nuiciv. Would that be calendar year 1981?
Mr. O'MALLEY. I responded to the question I thought you had asked
within the past year. But I am not sure in the past few years that we
have gotten any criminal referrals.
Senator NuNN. So your records don't reveal any or at least. :you
don't know of any criminal referrals from the Compliance Divisioti
of Commerce to the FBI?
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Mr. O'MALLEY. That is true.
Senator NUNN. How about criminal referrals by the U.S. Customs
Service?
Mr. O'MALLEY. We have a very close working relationship with
Customs, both at headquarters and with their field divisions through-
out the United States and there has been, although I don't have sta-
tistics on it, a number of referrals from us to Customs and vice versa.
At the current time we have a number of very, I would say, defined it
as substantial cases that; we are working jointly with Customs in the
technology transfer area.
Senator NUNN. Do you have an established procedure for liaison be-
tween the FBI and the Commerce Department in high technology
cases?
Mr. O'MALLEY. It is riot a written document as such but we do have,
I think, fairly well structured relationship with Commerce. We have a
liaison officer. We also have, I think, excellent liaison from the very
highest levels of Commerce down to the lower levels, and with several
different divisions within Commerce. Particularly in the last year we
have had a number of meetings between the FBI and Commerce at
fairly senior levels, to brief them on our responsibilities, particularly
in the counterintelligence area, and to exchange ideas on the whole
technology transfer issue in general.
I think they have been very worthwhile. At the present time we are
in the process of negotiating with the Department of Commerce a mem-
orandum of understanding which will, I think, enable us to avoid
problems that we have experienced in the past of I2-C of the Export
Administration Act where we ask for certain information and accord-
ing to that particular section it was either not forthcoming or there
were lots of delays. I think, though, as a result of the meetings that 1
have been talking about, and the relationship that we have today, that
hopefully at least there will be a memorandum of understanding that
in the future when the Bureau approaches Commerce requesting cer-
tain, particularly licensing-type information that that request each
time does not have to go all the way up to the Secretary of Commerce
but can be handled let's say at a routine but albeit
Senator NUNN. You mean at the present time under the present
procedures any FBI requests for information have to go all the way
to the Secretary of Commerce?
Mr. O'MALLEY. That is required by the Export Administration Act.
Senator NUNN. That is the law?
Mr. O'MALLEY. Yes.
Senator NUNN. What provision of the law is that?
Mr. O'MALLEY. 12-C of the Export Administration Act.
Senator NUNN. Is that proprietary information?
Mr. O'MALLEY. It basically says, licensing information or requests
for licensing information cannot be made public without the expressed
authority of the Secretary of Commerce unless he decides that it will
be in the public interest I gather to release such information. The
problem is?
Senator Nrinciv. Making it public is giving it to the FBI
Mr. O'MALLEY. That is the way the Commerce has interpreted it in
the past, that making it public is synonymous to giving it to other
agencies within the Federal Government.
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Senator NuNN. Does the Justice Department to your knowledge
agree with that interpretation of the present law?
Mr. O'MALLEY. They do not agree with that.
Senator NuNN. So the Justice Department believes that the Com-
merce Department without changing the law could actually share that
information with the FBI?
Mr. O'MALLEY. Yes; I believe the Justice Department has prepared,
the Office of Legal Counsel, has prepared a study on that and com-
municated the results of that study to the Department of Commerce.
Senator NuNN. I am informed by staff that that law was amended
last year, in December specifically to permit that information to be
passed for investigative purposes. Are you familiar with that?
Mr. O'MALLEY. I am not.
Senator NUNN. Could you ask the Justice Department to furnish us
their position on the current law, whether there is a change in the law
needed to permit that kind of cooperation?
Mr. O'MALLEY. I will ask the Department.
Senator NuNN. I will pose the same question to the Commerce De-
partment when they testify next week. Your own view is so far as you
know the Justice Department believes the Commerce Department has
it within their authority to permit that under existing law?
Mr. O'MALLEY. Yes.
Senator NuNic. Do you know how many technology transfer cases
have been worked jointly in the last year by the FBI and the
Commerce Department?
Mr. O'MALLEY. I don't believe we have worked any cases jointly.
We normally contact the Commerce Department where we have a
question regarding certain licensing information or whether or not
a given item is on the commodity control list and therefore embargoed
for transport abroad, particularly to a Warsaw Pact country.
Senator NUNN. How about the Customs Service? Do you have cases
that you work jointly with them?
Mr. O'MALLEY. We certainly do. We have a substantial number of
such cases going on at the present time.
Senator NuNN. How do you explain the lack of having any referrals
from the Compliance Division of the Commerce Department to the
FBI and how do you explain the lack of having any joint cases you
are working with the Compliance Division? Is there a reason for
that that is not readily apparent?
Mr. O'MALLEY. I think it is probably because in the past Commerce
has been understaffed. They do not have, compared to Customs, the
number of investigators out in the field or the people with the same
kind of law enforcement training, that people in the field in terms of
Customs would have. We have a tradition which transcends the tech-
nology transfer issue of working very closely with Customs. They
have a large presence as the Department of State indicated through-
out the country of all the key ports. So I think these are the general
reasons why we exchange information more frequently with Customs
than we would with Commerce.
Senator NuNN. Are you familiar with the DeGeyter case?
Mr. O'MALLEY. Yes ; I am.
Senator NuNN. Was that an FBI case?
Mr. O'MALLEY. Yes.
Senator NuNN. Did you work with Commerce on that?
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Mr. O'MALLEY. No. We did not work the case jointly information
being
Com-
merce. We consulted Commerce as to whether or not the
being sought by Mr. DeGeyter was on the commodity control list, or
something within that data base management system would have
qualified it as sensitive enough to bring it within the parameters of
the Export Administration Act.
Senator NUNN. So the Commerce Department simply answered
inquiry by you on that case?
Mr. O'MALLEY. That is right.
Senator NUNN. Were you aware that the DeGeyter case was listed
in the Commerce Department's annual report as a 'criminal proceed-
ing handled through the Compliance Division"?
Mr. O'MALLEY. I have been told that it was. I am a little mystified
as to why it was said, perhaps there is a reason why they said that.
I am not sure. I haven't discussed it with them.
Senator NuNN. What; areas would you point out where coordination
can be improved between the FBI and the other Federal agencies in
this area?
Mr. O'MALLEY I think an awful lot has been done in the past year,
18 months, Senator, on this issue, both within the intelligence com-
munity itself and between the intelligence community and the export
control community. There are a number of committees in the intel-
ligence community and outside the community that we all sit on and
I think that it is working very well. Commerce sits on it, State sits on
it, Customs, all the export control community agencies as well as ours
and other members of the intelligence community, includinc, Defense
and CIA. So I think a lot has been achieved in terms of coordination,
but I think like anything else, there still can be more achievements.
I think even more coordination in the future.
But I can say, with a fair degree of certainty, that there is no issue
of greater importance in the intelligence community today than the
technology transfer issue.
Senator NuNic. I certainly agree with that. Do you have any diffi-
culty getting people in the Commerce Department who have security
clearances so you can deal with them in your counterintelligence in-
formational exchange?
Mr. O'MALLEY. There was a problem in the past on that issue. We
brought it to the attention of the Commerce Department and appro-
priate clearances were obtained for people within the Compliance
Division.
Senator NurNic. So you think that problem has been smoothed out?
Mr. O'MALLEY. I think it has been.
Senator Nui.ix. We were told during the grain embargo that at one
of the high level meetings someone was excluded from the meetings
because of clearance?
Mr. O'MALLEY. That :happened initially. That is the exact situation
I was discussing with you. That happened in the initial meeting. We
found out he did not have appropriate clearances. We brought it to the
attention of Commerce and they saw to it that these people were given
clearances and thereafter they sat in on our meetings.
Senator NuNri. So you don't think that is a problem at this point
in time?
Mr. O'MALLEY. I do not. I think the Commerce Department has
tightened up its security substantially over the past 2 years.
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? Senator NUNN. Do you feel in your personal opinion that the Com-
merce Department is capable of?the Compliance Division in the
Commerce Department?is capable of effectively enforcing the Export
Administration Act as it is presently constituted?
Mr. O'MALLEY. I mentioned earlier some of the problems that Com-
merce, would acknowledge themselves in terms of a lack of sufficient
personnel, a lack of training, a lack of presence throughout the United
States and abroad. There is one or two ways that that can be resolved,
either increase or improve the capabilities of Commerce in the areas
that I mentioned or consider transferring it to another agency.
Senator NuNN. Would the Customs Service be better able to handle
the enforcement of the Export Administration Act than the Com-
pliance Division?
Mr. O'MALLEY. The only thing that I can say in regard to that ques-
tion, Senator' is that the Customs Service does have a larger presence,
both here in the United States and abroad. Their training is better.
They have law enforcement powers which Commerce people do not
have. I believe it would be inapproprate for me to publicly? .
Senator NuNN. I understand, but your relationship with the
Customs Service in this overall area is very professional, very good?
Mr. O'MALLEY. It is excellent.
Senator NuNN. What about the Silicon Valley problem? We have
heard testimony that there is a huge theft problem in the Silicon
Valley. An awful lot of the enforcement in the past has been left up
to both police and sheriffs and local prosecutors and so forth. Has the
FBI moved into that area in recent months?
Mr. O'MALLEY. Senator, I understand what you are saying, that
there has been a tremendous amount of work done by the local author-
ities in the Silicon Valley area. But I must add also that there is a
substantial Federal presence in that area also in terms, of our own
operations and the operations of customs. Silicon Valley is a cause
of concern for us. It is of obvious interest to the Warsaw Pact coun-
tries. As serious as it is, it is one of many problems that we have
throughout the country in the technology transfer area.
Our presence there as I indicated is substantial and I would be, I
think, very happy to go into closed session with you for the details on
that presence.
Senator NuNN. Fine. We are going to need to have a closed session
because we had certain questions that came up yesterday about mis-
demeanor pleas on a very serious case that involved national security
and we are going to have to hear that in closed session. So we would
like to talk to you in closed session on the other too.
I want you to understand that we have not taken a look at the Bell
case from the point of view of determining whether law enforcement
efforts were excellent, good, or fair. We are making no finding or impli-
cation. Nothing I said should indicate that we are in any way criticiz-
ing the FBI on the Bell case. We did hear testimony from him
yesterday.
Mr. O'MALLEY. I understand that, Senator, but I saw the newspaper
piece regarding Mr. Bell's testimony. That is the only reason I
responded to that, not because of anything that you have said or
anyone else.
Senator NuNN. The implication I got from his testimony was that
there were a lot of signs there that his own company should have
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caught or someone should have caught earlier. But I certainly am not
making any statement to that effect. We just haven't looked at it in
that aspect. We have looked at it in the aspect of whether this tells us
something about our overall capability in this area and whether the
business community can do more themselves.
Have you been a member of a working group on export controls?
Mr. O'MALLEY. Yes; I have.
Senator NtrisTN. What is that group?
Mr. O'MALLEY. It was a group, as a matter of fact, you mean the
FBI or me personally?
Senator NuNN. Both.
Mr. O'MALLEY. The FBI is currently a member of four or five such
groups on export control. As I said, both within the intelligence com-
munity and combined with the intelligence community and the export
control community. I also chaired a committee about 3 years ago look-
ing into the entire problem of export control.
Senator NuNN. Has that group had recommendations?
Mr. O'MALLEY Yes; it has.
Senator NuNN. Whom did the recommendations go to?
Mr. O'MALLEY. Those recommendations went to the National Secur-
ity Council.
Senator NTJNN. When did they go to the National Security Council?
Mr. O'MALLEY. If my recollection serves me it was in December 1979.
Senator NUNN. December 1979?
Mr. O'MALLEY. Yes.
Senator NONN. Have those recommendations or some of those rec-
ommendations been acted on?
Mr. O'MALLEY. Yes; they have.
Senator NuNN. Have some of them not been acted on?
Mr. O'MALLEY That is also true.
Senator Nurric. Are these classified recommendations?
Mr. O'MALLEY. Yes, they are.
Senator NuNN. At the appropriate time in a closed session, are you
permitted to go into that?
Mr. O'MALLEY. No; that is a national security document and I can-
not comment even though I chaired the committee, I cannot comment
on anything that is in that report and the only thing I would do would
be to recommend that you approach someone in the National Security
Council for that document.
Senator NENN. You are familiar with it?
Mr. O'MALLEY. Yes.
Senator NtrivN. But you have to get permission from them?
Mr. O'MALLEY. I cannot discuss it.
Senator Num,r. We will pursue that with the National Security
Council and perhaps go into that in closed session also. It is certainly
relevant to the hearings, if you have an expert group of people looking
at it and coming to conclusions. We will pursue that. We appreciate
very much your being here. We appreciate the cooperation of the FBI.
Mr. O'MALLEY. Thank you, Senator.
Senator NuNN. Thank you.
Our next witness is Mr. Arthur Van Cook, Director of Information
Security, Department of Defense, and Chairman, National Disclosure
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Policy Committee. Do you have anyone else with you this morning?
Mr. VAN COOK. I have one of my staff.
Senator Nmsnsr. We would be glad for him to come up. If he is going
to testify, I will swear him in.
Mr. VAN CooK. He is not going to testify.
Senator NuNN. Will you hold up your right hand? Do you swear
the testimony you will give the subcommittee to be the truth the
whole truth, and nothing but the truth, so help you God?
Mr. VAN COOK. I do.
Senator Muir% We appreciate you being here this morning. We ap-
preciate your cooperation. We look forward to getting your testimony.
You go right ahead.
TESTIMONY OF ARTHUR VAN COOK, DIRECTOR OF INFORMATION
SECURITY, DEPARTMENT OF DEFENSE, AND CHAIRMAN, NA-
TIONAL DISCLOSURE POLICY COMMITTEE
Mr. VAN COOK. Thank you, Mr. Chairman. I do hold the position
of Director of Information Security in the Department of Defense.
I am also designated as the Chairman of the National Disclosure
Policy Committee and I am the U.S. representative to the NATO
Security Committee.
In these capacities and with these titles I am responsible for policy
development and oversight of DOD activities in the areas of informa-
tion security and foreign disclosure.
Senator Nurrx. What did you say your position was in terms of
NATO?
Mr. VAN COOK. I am the U.S. representative to the NATO Security
Committee, sir.
Senator NUNN. Does that committee interrelate with Cocom?
Mr. VAN COOK. No, sir.
Senator Nummr. It has no relationship with that?
Mr. VAN COOK. No.
Senator Nuisrx. Is there a body in NATO that has any feed into the
Cocom decisions on export?
Mr. VAN COOK. Not to my knowledge, sir. As a NATO body.
Senator NuNN. I would like to pursue that with you. But go ahead
with your statement. We will get to it.
Mr. VAN COOK. Yes, sir.
I welcome this opportunity to discuss the problem of technology
transfer to the Soviet Union and other Soviet bloc nations. The Depart-
ment of Defense has been concerned for some time about the virtual
unremitting flow of unclassified defense information to our adver-
saries. This hemmorrhage of information to hostile nations, particu-
larly technology and technical data with military applications, is one
of the more serious problems confronting the Department.
Soviet bloc acquisitions of unclassified national security related
publications greatly enhances their capabilities to design, produce and
field weapons systems of all types, as well as develop measures to
counter U.S. weapons systems. It cuts their production costs, shortens
their production times, and improves the quality of their product.
A Soviet scientist who defected several years ago and others told
Congress that the majority of Soviet information collection require-
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ments can be openly obtained in the United States. The Federal Bureau
of Investigation has estimated that as high as 90 percent of the Soviet
collection requirements can be satisfied through open sources. A recent
unclassified CIA report states that Soviet intelligence organizations
have been so successful at acquiring Western technology that the man-
power levels allocated to this effort have increased significantly since
the 1970's to the point where there are now several thousand technology
collection officers at work.
We are painfully aware of Communist bloc efforts within the United
States to obtain technology, mostly through legal means, that is,
through open literature, which we are powerless to stop. Prior to
February 1980, for example, we stood helplessly by as the Soviet Union
purchased 80,000 technical documents from the National Technical
Information Service (NTIS). Although their access to the NTIS has
now been officially terminated, their surrogates undoubtedly continue
to exploit this source of extremely valuable information.
Members of Congress, industry spokesmen, and the media fre-
quently lament this state of affairs, and ask is there nothing that can
be done. Generally, these activities are carried out overtly and do not
violate existing U.S. law. In fact, it has always been presumed that
little could or should be done to limit such acquisitions, relying instead
upon the ability of the publishers of such documents to properly secure
sensitive information by using the existing security classification sys-
tem. However, much of this information is not classifiable under exist-
ing rules. The existing classification criteria does not provide adequate
protection to a large body of sensitive national security information,
particularly militarily critical technology and operational data devel-
oped solely for the use of our Armed Forces.
Classification of such information has been neither possible nor
practical. Although such sensitive national security information fits
the categories permitted to be classified, it does not rise to the level of
the "damage" standard of the Executive order governing classification.
Disclosure of the technical characteristics of electronic components
used in a missile guidance system, for example, may not appear to
damage the national security, and yet may well provide our adversaries
with precisely what they need to produce a more effective missile. It
is this "damage" standard that is applied by originators in deciding
whether to make their documents unclassified or to protect them by
security classification. Uppermost in their minds is the realization that
the test for classification could receive judicial review.
Consequently, if a determination is made not to classify, this in-
formation is vitlm?,rable under the Freedom of Iniormation Act
[FOIA] since the information does not fall within one of the non-
security exemptions to mandatary disclosure. It therefore becomes
available and this valuable technological and operational information
can be utilized by our adversaries to their military benefit.
Senator NUNN. Is it correct that foreign citizens have access to in-
formation in America under the Freedom of Information Act?
Mr. VAN COOK. Yes; they do, sir.
Senator NITNN. If President Brezhnev sends over a freedom-of-
information request to the Department of Defense and it is not classi-
fied, what is the law on that?
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Mr. VAN Com. The law would be if it is not exempt under the
nine exemptions of the Freedom of Information Act, classification
being one, that he would get the information he asked for.
Senator NUNN. So if the President of the Soviet Union sent over a
request for 100 different items under the Freedom of Information Act,
signed his own name, signed as President of the Soviet Union, he
would be entitled to that information under present law?
Mr. VAN COOK. It would be interpreted to be a member of the public
under that act.
Senator NUNN. Have there been any recommendations made by the
Department of Defense or any other agency in respect to access of
foreign citizen to that?
Mr. VAN COOK. There have been by the executive branch. The Pri-
vacy Act provides that the information can be asked for by a U.S.
citizen or permanent resident alien and that same language was pro-
posed for the Freedom of Information Act. My view would he that
it would be helpful to have that language in the act if in the initial
request the individual is identified as a foreign national. But I think
it would be very difficult to enforce.
Senator NUNN. Why is that?
Mr. VAN COOK. Any citizen or anyone who wrote in we would be in
the position of probably asking them for their birth certificate to prove
that they were a U.S. citizen.
Senator NTJNN. Shouldn't there at least be a prima facie showing
of citizenship on the application
Mr. VAN COOK. It would be very difficult to enforce. I think it would
be helpful nevertheless. There are
Senator Nurri.r. We are saying right now if Fidel Castro wrote in to
the Department of Defense and said he wanted 200 items that were
unclassified, that you would have to send them to him?
Mr. VAN COOK. That is correct, sir. If the items were not covered
by the exemptions.
Senator NUNN. Qadhafi in Libya. Is that correct?
Mr. VAN COOK. That is right.
Senator NUNN. The ayatolla of Iran?
Mr. VAN COOK. Yes, sir.
Senator NUNN. Don't you think on the face of it that is ludicrous?
Mr. VAN COOK. Yes, sir. I do.
Senator NUNN. So do I.
Suppose there is a hypothetical spy trial going on in West Germany.
Two or three East Germans are being tried for espionage. Suppose
during the course of that trial they write into the Department of
Defense and ask for certain information under the Freedom of In-
formation Act. What would be the law under that circumstance?
Mr. VAN COOK. The law would be that they would be entitled to the
information that they requested but we would certainly be reluctant
to give it to them with the knowledge that they were on trial for
espionage in their own country.
Senator NUNN. You would be slow. You would put that request at
the bottom of the pile?
Mr. VAN COOK. I think we would handle that very carefully, sir.
Senator IsTuNN. Let's say the situation developed in this country
where there were people who were charged, as being spies and were
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being tried under the Espionage Act. Would they still be entitled
to the Freedom of Information requests?
Mr. VAN. COOK. Yes; they would.
Senator NUNN. How about the case we heard earlier this week, the
Bell case? He is convicted of violating American law and giving away
national security secrets and he says very openly that he did and so
forth. What is his status under the Freedom of Information Act?
Mr. VAN COOK. He would be eligible to request information under
the Freedom of Information Act and if it could not be withheld under
the provisions of this statute, he would receive it.
Senator NuNN. So if he were to write in, ask for certain high tech-
nology items and so forth, that are not classified, he would be entitled
to that?
Mr. VAN COOK. Yes; he would be entitled to receive it under the
Freedom of Information Act. Yes, sir, if there were no other restric-
tions, no restraints under the act.
Senator NUNN. Are there any other restraints under the law?
Mr. VAN COOK. There are nine exemptions under the Freedom of
Information Act, the first of which is classification.
Senator NUNN. But it relates to the material itself and not to the
applicant?
Mr. VAN COOK. That is correct, sir.
Senator NuNN. So, Mr. Bell, a convicted felon, would have the same
rights under the Freedom of Information Act as the New York Times
reporter or the Washington Post reporter?
Mr. VAN COOK. Yes; we have the experience of a Norwegian citizen,
I believe the name is Gletich, who was an access professional you
might say. He asked us on 23 different occasions for information
under the Freedom of Information Act. This man was put on trial
for espionage in his own country and was convicted. To some of those
requests we did respond favorably and some we did not.
But this is an example?
Senator NuNN. Would you have responded favorably on some after
he was convicted?
Mr. VAN COOK. No; this was prior to the time that he went on trial.
Senator NuNN. But he has been convicted now?
Mr. VAN COOK. He has been convicted.
Senator NUNN. Would he still be entitled to get the information?
Mr. VAN COOK. Now that we know that the individual is tried and
convicted, I would suspect that we would work that case very care-
fully but nevertheless I believe under the law
Senator NUNN. If he had a good lawyer he could go to court and
get it?
Mr. VAN COOK. He could go to court and get it; yes.
Senator NUNN. Go ahead.
Mr. VAN COOK. As Admiral Inman has remarked, a "cottage in-
dustry" has been created by the Freedom of Information Act. Access
professionals and data brokers use the act to gather information, re-
package it, and market their information product in the United States
and abroad. Openness is a desirable social and economic commodity,
but we must not lose sight that such openness comes at .a cost. It has
been presumed that the rapid dissemination of information is socially
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and economically good because it avoids duplication of effort, fosters
competition, and beneficially spreads technology.
But, there is a hidden cost. While it may be argued, for example.
that a full and free exchange of information is necessary if the United
States is even to maintain its technological world leadership, it is my
concern that it is this very full and free exchange of information
that may be causing that technological lead to wane.
I have just mentioned a case where we received requests under FOI
from the Norwegian access professional who was, at the time of his
request, being tried in court in his country for espionage. This
dramatically illustrates the point.
Senator NUNN. Is there any other country in the world that has
this same kind of law, that foreign citizens are entitled to request
information? Could you, as a U.S. citizen, request information in
Britain and be entitled to it?
Mr. VAN COOK. I would expect not, sir. In Britain, they have an
Official Secrets Act. The information, official information, in gov-
ernment records is the property of the Crown. In our country, our
Government records are the property of the people, the public. We
are just protecting those records for the people.
Senator NUNN. There presumably would be the people of this
country, not the people of the Soviet Union?
Mr. VAN CCX)K. That is correct, people of this country.
Senator NUNN. Have you ever heard an argument that would have
the logic to it that the President of the Soviet Union or the ayatollah
in Iran, or Qadhafi in Libya ought to have access to information
under the Freedom of Information Act, does anybody have an argu-
ment that that is necessary to protect our own right to know in this
country?
Mr. VAN COOK. No, sir, I have never heard such an argument.
Senator NUNN. If you hear it, let me know. I am really curious
about what the argument would be.
Mr. VAN COOK. I share your curiosity, sir.
The Soviets view the United States and several other Western
countries as a continuing source of important and openly available
scientific and technical information. In some cases, according to an
unclassified CIA report, their acquisitions satisfy deficiencies in
Soviet technology such as smart weapons, electro-optical and signal
and information processing technology for Soviet air defense systems.
Also, the Soviets appear to have concentrated their tactical systems
acquisitions on Western tank, antitank, and air defense related tech-
nology to benefit their weapons programs and to design counter-
measures to Western systems.
Even with classification there have been instances of difficulty caused
by judicial review of such determinations pursuant to FOIA litiga-
tion. A requester sought access to records entitled "Technical Abstract
Bulletin" [TAB] indexes produced by the Defense Technical Informa-
tion Center. The TAB is a bibliographical reference document that in-
dexes technical reports prepared for the Department of Defense. It was
an entity classified confidential. Most of the reports indexed in the
TA_B were unclassified and although some of the reports indexed in
the TAB were in themselves classified, their titles had been rewritten
so that each title was unclassified. The basis for its overall classifica-
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tion of confidential was that the compilation of research and develop-
ment information contained in and revealed by the TAB index would
allow a foreign nation to develop, improve or refine similar items of
war potential, or would provide such a nation with a base upon which
to develop effective countermeasures or weaken or nullify the effec-
tiveness of a defense plan, project or system which is vital to the na-
tional security.
The, court ruling in this so-called Florence case did not even reach
to the question of whether the documents were in fact properly classi-
fied, and thus not subject to disclosure. In the court's opinion, other
provisions of the FOIA were overriding. The FOIA stipulates that:
"Any reasonably segregable portion of a record shall be provided to
any person requesting such record after deletion of the portions which
are exempt." The effect of the court's opinion and its order to release
the segregable portions resulted, in this instance, in the release of the
entire document.
In 1980, Senator Sasser brought into focus the problem of unlim-
ited dissemination by making inquiries into the international exchange
program. It was discovered that a large number of unclassified 'U.S.
Government publications were being automatically distributed to for-
eign governments such as the Soviet Union, Cuba, and Iran under this
exchange program. A large portion of these documents were defense-
originated publications including field manuals and technical manuals
developed for the use of the Armed Forces.
The international exchange program is under the direction of the
Library of Congress, and the distribution of these unclassified docu-
ments is made pursuant to law and in accordance with some 55 bilateral
agreements negotiated by the Department of State and foreign govern-
ments. The laws governing the supply of U.S. official publications for
international exchange are section 1718 of title 44 of the United States
Code, "Distribution of Government Publications to the Library of
Congress," and section 1719 of title 44, "International Exchange of
Government Publications."
The intent of this legislative policy is to make the widest range of
U.S. official publications available for exchange. The only documents
considered in this process are those published by the Government
Printing Office, and the publications made available for the e,m1tange
program are generally identical to those that are made available to
designated public and academic libraries in the United States under
the depository library program established by section 1902 of title 44.
The trend toward openness in Government has run virtually un-
interrupted for the past 30 years. It is a trend that the Department
of Defense certainly has supported over those years. It has lonrr been
the Department's policy not to constrain information the public re-
quires to be informed sufficiently about the activities and operating
functions of the Department. We were concerned, however, that there
appeared to be no compelling reason for permitting Government pub-
lications that are required solely for official use or for strictly ad-
ministrative or operational purposes to be freely transferable to all
countries participating in the exchange program even though the
publications were not classified for reasons of national security.
Therefore, the military departments and defense agencies were
asked to revise their policies and procedures with respect to the ap-
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proval and issuance of unclassified field manuals, technical manuals
and other publications containing valuable technical data to assure
that these publications required solely for official use or for strictly
administrative or operational purposes were clearly identified.
Further, the Library of Congress and the Government Printing Office
agreed not to include defense documents so identified in the inter-
national exchange program. Our aim was not to exclude all defense
documents from the program but to provide more positive control
over a certain class of such documents. This we did.
Senator NUNN. You are really saying that you took these documents
out of the circulation list that were automatically sent abroad; is
that right?
Mr. VAN COOK. By identifying those documents as those which had
technical data and operational data for the use of the Armed Forces,
by identifying them with a notation, the effect of it was that we did
take them out of the exchange program.
Senator NUNN. But that doesn't mean they aren't obtainable under
other methods?
Mr. VAN COOK. They could be reached under the Freedom of Infor-
mation Act for example, yes, sir.
Not satisfied that we had done all we can within the Department
to Fmk the availability of such unclassified information, General
Stilwell, Deputy Under Secretary of Defense (Policy), established
a DOD working group on technology transfer. This group which I
was asked to chair, was directed to address: (1) what the Department
of Defense can do now to effect more positive control of such defense
information, (2) what Department policies and procedures ought to
be changed to effect more positive control, and (3) what can we ask
others outside the Department to do to assist in these efforts.
The issues involved in such an undertaking are not unfamiliar and
center around the countervailing principles of openness in Govern-
ment and the Government's legitimate need to protect from disclosure
certain information in the interest of national security. What we are
seeking is a more equitable balance between the need to protect certain
information and the competing need to keep the public properly in-
formed about the activities of its Government.
One of the initiatives that has emerged as a result of the technology
transfer working group was a proposal to authorize the Secretary of
Defense, by Executive order, to classify at a level lower than confi-
dential, defense information the unauthorized disclosure of which
could reasonably be expected to be prejudicial to the national security
because it would result in the loss to the United States of a military,
technological, or operational advantage. This proposal did not receive
broad executive branch support, however, and has been abandoned.
Another initiative appears in the defense legislative proposal to
amend the Freedom of Information Act where it has been recom-
mended to exempt from disclosure technical data that may not be
exported lawfully outside the United States without an approval, au-
thorization, or a license under Federal export laws. This recommenda-
tion is now a part of the administration's proposal to amend the act.
Senator NUNN. Are you saying that under the existing law and
interpretations that something under the Export Administration Act
has to have a license and approval from the Commerce Department
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or otherwise it can't go out of the country, would be obtainable, the
same information would be obtainable under the Freedom of Infor-
mation Act
Mr. VAN COOK. Yes. That is entirely possible.
Senator NuNN. I don't understand that. I don't understand how we
get to that spot.
Mr. VAN Coos. Under the Freedom of Information Act, there is
no exemption that deals with technical information. There is an ex-
emption, the third exemption, under the Freedom of Information Act
which provides that information can be withheld from public release
because it is exempt from disclosure by statute. So if something is
subject to export control laws under the Munitions Act or under the
Export Administration Act, I would think that could be withheld
under the B (3) exemption under the Freedom of Information Act.
But there may be certain elements of information not clearly covered
by statute that might be released under the Freedom of Information
Act. I say it is probable, possible.
Senator NuNN. You are saying that if someone were careful in
applying that exemption that relates to the statutory restrictions that
the Freedom of Information Act could not reach that material?
Mr. VAN COOK. That is correct.
Senator NuisTN. You are saying it needs to be clarified?
Mr. VAN COOK. I think it needs to be clarified.
Further internal proposals to provide more positive control of this
type of information that is allowable under existing policies and pro-
cedures are being developed, but it would be premature to discuss them
at this time since they have not yet been fully considered by the
Department.
Thus far I have been dealing with the problem of technology trans-
fer from an information security perspective. However' in 1978, in
addition to my responsibilities as Director, Information Security for
the Department of Defense, I also became responsible for the imple-
mentation of the national disclosure policy. I should like now to
discuss technology transfer from my other perspective, that of the
chairman of the National Disclosure Policy Committee.
Under the basic national disclosure policy issued in 1971 by the Na-
tional Security Council, with Presidential approval and each subse-
quent President's reaffirmation, the Secretaries of State and Defense
are jointly responsible for controlling the dissemination of classified
military information to foreign governments. The interdepartmental
committee which I chair was established to implement the national
disclosure policy and includes representatives of the Central Intelli-
gence and Defense Intelligence Agencies, the Department of State,
the Organization of the Joint Chiefs of Staff, and the three military
departments.
The most important aspect of the national disclosure policy is the
realization that classified military information is a national asset, an
asset that must be conserved and protected. In determining whether
classified military information, including technology, will be pro-
vided to a foreign government five policy objectives or criteria must
be considered. The first is that the disclosure must be consistent with
the U.S. foreign policy toward the recipient nation. The second ob-
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jective is that the disclosure must not seriously jeopardize U.S. na-
tional security.
Third is the assessment of the foreign recipient's ability to protect
the information as we protect it. Fourth? is whether the information
to be provided is sufficiently limited to only that which is necessary to
accomplish the purpose of disclosure. And finally, the benefits to the
United States must be at least equivalent to the value of the informa-
tion disclosed.
Each year there are approximately 10,000 disclosure decisions
made in the Department. Obviously the National Disclosure Policy
Committee itself cannot handle this volume. Consequently disclosure
authority is delegated to principal Department of Defense officials as
the Secretaries ot the military departments, the Chairman of the Joint
Chiefs of Staff, the Director, Defense Intelligence Agency and a few
others.
These are, in turn, authorized to redelegate this authority to the
levels that they believe are necessary to meet operational requirements.
People authorized to make decisions with respect to the release of
classified military information to foreign governments are guided in
their decisions by the National Disclosure Policy Document issued by
the Secretary of Defense. This document lays out in clear terms the
criteria for disclosure which must be met and specifies the levels of
eligibility for each country with whom we exchange classified military
information.
In those cases where the criteria cannot be met for one reason or
another or the information to be disclosed exceeds the level of eligi-
bility for the country concerned, an exception to the national disclo-
sure policy must be considered before the disclosure is authorized.
The role of the National Disclosure Policy Committee is to consider
and act upon any request for exception to policy.
To assist in keeping track of the Department's disclosure decisions
we have an automated data system called the Foreign Disclosure Auto-
mated Data System or Fordad.
Four types of data are recorded in the Fordad system:
1. All delegated disclosure decisions of documentary information or
material that are normally made within the guidelines for the national
disclosure policy.
2. All decisions on requests for exceptions to policy initiated because
the disclosure falls outside the normal guidelines for disclosure.
3. All disclosures involving top secret information.
4. All DOD decisions on munitions license applications.
This data base is used on a routine basis to provide decisionmakers
with the background of previous, similar cases by weapon or country.
However, in a 1979 study, we found that this system had significant
problems of completeness, timeliness, quality, and accessibility. In
May 1979, the Deputy Secretary of Defense tasked the military depart-
ments and other agencies to assist the Deputy Under Secretary of
Defense (Policy) (my boss) in improving the system. We then initi-
ated a project to develop the Foreign Disclosure and Technical In-
formation System (Fordtis). The objective of Fordtis is to assist
the U.S. Government in meeting its national security responsibilities
in the disclosure of classified military information, import and export
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control, international armament cooperation, and assessment of U.S.
technology posture.
Analysis has shown that automation can be effectively applied to
the caseworking process by providing caseworkers a common frame
of reference within which to make decisions. We f mnd that the system
must include foreign military sales and munition licenses to give a
complete picture of munitions leaving this country. We also found
that commercial commodity licenses sent to DOD by the Department
of Commerce and Cocom cases sent to DOD by the Department of
State must be included in order to make rational decisions on the ex-
port of militarily critical technologies.
In addition to these historical files, the caseworkers need reference
information such as the militarily critical technologies list, country
assessments, and weapon systems reference lists. Fordtis will con-
tain this information and will interface with the Department of State
systems and one Department of Commerce system.
We expect an initial operating capability this month with a full
operating capability supporting a network of users 1 year later. We
anticipate that Fordtis will reduce staffing of routine cases and
allow more time for precedent-setting critical cases. Fordtis will
allow the U.S. Government an unprecedented capability to control
the export of information, munitions, and technology.
Mr. Chairman, this concludes my prepared statement. I shall be
happy to respond to any questions you or your subcommittee may have
at this time.
Senator NuNN. Thank you very much, Mr. Van Cook.
We appreciate your excellent statement. Because of the Soviets'
activities in Afghanistan the United States will not allow the Soviets
to obtain information from the Technical Information Service. Does
this mean the Soviets really are locked out of this or can they find
other ways to get to it ?
Mr. VAN COOK. The Soviets directly are locked out of it but we ex-
pect that their surrogates are certainly providing the information to
them and using the service.
Senator NuNN. Is this more of a symbolic act than it is something
that can really be enforced?
Mr. VAN COOK. Yes, sir.
Senator NuNN. You mentioned the so-called "cottage industry"
that has sprung up regarding the Freedom of Information Act. Would
you tell us how you define a cottage industry? What do you mean
by that?
Mr. VAN COOK. These are organizations that have been in the
business of accessing Government records under the Freedom of In-
formation Act, asking for a wide range of Government records, repro-
ducing them, and selling them, here and abroad.
Senator NuNN. They are actually in the business?
Mr. VAN COOK. They are in the business, yes, brokers.
Senator N17NN. Do any of these so-called cottage industries have
computerized operations that you know of?
Mr. VAN COOK. Yes. They do, sir.
Senator NIETNN. Would you describe that
Mr. VAN COOK. You know, in this age of microfiche and microforms
and computers, the data bases are easily organized and they can be
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accessed in minimum time, within a matter of minutes. So that these
data bases are utilized by industry throughout the United States, cer-
tainly by these people, where they have a complete data base of all of
that which they have obtained through their requests under the
Freedom of Information Act.
I believe there is one outfit called INFODOC overseas that makes
great use of these data bases. I have an example of some of their publi-
cations which I will be glad to provide for the subcommittee's review.
Senator Nurnv. Do you regard our technology as a national asset as
you do our military information
Mr. VAN COOK. I believe that there should be no question in anyone's
mind that the U.S. technology and technical know-how is the best in
the world. It should be treated with a sense of worth. Yes, I believe
it should be treated as a national asset.
Senator Numv. Regarding the Freedom of Information case in
which an individual was able to obtain the technical abstract bulletins
index, is this really an equivalent to a road map of U.S. technology,
directions, capabilities, advancements, and future intentions ?
Mr. VAN COOK. Yes. In that particular case, Senator, we classified
the document, the total document, the index on the basis that it would
give an indication of our level of effort because it did outline. in some
detail, although each entry being unclassified, the subject matter that
was in existence. So the compilation we felt revealed a level of effort
and classified on that basis. The court made a decision that it did not
need to reach to the validity of the classification but merely get to that
portion of the Freedom of Information Act which says that the re-
questor is entitled to the unclassified segregable portions and the court
ordered that he be provided with all of the unclassified entries. Conse-
quently, we provided him with the document.
Since, based on that court decision, we have since declassified that
document. It is no longer a classified document. So it is available.
Senator' NurrN. So that was the combination of the Freedom of
Information Act plus the court decision?
Mr. VAN COOK. That is correct, sir.
Senator Nurnsr. Is this administration going to have any recom-
mendations on the Freedom of Information Act?
Mr. VAN COOK. Yes. There is a legislative package in the Congress
at this time.
Senator NuNN. Now pending?
Mr. VAN COOK. Now pending, yes.
Senator NuNN. Does that cover any of these areas we have talked
about? Does it cover the access by foreign citizens?
Mr. VAN COOK. My understanding is that it is in that package. Yes,
sir.
Senator NUNN. COLTH you furnish that package to us for the record?
We can get it?
Mr. VAN COOK. I will be glad to.
[The material referred to was marked as "Exhibit No. 32," for
reference, and may be found in the files of the subcommittee.]
Senator NuNN. Has the Department of Defense participated in that?
Mr. VAN COOK. Yes.
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Senator NUNN. Do you think this package does plug up most of the
loopholes that you are dealing with?
Mr. VAN COOK. The one that we are principally concerned with now
and which we are addressing today, technology transfer, we think it
would go a long way if under the Freedom of Information Act we
would have the authority to withhold that type of information. I think
it would help considerably, sir.
Senator NUNN. What about the index of military specifications? Is
that currently available under the Freedom of Information Act?
Mr. VAN COOK. Yes. The index of military specifications and stand-
ards is a two-part document, alphabetical listing and numerical list-
ing of our military specifications and standards. It is for sale by the
Government Printing Office. By subscription, $40, I think, domestic
and $50 foreign.
Senator NUNN. Is this something that should be classified?
Mr. VAN COOK. It is very difficult to classify this, Senator, to reach
the damage criteria for one thing. For another thing, it sometimes
is not practical to classify. Example, you might take a military
standard and specification of a Jeep tire which is listed in this book
and if you went to the classification route, the fellow who has to
change tires would have a clearance, you know, you get into all of those
safeguard rules and it is just impractical to do it.
Senator NUNN. So this is something no matter how we change the
law, regulation, something like this is going to always be available.
Right?
Mr. VAN COOK. Not a matter of how you change the law and
regulations. I think if the laws were such that if we could withhold
this information properly and use it for the people who need to use
it, in the Department of Defense, in the Government in fact, possibly
the contractors, that is what we are looking for.
Senator NUNN. Is there any kind of proposal by the administration
that would allow you to do that?
Mr. VAN COOK. Yes. I think this amendment to the Freedom of
Information Act would give us that license.
Senator NUNN. But I thought you were saying that this is a docu-
ment that is printed by the U.S. Government Printing Office and can
be subscribed to?
Mr. VAN Coox. Under the Freedom of Information Act, if we could
withhold it, under a statute, under the Freedom of Information Act,
for example, we would stop that, that would no longer be available
for subscription.
Senator NUNN. One of the huge problems in classification is that
the people at the top, or even the second echelon or third echelon, don't
have time to go through all of these documents and classify. Conse-
quently any comprehensive system of classification has people way
down the line making those determinations. Is that correct?
Mr. VAN COOK. Sir, in the Department of Defense we make very
extensive use of what we call security classification guides. so the
people down the line that you are speaking of work under these guides.
They don't make original classification decisions. nor do they have to.
They merely need to determine that the information they are deal-
ing with fits this guidance and they mark it as the original classifier
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wants it marked. We have over 1,200 such guides in the Department of
Defense covering classified programs, projects, plans and systems.
Senator NuNN. We thank you very much for your cooperation and
your testimony. We want to stay in touch with you as we begin to
make suggestions in these areas.
Mr. VAN COOK. Thank you, Senator.
Before I go I would like to say I have 39 years in the Government
service and I have dealt with many of the committees, both in the
House and the Senate side. But I just want to say that the coopera-
tion that was extended and the courtesies that were extended to us by
the staff people on this subcommittee was above and beyond. I think
they are truly professional and specifically Mr. Fry of your staff,
Mr. Asselin who dealt with us on the preliminary inquiries, were com-
pletely cooperative and the Department expresses its appreciation to
the subcommittee for that.
Senator Nurrs. Thank you very much. We appreciate that. I know
the staff appreciates that. I agree with your evaluation of them and
I am delio:hted that they were received that way in the Department of
Defense. We hope to have some constructive recommendations and we
certainly have benefited very much from your input.
Mr. VAN COOK. Thank you, sir.
Senator Nio-xx. Our next witness is Mr. William Von Raab, Com-
missioner, U.S. Customs Service. I believe Mr. Von Raab is going to
be accompanied by Mr. George Corcoran, Assistant Commissioner?
border operations?U.S. Customs Service.
Mr. Vox RAAB. That is correct. One other individual possibly. We
have some charts.
Senator NUNN. That will be fine. If the people who are going to
testify, if you could introduce them for the record, then we will ask
all of them to be sworn in.
Mr. VON RAAB. George Corcoran is at my right, Assistant Commis-
sioner for border operations; Pat O'Brien, who is our Director of
General Investigations under which most of these activities take place.
They may be asked a question.
Senator NuNN. If you will all hold up your right hand, do you swear
the testimony you will give before this subcommittee will be the truth,
the whole truth and nothing but the truth, so help you God?
Mr. VON RAAB. I do.
Mr. CORCORAN. I do.
Mr. O'BRIEN. I do.
TESTIMONY OF WILLIAM VON RAAB, COMMISSIONER, U.S. CUSTOMS
SERVICE, ACCOMPANTED BY GEORGE G. CORCORAN, ASSISTANCE
COMMISSIONER?BORDER OPERATIONS?U.S. CUSTOMS SERVICE;
AND, PATRICK O'BRIEN, DIRECTOR, GENERAL INVESTIGATIONS,
U.S. CUSTOMS SERVICE
Mr. VON RAAB. I brought a few charts here which might make
my presentation a little clearer' if it is all right with you.
Senator NuNN. That will be fine.
Go right ahead.
Mr. VON RAAB. Let's make sure that the Senator can see them over
there.
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Senator, I appreciate this opportunity to discuss with you the prob-
lem of Soviet acquisitions of critical technology. Since you are all well
aware of the magnitude and seriousness of the matter, I will take this
opportunity not to discuss the critical technology issue but rather what
the Reagan administration and Customs is doing to address it.
Historically, the Customs Service has played a role in export con-
trol enforcement since the birth of our Nation. In 1793, President
Washington, in order to avert American involvement in the French
Revolutionary Wars, issued the first proclamation of U.S. neutrality
and directed enforcement by officers of the Customs Service.
Since that time,
numerous proclamations and statutes have been
promulgated involving neutrality and other areas of export control.
Some of these enactments were for specific political or policy purposes,
such as bans on the export of critical technology to the Soviet Union
and others were for general purposes such as the licensing of all muni-
tions for export whatever their destination. Regardless of their nature,
Customs has always played a principal role in the enforcement of
these provisions.
Until 1973, Customs investigations regarding illicit exports were
mostly reactive and centered around various exile groups in the United
States, who, at times, would try to organize expeditions to invade
their former homeland.
Cases involving other areas of export control were almost non-
existent and, of the few that were conducted, most concerned the
export of stolen articles or commercial goods. During the mid and late
1970's, more and more emphasis was placed on export control enforce-
ment and several significant investigations were successfully culmi-
nated, including some cases involving the illicit transfer of critical
technology. These critical technology cases have been provided to your
staff in written summation.
Under the Reagan administration, a strong emphasis has been
placed on thwarting the flow of high technology to the Soviet bloc
and other unfriendly nations. In response to this mandate, I directed
the U.S. Customs Service to launch new initiatives aimed at com-
bating the trafficking in illegal exports.
The result of these efforts is called by us in Customs Operation
Exodus, a national enforcement program which integrates the various
operational units of the U.S. Customs Service. The program has three
distinct objectives, each of which is essential to the national interest.
The first objective is to halt, to the maximum extent possible, the
illicit flow of critical technology to the Soviet bloc and other un-
friendly nations. By critical technology, we in Customs means those
items which represent technological advances to the Soviet bloc
whether they be revolutionary or merely evolutionary in nature. This,
of course, is necessary if we are to regain and retain military parity
with the Soviet Union.
The second objective is to disrupt the flow of high technology to
the Soviet Union. By high technology, we mean those items which
the Soviet Union can manufacture themselves but choose to acquire
from the 'United States in order to reduce costs and improve ouality.
By intercepting such shipments, the Customs Service can significantly
disrupt the Soviet military complex.
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The Soviets will eventually be required to produce their own high
technology rather than relying on ours and will thereby be forced
to divert resources from other military areas.
The full significance of this becomes apparent when one realizes
that the Soviet Union does not have the massive civilian market for
this technology and must absorb the entire cost of building and operat-
ing Manufacturing facilities without being able to offset the expense
through large-scale commercial sales.
The final goal of the program is to intercept shipments of other
commodities which are being exported in violation of various sanc-
tions and embargos, such as the present embargos against Cuba, and
Libya, as well as the recent sanctions against Argentina. Effective and
credible enforcement is essential if the sanctions are to achieve their
desired end.
Operation Exodus is being coordinated from the national com-
mand center located at the Customs headquarters in Washington. The
command center is staffed with special agents and intelligence analysts
who coordinate the interdependent intelligence, inspection, and investi-
gative activities both here and abroad. The effective correlation of
these three disciplines has been one of the prime underlying factors
contributing to the early success of Operation Exodus.
In our intelligence efforts, we have been very fortunate. We have
found that most manufacturers and exporters are also importers
amongst whom we have developed sources in relation to our import
smuggling and fraud programs.
Likewise, the sources we have among shippers, brokers' and freight
forwarders as well as our extensive network of contacts within the
foreign Customs Services have all been very productive in the? area
of illegal technology transfer.
We have also clone very well with U.S. Government agencies. Here,
our reputation in investigating illegal exportations and the focus pro-
vided by Operation Exodus have combined to play a critical role in
the administration's efforts to block the transfer of technology to the
Soviet Union.
Due to the fine efforts of Assistant Secretary Lawrence Brady, we
have been able to establish an analytical unit within the Department
of Commerce. This unit which is headed by a special assistant to
Mr. Brady and staffed by Customs and Commerce employees, has de-
veloped an innovative intelligence approach dependent upon the appli-
cation of link-analysis techniques to the Department of Commerce
license application files.
The analyses produced to date have been outstanding in identifying
firms engaged in diverting critical technology to the Soviet Union
and in pinpointing new diversion routes. This intelligence is being used
in developing profiles for the Exodus inspection teams and as the
basis for major criminal investigations into Soviet diversions.
The Department of State has given us extensive access to their files
both in their Office of Munitions Control and their Office of East-West
Trade, where the sheer volume of information available has required
us to place a full-time analyst. We are also receiving maximum sup-
port from the U.S. intelligence services and the FBI who is providing
intelligence and participating in joint investigations with us through-
out the country.
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Our inspectional activities are progressing equally as well. The
Exodus teams are now operational throughout the Nation examin-
ing cargo at airports, seaports, and land borders. What they encounter
most are fraudulent exportations. That is goods being misdescribed to
lead the shipper and Customs officials to believe that they do not re-
quire a license; or goods being shipped under either a fictitious license
or one that covers a different commodity or different destination.
When one of our inspection teams locates a suspicious shipment they
contact the command center to determine whether the shipment re-
quires a license, whether any license associated with it is valid, and
whether the firms or commodities involved are suspicious and should be
monitored overseas for potential diversion.
In addition, to facilitate matters further, two special agents and two
import specialists have been detailed to the Department of Commerce
to assist in responding to licensing inquiries. This not only improves
the efficiency of our operation but also minimizes delays of legitimate
exportations.
The inspectional teams also on occasion encounter goods being clan-
destinely smuggled out of the country or being diverted to third coun-
tries, however, by and large, smuggling and diversions are detected
only through good intelligence and thorough investigations.
The results of our Exodus inspections have been outstanding. The
chart on display indicates the number of shipments being detained
by our inspection teams since we established our Exodus Command
Center.
These figures, we have found to be an accurate measurement of our
field activity. You will notice the sharp increase in early February,
this is when formal Exodus teams became operational.
The high level of activity in March, on the other hand, is the result
of the President's Libyan embargo which became effective in stages
between March 12 and March 28.
The next chart indicates the export seizures being made. The high
number of seizures in March is again due to the Libyan sanctions. So
far this fiscal year, we have made over 300 export seizures valued at
more than $20 million. The more notable seizures have involved lasers,
computers, and highly sophisticated military technology destined for
the Soviet Union either directly or through other nations.
We have also made numerous seizures destined to Libya and
other nations against which this Nation has imposed sanctions and
embargos.
In just the last week, we seized a, shipment of 32 military aircraft
engines destined for Argentina and have also placed several ship-
ments, including a high performance helicopter under detention.
As I previously stated, our most significant results can be expected
in the area of investigations. The intelligence being provided by the
CIA, FBI, and other Government agencies, both foreign and domestic,
the information being provided by Commerce and gathered from our
contacts in the import/export and shipping industry, again both here
and abroad, and the leads being developed through the efforts of our
inspectional teams have led to numerous significant investigations in-
volving the diversion of technology to the Soviet Union and other com-
modities to Libya, Cuba and other sanctioned nations.
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Our investigations are aimed at criminal prosecutions which we
hope will provide an effective deterrent to those engaged in this
illicit trade. The techniques we use, that is confidential sources' sur-
veillances, data base analyses and foreign investigations are those
that we have always used in smuggling and fraud investigations.
At this moment, we are conducting over 40 major criminal investiga-
tions involving illegal diversions and are monitoring several signifi-
cant shipments abroad which we believe are intended for the Soviet
bloc.
While I cannot publicly discuss the details of most of these investi-
gations, I am free to discuss one of the more significant ones with you,
due to the nature in which the investigation has progressed.
Early last month, the Custom attach?Mexico City, acting upon
information from a confidential source, located a multispectral scanner
which had been smuggled out of the United States on a corporate jet
belonging to a Los Angeles-based firm.
The scanner is designed for use by the military in tracking the
movement of troops and supplies by airplane and satellite. It works
by emitting infrared and thermal light waves that strike objects on
the Earth and transmit electronic data to computer equipment at a
ground station which converts the data into photographs.
Using false documentation describing the merchandise as photo-
graphic equipment from Panama, the violators booked the shipment
to Zurich, Switzerland on KLM Airlines. A rapid investigation in
Europe quickly determined that the consignee had only a mail drop
in Switzerland and was actually located in East Germany.
Consequently, the Customs attach?n Mexico City determined that
the shipment was placed on a flight that stopped in the United States
enroute to Zurich.
When the plane landed in Houston, the cargo was off-loaded, seized
by Customs agents and replaced with sandbags. The shipment was
permitted then to proceed to Zurich via Amsterdam.
Two days later, special agents in Los Angeles executed a search
warrant at the exporter's premises, and seized two sophisticated com-
puters also destined to the same customer as well as documentation
establishing the true destination as Moscow. This investigation and
many others equally important, are being pursued this very moment
by Customs special agents.
Consequently, from an almost nonexistent and purely reactive
Federal export control program focusing on illegal arms exports;
Customs, with the support, cooperation, and encouragement of the
entire export control enforcement and intelligence communities, has
successfully launched a major initiative to combat the illicit transfer
of technology and other commodities to hostile nations.
We attribute this success to our unusual role in the international
enforcement community. Our authority, structure, contacts, and ex-
perience in smuggling and fraud investigations have placed us in the
position of being able to reach out and almost instantly provide to
the Nation a capability which is sorely needed.
I believe that in the coming years, the U.S. Customs Service can
continue to be very effective in addressing the problem at hand and
disrupting, the Soviet acquisition attempts which the intelligence com-
munity has projected throughout the 1980's.
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Thank you for this opportunity to describe briefly some of our
efforts to stem the loss of critical and high technology and I would
be happy to answer any questions as would Mr. Corcoran or Mr.
O'Brien that you may wish. to put to us.
Senator NUNN. Thank you, very much, Mr. Von Raab. Is the en-
forcement of the Export Administration Act a long-term priority
of the Customs service? I gather from what you have said here today
it is.
Mr. VON RAAB. Yes, sir.
Senator NUNN. Can you provide to the subcommittee an approxi-
mation of the amount of resources devoted to controlling the export
of critical technology by the Customs service?
Mr. VON RAAB. At the present we have approximately 125 Customs
inspectors, 50 special agents, and 25 support personnel, who are as-
signed exclusively to Operation Exodus. We are also drawing upon
on a regular basis the daily responsibilites of almost 4,000 other
Customs inspectors, and just under 600 other agents where and when
the need arises.
Senator NuriN. Plus all your people out there in the field, I guess,
are theoretically available when the need arises?
Mr. VON RAAB. That is about all our people. I would say as far as
our inspectors and agents are concerned, there is not a single one of
them who has not spent a fair amount of time, if not just being trained
in Operation Exodus, having some personal experience with that.
Senator NUNN. To what extent does Customs have liaison with the
Department of Defense in this technology area?
Mr. VON RAAB. We have a number of contacts with the Department.
We have individuals who are identified to work with the Department
of Defense. We have excellent liaison with the Department of Defense.
Senator NUNN. Where do you go for your expert technical opinions
when you run across a technology case?
Mr. VON RAAB. If we can't answer it ourselves?we are getting
better at doing that?we then make an inquiry of the Commerce De-
partment and we consult with them over the telephone if we can
handle it that way. If not, we will go into it in more detail in person
or bring a sample or documentation with us. Therefore, we receive the
ultimate technological support from the Commerce Department.
Senator NUNN. You say that you have assigned certain personnel
from Customs to the Commerce Department?
Mr. VON RAAB. Yes.
Senator NUNN. How many?
Mr. VON RAAB. Seven.
Senator NUNN. What is the reason for that? What do they do?
Mr. VON RAAB. The reason is simply to merge where possible our
expertise and theirs. We are experts on the way cargo is passed across
borders. They are experts on the particular requirements involved in
licensing of particular matter. We are often faced with a question of
whether something needs a license at the border.
It is easier for us to have people in the Commerce Department who
can deal directly with the Commerce experts and to be able to ask
them those questions.
It saves us time and energy and we get better answers as a result.
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Senator NUNN. Mr. Von Raab, if you were given total responsibility
under the law, to enforce the violations of the Export Administration
Act, would Customs be able to carry out that mission in your view?
Mr. VON RAAB. Yes; we would. We would continue however to
rely heavily on Commerce's expertise to provide us with assistance.
Senator NUNN. In terms of what expertise that they have?
Mr. VON RAAB. They make the decisions as to whether something
should be licensed.
Senator NUNN. If they were doing the licensing that would be where
you would get your information as far as what should be enforced?
Mr. VON RAAB. Yes; often we are asking the question of ours at the
border as to whether something requires a license. Often, it is a
difficult question. Therefore we do rely on them.
Senator NUNN. Would the Customs Service have to employ addi-
tional people in order to handle the enforcement part of the Export
Administration Act?
Mr. VON RAAB. As I indicated, we have exactly what the munbers
were, but between 200 and 300 individuals already assigned direetly to
that with the ability to call on the rest of our forces. We would not heed
to hire additional individuals because I don't believe that Commerce
really has more than 20 or so that would have to be replaced.
Senator NUNN. Do you think it is possible for the Commerce De-
partment to have a viable export control program in terms of enforce-
ment with 8 to 12 investigators and 5 inspectors in the compliance
division?
Mr. VON RAAB. No, sir. Obviously, those numbers are much too low
for a reliable enforcement effort. I would say, however, that those indi-
viduals do make an important contribution to the enforcement effort.
Senator NUNN. How can Customs insure that violators of the Export
Administration Act will adhere to the administrative sanctions such
as denial of export privileges?
Mr. VON RAAB. The way?I don't fully understand you.
Senator NUNN. Let's assume you took over the enforcement end. How
would you insure that when there is a violation that the administrative
sanctions can be administered? Would that be a Commerce function?
Mr. VON RAAB. We would refer that to Commerce.
Senator NUNN. Commerce would handle that end of it?
Mr. VON RAAB. Yes, sir.
Senator NUNN. Could you in Customs, if you were reouired to by
law, assume the administration of the Export Administration Act such
as conducting licensing operations in adjudication of noncriminal vio-
lation? Would that be something you could also undertake?
Mr. VON RAAB. I would not like to ever say that the Customs Service
is not canable of doing anything. but I think it is reasonable to say that
that activity certainly fits much better into Commerce with its close
association with the business community.
Senator NUNN. If there was a determination to give you jurisdiction
over the enforcement end of the Export Administration Act, you think
it makes sense to continue to have the licensing in the Commerce
Department?
Mr. VON RAAB. Yes, sir.
Senator NUNN. We understand that in the CTC case that West Ger-
many cooperated and that was facilitated through the establishment of
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a working agreement between the U.S. Customs attache in Bonn and
West German Customs; is there as specific agreement on that?
Mr. VON RAAB. On the case? We have mutual assistance agreements
with Canada, France, Austria, Mexico, and West Germany; I think
that is it.
There are five. There are five specific mutual assistance agreements
that the Customs Service does have with the proper agency or govern-
ment of five other countries. I don't know if I gave you five or not. But
there are five.
Senator NUNN. You have the authority under the law in certain
cases to make arrests without warrants; do you not?
Mr. VON RAAB. Yes, sir.
Senator NUNN. What kind of cases do you have that authority in?
Mr. VON RAAB. Those are typically border searches, mostly on in-
coming border searches.
Senator NUNN. Incoming?
Mr. VON RAAB. Yes, sir.
Senator NUNN. Do you have any authority on outgoing?
Mr. VON RAAB. We have no specific statutory authority on outgoing.
However, we have received a succession of favorable cases implying
that we have very, very strong authority in that are under State stat-
utes or under, in sonic cases, posse comitatus.
Senator NUNN. How about large amounts of cash being taken out of
the country? Is that something that you can make an arrest in when
it violates the law without a warrant?
Mr. VON RAAB. We require probable cause in the case of currency
seizures.
Senator NUNN. But you don't have to have a warrant?
Mr. VON RAAB. Only on search, not on the arrest.
Senator NUNN. What about the export control cases? Do you have
authority to make arrests without warrants in these cases?
Mr. UBRIEN. I am Pat O'Brien, Director of General Investigations
with the Customs Service.
While not having needed explicit search or arrest authority we have
done very well in the courts and they have ruled that we have implied
authority to conduct the searches and the arrests.
The difference in the.currency area is that the currency statute it-
self says that searches will be conducted pursuant to a warrant based
upon probable cause.
So, the currency statute actually limited our authority beyond what
we had prior to the statute.
Senator NUNN. DO you need authority under the law to conduct
searches of persons leaving the country as well as coming into the
country?
Mr. VON RAAB. We have implied authority to conduct searches of
those individuals.
Senator NUNN. So you don't need any changes in the law in that
regard?
Mr. VON RAAB. Of course we would prefer to have wherever explicit
statutory authority to conduct those searches. We have been success-
however, in receiving as Mr. O'Brien indicated, very good and
supportive decisions based upon our implied authority.
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We would certainly like to have the issue of the currency seizure
cleared up and we would like to have the level required to reduce the
suspicion as it is in most others.
Senator NUNN. Is there a pending bill on that? I thought Senator
Proxmire had a bill on that; do you know?
Mr. CORCORAN. Yes, there is a bill on the arrest authority, but not
on the search and seizure.
Mr. VON RAAB. The Treasury is preparing some legislation and
I would expect that if we can move it through OMB, we will probably
make it up here at some point.
Senator NUNN. We understand that Customs has experienced diffi-
culty in receiving information due to a restricted interpretation of
section 12(c) of the Export Administration Act by the Department
of Commerce.
Could you tell us what?
Mr. VON RAAB. In the past, Customs Service has had some prob-
lems receiving information from the Commerce Department. How-
ever, a recent decision by the Secretary made, I believe, some time
during March has opened up our access to the files with respect to
specific cases that we may be working on. So Commerce has shown
a tremendous amount of increased cooperation, I believe largely
through the intercession of the Assistant Secretary Brady, who has
been working very hard to improve our working relationship.
Senator NUNN. Are you familiar with the Richard Mueller case
and the Volker Nast case?
Both of those cases, I think, were made by Customs? The II
batteries case?
Mr. CORCORAN. Yes.
Senator NUNN. We understand that both of these men were indicted
and are now in West Germany ; is that right?
Mr. CORCORAN. They have both been indicted and that is right, two
of the individuals are in West Germany. This was one case we jointly
worked with the Commerce Department.
Senator NUNN. Was this a violation of the Export Administration
Act?
Mr. CORCORAN. Yes, they were indicted for the violation of the
Export Administration Act and found guilty of exporting semicon-
ductor manufacturing equipment.
Senator NITNN. Who was found guilty?
Mr. CORCORAN. Three individuals and the company in southern
California, II Industries.
Senator NUNN. Are these extradictable offenses under the Export
Administration Act?
Mr. CORCORAN. They are not for American citizens.
Senator NUNN. How about foreign people?
Mr. CORCORAN. I don't think so, sir. I would have to check.
Senator Nmsrx. Could you furnish something in the record on that?
Mr. CORCORAN. Yes.
Senator NUNN. ParticularlyThese two cases.
Mr. CORCOT?AN. The company was fined $10,000 and the three indi-
viduals were fined $25000 aniece in addition to being found guilty.
[The information follows :J
Violations of the Export Administration Act and the Arms Export Control
Act are not extradictable offenses.
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Senator NUNN. Mr. Von Raab, we understand that customs has
experienced certain difficulties with the Commerce Department in
criminal investigations. These difficulties were outlined in an October
30, 1980, memo from William Green, Deputy Assistant Commissioner
of the Office of Border Operations. That was to Mr. Robert Keuch,.
who is the Associate Deputy Attorney General and Chairman of the
Interagency Group on Export Control.
This is the memo that we have on that subject and I quote from it:
What is particularly significant is Commerce's 0EA CD continued action to
impede cooperation and investigation even while it states that it wishes to
fully participate in all cooperative ventures.
Commerce continues to take unilateral and uncoordinated action concerning
either joint or Customs initiated investigations by requesting foreign inquiries
through various U.S. embassies and consulates without consulting with either
Customs attaches or headquarters. Such action is causing serious problems.
These problems are not limited to hampering instant investigations but also
compromising the U.S. Customs foreign government sources, damaging the
previously close and long relationship between the United States Customs
Service and their foreign counterparts and directly impacting on national
security.
'Senator NUNN. This memo is October 30, 1980. Have you seen that
memo?
Mr. VON RAAB. No, sir. I have not. But I have spent a lot of time
discussing the problems that have existed in the past between the Cus-
toms Service and the Department of Commerce, both with the individ-
uals at Customs who are responsible and also with the number of offi-
cials at Commerce.
As I indicated, Assistant Secretary Brady and I have taken this as
a personal campaign to improve the cooperation of the two services
and particularly to improve the Commerce Department with respect
to our activities.
I believe that he has made a number of changes within the Commerce
Department. He is trying very hard. It takes a long time to turn
around a bureaucracy like the Commerce Department. I, fortunately,
am lucky enough to have an enforcement organization of extremely
responsive and extremely dedicated individuals and therefore we have
been able to respond to Exodus very quickly.
But I would like to indicate that the environment between Commerce
and the Customs Service has improved immeasurably. And I have
great hopes for the developing relationship.
With respect to foreign investigations, I do believe that there are
problems with Commerce conducting certain foreign investigations.
Customs does have much better connections with the police agencies
that these investigations would typically use.
Unfortunately, Commerce is burdened with a number of other re-
sponsibilities that other nations find offensive, particularly antitrust,
some antitrust investigations but more particularly some of our anti-
boycott as a result of which it is very difficult for a Customs or for
Commerce officials to work effectively with police agencies and in other
parts of the world where they fear that the Commerce officials are not
only interested in stemming the flow of critical technology which they
regard as a legitimate exercise but they are also afraid that the Com-
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merce officials may be visiting certain businesses for purposes of en-
forcing some of the U.S. laws that those countries do not like.
So it is a real problem for Commerce abroad in my opinion. Occa-
sionally we stumble over each other but I think the bigger problem is
that the police organizations don't like the Commerce attaches.
Senator NUNN. In your personal opinion doesn't it make sense to
shift the enforcement part of the Export _Administration Act to the
Customs Service leaving the licensing in the Commerce Department?
Mr. VON RAAB. We are already doing a large part of the enforce-
ment. I don't know that it is necessary that only one agency have the
total responsibility for enforcement.
Senator NUNN. If you were trying to devise an efficient method,
though, you wouldn't split the same responsibility between two agen-
cies, would you, one with an overwhelming capability and the other
with very little capability at all?
Does that makes any sense at all from an administrative point of
view
Mr. VON RAAB. I unfortunately do not know enough about the uni-
verse of Commerce's responsibilities. I have to assume that there are
certain aspects of investigations or enforcement that they do bring
particular expertise to bear on. I certainly wouldn't suggest that they
need to increase their forces in any way. But if I were Assistant Secre-
tary Brady, I would hate to lose any power I had over enforcement
because there are particular cases in which I feel that I might find it
necessary.
Senator NUNN. You are not Assistant Secretary Brady. We will
hear from him later. I am asking for your opinion.
Mr. VON RAAB. I have to agree with him on this. I think he will
probably say that to you. I think we should carry the major share,
the 95 percent, but I don't believe that it is necessary to snatch it
totally from Commerce.
Senator NI:wig. Would you see that there would be any damage done
to our overall export capability in enforcing the law by putting it all
into Customs?
Mr. VON RAAB. As I indicated before, I have great faith in Customs.
So my answer to that would be, No, I don't see that it would cause
a problem.
Senator NUNN. But because of your fondness for Mr. Brady and
your sensitivity to the Commerce's Department's feelings in this sub-
ject, you would not advocate shifting?
Mr. VON RAAB. That is correct.
Senator NUNN. Is Mr. Corcoran free to give his opinion?
Mr. VON RAAB. Absolutely.
Senator NUNN. He can give his own personal view without being
in any difficulty? Is that right?
Mr. VON RAAB. Yes, sir.
Senator Numsr. Mr. Corcoran
Mr. VON RAAB. At least for now he is.
Senator NUNN. Do you think it makes sense, Mr. Corcoran, to have
two different agencies responsible for enforcement under this?
Mr. CORCORAN. I think on the basis that you mentioned of effective-
ness and efficiency it makes sense to have one agency when we are so
predominantly involved.
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Senator NUNN. You think it makes sense to put it all in Customs?
Mr. CORCORAN. Yes.
Senator NUNN. Is Mr. O'Brien free to give his opinion?
Mr. VON RAAB. They are both free to.
Senator NUNN. For the time being?
Mr. VON RAAB. They don't have control over this decision.
Senator NUNN. What is your personal view on that?
Mr. O'BRIEN. Being under oath, I must give my personal view.
I believe it can only improve the effectiveness and efficiency opera-
tions to centralize it.
Senator NUNN. Put it all under Customs?
Mr. O'BRIEN. Yes.
Senator NUNN. You don't believe it would damage our overall
ability to enforce the Export Administration Act to take it out from
under Commerce altogether except leaving the licensing there?
Mr. O'BRIEN. Absolutely.
Senator NUNN. Would you agree leaving the licensing there makes
sense?
Mr. O'BRIEN. Yes; I think it is important to keep the administra-
tive, especially the policy determinations separate from the enforce-
ment function. They make their determinations based on national
interest rather than enforcement.
Senator NuNN. I have a memo here the origin of which I will not
give at the moment but it says:
The Commerce Department has to wear two hats. On the one hand, it must
serve the interest of the exporting community by assisting them in opening for-
eign markets, by advising them on proper procedures for exporting, by offering
advice, making determinations concerning export licenses and in general assisting
exporters.
On the other hand, however, the Commerce Department must police the same
group to ensure the laws and regulations have been complied with and take puni-
tive action. This, of course causes a somewhat incongruous situation which can
lead to conflicting internal policy and management decisions.
Customs now enforces the Arms Export Control Act with the delegation of the
Department of State and has done so for many years
and so forth.
Do you, Mr. Corcoran, agree with that?
Mr. CORCORAN. I think my feeling is that very much as Pat O'Brien
just mentioned, I think that we as the enforcement agency should be
the factfinding agency.
I do think that even though there seems to be a conflict there that
Commerce should retain the licensing and administrative function.
I think overall policy and considerations in the Commerce and the
oversight of the movement of products in and out of the country
Senator NUNN. Should retain the licensing function?
Mr. CORCORAN. Yes; I think they should retain that function and
the policy and administrative actions involved in the licensing. I think
we should be just a factfinding enforcement agency.
Senator NUNN. I think Mr. Von Raab, you mentioned in your state-
ment that or in answer to the question that you didn't believe the Com-
merce Department couldn't really do the job with the number of people
they have there now?
Mr. VON RAAB. The point I am trying to get across is I am not sure
that to deprive Commerce, the ability to do any enforcement in this
area is a good idea.
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I say that only because we live with a similar problem with respect
to drug investigations in which we are deprived by the Reorganization
Act of 1972 from conducting drug investigations. DEA has that
responsibility.
Senator N17NN. What I am puzzled about, I have been through all
of that?
Mr. VON RAAB. Therefore I think it is a mistake to prohibit a depart-
ment from conducting certain activities which are very closely related
to other matters that it deals with. I am not suggesting in any way that
Customs shopld not, in effect it is. but should not remain and grow as
the primary if not almost total enforcement arm.
It makes me nervous to remove any enforcement authority from the
Commerce Department. That is my concern.
Senator NuNN. But if you just remove the people, left the authority
there, that would solve it, wouldn't it?
Mr. VON RAAB. You will get to it one way or the other.
Senator NUNN. What I am puzzled about is you don't believe they
could properly enforce
Mr. Vox RAAB. Certainly not with that number of people.
Senator NUNN. But then you added you don't think they should
increase the number of people.
Mr. VON RAAB. I don't think they need a large enforcement effort. I
just think it is probably important for them
Senator NuNN. What you are basically saying is we should leave
some authority and maybe a few people in the Commerce Department
for sensitivity and prestige purposes and then shift the main respon-
sibility to the Customs Service?
Mr. Vox RAAB. That is probably true.
Senator NuNN. I want to thank all of you for appearing, not only
appearing here today, but also cooperating with us so well here in this
whole investigation.
The staff has informed me of your excellent cooperation. We appre-
ciate it. Mr. Von Raab, if you could reduce those charts to be this size
so we could put them in the record, we would appreciate it.
Mr. VON RAAB. We have a few sets. We will send them up.
[The charts referred to follows:]
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PROBLEM:
FOREIGN ACQUISITIONS
O Critical Technology
O High Technology
O Other Commodities
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Z-17000Z91-001-001179?001A198dCl-V10 1-1-/Z1-/LOOZ eSeeiei -10d penaiddV
118Z.Lg
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INSPECTIONS
O Fraudulent Exports
O Smuggling
O Diversion
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EINTELUG EXCE
O Manuffacturers/Expo ers
O SMppers/Brokers/F
rward rs
O Forerign Customs Senfic
O Commerc
/Stat
O U.S. Dnte[INgenc
4."
E"
Sendoes
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INVESTIGATIONS
O Criminal prosecutions
O Techniques ? smuggling/fraud
O Sources
O Surveillances
O Data base analyses
O Foreign investigations
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CIINCLUSI Iii
O Disru
t flow of critical tech
O impede military badup
Lor
n military ec
O Enforc
sanctions
O Dtrrr
rot/compHanc
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uc7,
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ty),?p,c9,c2cogRir92,g?re9,4,9
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Senator NuNN. Thank you, very much. The subcommittee will be
back here at 9 o'clock Tuesday, at which time we will hear from Adm.
Bobby R. Inman Mr. Lorenzo, Deputy Under Secretary of Defense,
and Mr. Bryen, Deputy Assistant Secretary of Defense as well as Mr.
Lecht, former chairman, president of the board, of Advanced Com-
puter Techniques Corp.
[Member present at the time of recess: Senator Nunn.]
[Whereupon at 12 :30 p.m., the subcommittee recessed, to reconvene
9:08 a.m., Tuesday, May 11, 1982.]
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TRANSFER OF UNITED STATES HIGH TECHNOLOGY
TO THE SOVIET UNION AND SOVIET BLOC NATIONS
TUESDAY, MAY 11, 1982
U.S. SENATE,
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,
COMMITTEE ON GOVERNMENTAL AFFAIRS,
TV a8hington, D.0 .
The subcommittee met at 9:08 a.m., in room 3302, Dirksen Senate
Office Building, under authority of Senate Resolution 361, dated
March 5, 1980, Hon. Sam Nunn presiding.
Members of the subcommittee present: Senator William V. Roth,
Jr., Republican, Delaware; Senator Sam Nunn, Democrat, Georgia;
and Senator Lawton Chiles, Democrat, Florida.
Members of the professional staff present: S. Cass Weiland, chief
counsel ? Michael C. Eberhardt, deputy chief counsel; Eleanore J.
Hill, chief counsel to the minority; and Kathy Bidden' chief clerk;
Gregory Baldwin, assistant counsel to minority; Jack Key, Glenn
Fry, and Fred Asselin, staff investigators to the minority; and Kath-
leen Dias, executive secretary to the minority chief counsel.
[Members of the subcommittee present at convening: Senators
Nunn and Chiles.]
Senator NuNN. The subcommittee will come to order.
Senator Roth is coming in a few minutes but has asked me to begin
in his absence.
Our first witness this morning is Michael Lorenzo, Deputy Under
Secretary of Defense, International Programs and Technology, De-
partment of Defense.
Mr. Lorenzo, do you have some associates with you? If they are
going to testify, I will ask all of you to take the oath.
Mr. LoRENzo. I have a lot of supporters, Mr. Chairman.
Do you want them to take the oath? I don't know if I will call on
them or not.
Senator NUNN. We can have them come up later, if you need them.
Do you swear the testimony you give before the subcommittee will
be the truth, the whole truth, and nothing but the truth, so help you
God?
MT. LORENZO. I do.
Senator Ntrxx. Mr. Lorenzo, we appreciate you being here this
morning. We appreciate your cooperation with the subcommittee. You
can introduce your associates and I will ask if either of you are going
to testify, you go ahead and take the oath now.
Do you swear the testimony you give before the subcommittee will be
the truth, the whole truth, and nothing but the truth, so help you God?
(217)
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Dr. KAPPER. I do.
Dr. LOIVIACKY. I do.
Senator NUNN. We swear all our witnesses before the subcommittee
without exceptions. It is a long tradition.
Mr. LORENZO. Nothing like starting with a common base line, Mr.
Chairman.
Senator NUNN. That's right.
Mr. LORENZO. It is indeed a Pleasure, Senator Nunn. I guess I have
the go ahead, do I not?
Senator NUNN. Yes, sir, you go right ahead.
STATEMENT OF MICHAEL LORENZO, DEPUTY UNDER SECRETARY
OF DEFENSE, INTERNATIONAL PROGRAMS AND TECHNOLOGY, DE-
PARTMENT OF DEFENSE, ACCOMPANIED BY DR. FRANK KAPPER,
DIRECTOR OF MILITARY TECHNOLOGY SHARING AND DR. OLES
LOMACKY, DIRECTOR OF THE OFFICE OF TECHNOLOGY TRADE
Mr. LORENZO. Mr. Chairman, in the interest of time, and I might
say the thorough work we have done with your wonderful staff, Glenn
Fry and others, and going over the issues, the substance, I would like
to submit my prepared statement for the record as if I read it and
make a brief opening statement to summarize the statement, and I
would like to hit, a few highlights and be prepared, perhaps, for some
questions you may have.'
Senator NUNN. That will be fine.
Mr. LORENZO. I mentioned earlier, I have Dr. Frank Kapper here
on my left. He is the Director of Military Technology. He handles
munitions cases, FMS cases, MOU's, national disclosure policy,
mainly what is known in the vernacular as West to West trade.
On my right is Dr. Lomacky. As you know, he has the very difficult
and unpopular job of being in charge of dual-use technology trans-
fer, which comes under the Export '-Administration Act of 1979 and
which is the primary thrust of the hearings today, commonly known
as East:West trade, which I think is a misnomer.
It is really West to East trade we are concerned about.
The statement goes into the defense roles and responsibilities, and
accomplishments to date, of which there have been some. We would
like more and are working hard with some of our concerns related
to export control.
Limited by an unclassified hearing you have here, of course, we
stand prepared to go into closed session in subsequent hearings, if you
so desire, and, of course, classified sessions which you may desire to
do to get down to a lot of the nitty gritty, et cetera.
I looked over and I have read the statements of a lot of my col-
leagues who have already testified before this subcommittee and some
of them to follow.
Senator NUNN. Mr. Lorenzo, if you prefer to go through your whole
statement, we would be delighted. It is not that long. I am sure that
might be more comfortable for you. We have time this morning.
We will be delighted to hear all of it.
a. See p. 552 for the prepared statement cf Michael Lorenzo.
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Mr. LORENZO. Rather than read word for word, I was going to hit
the hightlights.
Senator Nuxisr. Whatever you prefer.
Mr. LORENZO. Really, we do two functions for the Under Secretary
of Defense Research and Engineering, Dr. DeLauer.
One is the technical policy and the other one is technical assessment.
This combined with strategic policy that is going to be covered by
my successor, Dr. Bryen, generally constitutes the DOD decision or
position that we go back to Commerce as our response to anybody's
request for technology transfer.
Technical policy becomes very difficult, like policy in general, to
define. We define it as pertinent to technical performance, operational
parameters and the acquisitional aspects of technology transfer. Dr.
DeLauer himself has established a new technical policy. Since we are
both rather fresh and recent from the private sector, it goes like this.
We have discovered and observed that on a case-by-case review basis,
we do an excellent and outstanding job in turning down cases.
However, it is our opinion that we do not do a job commensurate
with telling industry what they can do and can sell. We are working
on that and will give you some examples later, if you so desire.
There are many, many cases.
Let me take one now. A CAT scanner which is headed for a hospi-
tal. Everybody wants to help a hospital. I think maybe Larry Brady
uses this example, too.
I have a little different rationale than he does, but that is all right.
The OAT scanner is going to be roughly a million-dollar piece of
equipment. So that means a lot to the people manufacturing and sell-
ing. However, in that CAT scanner is imbedded a general purpose
computer, an array processor, display and signal processing equip-
ments both in hardware and software.
Obviously, the imbedded equipments only amount to around $35,000
to $10,000. However, they are accessible and normally through engi-
neering practices they are readily accessible, to be used off-line for
other things that we don't want them used for.
They are high powered computers. Well, first, the usual harangue
and argumentation goes on. The case of course should be considered
on its pure merits that is whether it could contribute a significant
enhancement to the military capability of a potential adversary,
either the country receiving it or another country who gets it on a
third party transfer.
In looking at this very deeply, we find out that we have not and
really should use technology to help solve technology transfer leak-
age, or so-called hemorrhaging.
This we can do, and I am glad to report to you though with a
humble and rather primitive beginning, that efforts are underway,
because we do want to protect the trade, the economy of our country
which, of course, we all know needs help now more than any other
time and sell, but protect the critical technology so it cannot be used
for off-line uses. And this we can do by changing the engineering
design to make the software, you might say, difficult to reverse engi-
neer, change the writing and change the mechanical accessibility.
And so we would like to work with you in the months to come and
95-929 0 - 82 - 15
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I think we can make great strides in letting a lot of our advanced
technology go out but it will not?in unmodified form?let's say
modified form, I am sorry, be a contributor to the military enhance-
ment of a potential adversary.
That, as you heard, is costing us a lot of money in defense today.
The Soviets obviously have built up tremendously over the last 15
years with a lot of technology from our side and they depend on
Western technology.
I think with approaches like this, as an example, we can at least
make it very difficult for them and hopefully keep down the amount
of defense money expended in countering their threat which is being
built on Western technology to a great extent.
I might say in passing a very important message, I would like to
leave with the subcommittee is that we are getting great cooperation
from American industry. It is a good thing.
I will cite two examples. You take John Young, chief executive
officer of Hewitt-Packard. We sat down with them in detail, also with
Dr. Matt Sutton, Minneapolis Honeywell. They do not want to trans-
fer their advanced critical technology to do anything conflicting with
defense desires. We have to tell them what it is we want them to do
and what they can do, instead of all this back and forth work we are
going through now.
Of course, we are in the learning period of controlling critical
technology and we will get there, I am sure.
Senator Ntrxx. Do you have a group of people under your jurisdic-
tion who really sit down and conceptually with their scientific back-
ground and knowledge. try to come up with a list of what the Soviets
really need, what is critical to them in the defense arena, what kind
of dual use technology they could employ in their defense efforts?
Mr. LORENZO. I think the answer to your question, Mr. Chairman, is
essentially yes. A military critical technolopy list, which was called
for in the Export Act, is a step in that direction. We have revised it
twice and it is being- revised again.
The first time it was aimed for products predominantly. As you
know, the first submission was October I, 1980, in accordance with the
act.
The second round, we infused in that revision, you might say a Bucy
report type of description. The end products themselves are not too
bad because we give it to somebody who has to reverse engineer and
that takes time.
However, in the Bucy report, and he was 10 years ahead of his time,
he dealt, with Keystone equipment, in other words, something that
could be. done to the design, production, and manufacturinp; process.
Those are the kinds of technology that would hurt us most if it falls
in the hands of an adversary.
I would say the military critical technology list is one step in that
direction.
Senator NuNN. Does it cover dual use technology and commercial
applications?
Mr. LORENZO. Primarily that is what it covers right now, dual use
technoloTy. As everybody knows on this subcommittee, that is tech-
nology and products predominately made for the civilian market, but
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which have critical military applications. The majority examples are
computers, including the software and that kind of product.
Senator NUNN. IL you ever get the feeling we are trying to control
too much and by trying to control too much we aren't able to do a good
job with controlling anything?
Mr. LORENZO. Personally, I think the answer to your question is yes.
When I came from the private sector 7 months ago, I had the feeling
we were unnecessarily controlling too much, like the CAT scanner I
mentioned.
We get in an argument and say, yes, that imbedded computer is crit-
ical and could help, but let me go off on a little philosophy, and I am
going to leave another paper and introduce it for the record which you
can keep.1
Technology really is an international language. When you get all
done, the physical scientific laws of nature were imbedded in all people,
with all ethnic backgrounds, almost from the beginning of the Earth.
Everybody knows what they are in every language. I go around the
world, I talk to the Turks, I talk to the Japanese and when you start
talking about such things as Carnot's laws of thermodynamics law,
they all know what you are talking about "in English."
You do not, as you know, need an interpreter. Being a research tech-
nologist and working at the graduate level, I have no difficulty com-
municating. We have to understand that they all know the physical
scientific laws of nature very well in every language and they know
what the parameters are for key payoffs. What we fail to realize in this
country is that if we can control and classify things to the ultimate,
we can impede progress, but they will eventually know what we do.
The classical example of that is nuclear energy.
That is enough motivation for them to know where to put their
resources.
Yes we can control critical technology, and I think we can identify
such fairly well. However, the best control in the world is short-lived
at best so we shouldn't use a lot of discretion on what we control be-
cause it goes contra to our economic development, open society, free
trade, understanding with foreign nations and also building up mutual
respect with foreign nations to meet your military obligations.
The bottom line is this: If you buy everything said, and I think you
do, I think you will also buy that the physical scientific laws of nature
are in the hands of everybody and always will be. Of course, we being
an open society, just by definition, our findings get in our research
and development findings, particularly at universities where we share
knowledge to help out the whole world. But we have bad people in
the world here and there who use it for other things. We can and will
control critical technology.
Let me come to the bottom line. There are two things we can do:
One, we can be smarter as in the example of the CAT scanner I talked
about?another is keeping our technology base out in front and ahead
of everybody else and I think we are doing that very well in this coun-
try and spending approximately $20 billion in fiscal year 1982 R. & D.
dollars?I won't get into exact numbers?just for other than research
and development, or let's just say the technology base in DOD.
1. See p. 562 for the material referred to by Mr. Lorenzo.
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Being smarter, I think, is where we as a nation have failed in tech-
nology transfer, not doing things like I described, as in the CAT
scanner.
Let's back off, and I am answering your question in the affirmative,
yes, I think we sometimes, and this is a personal professional opinion
of my own, are controlling things maybe too much. If we modify
them slightly and make them inaccessible for uses we don't desire, I
think we will go a lot further in obtaining our national goals and
objectives.
I am sorry to give you such a long answer.
Senator NuNN. Is DOD the proper place to do that? Without any
doubt, DOD ought to have a major input and, of course, I joined
Senator Jackson in his efforts to give DOD much more input than they
had formerly. But is DOD the place where you should get an objective
technical analysis, let's call it a Soviet wish list, a list that we compose
of what the Soviet Union really needs? Certainly DOD should have an
input, but I wonder if DOD or State or Commerce, each with their
own perspective, is the proper place for that kind of list to be found.
Mr. LORENZO. You pretty well answered all your questions, Mr.
Chairman. DOD can give you the major, critical inputs for what the
critical technologies are, what the Soviet Union needs for military
use. But you have to remember of the total electronic capability in
this country. DOD uses less than 5 percent.
So you will need somebody, some organization with a scope bigger
than DOD to handle the total problem. I think you pretty well
answered your own question by the way you stated it. I am in agree-
ment.
Senator NUNN. Theoretically the final decision will be made at the
White House on any dispute, but as a practical matter dealing with
thousands of different items, where should the technical part of the
equation and policy part come together for a final decision after
receiving the input from the various agencies?
Mr. LORENZO. That is a very difficult question for me as an individual
to answer. I will answer you very truthfully and honestly, I don't
know where it is. I don't think you have it.
Does that answer your question?
Senator NUNN. Not any single place.
Mr. LORENZO. That is correct. I don't think DOD should be the total
picture, but I think DOD is very critical and a very major contributor.
When I say DOD, I say all of its intelligence agencies and all the
intelligence agencies we work so well with, like the CIA, DIA, so
forth.
That working relationship is very good, very critical and very vital.
Senator Nuwx. Go ahead.
Thank you.
Mr. LORENZO. I would like to just cover one more thing here. There
is a trend, and this goes back to what I said earlier, Mr. Chairman,
we are turning down more cases or rejecting more requests for tech-
nology transfer.
For example, just to give you and the subcommittee a feel, for the
munitions cases or West-West trade, let's say, in the 1981 calendar
year, we handled or processed about 8,000 cases in our office in DOD.
That was just a part of the 28,000 we delegated, you might say, by
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mutual agreement, that Bill Robinson and the Munitions Board
handles and that working relationship with the Munitions Board in
State and Defense is outstanding.
It has been very good for years. We do get together and solve our
problems very well, but let's just say this: Less than a couple years
ago, the turndown rate was less than 1 percent. In 1981, the turndown
rate was 5 percent, but that is sort of misleading. It's apples and
oranges a little bit. Well, the turndown rate was 5 percent on the 8,000
cases we said we wanted to see as examples, you might say to set
technical policies with the Munitions Board.
On a lot of the approvals we gave, on the 95-percent approvals, a lot
of them have "fences" and "gates" and no no's here and there, or modi-
fications to make things inaccessible or parts of it.
I don't like to see that high turndown rate increasing because that
implies we have gone back to the other points I have made. We are not
communicating too well with our friends in private industry. We are
spending a lot of money. But we do offer and have offered more advice
through what we call a defense advisory service.
The State Department works with us very closely. Instead of a con-
tractor or an applicant submitting a total case, he submits just a draft.
We give an advisory, sit down and talk it over with them and back
they go. We don't waste a lot of time and create a lot of friction and
irritation. Technology transfer, by and large, in our open society, I
think is communications, making it known to all sectors that are in-
volved an awareness of the impact of certain critical technologies. If
we do that, and I am talking about university research which we are
working very closely with, a lot of studies, National Academy of Sci-
ence and all around the country, I think we will get there better in our
open society.
As Dr. Guy Steven recently said, we get confused in this country of
having too much of a matrix organization where we hear everybody
from all sides. It is known to the Soviets and we have been accused by
them in international fora having an "ad hoc" form of government.
Everybody speaks and everybody does everything, but by and large,
I think if we keep on that approach, and we have no other choice than
to do that, that is our way of life.
I think once we get there, we are going to be in better shape than our
potential adversaries.
On dual use technology, which this committee is primarily interested
in today, working with Commerce and looking over the numbers, it
seems like we had a rejection rate of less than 2 percent on the defense
process cases and that was, about 2 years ago. And this past 1981 cal-
endar year, that reject rate was up to 15 percent. There the job is very,
very difficult because you are dealing with people who have made a
product primarily for the civilian market and it does have defense
application.
Of course, that was a sample of 3,500 cases we did, taken from the
commodity control in Commerce which approximated something like
77,000 cases in 1981.
So I have covered here just the highlights, the MCTL. We are im-
proving it. And I might just say, with a very small staff we do interface
with a lot of people. There are over 300 key technically qualified people
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we interface with in the rest of the Department of Defense, such as
all the military agencies, predominantly the research and acquisition
people, counterparts and all the intelligence agencies and many, many,
thousands in the private industry.
To give you an example of private industry and our interfaces with
it, MAPAG alone, a multiassociation reviewing our MCTL right now,
has over 80 company members, but a staff person gave me an estimate
of over 90,000 people in American industry.
So we have underway, have done and have a tremendous educational
process for technology transfer.
I might go a bit further, Senator Nunn, and I know you are well
aware of our four power meetings where we meet with Germany,
France, and England twice a year. Dr. DeLauer is the principal rep-
resentative for the United States and I am the alternate.
We also meet with CNAD, the Conference of National Armament
Directors, of 15 nations in Brussels, Belgium, twice a year, and since
I have been aboard, I may not have become unpopular but I have in-
troduced on the agenda or at least I have helped introduce it. It has
also been introduced in the NATO technology transfer study and
others, which is a very good thing, and Dr. Bryen's statement is going
to uncover that very important study, underscoring to the allies: "Hey,
you are very nice people, we need you; we need a mutual military
capability but we want to help you close your doors on letting dual use
critical technology out to potential adversaries or places where they
can do harm."
And this is very, very effective. The bottom line on the NATO tech-
nology transfer study, in my opinion, is to get the respective Minister
of Defense, counterpart to our Secretary of Defense, involved in their
government infrastructure on all technology transfer, particularly
dual use, going from their civilian contractors into the East-West bloc.
And a lot of progress has been made and I don't want to steal the
thunder of my colleague, Steven Bryen. He is probably going to talk
about France. France has a new law where the MOD gets into this
process and the law went into effect October 9 but it is on the agenda
now and all of these international fora are getting attention.
They know and I give credit to our intelligence community net-
works, that we have good networks. They also have a lot of good net-
works, not comparable to ours. They are asking us now in meetings,
and they bring the subject up themselves. They say if we get. some-
thing leaked, let us know. So I think our savior with our allies is
their MODS and I say they are working the problem and they have
a long way to go and I will defer the rest to Dr. Bryen to get into
that area.
I am pretty much through with my statement, Mr. Chairman.
You can go ahead and shoot questions. We do have the DOD tech-
nical data base we outlined. The foreign disclosure technological in- ,
formation system is a massive effort. Just the supporting documen-
tation is over 10,000 pag-es.
On foreign availability, which you sort of alluded to in your ques-
tion. Let me say this. True DOD may not be the agency to put it all
too-ether, but certainly with the intelligence agencies, T think we can
'like a significant contribution. If for military enhancement of a
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potential adversary, I think DOD is definitely the main arm and also
should play a major part but I cannot answer your question, who is
that total agency.
May I suggest you go talk to Senator Garn, he may have some
ideas on that point.
Senator Nrr,NN. Thank you very much. When you make up the
militarily critical technology list, the MCTL, does that in effect deter-
mine it for even availability of technology?
Is that a key part of the process?
Mr. LORENZO. The MCTL is concerned with availability in the
adversary countries. If they already have something in great bunches,
or certain technologies' it is pretty hard for us to say to our allies
that we have to control it. There is definitely a corollary or strong
relationship.
Senator NUNN. We have heard in previous testimony that diver-
sions of U.S. technology occur through free world nations. In light
of this, do you think D.R. & E. reviews an adequate number of free
world export licensing cases?
Mr. LORENZO. We need to do more in the free world area. Since this
is an unclassified session, I won't cite the countries that cases are
going to. We are on record now in daily dialog, you might call it,
in an argument with the Department of Commerce. We do want more
cases.
The answer to your question is, no; I don't think we are doing
enough cases to the free world because technology goes into the free
world. There are all kinds of international trade houses, all kinds of
multinational hookups, all kinds of companies that are multinational;
some are part or totally owned by the Communist bloc---yes; to an-
swer your question, we should look at more free world cases and I
think when the act, the Export Administration Act of 1979 is read-
dressed, when it comes up in 1983, that should be incorporated in the
revision, or updating of the new act. We will be glad to make recom-
mendations for you at that time.
Senator NuNisr. Thank you very much. Does Defense Research and
Engineering have a presence in the enforcement activities or do you
strictly have the input in the policy level licensing or does DOD in
any way enter into the enforcement?
Mr. LORENZO. We don't have I guess you would call a direct or
substantive impact on enforcement, but we are consulted at all times.
We are now preparing in connection with our colleagues on the policy
side of Defense, Dr. Bryen, the "Mushroom Book," in other words,
a book Dr. Lomackv on my right and I are preparing to help Customs
identify high technology.
In other words, when they are out checking shipments and so
forth, what is it they are looking for, how should they look for it?
We should be more involved and we have been talking informally
with both State and Commerce and they have expressed a desire for
us to be more involved. We just have to develop the people and I fore-
see where we are going to have to provide people probably onsite to
help out as this enforcement activity grows. This is something that has
come up in the last 6 months or a year. Customs has put more people on.
Project Exodus is underway and they are revealing more. Yes; we
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have to get with it. I think we have to provide more input and def-
initely we can help them in the technological and engineering aspects
and particularly in training of their agents on what to look for, what
it is when they have it, and how to handle it, and what to do about it.
Senator NUNN. We heard testimony from Dr. Lara Baker of the
idea to establish a technical expert group somewhere away from Wash-
ington divorced from policy to :function as a technical evaluation
center, not that all the people would be housed there, only a small
group, but that the technical information would be cleared through
there. Would this be an advantage or do you see it as just adding one
more layer in the process?
Mr. LORENZO. If I said yes, I would be shooting myself in the foot,
Mr. Chairman. Dr. Baker is doing a very good job tor us right now.
He has a lot of good people and they contribute tremendously from
their background in nuclear weapons development in that the major
technology used is you might say supercomputers. He is doing a very
good job. So from a selfish point of view, I would say no, I don't want
him to do that, I would want him to do what he is doing right now,
but if he decides to do it, of course that is his business in our free
society.
I would like, if a group was going to start like that. and we essen-
tially have parts of that right here; to see it in Washington. We are
looking at?my bosses and I are right now permanentizing my staff,
making it more professional, making it more career oriented and per-
haps we are looking at alternatives, to set up you might say situations
he has. His idea is good. But from the selfish point of view I am not
going to shoot myself in the foot and bless him to do it in Albuquerque.
I want him to work right now for me, which he is, and he is doing one
mighty fine job.
Senator UNN. How many people in your office are actually dedi-
cated to what you call West-East trade functions? What is the staffing
you have dedicated to that purpose?
Mr. LORENZO. I took a count very recently, as a matter of fact last
night.
I have taken many counts since I have been on board. We have a
total, you might say, on East-West trade which I think is a misnomer
because we are talking from West-to-East trade, of 12 professionals
and 4 secretarial. But of those 12 professionals we only have really 4
that you might say are deeply highly technically qualified people and
1 administrator. Then I have more technically qualified. I am sorry,
I should have said 4, of a permanent nature and I am fighting for more
and have gone down to my bosses for more and I am promised that
I am going to get more permanent because this cadre of 11 people?
we have 1 schedule C temporary, trainee, involves a lot of trainees
coming and going. They are very good. That is part of the educational
process.
We consider and I have gone to the mat on this, 11 truly technically
qualified people to form a minimum critical mass in a centralized loca-
tion because we are dealing, as I have mentioned before, with 300
highly qualified technical people in the rest of defense, and intelligence
agencies, 90,000 in industry, and also you might say 5,000 in foreign
governments.
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I have never counted the number of R. & D. people we are dealing
with in foreign governments. So I have drawn the line you might say.
I don't think we could be any smaller and having gone through many
recent exercises in the last 2 months, you cannot delegate any more
of the responsibilities to the military services. We need a minimum
critical mass just like an atomic weapon. You cannot get anywhere
unless you have a certain minimum critical mass and from a manage-
ment point of view I think that is a very logical point.
I would like to enhance them, make them career oriented, get rid
of the temporary label. Qualified people are very important, but you
have got to automate the data and use other management techniques
that we are doing very fast, such as entering our data base into
FORTDIS. I think that pretty well answers your question. Yes, we
are small. I think as the job gets bigger we have to get smarter with
more automation or have more permanent people, and we are using
a lot of contract help, too.
I might mention the Institute for Defense Analysis, headed up by
Dr. Alex Flax. They have been supporting us particularly on the
MCTL, and many other things and are doing a very outstanding job.
Senator Nuicsr. Do you or either of your a5.sociates have any recom-
mendations about changes in the law that we should consider?
Mr. LORENZO. We have several recommendations. They are kind of
detailed. We would like to document them for you and submit them
for the record at a later date.
Senator NUNN. All right. Are those recommendations in the form
of administration proposals or just DOD proposals at this stage?
Mr. LORENZO. The majority of them will be from the DOD perspec-
tive. But we will give you recommendations on the overview when the
act is to be revised in 1983.
Senator NUNN. I also have a number of proposals I am going to
probably make at the close of the hearings that I would like for you
to review and what I will be doing is making recommendations to the
subcommittee. There may be several of us individually, Senator Chiles,
Senator Roth, and others, that would like to make recommendations
to the subcommittee. But that is not an official final view of the sub-
committee. We would like your input about those recommendations.
Mr. LORENZO. We will be very happy to participate, Senator Nunn.
We have in the past. I have looked over the record. I want to congratu-
late you on the Culver-Nunn RSI law as well as other things. I think
you are very internationally oriented. You are looking at the total
picture.
I think technology transfer is a very difficult problem. We would be
glad to work with you.
Senator NUNN. It is certainly not simple.
Mr. LORENZO. It is a very tough job?technology transfer?you are
going against the tide you don't have the big dollars a lot of the other
programs have like a lot of the strategic and tactical programs. You
are taking things away from people. You have got to know all the
technologies. You have got to have highly qualified people. You have
to tell people no. On top of it all, it is the most thankless job prob-
ably in the Department of Defense today.
Senator NUNN. Of course, we operate in an alliance also and if we do
not coordinate in the alliance, if we don't have commonality, standard-
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ization, interoperability, those things in the alliance, we deplete our
resources to the point we can't defend against the Soviet Union.
The only way you get those things is to cooperate more at the R. & D.
stage, at every stage which means you have got to have probably more
technology transfer at least within the alliance. So this is not exclu-
sively an American problem. America can't solve it. It has got to be
an international approach as you have already said.
Mr. LORENZO. You are so correct. It has to be multilateral. You
can't go unilateral on the controls, You are so correct. You have said
it so well. I called it the "delicate balance" of giving friends?allies?
technology and controlling critical technology that might leak to the
adversaries' atmosphere.
Senator NUNN. The key to it is to get that list of the things you are
going to control down to a manageable level and not having it so
broad and so long that in an effort to control everything you don't
control anything.
It is like classification, too. If your classification gets so broad, if
everything is classified, in an effort to protect everything, you end up
causing such disrespect for the system you don't protect anything and
then you leak out information every day that is very, very important.
So I think here the answer administratively is illusive, but at least
in concept we have got to find a way to hone down what it is we con-
trol as the most important element and do a darned good job of that
as I see it.
Mr. LORENZO. You are so right.
Senator NUNN. The challenge is how do you do that. We have got
a lot of agencies involved. There is certainly no simple answer to it.
But I appreciate very much your testimony. Do either one of your
associates want to add anything at this point? We would be delighted
to hear from them? Any suggestions, recommendations?
Mr. LORENZO. Fire their boss.
Senator NUNN. Do either one of you want to make any statement at
this point?
Mr. LoarracKY. Senator Nunn, I think Mr. Lorenzo has outlined
very well the kind of work that we do and the difficulties that we face.
One of the major efforts that we have underway now is to achieve
precisely what he alluded to; namely, to get our allies to cooperate
with us in technology and export control. But we have a very intensive
effort underway in Cocom. We have taken the critical technologies list
and we are making very good progress and getting that list accepted
in the negotiations on the Cocom list.
I am very encouraged by the attitude of our allies in that we were
told over the years, no, they cannot control technology, this is strictly
a U.S. kind of thing. I am very pleased that we have made some
very important progress in that area. I might also add that as in
the past so it is today they are extremely careful to demand and rightly
so the kind of precision which you have alluded to; namely, they want
to make sure that we have made a good intelligence assessment of the
other side. They want to make sure that what we want to control is
described in such a way that it has a minimum unnecessary impact
on commercial trade.
I think with these criteria is they are presented to them properly
I think the chances are that they will accept our proposals. If we do
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not follow these rules I think we will have a very difficult time. Thank
you.
Senator NuNN. Thank you.
Thank you very much, Mr. Lorenzo. We appreciate all of your co-
operation, you and your associates. We know you have a tough job.
We look forward to your giving us your reaction to the recommenda-
tions we will be making next week.
Mr. LORENZO. It is a tough job and it is a challenge. But with people
like you on our side we will get there.
Senator Nuivisr. Thank you very much.
Our next witness, Admiral Inman, is coming in just a few minutes.
I believe Mr. Charles Lecht is here. If you would kindly take the chair
we will go ahead and hear from you and then we will hear from Ad-
miral Inman. I think it is really fortunate we are going to hear from
you first in a way because I have read your statement and find some
very interesting points there that I think could be addressed later with
questions from other witnesses.
We swear in all witnesses before this subcommittee. It is a matter
of practice before the Investigations Subcommittee. So before you
start your testimony, if you will stand and take the oath.
Do you swear the testimony you will give will be the truth, the
whole truth, and nothing but the truth, so help you God?
Mr. LECHT. I do.
Senator NowN. Thank you very much. We appreciate your coopera-
tion with the subcommittee. We appreciate your meeting with the staff
and discussing these areas. We know you are highly qualified in this
whole area of technology. We look forward to having your statement.
TESTIMONY OF CHARLES LECHT, FORMER PRESIDENT AND CHAIR-
MAN OF THE BOARD, ADVANCED COMPUTER TECHNIQUES CORP.
Mr. LECHT. Thank you very much, Senator Nunn.
I have my prepared statement which I submitted to the subcom-
mittee. I will summarize it if you would like.1
Senator NuNN. Your statement is not too long. We would be de-
lighted to hear it, whatever you prefer to do. I might acid, Mr. Lecht
is the former president of the Advanced Computer Techniques Corp.
in New York.
Mr. LEciErr. Yes, sir.
Senator NuNN. Whatever you desire.
Mr. LECHT. I agreed to testify to this subcommittee on the issue
of international trade of computer technology because I believe the
goals to which this subcommittee is directed are correct ones and
important ones for the national defense and security of this country.
I have spent many days abroad for the last 15 to 20 years and I
have had occasion to work with both Socialist and Western countries.
I have some different conclusions regarding Soviet or should I say
Soviet bloc attempts to acquire a U.S. technology. I have reached
conclusions as to why this is going on which differ from those which
I have previously read about or heard about in the media or in
Washington.
See p. 570 for the prepared statement of Charles P. Lecht.
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Primarily I have come to the conclusion that the concept that the
Soviets want U.S. technology because they can't make it themselves
or they can't buy it themselves is a fallacious one. I have concluded
that the Soviet technology establishment?in the country which pro-
duces more scientific literature than any other country in the world?
is capable of producing what it wants. I have thus concluded that
the Soviets have been looking for U.S. technology primarily because
they want to find out how our military materiel work, our missiles,
our aircraft, our radar, our sonar, and the like. Since most highly
advanced military technology is driven by dual use embedded com-
puter systems to be found in both the private as well as the Defense
sectors, the acquisition of these systems by the Soviets reveals infor-
mation on how to jam our technology-driven military devices?how
they operate or what their shortcomings are.
My prepared statement supports this thesis.
Furthermore, my experience abroad in dealing with a variety of
companies, both American and foreign, has led me into direct con-
tact with Soviet military on one occasion?I have been called at my
hotel room by a Soviet general asking me to come have a drink with
him, an event which I refused to do for my health and welfare, and
loyalty to this country.
I have found that the notion of creating lists of items to guide
what may be traded and what may not be traded and which can be
used by persons at the borders of our country won't work in the high
tech, area, especially around computer systems technology. Much of
this high tech stuii has elements which vanish into the microscopic
world, has no metal thus are not detectable by machinery. For ex-
ample, computers for the future are being experimented with as
creatable in test tubes? protein based devices which are at the fore-
front of the technology. But, even today's metallurgical, chemical,
and electronic-based devices which are at the developmental fore-
front, allow for the creation of systems which are extremely powerful
and extremely small and almost nondetectable. These are the devices
being used in our embedded weaponry.
I thought I would call this to the subcommittee's attention to indi-
cate that I really believe the concept of border policing and lists which
may be looked at by, say, border patrolmen or the like is an untenable
one in this age of high science in and about computer and communica-
tion systems technologies.
Senator NUNN. You are saying the advanced technologies are so
sophisticated, so small and involve know-how in many cases and that
border control is not the answer to controlling that kind of high
technology?
Mr. LECHT. For the most part I don't see how it could be controlled
that way at all. But I also don't believe that the capacity to create
these is the privileged commodity of the U.S. scientific community. I
think the chairman of Control Data Corp. and others have testified in
the past that U.S. dominance in the high tech area is no longer a
reality. Japan, countries like France, England, Russia, and even Soviet
bloc countries have the capacity to make exactly what we are making
now.
So I wonder about the Cocom lists and our ability to police these
lists and whether this preoccupation was not causing us to focus in the
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wrong direction, so that we cannot see that the Soviet desire to ac-
quire our technology has more military meaning than anything else.
Senator Nu-NN. What do you think we ought to be doing? You
acknowledge it is a serious problem, I think. You would narrow it
down more to the pure military analysis part of it. You are saying
border control in this sophisticated age is not adequate, maybe not
even relevant. What is it that we should be doing in this country in
your view to begin to address the problem as you see it?
Mr. LECHT. First of all, I believe the establishment of a subcommit-
tee like this one to identify the problem is very relevant and extremely
important because up until this point I am not sure that we have
identified the problem in the United States. Certainly cooperation at
the source of these high technologies is probably the beginning point.
I have here a list of the American microprocessor companies and their
foreign involvements and it is quite astounding. You've got compa-
nies for example, like American Microsystems, Inc. It is a Gould Co.
It is a U.S. owned company recently bought back from a West German
company which has involvements in Austria. We know that Austria
has been a center of technology transfer in trade for many years now.
If you go through this list, and you see companies like Fairchild Cam-
era, Analog Devices, you see Motorola, Nixdorf, Solid State Scientific,
all with foreign involvements, with foreign staff on site at plants
abroad. Even if these are U.S. companies they are worked in by for-
eign people in various locations around the globe.
Some of the devices that they are working on are so small that you
can carry 1,000 of them out in your pocket and still not be detected.
Senator NUNN. When you say controlled at the source, do you mean
much more governmental business involvement and coordination? Is
that what you mean?
Mr. LECHT. Yes, but better focused. As I said earlier, if you buy the
idea that we are no longer the country which has a privileged position
in solid state large-scale integrated circuit technologies. Then we don't
have as our primary worry controlling trade in those technologies.
They can be bought elsewhere. We have to control those particular
technologies that relate to our national defense?the plants that make
these technologies, the data describing them and the way they are em-
ployed.
Senator NUNN. We go a step further. How do you go about doing
that? What do you do that we don't do now? I think you have made
it plain that some of the things we do now you don't believe are rel-
evant, but when you really hone it down, trying to control the defense
technologies and as you have described it, what steps do you think
could be taken that are not now being taken?
Mr. LECHT. It should start with an education program that de-
lineates between those items which are peculiar to our national defense
and those items which are not. We do not need a blanket embargo on
all high tech going abroad. Such an embargo doesn't have any mean-
ing. We do need better identification by the Defense Department of
those technologies which are key to our national defense 21 nd then a
campaign to educate source management who are creating these tech-
nologies.
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Senator NUNN. Both in this country and in our allied countries?
Mr. LECHT. Yes, sir.
[At this point, Senator Chiles withdrew from the hearing room.]
[The letter of authority follows :1
U.S. SENATE,
COMMITTEE ON GOVERNMENTAL AFFAIRS,
SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,
Waahington, D.C.
Pursuant to Rule 5 of the Rules of Procedure of the Senate Permanent Sub-
committee on Investigations of the Committee on Governmental Affairs, permis-
sion is hereby granted for the Chairman, or any Member of the Subcommittee as
designated by the Chairman, to conduct open and/or executive hearings without
a quorum of two members for the administration of oaths and taking testimony
in connection with hearings on the Transfer of United States High Technology to
the Soviet Union and Soviet Bloc Nations, to be held May 4, 5, 8, 11 and 12, 1982.
WILLIAM V. ROTH, JR.,
Chairman.
SAM NUNN,
Ranking Minority Member.
Senator NtrigN. You believe that, if the list is properly made up and
kept current and changed with the state of the art, that that kind of
education campaign between the Department of Defense and the other
departments and high technology industry would be more meaningful
than all the law enforcement we could muster?
Mr. LECHT. Yes, I believe it would be a good start. Certainly in the
United States you have a lot of sympathy for Defense requirements
and the requirements for maintaining secrecy around high technology
affecting that defense. But abroad, I am afraid our partners don't have
the same sense of urgency with regard to the handling of our high tech
products. For example, I have seen Russian computers sitting along-
side American computers running the same software in some of our
allied countries. I have concluded that in other country locations of our
plants producing high tech there really isn't a lot of sympathy for our
secrecy needs.
I have seen Communists working in American plants in high tech
in northern Italy for example.
Senator NuNN. Communists actually working in the plant?
Mr. LEcirr. Yes; card-carrying Communists and proud of it, en-
couraging others to attend their meetings in the evening.
Senator NUNN. Are these American companies operating abroad?
Mr. LECHT. Yes.
Senator NUNN. Dealing in high tech?
Mr. LECHT. Yes.
Senator NUNN. Dealing in items that you think might be crucial
to the national security?
Mr. LECHT. No question about it, sir.
Senator NUNN. You travel quite a bit. Does your company do busi-
ness in several foreign countries?
Mr. LECHT. We have just about worked in every Western country,
in the Far East, Australia, Japan, South Africa, and black African
countries. We have also worked in Yugoslavia and in the Soviet Union,
in Hungary, Czechoslovakia, and the like.
Senator NUNN. What is the general attitude of American businesses
toward this problem? Do you find them generally anxious to cooper-
ate or are they very skeptical about governmental efforts?
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Mr. LECHT. No; I think that any serious businessman in this coun-
try is compelled to cooperate with the Government's requirements on
the transfer of technology abroad. I think that they generally are sym-
pathetic. The problem is it has been so overstated in the past that at
times they become suspicious that it is going to in some way impact
their capacity to trade anything.
Senator NUNN. In other words, by overstating the problem if the
Government does that, and by having too many items on the list that
perhaps do not have the significance that you have described, you
create skepticism among businesses and less cooperation rather than
more?
Mr. LECHT. Yes, the American businessmen who are going abroad
and who see large-scale integrated chips of the most modern variety
coming out of the Soviet Union, wonder what the flak is about in
the newspaper which says we shouldn't trade with them.
Senator NUNN. You mention in your statement that the General
Electric Co. trains Soviet personnel in computers in Milan. Would
you tell us a little more about that?
Mr. LECHT. I mentioned that they trained them in the latter sixties.
The General Electric Co., as well as IBM and all the other manu-
facturers, have been selling high technology to the Soviet Union of
one kind or another, I should say, over the past 20 years off and
on with various periods of time where restrictions prohibited this.
And with the sale of computers, frequently there is training as part
of the package of the sale of these devices. This involves taking the
client's staff into a classroom to train them on how to operate,
program, and, in general, how to use the machines.
Well, if you sell to the Soviet Union, they need the training also.
I have seen Soviet staff in classrooms in Italy being trained by com-
puter manufacturers' representatives from the United States of
America.
Senator NUNN. When you actually sell the computers, the training
goes with it, though; doesn't it?
Mr. LECHT. Frequently it does, sometimes they will buy it.
Senator NUNN. The critical decision is whether they sell the com-
puters at all.
Mr. LECHT. I don't think that stopping the sale of computers will
benefit anything though. They hardly buy anything from us anyway i
in the computer area n the Soviet Union. The demand statistics don't
seem to justify the concern so often expressed that they cannot manu-
facture or obtain high tech without U.S. involvement. What they are
i
more concerned with in my opinion is high tech that finds its way ntc
the nose cone of a missile.
Senator Nurix. So you are saying the kind of computers that have
been sold you don't think are damaging?
Mr. LECHT. Most of the computer technology the United States has
sold to the Soviet Union could have been bought anywhere else or
made themselves. It is the stuff they stole, sir.
Senator NUNN. There are export control lists that our Government
has. Are these widely distributed in industry, in your view? Does
industry appear to be cognizant of what the Government believes is
critical?
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Mr. LECHT. These export control lists, I think, spend more time in
the Government files than they do in the hands of people doing inter-
national commerce. I have never seen a recent export control list until
your subcommittee started. I should say, I haven't seen one in years.
I had seen one earlier. I don't think the past or current export control
lists portray a deep knowledge in current high tech by those who
prepared these.
Senator NUNN. Could American private businesses and people in the
high tech area play a role as an advisory kind of committee in this
area and be helpful or would there be such inherent conflict of interest
that it would not be feasible?
Mr. LECHT. You have to start somewhere. I think bringing some
high tech advisers into the Government to better help define the prob-
lem and better help create the guidelines is absolutely mandatory at
this point in time.
For example, some of the lists at the present time are influenced by
the notion of size of the machines. Well, size today means old, not
new. The bigger they are the older they are, the newer they are, the
littler they are. So on occasion we hear that we can't sell big machines
but we can sell small ones. It frequently turns out that the smaller
machine the more powerful it is, the larger, the less powerful. Thus,
there are a lot of conceptual revisions needed and I think the scientific
community ought to be brought in on these revisions.
Senator NUNN. Have you had any dealings with the Department
of Commerce in enforcing American technology transfer?
Mr. LECHT. Well, the Department of Commerce once helped me
transfer some of my technology over to Italy to demonstrate it at an
Italian fair. but other than that dealing, I have had none.
Senator NuNx. Have you seen them create much of a dialog with
industry about what should and should not be on the list? Is there
any kind of educational effort going on from the Commerce Depart-
ment that you have personally seen?
Mr. LECHT. No, sir, I haven't.
Senator NUNN. We appreciate very much your being here, Mr. Lecht.
Your testimony has been very helpful and very heartening and we
thank you for your cooperation with the subcommittee.
-Mr. LECHT. Well, I was heartened to see this subcommittee formed,
Senator Nunn. I wish you good luck and great success.
Senator NUNN. We hope to continue to bounce ideas off of you.
Mr. LECHT. It will be a pleasure, sir.
Senator NUNN. Thank you.
At this point, Admiral Inman is our next witness and we will take
about a 5-minute break while we wait on him to arrive.
[Member present at the time of recess: Senator Nunn.]
iBrief recess.]
[Members present after the taking of a brief recess: Senators Roth,
Nunn, and Chiles.]
Senator NUNN. Our next witness is Adm. Bobby Inman. Admiral
Inman, we appreciate, the excellent job you have done for your country
in every area and I particularly appreciate the interest you have dis-
played in the technology transfer area. I don't know of anybody in
government that has concentrated on it more and given it more em-
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phasis in the last couple of years than you have. I also appreciate your
cooperation with our staff in preparing for these hearings.
We are delighted you are here. We swear in all the witnesses before
the subcommittee so if you would take the oath we will be glad to get
your statement.
Do you swear the testimony you give before the subcommittee will
be the truth, the whole truth, and nothing but the truth, so help you
God?
Admiral INDIAN. I do.
Senator NuNN. Thank you.
Why don't you go ahead and proceed and then we will have
questions.
TESTIMONY OF ADM. BOBBY R. INMAN, DEPUTY DIRECTOR,
CENTRAL INTELLIGENCE AGENCY
Admiral INMAN. Thank you, Mr. Chairman. I have a statement that
I will submit for the record, if I may, including as a part of it the
unclassified version of the intelligence community's look at Soviet
acquisition of Western technology.
Senator NUNN. That will be admitted, without objection.1
Admiral INMAN. The origin of that study really begins with this
subcommittee and its staff, as you will well recall, from dialogs that
go back a year and a half, the questions asked about the general status
of Soviet technology transfer and inadequacy of the answers we
had--
Senator Nuivisr. If you could pull that mike up a little closer.
Admiral INDIAN. Bow is that?
Senator NuNN. That's good.
Admiral INMAN [continuing]. And the inadequacy of the answers
we had available. The whole question of technology transfer had not
been a priority topic. Out of the dialog between this subcommittee, its
staff, and the Senate Select Committee on Intelligence, we were asked
in March 1981 to do an interagency study to pull together all we knew
about the Soviets success in acquiring Western technology and their
use of it in their military buildup.
A 6-month effort was undertaken. The results were startling to
those of us inside the intelligence community as well as to the users.
It was clear that we had a great deal of information about the nature
of the Soviet efforts, their use of their Eastern European allies to
support it and the general outcome. We provided that study in its
full classification level to the Senate Select Committee last October,
and then we proceeded in the ongoing dialogs within the administra-
tion and with the staff both of this subcommittee and of the Senate
Select Committee to try to refine what we knew to improve our
capabilities to track the problem better in the years out ahead but
most of all to try to help assess the impact of the damage and what
might be done in response.
I would point out two or three highlights from that knowledge for
our discussion today. First, is we look at the militarily useful, mili-
See p. 577 for the prepared statement of Adm. Bobby R. Inman.
95-929 0 - 82 - 16
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tarily related technology that the Soviets have acquired from the West,
about 70 percent of it has been accomplished by the Soviets and the
East European intelligence services. They have used clandestine,
technical, and overt collection techniques in the process. They are
trying to get technologies of proven Western weapons and component
designs that can be applied directly to Soviet weapons research and
development, and industrial needs.
They concentrate their efforts through open purchases, legally
accomplished where that is possible and where it is not successful,
through illegal purchase and when that is not successful, through use
of espionage.
The sources of the technology may be Government classified or
unclassified reports, private company's proprietary reports, open
source technical documents from companies and Government organi-
zations?much of the embargoed equipment falls in this category as
well. The Soviets have undertaken a thorough vacuum cleaning of
everything in the public sector which will let them better target their
espionage activities. Of the remaining 20 to 30 percent of the acquisi-
tions of information of potential military value to the Soviets, most
comes through legal purchases and open source publications acquired
by other Soviet organizations, such as the Ministry of Trade and
related international bodies.
A very small percentage of it comes from direct technical exchanges
conducted by scientists and students.
As we look out. into the later 1980's, we believe that future Soviet
and Warsaw Pact acquisition efforts are likely to concentrate on the
sources of such components and manufacturing technologies, such
as defense contractors in the United States, Western Europe, and
Japan who are responsible for military technologies, general pro-
ducers of military related auxiliary manufacturing equipment, again,
in the United States, 'Western Europe and Japan, and small- and
medium-sized firms and research centers that develop advance com-
ponent technology and designs, including advance civil technologies
with future military applications.
Since the early seventies, and Soviets and their surrogates have in-
creasingly used their national intelligence services to acquire Western
civilian technologies, for example, automobile, energy, chemicals, and
even consumer electronics. Since the midseventies, the Soviet's Euro-
pean intelligence services have been emphasizing collection of manu-
facturing-related technology in addition to weapons technology.
And since the late seventies, there has been an increased emphasis
by these intelligence services on the acquisition of new Western tech-
nologies emerging from universities and research centers.
I can only conclude from all of these efforts that the Western secu-
rity services will be severely tested by the Soviet intelligence services
and their surrogates during the eighties.
I am pleased to say that coordination within the intelligence com-
munity and intelligence support. for the executive branch, the various
departments and agencies which have responsibilities in this area, is
substantially better than it was a year ago. In the wake of the study
document, the DCI has established a Technology Transfer Intelligence
Committee along with a dedication of analytical resources which had
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not previously been committed to the problem and new mechanisms to
coordinate how the intelligence community pursues intelligence col-
lection, analysis, and reporting, and new subcommittees to support the
activities of the other departments as they try to bring better coordina-
tion and better formulation of policy.
There is still a great deal of work to be done.
Mr. Chairman, rather than proceeding further with the formal
statement, I think it would be better to use the time to try to field
questions of members of the subcommittee.
Senator NUNN. Thank you very much, Admiral Inman.
I will take just a few minutes and, Senator Roth, I defer to you
and Senator Chiles.
We just heard testimony from Mr. Lecht who is in the software
side of the high technology business. His statement, if I could para-
phrase it without trying to quote it, is essentially that the high tech-
nology critical lists that he has seen are very broad and tend to be
very severely outdated.and do not aim themselves toward state-of-the-
art technology, small computers, and that sort of thing. I understand
from other witnesses, too, that there seems to be a consensus that we
ought to really make an all-out effort to narrow the list and to try to
find the areas that are critical to the Soviets rather than trying to do
a job of controlling more and more, poorer and poorer.
Do you generally share that sentiment or do you disagree?
Admiral INMAN. I do not sign up to it entirely, Senator. I think
we have to stay focused on the larger problem of trying to do the
best job across the broadest range of technologies. I agree one ought
to prioritize the activity. Clearly the critical technologies ought to get
the immediate priority attention. But what I worry about in that
formulation is that one would then conclude that is the end of the
problem and that one does not need to pursue the whole broad range
of activities.
There is no doubt in my mind that the highest priority ought to go
to the direct weapons-related technology, the ones where we have
classified research underway.
The mechanisms may not have worked well in the past, both to up-
date those lists and to have the kind of dialog with industry that lets
you know what is coming along as the newest area of technology.
I suspect improvements are doable and prioritizing ought to be under-
taken regularly, but as a broad general national problem, we ought to
look to try to preclude the broadest range of acquisition by the Soviets
of Western technology which feeds that continuing military buildup.
It is from looking at the scope of that buildup across the whole range
of strategic conventional forces, manufacturing capabilities, that I am
persuaded this is a challenge that is going to be with us for another
decade.
Senator Nuisrx. When you look back?you have been involved in the
intelligence area for some time now without regard to any administra-
tion, Democratic or Republican, but if you look back at the last decade,
how would you rate our greatest failings in the technology transfer
area?
Admiral IrimAN. I have to conclude from simply the accumulation
of evidence and Soviet success that our performance has been very
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poor, indeed, in the whole area of limiting technology transfer, but
I think, Senator Nunn, that you really have to look at that and in the
climate of times. For a decade, the country at large, as well as the
Government, put its faith in total broad terms in detente as an ap-
proach that was going to bring us peace, that was somehow going to
slow down the military threat we were going to have to face?a general
optimism that all exchanges were inherently good, that whether they
were scientific or technical or simply economic, business, that that
would produce from our principal adversaries a greater willingness to
work with us rather than to feed the military threat that we are going
to have to face.
That was also a climate when we were pulling down our whole na-
tional security apparatus with the basic question of what can we do
without? That impacted heavily on the intelligence community where
we lost a great deal of manpower to pay for new technological collec-
tion opportunities. As we gave up what we could do without, one of
the many things we gave up was any kind of coordinated collection or
reporting efforts against the Soviet acquisition of technology in this
country.
It had its own impact in trying to assess the success of the Soviets
R. 86 D. efforts. One of the small side benefits of this latest study is
that we now recognize the Soviets did not embark, as some had feared,
on the major investment in R. & D. to find breakthroughs in areas
that we were ignoring. Rather they used the clear technique of taking
whatever the West was developing, adapting it to their own needs
and getting it into production in very impressive timeframes.
When one looks back, what you get is a reflection of activity all
across the Government and the general attitude of the country not to
worry about the loss of outflow, it is kind of a security blanket comfort
that any kind of trade or exchange was inherently going to be favor-
able for us. When one looks at the results 10 years later and looks at
Soviet activity, I think it would be very hard to come to those same
conclusions at this point in time.
Senator NUNN. If you had to rate our problems now addressing the
most critical for the next decade in this area, how would you rate
the major challenges?
Admiral INMAN. I have read a lot of writings, I have listened to a
lot of speeches, both inside the Government and in the private sector
over the last decade in describing Soviet economic problems. I can re-
member 10 years ago listening to a learned authority tell those of us
who were in his audience that within 5 years, the state of the Soviet
economy would be so bad and the problems with the minorities would
be so difficult that we didn't really need to worry about the Soviet
military buildup. They would be turned inward to deal with their
problems and they would not be a challenge.
I have heard the same authority say almost exactly the same thing
last spring, almost 10 years later. But, in fact, I am still looking for
that change. The economy is in bad shape, cost of the empire is high,
but they have continued to protect a steadily increasing investment
across their whole military structure for the last 17 years. The result
is that we now face a qualitative challenge as well as a quantitative
one.
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The qualitative one that we didn't face at all 11 years ago, an ability
to stay and fight, with a whole range of weapons systems which have
very impressive standoff capabilities.
Much of that growth in the Soviet side, in manufacturing techniques,
in weapons systems, in design, has come about from their acquisition
here. As I look out for the next 10 years I don't see anything on the
horizon that is going to change those priorities on the part of the
Soviets. I think they are going to continue to have economic problems.
The major pressure on them right now is the agricultural failure
and the hard currency they have to spend to buy grain. But they have
continued to protect the investment in the military sector and I think
they will continue to do so. Therefore we must pay very high propriety,
I believe, to outflow of technology which will let them quickly adapt
and bring into use of more sophisticated weapons systems, standoff,
longer range, better guidance systems?accuracy is going to be increas-
ingly a problem we have to deal with in their strategic weapons as well
as their conventional weapons and, again, a good deal of the technology
for that has come out of the West.
So I would rank efforts to preclude Soviet access to high technology,
to things that would improve the firepower, the acquisition, recon-
naissance capabilities very high in our own national priority interest.
We have got a very long way to go in our own rebuilding program.
Senator NUNN. In that rebuilding program, what are your
priorities ?
Admiral INMAN. Let me split that into two categories. I can speak
Pretty easily about the Priorities in the intelligence community side.
There I believe the challenge that we are going to face in the decade
ahead is going to find its greatest prominence in challenges all over
the Third World, competition for raw materials, natural resources,
Problems with access to markets, and countries with political instabil-
ity. A great change that faces us is Soviet mobility, mobility of the
Soviet power to the degree that we have never had to worry about in
the past.
Thirty years ago, when we looked et the Soviet Union as an adver-
sary, their forces were primarily designed for use perhaps 200 miles
from the periphery of the Soviet Union. By the mid 1950's, it was
a 600-mile line. By the early 1960's, and the exercises, it was a L500-
mile line. But was still largely in their own discussion a defensive po-
sition and a defensive structure.
By 1975. that had changed abruptly. Theer waz no longer a 1,500-
mile line. They looked to use their forces wherever they saw the in-
terest ef the State involved. But they were still cautious and therefore
in the late 1975 time frame, in the move to Angola. they used Cuban
troops?not their own?with Soviet airlift and Soviet equipment. In
Ethiopia in 1977, the same pattern evolved. It was Vietnam's man-
power. Soviet equinment, that moved into Kampuchea in 1978. The
watershed came in 1979 with the Soviets willingness to use their own
forces in Af0thanistan.
? We had watched a massive airlift exercise into Mongolia in April of
1979. And that turned out to be a precursor for a massive movement
of force into Afghanistan on the Christmas date of 1979.
When one thinks out to the next decade, with a new generation of
leaders who may not be as cautious as these old Bolsheviks that we have
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dealt with for the last 17 years, I believe one has to worry a great deal
about whether those new leaders will be as reluctant to use Soviet mili-
tary capabilities beyond their own shores.
It is not beyond the realm of possibility that we will find a decade
out, or sooner, an unstable situation and sudden quick movement of
Soviet military forces into the arena and we are then confronted as the
British are now confronted in the Falklands with the fact of military
presence and trying to contemplate what to do about it. But it is going
to be vastly different than dealing with Third World nations using bor-
rowed military equipment, with sophisticated capabilities, with the
ability to use that high technology at very substantial distance.
The country has to contemplate whether we have the mobility, the
range of conventional forces that can deal with that kind of challenge.
It is a very long winded answer to what are the priorities for the
future, but we are going to need to know a great deal about countries
all over the world, to try to anticipate in advance where the instabilities
are developing that might offer the opportunity for our adversaries to
take advantage of the opportunity.
We are certainly not going to be able to do less in following the
threat in the Soviet Union itself, to the peripheral nations, particu-
larly in Eastern Europe and across the central European plain.
Senator NUNN. Getting it down to the high technology area, what is
it that we should do better than we are doing now? What should be
our emphasis in high technology?
We have heard a good many suggestions over the last 4 days of hear-
ings and we are really searching for priorities. If you had to name the
priorities of ways which can improve, what would you list?
Admiral INMAN. Senator Nunn, I am not the best witness to answer
that, since I have spent most of these last 30 years looking out at what
others do, not at what is happening' in the United States.
Senator NUNN. Let's look at the intelligence area then.
Admiral INAIAN. In the intelligence area, we clearly need more
analytical personnel, dedicated to a range of problems, particularly to
problems like technology transfer. I am less certain what we need in
the counterintelligence area. I am less certain because we have had a
long time, a number of delays in getting underway with the kind of
detailed examination of our long-range needs in that area that has
already been completed in the foreign intelligence area.
True, there is a major component in technology transfer avoidance
that falls to the FBI, to the other organizations that operate in the
United States. There is a study now underway which should be fin-
ished by July which will define with a great deal more clarity, both
the threat that is faced, the methodology being used by various for-
eign intelligence services to extract, informatiorr from this country and
the kinds of resources that are necessary to deal with it. So, you will get
a much better answer on this question along about late August 8 or
early September.
My guess to you is that the first priority is a pretty substantial input
of manpower into the Federal Bureau of Investigation. Also less
expensive and easier to do these days are going to 1:. some additional
steps to automate files available to Customs, Immigration. to increase
the speed with which they can correlate information available to them,
and make it available to the enforcement agencies.
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From my own cursory examination, and your detailed one in these
last days probably now already exceeded my knowledge, most of these
agencies have had very little help in the last year or so, either in the
way of manpower to deal with the increasing foreign presence in this
country?
Senator NuNN. The FBI has had a real cutback in this area.
In the last 6 years they have had substantial cutbacks.
Admiral INmAN. It is an area that I don't believe there is a substi-
tute for manpower to deal with the problem.
Senator Num.'. Senator Roth?
Chairman ROTH. First, let me publicly say what a splendid public
servant I think you have been, Admiral Inman, and as a member of
the intelligence committee I regret very much your decision to depart.
I think these hearings initiated by Senator Nunn are extremely
valuable and ones that are at least to me very complex and troubling.
If I understand your answer to an earlier question of Senator Nunn,
you disagreed with the idea that we should concentrate on select areas
to prevent the transfer of high technology but instead, have a broader
approach.
Admiral INMAN. I disagree, Senator Roth, only if that means you
are simply going to concentrate in the high technology area and then
give up the efforts on the other areas.
I have no difficulty at all with the prescription that would say the
highest priority, the maximum concentration of effort in the interven-
ing months should be to try to stop the outflow in the highest technol-
ogy area. And we should be able to rapidly define that from inside the
Government and we ought to get the new mechanisms established very
quickly that let Defense stay right at the front edge of what is coming
along in industry. Most of it, I believe, will be coming out of advanced
research in any case. So it ought to be feasible to have a very rapid
updating and change of focus of where your highest priority is, but I
believe we should never lose sight of the breadth of the Soviet efforts
and I take the view that it is in our long-term national interest to im-
pede as much of that as it is feasible to do.
Chairman ROTH. That is the point I would like to get at. To me it is
troubling because looking at it from the one perspective I agree with
you. But at the same time, as a democracy we take great pride in having
an open and free community, so that once we start talking about pre-
venting the transfer very broadly, you come in to conflict with other
goals of this county.
I have been told that particularly in the area of research and develop-
ment, the free flow of information among the scientists is fundamental
and that one of the reasons for our success is that you do have this free
discourse between the universities, Government and the private sector,
all which makes it seem to me extraordinarily difficult to have very
effective controls in a broad sense of the word unless we make some
sweeping changes.
Then there is the other aspect of the problem and that, of course, is
trade which is important to this country and on which our future pros-
perity and strong economy depends.
Often one hears that if one shuts off this technology we are shutting
off sales and that means that we cannot compete not only with those
behind the Iron Curtain, but other democracies.
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So that I wonder if we can realistically shut off all technology with-
out impeding some of these other efforts. Would it make sense that we
should export no technology, not only from the military point of view,
but from the competitive point of view?
Would that be a practical approach to try to shut off the transfer of
all technology?
Admiral INMAN. Senator, I don't think it even feasible to consider
shutting off all of it. I have been spending a lot of time tugging at this
problem since the committee first started asking me questions about it
2 years ago.
I have a perception that the leakage from basic research is minimal.
There is a little. But that the Soviets themselves have difficulty in
applying that. That burns up time; that it is in applied technology
where the gains are quickest; where the applications are fastest, where
one can also make sure judgments about the impact on our own case if
we make an effort to impose additional restrictions.
I would set out for your several basic ground rules with the ease of
one who is departing that is not going to be responsible for a great
deal of it.
First, that before one enacts additional legislation or establishes new
controls the first emphasis ought to go on insuring that the ones we
have now work well. I think we will clearly document in the next
several months that in dealing with the espionage problem we have
simply provided far too few people with too little support here in this
country, to let the job be done the way it needs to be done.
I suspect when one examines closely the implementation of the
Commerce export controls, the efforts by the State Department in the
international trafficking and arms regulations, and looks at the De-
fense critical technologies list, you are going to find several things.
You will find a measure of protection of bureaucratic turf. That
al ways happens when organizations are being pulled down in size.
The first priority becomes protecting turf. I think you will find prob-
ably some shortfalls in manpower and in automation and perhaps not
as close working relationships among the various organizations as
really ought to occur.
I would put first priority on trying to improve the performance of
the existing mechanisms.
There may be a need for some additional legislation. I would go
very slowly in that category where one is dealing with the open pub-
lication of basic research. There I have been trying since last January
to spur the academics into addressing that problem themselves. I have
a basic faith that if they put some effort on the problem, they are
probably far more likely than those of us in Government to come up
with some thoughtful ideas on how one impedes the outflow and I
choose that word very carefully.
I don't believe the idea of a total cutoff of outflow is achievable and
I am not sure it is even a useful goal. But I think one ought to con-
sciously look at the whole range beginning with advanced technology
as the area where the highest payoff is likely to occur and look at all
the measures that one can undertake to impede Soviet access to tech-
nology which they can use for production of military hardware.
Chairman ROTH. Admiral, to what extent has the Soviet Union
been successful in securing this technical information from our allies
and partners?
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Have they been better, about the same, or less effective than we have
in protecting the technology of national security?
It seems to me this is important from a number of standpoints, first
of all, to what extent we are going to exchange technology; second,
many of us think that it is important that because of the increasing
costs of weapons that they should begin to purchase agreed-upon weap-
ons on an alliancewide basis.
It would be increasingly difficult if we couldn't share technology
because one or the other of us were less reliable.
Would you care to comment on that?
Admiral INNIAN. We are too far down the path to try to walk back
from sharing technology with our allies. I would not want to walk it
back because I think commonality of weapons systems and capabilities
over the long term is going to be a greater plus than the potential
drainage. But in any case, we are too far down that path. But there
are components that are not subject to immediate Government con-
trol in any case. With the growth of the multinational corporation,
there are many subsidiaries that are not only manufacturing, but file
for patents back in this country from foreign subsidiaries. And we
sat about consciously to help our former enemies as well as our former
allies rebuild their economic health.
We have been successful beyond our wildest dreams and now some
of that competition is very intensive. One cannot seriously talk about
being completely successful in denying Western technology to the
Soviets without including our allies as close partners. That means it
is a much more complex problem. Where we can impact is on the direct
access for equipment, hardware that is being developed; particularly
in the military sphere where clearly we are the leaders still.
In response to part of your question about how much do the Soviets
acquire from the various components, I don't have a certain figure on
the percentage of the success that has come out of Western Europe or
out of Japan. I do know that they have intense efforts in those areas
just as they have here. We have had some particularly good reporting
in the last year from a defector in the Far East who documented very
substantial efforts the Soviets made in Japan to acquire technology.
Again, in Western Europe and Japan, as here, they have been
successful in buying a good deal of it. They haven't had to steal it.
What is clear is that the Soviets to this point in time are very depend-
ent on the totality of that vacuum cleaning and purchasing for this
massive military buildup that we have watched occur.
Chairman ROTH. My last question, Senator Nunn, you said in answer
to a question that the Russians, the Soviets, have not tried to imple-
ment or fill out those areas that we have not provided to do work our-
selves. There was a recent editorial in the New York Times comment-
ing on technology transfers to the Soviet Union in which it expressed
the opinion that lowering the barriers to the flow of technology to the
U.S.S.R. is not necessarily a bad thing.
It editorialized that "a more relaxed policy would serve the West's
best interests because a steady supply of foreign technology taxes the
Soviet Union's incentive to develop its own better to have the Soviets
stealing and copying, following a few steps own,
than working inde-
pendently and becoming able to deliver a technological surprise."
What would be your response?
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Admiral INMAN. It will not surprise you that I do not agree. It is
wishful dreaming. To say that it has sapped the Soviet efforts, I am
afraid portrays a lack of understanding of the state of the Soviets and
how far they have come in building up an R. & D. structure.
You worry me a little in the first part of the question. I hope I did
not mislead the committee in my wandering answer. We have not found
evidence thus far of a Soviet breakthrough in a critical technology
area that they have pursued on their own or indeed that we have ig-
nored.
There clearly is apprehension in fields like charged particle beams
and lasers, where they were clearly investing large sums of money in
research and development and test facilities that they might in fact
have that prospective breakthrough.
We have not seen evidence that they have achieved any. But what
is clear at this point is that the primary path the Soviets took was to
acquire what was obviously easily acquirable, technology from the
West and to adept that to their needs.
They have done that ranging all the way from manufacturing tech-
niques or technology to the guidance systems, to improve the accuracy
of ICBM's and SLBM's and cruise missiles.
Chairman ROTH. Thank you.
Senator NUNN. Senator Chiles?
Senator CHILES. Admiral, I want to add my voice publicly to thank
you for your outstanding service and to say that I hope your leave is
going to be temporary, and that you will be back giving us your serv-
ices.
You mentioned that the Soviets had a problem in agriculture and
that they have had to expend their hard currency to obtain grain and
food.
Argentina has been the principal supplier to the Soviet Union of
grain. For that, the Soviets have paid hard currency.
Given the present situation in the Falklands, do you see the Soviets
getting the possibility of not having to use hard currency, but, being
able to trade off weapons, which they seem to have a large capacity to
manufacture, for grain?
Admiral INMAN. Over the past decade, the Argentines have turned
largely to Western Europe as a source for their military hardware.
That is expensive. They have not previously indicated any interest in
procuring Soviet hardware, even though Peru was acquiring a great
deal of it. But you have fingered a very major worry that I have, that
the outcome of this crisis will be a decision on the part of the Argentine
Government to embark on a substantial program of acquiring new
military hardware from the Soviet Union.
I think you will find the Soviets very eager to sell at a bargain price
and particularly if that means they can lower the amount of hard cur-
rency they have to spend to get access to get wheat and beef.
It is a major cause for worry in the months ahead.
The only thing that stood between that to this point has been lack of
Argentine interest in turning to them as a major military supplier.
Senator CHILES. Of course with those weapons could also go the
advisers, spare parts and all of the--
Admiral INmAN. Dependence.
Senator CHILES. Yes, dependence will go at the same time.
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I would like ask you another followup question on an issue that
greatly concerns me and a number of my colleagues in the Senate, the
Soviet threat. We even had a closed session of the Senate to go into the
Soviet threat. There had been a briefing by the intelligence community
for many of us prior to that, but the feeling was that, because only 25
or 30 had availed themselves of that briefing, all of the Senate should
have that opportunity.
For that reason we went into a closed session. That is not done very
often in the Senate.
I and many of my colleagues feel that that briefing we received was
so sobering. It was alarming to see the tremendous buildup, and to
compare what actually happened every 5 years with what we thought
would happen. We now see the Soviets achieving a momentum that
would be very, very difficult for them to stop and reverse. A large por-
tion of their GNP now is going into the war machine; it has got to
make up so much of their employment. I feel that is something that
should be more available to the U.S. public. There is no perception on
the part of the public as to actually what that buildup is.
We are continually told that all of this is classified. My concern is:
Are we going so far as to classification of this information that we are
prohibiting the ability of really forming a public understanding in
this country that is necessary to do something about this Soviet weap-
ons buildup?
I wonder the way that we collect some of this information is classi-
fied. How much about those methods do the Soviets really care about
now?
The information we collected is something that is available to the
Soviets. But, ironically, the information is a secret from our people
as opposed to being a secret from the Soviets. I understand that how
we collect some of this information is classified. However, from your
perspective how are we going to be able to show this alarming build-
up to the American people in sufficient detail to convince them that
this is not rhetoric, that this is not one of those statements that will be
discounted later? How can be made the public understand this threat?
Admiral INMAN. Senator Chiles, let me try to stumble my way
through a response to that in an open, unclassified session.
Senator CHILES. I understand this.
Admiral INMAN. I happen to be a great admirer of John Hughes
and of the presentation of the Soviet buildup which would help a lot
of people. It was put together a number of years ago and I have
watched the impact on Republican and Democratic Congressmen, Re-
publican and Democratic administrations, and our foreign allies. It
has in every instance been a very sobering presentation because of the
accumulation of data before your eyes on the full scope of the buildup,
the infrastructure, the building of shipyards, the building of airplane
factories, the building of tank plants, the clear fact that they are using
those facilities substantially less than their capacity at this point in
time even when we have worried in our own defense buildup of
whether we have the industrial capacity to do the job that needs to
be done.
The complications in releasing that information, or in declassifying
it are substantial. One is the question of the impact of the Freedom of
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Information Act. If you declassify satellite information to use for that
specific purpose, is all of it, thereby, open and accessible and thereby
knowledge of what you targeted, how frequently you acquired. it,
available under the existing terms of the Freedom of Information
Act.
There are considerations one must carefully take into account on
national technical means of verification of treaties and the whole arms
control process and if one believes that we do need an arms control
track as well as the rebuilding track for our defense capabilities, then
you have to think very carefully about whether you endanger con-
tinued access.
The Soviets have an antisatellite capability now. Many of the
systems which provide this information are very suspectible to its use.
There is the question, when do you cross over the line between that
which is accepted under treaty for national technical means and when
is it a challenge to the secrecy in that closed society that they are not
willing to accept. But I must admit those of us who have been inclined
to support the use of the imagery had a real setback a couple of
months ago when we did use imagery to describe the buildup in
Nicaragua and the press coverage, at least some of it the next morning
talked about the claimed, alleged, reported information and it was
very clear that what to John Hughes and Bobby Inman was enor-
mously persuasive information from photomterpretation, was instantly
challenged. The average man in public is not a photointerpreter, able
to make their own independent judgments. If the views of the profes-
sionals are not to be accepted as credible, then I have great reserva-
tions that, taking any risks about future access is worth the cost.
Indeed, it has been the credibility that John and others of us have
had with these committees which I think has been a central factor in
the weight that that briefing has.
So we are on the edge here of some deeper and more complex prob-
lems of the general attitude that the media brings to the validity of
information provided by the Government and specifically by the
intelligence community on issues. If one doesn't want to believe that
there is a Soviet buildup, you can find all kinds of questions to ask
to divert attention.
I am grateful for the expressions of support that have come from
the members here and I have enjoyed enormously my working relit-
tdonships with you over the years. Rather than saying that this is a
temporary departure I would rather phrase it a different way. As I
go off to my second career, I hope I am still going to be able to help
in addressing a great many of these issues from the private sector.
But. even there, credibility, a willingness to accept the honesty and
integrity of the professionals in providing information is absolutely
key to building public understanding. A very good publication was
put together with a lot of hard work last year called "Soviet Military
Power." It does not have all the dramatic impact that you got, that
many of your colleagues have gotten, as have I, from watching the
full classified briefing, but all of the essence is there in that publication.
Senator NUNN. That publication was primarily done for NATO?
Admiral INMAN. Yes, sir.
Senator NUNN. An interesting thing about that publication if I
can interrupt Senator Chiles for just a moment is the overall view
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was it was enormously helpful in European circles. I was over there
shortly after it was put out. But there were a substantial number
of critics that kept talking about the fact this was simply expressed
in gross terms, this is what the Soviets had, one, two, three, four
with no effort to make a net assessment, with no effort to say what
the American capability was, what the NATO capability was. Of
course, when you get into net assessments you are getting into subjec-
tive judgments that would take 15 or 20 years for the Department
of Defense to agree on, never mind the ones that go to the National
Security Council.
I know the difficulty of putting out that kind of information.
There is a totally different group of people dealing with it. That
is where the skepticism goes. There is a great desire on the part of
the people in the media and the public, I might add, to have some-
one digest the American-Soviet-NATO-Warsaw Pact balance in 30
seconds or less, in one page or less.
Tell us whether we are stronger or weaker, tell us who is superior
and I think that is a very fallacious kind of approach but that is
what you are dealing with and that is what, of course, we are all
dealing with.
Admiral INMAN. I think we have gotten enchanted in this last 20
years, at least the public debate has gotten drawn too much to charts,
graphs, trying to compare everything by numbers. The systems ana-
lysts love it. I am very skeptical about the ultimate value of making
judgments about need in that way. I doubt if any systems analysts
would have put the Falklands or the kinds of forces one needs to
impact on the Falklands in the charts or in racking up the kind of
capabilities one needs to deal with the troubled world of the decade
ahead.
Senator CHILES. I am sure that is true. I would say one comment I
have, I see the problem which you are raising. I have a feeling if you
give the American people sufficient information and detail, they won't
allow the media to interpret for them. They will make their own
interpretation.
Admiral INMAN. I don't want to leave any doubt at all that I believe
the Soviet buildup over these last 17 years has brought us to a perilous
state. That there is now vastly greater military power in the hands
of a very few leaders who certainly are not chosen by public mandate
than have ever been in the hands of any of the czars in the time
before.
There are several components. Ultimately whether those new leaders
are willing to use those military powers in ways that are directly
threatening to us or our interests will lie partly on our own military
forces but partly on judgments about our national will. And clearly
they will become very sophisticated at looking at public debate in
the United States, but I am afraid sometimes they may conclude
that there is less will to deal with problems than in fact I believe
exists in the country at large.
Senator CHILES. I agree, that they could miscalculate.
Admiral INMAN. Yes, sir.
Senator CHILES. Thank you.
Senator NuNx. You made reference in the past and again this morn-
ing about scientific exchanges and your desire to stimulate the aca-
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demic community and scientific community to take their own action.
You are about to move into the private sector. We heard over and over
again about how the Soviets send middle-aged scientists over as stu-
dents, we send students of Soviet history over in an exchange program.
One is after technology, the other is after some form of legitimate
literary or historical endeavor.
[At this point, Senator Chiles withdrew from the hearing room.]
Senator NuNx. There is nothing wrong with the latter, but what is
it you would like to see the scientific and intellectual community do in
this regard and I stress voluntarily without Government dictating, I
am sure that is what. you mean?
Admiral INMAN. Happily what I wanted to see is now underway.
In anticipation that the Government was going to eventually come to
grips with the major technology outflow for which there are laws that
ought to be effective and organizations that ought to be effective in at
least making that very difficult, it was clear that there was a segment
of this outflow that was not regulated, that was not controlled and in
thinking ahead, I was trying to spur the scientists into giving atten-
tion to that area themselves and coming up with thoughts about what
one could voluntarily do to deal with it.
That got interpreted as proposals for censorship, for threatening to
put controls in places, to try and somehow turn the intelligence com-
munity loose on academicians and other things. They were just flatly
false. What T hoped to get was an honest broker in the scientific com-
munity to put together a forum to discuss the problem and come up
with recommendations. The National Academy of Sciences and Na-
tional Academy of Engineering are now jointly sponsoring such an
effort.
It is a study group that is going to take about 12 months to deliber-
ate the problem very carefully. They were fortunate to have gotten the
former president of Cornell University to head the group. They have
had one meeting. They have another one coming up in a month. They
need to be left alone. They don't need a lot of people peering over their
shoulders either from the Government or from the media, but I have
substantial optimism based on my earlier experience that they will
define areas that are of concern where there are approaches that are
entirely acceptable.
There will be some grumbling, but I believe it will be possible to
determine what it really impacts on the free growth and exchange of
science, and to recognize things that do not impact on that, that will
nonetheless let us throw some barriers in the path of the Soviets to
make their acquisition harder.
I would finally make a pitch that there are some exchanges that are
clearly in our national interest. We are going to need in this decade out
ahead scholars and students with genuine area study capability, with
language skills who can watch the actions of our adversaries and give
us sound advice, whether they are working in the intelligence com-
munity as analysts or whether they are working in the Foreign Service'
or other parts of the Government.. And so we should be cautious as we
go about assessing the value of exchanges that we don't underplay the
value to this country of various area studies and language training as
part of the exchange structure.
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Senator NuNN. In other words, you are not here advocating a new
law on scientific and technological exchanges?
Admiral INMAN. I am not. I think it would be an area well serviced
to stay away from for a while and see what they can develop on their
own.
Senator NuNN. Thank you very much. We appreciate your coopera-
tion. We look forward to your views on some ideas we have in the next
couple of days. What is your expected departure date?
Admiral INMAN. It depends on the confirmation of Mr. McMahon.
I would hope that would go smoothly without difficulty and, therefore,
in early June, he will be ready to take office and I will retire.
Senator NuNN. I hope you are accessible in the future to the Con-
gress and to those of us who have come to respect you so much for your
advice and wisdom and experience. We will certainly continue to call
on you as if you had never left.
Admiral INMAN. Thank you very much.
Senator NuNN. Thank you.
Our next witness is Dr. Stephen Bryen, Deputy Assistant Secretary
of Defense, International Economics, Trade, and Security Policy.
Dr. Bryen, if you have other people with you this morning, if you
would introduce them, if any will be answering questions we direct to
you, we can have them take the oath also. Would you raise your right
hand.
Do you swear the testimony you give will be the truth, the whole
truth, and nothing but the truth, so help you God.
Dr. BRYEN. I do.
TESTIMONY OF DR. STEPHEN D. BRYEN, DEPUTY ASSISTANT SEC-
RETARY OF DEFENSE, INTERNATIONAL ECONOMICS, TRADE AND
SECURITY POLICY, DEPARTMENT OF DEFENSE
Senator NuNN. Dr. Bryen, we appreciate your cooperation, your
office's cooperation with this subcommittee and our staff as we have
undertaken a rather lengthy, detailed examination in this technology
area.
[At this point, Chairman Roth withdrew from the hearing room.]
Senator NUNN. We know you have prepared testimony today and
will be glad to hear from you before we begin asking questions.
Dr. BRYEN. Thank you, Mr. Chairman. I will try and summarize
my testimony a bit. Since you have the full text, it can be entered
into the record.
Senator NUNN. Without dbjection your whole text will be entered.'
Dr. BRYEN. I welcome the opportunity to speak with you today
concerning what we in the Department of Defense believe to be a
most serious national problem, the control of technology which is
being transferred to the Soviet Union and its allies. My discussion will
focus on what we have achieved so far, what we have now in the works,
what we have yet to do. Previous testimony has gone to considerable
length to illustrate the scope of the problem. It would be very difficult
to estimate the real damage done to American national security by the
Bell case, which you have already looked at.
1 See p. 583 for the prepared statement of Dr. Stephen D. Bryen.
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That loss consists of both military damage in making those weapons
systems vulnerable to countermeasures and the cost to the taxpayers
to overcome the vulnerabilities that those compromises entail. But the
same kind of damage is done in more subtle ways by a variety of
mechanisms that are essentially directed by the Soviet Union to the
detriment of the United States.
Undoubtedly you have heard or hear in the future of those who say
only by constant investments in the technology base upon which our
defense is founded can the United States hope to remain ahead of its
strategic adversary.
Senator NUNN. Will you pull that mike up a little. Thank you.
Dr. BRYEN. Likewise, you will hear that it is impossible to constrain
knowledge and to do so, in fact, is counter to the efforts to advance the
onward progress of technology. We believe it would be imprudent in
the extreme to shrink f'.roifi the difficult task of devising and enforcing
reasonable controls to preclude the use by the Soviets of the fruits of
our technological genius to destroy the very system by which it is
nourished.
It is our attempt to structure within the Department of Defense,
reasonable controls over technology, controls which will effectively
inhibit the flow of technology contributing to the growth in Soviet
military capability.
Now it is a truism there is no substitute for case-by-case review of
proposed exports, legal exports. Only by careful and objective assess-
ment of the facts of each case can the operational, technical, and prece-
dential impact of an export be properly assessed. We have no intention
whatever of eliminating this vital element of our contribution to the
Government's export control of technology. However, the case-by-case
approach functions best within a framework of guidelines and criteria,
proven standards by which judgments can be made.
In the past, our individual judgments were made in so flexible a
fashion that we were overly subject to the vagaries of the moment. The
effect has generally been to advance the margins of acceptability of
exports through the gradual accretion of precedential approvals, by
the way encouraged to some extent by the Export Administration Act
without particular regard to the basic standards by which exports
should be judged?the Nation's security.
Accordingly, we are engaged in a major effort to develop in a cogent
fashion, a framework of policy within which the Department of De-
fense can provide its advice and counsel to the ultimate licensing
authorities in our Government.
My office started with four people a year ago. We have expanded
since then to a staff of 12. We have intensified our role in the export
review process while. at the same time undertaking a major effort to
objectively develop policy. I would like to share with you some of the
things we have done to date and I would like to solicit your suggestions
for our future efforts.
First, an augmentation team composed of representatives of the
military services has been assigned to my office and is preparing for the
Secretary of Defense's signature a policy statement on control of tech-
nology transfer. This, we hope, will replace and improve a 1977 interim
policy that is signed by Secretary of Defense Brown.
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We hope that our new policy will reflect several changes that have
occurred since 1977. One of the most important ones being the enact-
ment of the 1979 Export Administration Act. This is the basic role
under which we today operate.
In addition, this team is providing management assistance to my
office in three basic forms.
The first of these is technical assistance to automate some of the
routine administrative tasks involved in determining policy and proc-
essing cases. The second is to assist the integration of existing data
bases used in routine case processing. And the third is the creation of
a central library to provide the basic documents required for develop-
ing policy.
This subcommittee should know a year ago when I came on board,
there were not available coherent records on past DOD determina-
tions, or for that matter any determinations by previous administra-
tions, nor was there any single source to appraise the result of past
activity. And we are slowly correcting this deficiency. It takes time
because we have to reconstruct records and try and determine exactly
what has gone forward in the past and to base our new judgments on
those records as best we can.
We are also working very hard to train our people, to develop rigor-
ous standards and try to follow more disciplined procedures as pos-
sible.
In the long run, I think these efforts will pay off in that we will
develop a solid core of professionals who will understand as best they
can the problem and will work in a consistent and predictable way.
If we can do this in the Department of Defense, we have to do it in
a broader way with the public, with the business community and with
our allies and friends abroad and to further this effort, we have under-
taken with our augmentation team the development of a white paper
on this entire subject of ,technology transfer, which we hope will be
published this summer.
The goals of the paper are to detail the importance of dual-use
technology to our defense support industries, promote as much as we
can a voluntary compliance with the export process and we hope to se-
cure support for and assistance in developing methods which more
closely review defense-related technology proposed for export.
The paper will attempt to present the roles and contributions of
both our Department, State, Commerce, Treasury, and Justice, and the
Bureau of Customs.
Another major effort is our attempt to work closely with both State
and Commerce and seeking to strengthen strategic trade controls in
Cocom, the coordinating committee, and thus to stem the flow of West-
n technology to the Soviet Union and its allies. As you know, Cocom
is an informal nontreaty organization established in the early 1950's.
It is comprised of the NATO countries, less Iceland, but it does include
Japan, a very important member. It has, however, no formal link to
NATO.
Senator NuNx. Is there a case to be made that there should be a more
formal relationship with NATO or would that be a negative kind
of development?
Dr. BRYEN. There is a good case to be made for it. I think the prob-
lem is a political problem in that Japan is a member of Cocom, of
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course does not view itself in the NATO system. Under those circum-
stances, those institutions will probably have to remain separate.
Senator NUNN. Does NATO have a way of getting its input in
through the various Department of Defense inputs and the respective
NATO countries?
Dr. BRYEN. You just put your finger on the very major issue and
problem and one we have been working very hard on. If I can step
away from my testimony, maybe T can try and elaborate on it a bit.
In the past, with the exception of the United States and to a lesser
extent Great Britain, defense ministries, surprisingly played a very
minor role in the technology control business. Surprisingly because the
whole point of the effort is to deny strategic technology to our adver-
sary. Our tradition was just very different from the tradition of our
European colleagues and Japan as well.
What we have been trying to do is to turn that around and develop
far more participation by defense ministries abroad in this entire
process. We have (rone to achieve this objective through two routes.
One is through Cocom. We have not achieved this yet but we have
asked for a, military subcommittee in Cocom to meet on a regular basis
where military experts from different participating countries could
get together, exchange information, evaluate proposals for export
based on the strategic implications both for the individual countries
and for the collective defense effort. As I said. we didn't get that. We
did get agreement to expand use of Cocom to include military experts
which we considered a step forward.
On a separate track, we have, and this is very much Mr. Weinber-
ger's recommendation which was approved by NATO, undertaken a
study within NATO of the whole impact of technology transfer on
the NATO military missions. The purpose was twofold. First, we have
tried often enough to relate the impact of technology transfer on Amer-
ica's national defense programs, but not so much how that cut into
our allies programs. So it is a very ambitious effort and we have gone
through the first 6 months of it now and quite successfully.
Second, it brings together defense ministry participants to consider
the study of technology transfer and to take that information back
home to their own governments.
The next point is, how do you get from NATO to Cocom?
Senator NUNN. So there is an effort to get NATO to begin consider-
ing this as a body.
Dr. BRYEN. Yes. It is more than an effort, to begin. They are doing
it. It will continue. T have learned that just today. We are very
enthusiastic about it. We think it will be very helpful to all of us. It
will create the kind of interrelationship and understanding that we
ne"cl in other governments to get this job done.
Senator NUNN. Is that going to be a standing group in NATO?
Dr. BRYEN. We have asked that it be a standing group.
Senator NUNN. Of people that will be responsible for that and will
get input from their own ministries.
Dr. BRYEN. That is how it has worked so far and that is how we
want it to work in the future.
Senator Nu-vr,r. Then bring it up to the NATO representative level?
Dr. BRYEN. That is right. Again it was largely at the suggestion of
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Secretary Weinberger that we undertook this effort. We supported it
very fully. I must tell you that we had many barriers to cross to get
the basic themes agreed on.
One of the aspects of this whole problem is that people didn't do
this kind of analysis in the past, either here or anywhere else. When I
came a year ago to this job and asked how technology transfer im-
pacted military programs, there was very little available.
It wasn't that the evidence wasn't in the system. No one was putting
it together and really attempting to evaluate it and do the right kind
of impact study. We have done a good deal of that. We have got a lot
more to do.
Senator Nurmr. What are you going to call that standing group in
NATO?
Dr. BRYEN. So far it has been called by the brilliant name AC 314
which means nothing at all, but it will be called the Technology Trans-
fer Group as it has been known colloquially among those of us who
have worked on the issue.
Senator N-crNiv. That sounds suspicious and covert enough to get it
some attention.
Dr. BRYEN. We think it has already gotten some attention. It has
been a process. We expect it to be a process. I must say that we have
had excellent support among all our agencies who help us get the job
done at NATO.
Senator NUNN. You were going to say that once NATO gets to be
cognizant of the problem and a working group, what do they do to
feed into Cocom?
Dr. BRYEN. Principally NATO will feed into the governments but
what we want to see, obviously, is far more defense participation in
the Cocom study as well and in each nation, a chance for the defense
ministries to review proposals for export before they occur.
There has been one very positive development in that regard, if I
can mention it today because I think it is an important contribution.
This was the decision by the French Government to give its defense
ministry a role quite similar to the one we play here.
We believe it has had a very positive result already and it has helped
a great deal. We are very grateful for that step by the Mitterand gov-
ernment.
I was talking about Cocom and let me just elaborate one step further.
This administration asked for it. It was actually the President last year
at the Ottawa meeting who asked for a high level meeting of Cocom
to see if we could strengthen the organization, to see if we could give it
a new strategic purpose.
His request was accepted, a high level meeting occurred last Janu-
ary, and I think an important start was made in terms of reaching a
concord with our allies on those items that we need to control and why
we need to control them.
We are now in the process of following up that initial high level
Cocom meeting?by the way, the first one in nearly 30 years, which
gives you an idea of the problem right there. Now the issue is to get
specific proposals adopted. In that connection we had a handful of very
high priority, what we call quick fix, proposals which we will be pre-
senting in June in Paris at the Cocom meeting.
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We have every anticipation that these proposals will be accepted and
we think they will go a long way to plugging some of the gaps and
loopholes in the system that have persisted for some time.
Beyond that, we have a major list review coming up in the fall which
will try to go even more broadly into areas where coverage by Cocom
has been less than adequate.
I am skipping ahead because I have already covered the NATO and
Cocom parts of the testimony.
I do want to mention, I think Mike Lorenzo this morning and Ad-
miral Inman mentioned it, but a point that we feel very strongly about
in the Defense Department, and which the administration feels very
strongly about, and that is improving enforcement of both the legal
and illegal transfers of technology.
There are two dynamics to the enforcement process, the domestic one
and again the international one.
At the international level, one of the conclusions of the high level
meeting WPS to explore how enforcement could be strengthened in
Europe and in Japan.
We expect specific measures to be shortly negotiated at Cocom and
we are looking forward to see the national implementation. of that
effort.
For our own part, Defense itself doesn't exactly participate directly
in enforcement. We try to support our enforcement people with a num-
ber of efforts. One of them is to try to target and identify areas, sensi-
tive areas where we think a special emphasis should be made by the
enforcement people, whether it is the Customs people, Justice or people
of Commerce.
A second one is to try to help our own Customs officials better
identify materials and equipment that are embargoed. It is not a
simple thing, not today, in the age of Atari and Pac-Man.
The Customs effort has been stepped up as you have already been
told, I am sure. Behind that we are trying to provide the supporting
assistance. We call it a "mushroom book." It is to give our Customs offi-
cials a fast and useful way to precisely identify the materials they are
looking at.
Senator NUNN. Where did you get the name "mushroom book"?
Dr. BRYEN. I don't know, myself. I suspect it was in the discussions
we had with the Customs people as we explored this idea in the initial
phase. There was a suggestion made and we took it. Whether it applies
to mushrooms hiding under, in a dark place, I suspect that is where it
comes from. But once you adopt the term, well, it is somewhat like the
plastic palace in the Senate.
Once the name is assigned, people forget why.
Let me deal with one final aspect, if I may, and then I will get to the
questioning stage.
One of the things we can do in the Department of Defense, one of
the efforts that I have taken a lot of responsibility for, because I think
it is so important, is better management of our own technology.
The program that I started with and one that is very important to
us in the future is the very-high-speed integrated circuit program.
The VHSIC program has very great prominence for our military sys-
tems because it will enable us to improve existing systems and develop
new ones with far greater capability.
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The VHSIC product will be used in advanced-signal processing
applications for weapons systems, electronic warfare, communications,
radar, precisely guiding munitions.
It will enable us to do these things at a lower cost, we think; it will
be smaller in size, with greater power than anything we currently
possess.
Obviously, the protection of this technology is of highest priority.
Congress, when it authorized the VHSIC program asked that we make
efforts to protect VHSIC.
To date, a full system of controls has not been implemented and I
think regrettably so. The task force I am heading now is designed
to try to remedy this situation, to get this program under a system
of control.
Part of it involves putting VHSIC under the ITAR, the interna-
tional traffic and arms regulations, as the Congress intended. We are
working with the State Department which has the authority and we
believe we will soon accomplish this goal.
Our immediate task is to protect the technical data, the military
hardware that is now being developed, before it is too late to prevent
the dissemination of these technologies to our adversaries.
In addition to putting the VHSIC under the ITAR, we have to
also deal with the problem of the wide amount of literature that has
already been out on VHSIC, some of it covering the circuit design,
some of it covering the hardware associated with the program, some
of it covering the software.
Neither the ITAR nor the export regulations really will protect
this kind of data from compromise. I don't need to tell you about the
Freedom of Information Act.
Senator NuNisr. Do you know of any reason why people other than
American citizens or people who are legally in this country should be
given access to the Freedom of Information Act?
Is there any reason why the Freedom of Information Act should
be as broad as to allow foreign citizens to obtain information just as
if they were American citizens?
Dr. BRYEN. That is a question you probably ought to ask the Justice
Department specialists. I am -not an attorney and I won't make any
effort to explain it.
It occurs to me though that one of the things that we want, of
course, when we are abroad is some reciprocal protection of rights. So
one has to be a bit cautious In this area. But so long as we publish
materials we have to expect, I think, that one way or another they
are an open resource for anyone that wants to get their hands on it.
We have proposed, as you know, special kinds of classification called
restrictive.
Frankly, sir, I think the answer is a very careful attempt on our
side to classify what we think really is important and what we are
going through now, 2 years later, I am afraid to say, but we are still
going through the process, is trying to find those forthcoming aspects
of this program that, if we can protect, we can thereby protect the
whole program.
We are making a major effort in that regard. We hope that this
? exercise in fact will be a prototype for control of other Department of
Defense programs both in the emerging technologies field and to a
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certain extent in more mature areas, where design, where circuit design,
where specifications information, really tells the tale to the adversary.
It is a tough thing but it is one we regard as very important.
I think those are the main points I wanted to touch on this morn-
ing. I have some testimony about the Siberian pipeline. We have
expressed concern and we continue to express concern about that be-
cause of the increment in hard currency earnings capability over a
25-year period at least that will accrue to the Soviet Union.
It will give them far more economic clout than they may now have.
It will enable them, I am afraid, to have even greater access to the
technology which we are trying to protect.
Admiral Inman did a superb job of describing the problem for you,
both in the broad brush sense and in the narrow sense.
It is a terribly important issue. It is one that the administration is
taking very seriously. It is one that we have to be successful in.
I cannot in confidence at this moment predict that we are going to
be successful but I think what we need is a period of time to try out
the effort on an organized basis.
I think we need 5 years minimum . before we are going to see real
impact of the mature technology effort. We need our allies to cooperate.
We are working hard on that. We are going to need more resources to
do the job. We have already put Congress on notice about that. We
need to do some things :in our own house to operate more effectively, to
try to take those steps. We are to a certain extent feeling our way
along.
Senator NUNN. Do you generally agree with the suggestion that has
been made that the most effective way to control technology, know-
how, small, very small sophisticated electronic computer equipment,
and so forth, is to try to control it at the source with the Government-
to-business education program rather than control it as it is going out
of the country? I am not saying you don't try both, but I am saying
which is the most efficient, which is the one that ought to be given the
highest priority?
Dr. BRYEN. I guess it harkens back to the Bucy report, in respect
that what you want to watch most of all is the manufacturing tech-
nology. That is the piece of it that hurts you the most. I put all of
my?not all, but a great deal of my emphasis right there. I would be
better off giving you an example rather than trying to speak generally.
In the microelectronics area, there is a small amount of very spe-
cialized equipment that enables you to make microelectronics.
A lot of that equipment is made in this country. Some of it is made
under license abroad. Very little is entirely independent of what we
develop ourselves. If we can control that manufacturing technology
and the design technology that goes with it, we may have a good shot
at certainly inhibiting very substantially Soviet efforts to acquire it.
It is also one of the areas we simply failed to inhibit in the early phase.
But we can do it. It is a last resort to track it on the way out but it has
a very valuable impact.
Senator NUNN. You need to do all the ways but, it seems to me your
most effective enforcement is through a dialog with industry.
Dr. BRYEN. We are doing that. In fact, we just had in representa-
tives of the Semi-Conductor Industry Association.
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One of the things we wanted to do was be as direct with them as we
could. So we granted special clearances so there would be no holds
barred. We got that done. We went through an entire briefing. Then we
heard from them. They have some problems, too.
Senator NUNN. Do you do that on a one-on-one basis or do you do it
in trade association seminars?
Dr. BRYEN. This was with a trade association, but it was one of the
most senior representatives of the trade association. It was very much
a prototype of a broader effort we want to undertake.
Senator NUNN. The FBI has a similar program and I am sure that
theirs doesn't get into as much technicality as yours does in terms of
details but they, I think, are going around alerting businesses to vari-
ous covert and overt means of Soviet operations. Do you coordinate
with the FBI?
Dr. BRYEN. We do.
Senator NUNN. Do you sit down and discuss it, talk about who is
going to do what?
Dr. BRYEN. We have a group headed by Gus White at the White
House that discusses all of these issues and we square off on these pro-
grams. But our effort was really designed to highlight for semiconduc-
tor industry people how they have, inadvertently, I might say, been
contributing to Soviet military capability.
It was a very elaborate presentation, but I think a very sobering one.
It is something we cannot do out in public. We felt we ought to experi-
ment with this and see if it would help them to understand our prob-
lem, the national problem, and at the same time to develop some
suggestions.
One of the things we would very much like to see security commit-
tees in our own sensitive industries, policed by the industry itself.
Some of our industries are not known for their internal security.
Senator NUNN. You mentioned in your statement that you were
replacing the 1977 interim policy of DOD for export control. What
is the reason for replacing that?
Dr. BRYEN. We think, if you read the 1977 statement, I happen to
have a copy with me, that it is basically an apple pie kind of descrip-
tion of what we should be doing. The problem is that it apparently had
very little genuine effect either in the Department of Defense or in
the interrelationship of the Department with other agencies.
It was too general. It needs more precision. We liked the part of that
statement that keys on what is called the Bucy report, which I am
sure you heard of already in discussions, the notion of aiming at the
critical manufacturing technologies. But it doesn't get very far beyond
that. It doesn't set out the marching orders in the Department clearly.
So we are doing a front to back scrub of the whole thing. We hope to
make it more precise so that it makes clear what ones' responsibilities,
duties and roles are. That is the purpose.
Senator NUNN. What is our recourse if there is a controlled technol-
ogy on the Cocom list and it is, let's say, transferred by one of the
Cocom nations to the Eastern bloc. Do we have any recourse under
Cocom or is it just a complaint mechanism?
Dr. BRYEN. COCOM is only a voluntary organization.
Senator NUNN. There are no sanctions involved?
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Dr. BRYEN. There is no sanction in Cocom. But obviously we have
to pace our cooperation with others on their overall performance, and
technology transfer is an issue of significant enough importance to this
administration that we are actually doing that.
It is a painful process. It is not one that I want to talk in open
session about. But it is one we are very much engaged in and I think
to the betterment of the whole effort.
Senator NuNN. You mentioned that certain technologies can only
be adequately protected by national security classification. Are you
saying there is nothing in between, either it is classified or not, if it is
not classified, it is out there, available and that is it?
Dr. BRYEN. That is pretty much the case.
Senator NUNN, Would there be any need, desire or merit in trying
to find something in between that would not be classified but would be
labeled crucial technology or would that simply be too cumbersome to
get involved in?
Dr. BRYEN. I think you put a big flag on it.
Senator Nuisuc. It ought to be classified or not classified?
Dr. BRYEN. Yes; I think parts of it have to be classified. It is a man-
agement thing as much as it is a security matter.
Senator NUNN. But can you classify dual use technology? Can de-
fense classify technology?
Dr. BRYEN. We cannot classify what we don't know, but we own some
things that we haven't classified.
What we need to do is look at our own house. That is what we are
doing, and we say, are we being careful enough in protecting this pro-
gram? That is the purpose of the VHSIC inquiry and I hope that we
can expand that further in the future.
We are always accused of overclassifying things as a matter of
course.
Believe it or not, there was not a great tradition in the Department
of Defense to manage technology development programs from the
point of view of security precautions. That is the thing we have to take
a much more careful look at and we are.
Senator NuNN. In your statement you refer to the small industry
that has risen in Washington composed of individuals who know how
to play the system within the export control community. What do you
mean by this?
Dr. BRYEN. What I mean by that are people who have become expert
on the export control process, they know where the soft spots are, know
how to characterize items in ways that make them sound perfectly nice
and harmless and they are good at it.
I don't want to get into the moral issues about it. It is to be antici-
pated. It is an interesting point. On the whole we have little trade with
the Soviet Union. When you take away grain, it is not all that much.
Even our European partners don't do that much trade. Sometimes
these issues are cast as if the economy is going to come to a halt if we
stop the transfer of a certain item.
It is very rarely really the case. Of course, one of the things the
Soviets have become quite good at is exploiting sick high-technology
industries, industries that are cash short, need money, need R. & D.
funds' whatever; they look for those companies because they are easy
targets.
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Senator NuNN. What specifically is your office doing to coordinate
with the law enforcement community? You mentioned the mushroom
book. Is that the main effort going on?
Dr. BRYEN. That is the main effort we have underway. The other
way we coordinate--but what we try to do on a regular basis is to
make known to, the State Department, that is where most of the action
is, our concern about specific areas, so we can bring those to the atten-
tion of other foreign governments. We don't ourselves have a mandate
for enforcement.
Senator NuNN. We have heard testimony the United States has in-
dicted at least three West German nationals for violations of the Arms
Export Control Act. These individuals are now fugitives and free men
in West Germany, a Cocom nation. Is there any effort within the
Government to make these offenses extraditable offenses?
Dr. BRYEN. I can't answer on the extraditable offenses. There is an
effort to try and get our European allies to upgrade their entire legal
structure. Here in the United States it is a felony to be involved in
transferring the technology. In European countries, it is a misde-
meanor at best. People calculate the cost. How much fine there is
against the how much profit there is?
That is the wrong way to go about it. You need some positive dis-
incentives and jail terms, or something severe like that. That is why
we come back to your earlier question, that of customs catching these
things and then making sure Commerce follows up. It is a very impres-
sive way to get people to understand export controls.
Senator NuNN. We heard testimony from William Holden Bell,
former Hughes Aircraft executive, who sold secret military informa-
tion to Polish agents. He testified last week. How serious a security
breach, in your opinion, was there in the Bell case?
Dr. BRYEN. I wouldn't comment on that except to say it was serious,
but I wouldn't want to comment in open session. I think we can pro-
vide you in closed session with a real evaluation. That is not the kind
of evaluation to make in public.
Senator NuNN. We may very well.
Dr. Bryen, you made reference in your testimony to the effort by the
Soviets to build and equip a semiconductor plant using equivalent
know-how from the United States.
Could the Soviets have built and equipped such a plant in the late
1970's and early 1980's without U.S. machinery, equipment and know
how?
Dr. BRYEN. My answer is they could not. That doesn't mean that
equipment necessarily came from this country. It could have been
transferred from Europe or elsewhere. In fact, it could have been
transferred from another country that bought that equipment?it
could have been on the secondary market. There is a secondary mar-
ket in this sort of machinery. These are terribly difficult things to
trace.
What we know in the first instance is that a lot had to be U.S.
equipment, that the system was full of holes, it was porous, it was
easy for them to get it and they got it.
The microelectronics area has enabled the Soviets to upgrade their
military equipment. Again, in my testimony, there is a kind of ques-
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tion and commentary about where all this leads. I think where it
leads is that we risk losing the quality edge on which our entire struc-
ture of national defense and alliance depends. I don't think we can
afford to take that risk. I think there are things we can do to protect it.
This is why we are making this effort and we very much appreciate
your support, the support of this subcommittee and the support of
the Congress.
Senator NUNN. Thank you, very much. We look forward to bounc-
ing some of our ideas off you and your people in the next week or so.
Thank you, very much.
Our final hearing on this subject in open session will be tomorrow
morning at 10 o'clock in this room.
[Whereupon at 12:05 p.m., the subcommittee recessed, to reconvene
at 10:05 a.m., Wednesday, May 12, 1982.]
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TRANSFER OF UNITED STATES HIGH TECHNOLOGY
TO THE SOVIET UNION AND SOVIET BLOC NATIONS
WEDNESDAY, MAY 12, 1982
U.S. SENATE,
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS,
Wa8hingt076, D.C.
The subcommittee met at 10:05 a.m., in room 3302, Dirksen Senate
Office Building, under authority of Senate Resolution 361, dated
March 5, 1980, Hon. Sam Nunn presiding.
Members of the subcommittee present: Senator William V. Roth,
Jr., Republican Delaware ? Senator Sam Nunn, Democrat, Georgia;
and Senator Warren B. Rudman, Republican, New Hampshire.
Members of the professional staff present: S. Cass Weiland, chief
counsel; Michael C. Eberhardt, deputy chief counsel; Eleanore Hill,
chief counsel to the minority; Kathy Bidden, chief clerk; Gregory
Baldwin, assistant counsel to the minority; Jack Key, Glenn Fry, and
Fred Asselin, staff investigators to the minority; and Kathleen Dias,
executive secretary to the minority chief counsel.
[Senator present at time of convening: Senator Nunn.]
[The letter of authority follows:]
T.T.S. SENATE,
COMMITTEE ON GOVERNMENTAL AFFAIRS,
SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,
Wataington, D.C. ?
Pursuant to Rule 5 of the Rules of Procedure of the Senate Permanent Sub-
committee on Investigations of the Committee on Governmental Affairs, per-
mission is hereby granted for the Chairman, or any Member of the Subcommit-
tee as designated by the Chairman, to conduct open and/or executive hearings
without a quorum of two members for the administration of oaths and taking
testimony in connection with hearings on the Transfer of United States High
Technology to the Soviet Union and Soviet Bloc Nations, to be held May 4, 5,
6. 11 and 12, 1982.
WILLIAM V. ROTH, JR.,
Chairman.
SAM NTJNN,
Ranking Minority Member.
Senator Nim-N. We have just seen a vote go up on the board This
matter has been debated for a couple of days. It makes more sense to
have the votes. I will be back in 10 minutes.
Senator Roth is over there voting now. We will start the hearings
in approximately 10 to 15 minutes.
[Brief recess.]
[Senator present at time of recess: Senator Nunn.]
[Senators present at time of reconvening: Senators Nunn and
Rudman.]
(261)
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Senator RUDMAN. The Permanent Subcommittee. on Investigations
is now in session.
The first witness in the continuation of these hearings on Transfer
of U.S. Technology is Lawrence J. Brady, Assistant Secretary of
Commerce for Trade Administration, U.S. Department of Commerce.
Mr. Brady, we welcome you here this morning.
Lawrence J. Brady is a personal friend, a New Hampshire native,
and I am particularly glad to have you here.
My colleague, Senator Nunn, of Georgia, has been the moving force
behind these hearings and I will ask Senator Nunn if he has any open-
ing remarks this morning.
Senator NUNN. No; we are delighted to have Mr. Brady here.
The only thing I say to Mr. Brady before he starts, how long have
you been on your present job?
Mr. BRADY. I was sworn in in June of last year.
Senator NuNN. I want to make it clear to you and everyone that
the problems we are outlining about the Commerce Department and
the Compliance Division are directed at not just this administration,
but the previous administration and the administration before that.
This is a longstanding problem and has no partisan origin and no
partisan conclusion. It certainly does not relate to you because a good
many things we are talking about have been ongoing problems. We
are afraid they are still ongoing, but we will hear from you on that
subject when we get into questions.
Senator RUDMAN. We have a practice here before the permanent sub-
committee of swearing in all witnesses. Please rise and raise your right
hand.
Do you swear the testimony you are about to give in the course of
this hearing shall be the truth, the whole truth, and nothing but the
truth, so help you God?
Mr. BRADY. I do.
TESTIMONY OF LAWRENCE J. BRADY, ASSISTANT SECRETARY OF
COMMERCE FOR TRADE ADMINISTRATION, U.S. DEPARTMENT OF
COMMERCE
Senator RUDMAN. Mr. Brady, your entire statement will be put in
the record, and you may summarize it or handle it in any way you are
comfortable with it.1
Mr. BRADY. Mr. Chairman, I would like the written statement I
have provided the subcommittee to be inserted in the record. I would
like to summarize the statement which I think puts this entire problem
into focus.
First, I would like to commend the subcommittee for the work it has
done in this area. I think one of the problems we have in dealing with
the whole technology transfer problem is one of public awareness.
And although we have some reservations about some aspect about the
minority staff report, these hearings certainly will have the result of
focusing the public's attention, the business community's attention
on the problem. And I think that is a very positive step.
[At this point Senator Roth entered the hearing room.]
3 See p. 596 for the prepared statement of Lawrence J. Brady.
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263
Mr. BRADY. Mr. Chairman, it is a privilege for me to be here again.
I have testified before this subcommittee previously. As a matter of
fact, it is 3 years ago this month that I testified over on the House
side before the House Armed Services Committee in which I dis-
agreed with the political appointees of the Carter administration and
inicated that the technology which we were licensing to the Soviet
Union, specifically for the Kama River plant, was being diverted to
the Soviet military. It is 10 years ago this month that the President
of the United States inaugurated the era of detente with a trip to
Moscow.
A central component of that historic trip was the hope that greatly
expanded trade ties between the East and the West would lead to
mutual cooperation and understanding.
Obviously, those hopes have not taken place. In that 10-year period,
as we in the administration have indicated in the last year, we have
been exploited both legally and illegally by the Soviet Union and
Eastern Europe. This technology which has helped the Soviets im-
mensely in their military-industrial infrastructure. Again, 3 years
ago, I personally disclosed the failures of the Commerce Department
in the licensing process, referring to it, as I said in my testimony, as
a shambles.
It is only now that as a nation we are beginning to understand the
extent of these technology transfers during the past decade. Stopping
the extensive acquisition by the Soviets of sensitive, dual-use West-
ern technology in the ways that are both effective and appropriate
in our open society is one of the most complex and urgent issues facing
all of us.
Moreover, Mr. Chairman, only now are we beginning to recognize
that the technology transfer issue is much more than simply an
enforcement problem. Apart from strengthening enforcement, in
order to deal successfully with the increasing Soviet effort to acquire
advanced Western technology, we need to do a number of things.
First, we need to understand what technology the Soviets need;
how such acquisition has helped the Soviet Union achieve its goal of
military superiority and what methods the U.S.S.R. is using to obtain
it; second, on a multilateral basis, we need to marshall the support
and the commitment of our allies to prevent further technology leak-
age to the Soviet Union by Western concerns and by -U.S. subsidiaries
and licensees operating abroad; third, we must build up our counter-
intelligence efforts to counteract the Soviet intelligence organization;
fourth, we must work closely with industry segments involved in the
development and production of high technology to assess ways of re-
tarding the growing industrial security problem; and examine all pos-
4ble avenues for identifying and protecting defense-sensitive tech-
nologies, including technical documents which are not now subject to
our classification system.
Strategically, we need to recognize that the U.S.S.R. is far more
powerful militarily than the nation we faced at the end of World
War II, when these controls were first put in place, and it is far more
capable of procuring and applying our latest technological advances.
However, we in the administration, within the last year, could not
take adequate protective action until we accurately assessed the na-
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263
Mr. BRADY. Mr. Chairman, it is a privilege for me to be here again.
I have testified before this subcommittee previously. As a matter of
fact, it is 3 years ago this month that I testified over on the House
side before the House Armed Services Committee in which I dis-
agreed with the political appointees of the Carter administration and
inicated that the technology which we were licensing to the Soviet
Union, specifically for the Kama River plant, was being diverted to
the Soviet military. It is 10 years ago this month that the President
of the United States inaugurated the era of detente with a trip to
Moscow.
A central component of that historic trip was the hope that greatly
expanded trade ties between the East and the West would lead to
mutual cooperation and understanding.
Obviously, those hopes have not taken place. In that 10-year period,
as we in the administration have indicated in the last year, we have
been exploited both legally and illegally by the Soviet Union and
Eastern Europe. This technology which has helped the Soviets im-
mensely in their military-industrial infrastructure. Again, 3 years
ago, I personally disclosed the failures of the Commerce Department
in the licensing process, referring to it, as I said in my testimony, as
a shambles.
It is only now that as a nation we are beginning to understand the
extent of these technology transfers during the past decade. Stopping
the extensive acquisition by the Soviets of sensitive, dual-use West-
ern technology in the ways that are both effective and appropriate
in our open society is one of the most complex and urgent issues facing
all of us.
Moreover, Mr. Chairman, only now are we beginning to recognize
that the technology transfer issue is much more than simply an
enforcement problem. Apart from strengthening enforcement, in
order to deal successfully with the increasing Soviet effort to acquire
advanced Western technology, we need to do a number of things.
First, we need to understand what technology the Soviets need;
how such acquisition has helped the Soviet Union achieve its goal of
military superiority and what methods the U.S.S.R. is using to obtain
it; second, on a multilateral basis, we need to marshall the support
and the commitment of our allies to prevent further technology leak-
age to the Soviet Union by Western concerns and by -U.S. subsidiaries
and licensees operating abroad; third, we must build up our counter-
intelligence efforts to counteract the Soviet intelligence organization;
fourth, we must work closely with industry segments involved in the
development and production of high technology to assess ways of re-
tarding the growing industrial security problem; and examine all pos-
4ble avenues for identifying and protecting defense-sensitive tech-
nologies, including technical documents which are not now subject to
our classification system.
Strategically, we need to recognize that the U.S.S.R. is far more
powerful militarily than the nation we faced at the end of World
War II, when these controls were first put in place, and it is far more
capable of procuring and applying our latest technological advances.
However, we in the administration, within the last year, could not
take adequate protective action until we accurately assessed the na-
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266,
We recognize the magnitude of the whole technology transfer prob-
lem and pertinent Federal agencies are working closely with the intel-
ligence community and industry.
Since the major Dart of the technology transfer problem is interna-
tional, we turned our attention to that aspect first. We examined the
effectiveness of the multilateral controls because of the technological
advances archieved in Communist countries: It was evident that
Cocom had become obsolete. This administration concluded that while
Cocom prevented many sensitive exports which would have contrib-
uted significantly to the military capabilities of countries, such as
sophisticated computers, it was still far from being totally effective.
We identified the major reasons for this. One the limited scope and
concept of the control list. Weaknesses in the multilateral enforcement,
the availability of goods from non-Cocom countries and inconsistencies
in licensing procedures among Cocom member countries.
Having identified these problem areas, President Reagan, at the
Ottawa Summit in 1981, made a personal appeal to the leaders of Eu-
rope, Canada and Japan to join with us to tighten export controls and
prevent illegal. exports.
As a result, the Cocom high-level meeting, the first, in 25 years, took
place in January of this year. Commerce played a key role both at that
meeting and in serving as a central agency for the preparation of the
materials for the U.S. delegation.
We are now actively following up on the political commitment
achieved among the allies at that meeting. Several bilateral meetings
have been held to discuss specific technical proposals. In addition, a
Cocom subcommittee meetincr6 will be held in Paris soon to review ways
of improving the enforcement on a multilateral basis based on the com-
mitments we received in January and based on the work done since
then.
On another equally critical front, we have been actively engaged in
bilateral discussions with our European allies to discuss the need to re-
strict Government-subsidized credits.
The Western countries have been pursuing a policy of competing
among themselves, to provide efficiently subsidized or guaranteed cred-
its to the U.S.S.R. These were going into a country that would other-
wise at least be required to pay commercial or above commercial rates
for credits.
These concessional credits shield the U.S.S.R. from the realities of
the marketplace and allow them to pursue their military buildup. An-
other bilateral mission headed by Under Secretary Buckley is sched-
uled for next week to pursue further negotiations on this topic.
Also, another technology transfer issue this administration is con-
cerned about is preventing the dissemination of sensitive, technical
data and know-how through academic institutions.
Since 1971, the number of academic exchanges between the United
States and the Soviet bloc countries quickly multiplied. On close ex-
amination of these agreements, it is this administration's view that ex-
changes we have had with the U.S.S.R. and its satellites have not in
the main been reciprocal. Rather, it is apparent the Soviets exploited
scientific exchanges as well as a variety of other means in a highly
orchestrated, centrally directed effort aimed at gathering the technical
information required to enhance military posture. In the area of schol-
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any exchanges, for example, the United States sends young masters
and doctoral students to study the humanities. On the other hand, the
Soviets send the equivalent of a Ph. D. to study the hard sciences.
In recognition of the serious technological drain occurring in the
academic arena, Commerce is clarifying the technical data regula-
tions to provide our scientific and academic communities with better
guidance and export responsibility in this area.
We are currently reviewing this issue with other agencies, including
the Departments of Defense, Justice, and State, to be sure the balance
between important constitutional freedoms and legitimate national
security interests is maintained.
In order to control technology transfers, this administration has
further identified the critical need for Commerce to have available
information and technological capabilities in both the free world and
the Communist countries.
Acting on the recommendation of three independent contractors to
establish within the Office of Export Administration a data base in
order to assess foreign availability in conformity with the Export
Administration Act of 1979, Commerce is in the process of developing
research and analytical capability within OEA under a foreign tech-
nical assessment center.
In addition to analyzing foreign availability within a free world, we
are also strengthening our capability to assess Communist-held tech-
nologies through the increased support in the intelligence community.
On the enforcement side, I have established a soecial analytical unit
within the Office of Export Administrition, which is staffed by both
Customs and Commerce employees. This special unit has developed an
innovative intelligence approach that relates the application of export
licenses and analysis techniques to Commerce's license application
files.
The analyses produced to date have been outstanding in identifying
firms engaged in diverting critical technology to the Soviet Union
and in pinpointing new diversion routes.
This intelligence is also being used to develop profiles for the
Exodus inspection teams, and as a basis for major criminal investi-
gations of Soviet diversions.
Our joint efforts with customs in this area have been described by
other law enforcement officials as one of the most cooperative and pro-
ductive relationships that they have witnessed in recent years.
Let me say, Mr. Chairman, that this partnership, which is an invalu-
able step for the enhanced enforcement efforts, resulted in large part
from the enthusiastic backing of Commissioner Von Raab. The con-
tinued support for this cooperative relationship between Customs and
Commerce will lay a cornerstone for future enforcement with the in-
telligence community as a whole. Customs has upgraded the inspection
effort, and I am pleased to announce today a real organizational re-
alinement and enhancement of the Compliance Division. The division
itself is being elevated to the Office status. and together with the Office
of Anti-Boycott Compliance, will comprise a new export enforcement
organization in the Department of Commerce that will be headed by
a Deputy Assistant Secretary reporting directly to me. The candidate
we have selected for that post, Ted WU, is currently an assistant U.S.
attorney for the central district of California. He is a celebrated ex-
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pert in the law enforcement community. His successful prosecutions
of two of this country's most notorious export diversion cases render
him highly qualified for this considerable undertaking.
Mr. Chairman, Mr. Wu has accepted this position because he knows
we are strongly committed to enhancing Commerce's enforcement
effort. Among the many changes Mr. Wu will oversee in the enhance-
ment of the Compliance Office will be the creation of an in-house
training program for our agents. This training program will feature
not only instruction of conventional law enforcement such as surveil-
lance techniques, but will also include development of skills associated
with the carrying of weapons, arrest, and seizure search capabilities.
We look forward to the near future when we will have an enforcement
office operating at maximum efficiency with no shortages of manpower
and resources.
might interject, Mr. Chairman, at this point, both Secretary Bald-
rige and Under Secretary Olmer have indicated a thorough commit-
ment to support whatever manpower resources are necessary to do
the job.
I anticipate, Mr. Chairman, that once Mr. Wu has taken office, he
will be happy to report to you on the achievements of Commerce's new
Enforcement Office.
In sum, I believe that we have a sensible, ambitious program to up-
grade and rehabilitate our enforcement responsibilities mandated by
the Export Administration Act.
Our Enforcement Office will remain what it should be, a lean, effi-
cient organization with no other continuing mission than the enforce-
ment of the Export Administration Act. It will be well coordinated
with the intelligence community and other enforcement agencies such
as the FBI and customs; it will also be able to utilize the invaluable
benefits of Commerce's close relationship with the business sector.
Mr. Chairman, Senators, I will be happy to answer your questions.
Chairman ROTH [presiding]. Thank you, Mr. Brady.
Mr. Brady, the members of the subcommittee are, of course, aware
of your personal commitment to this important area but I believe it is
important that the record reflect fully your position on the specific
question of export technology and particularly reference the efforts
some years ago to help the Soviet Union construct some trucking
facilities.
Would you, for the purposes of the record, explain your role in this
matter ?
Mr. BRADY. Mr. Chairman, about 3 years ago, the Export Adminis-
tration Act was up for review for extension. As part of that review,
the House Armed Services Committee decided that it was going to hold
hearings on that extension, in addition to the committee of appropriate
jurisdiction, namely, the Foreign Affairs Committee on the House side.
There were some statements being made on both sides in Congress
that were not totally consistent with the facts. We had intelligence in-
formation that trucks were being produced at the Kama River plant
for the Soviet military and, in fact, being distributed to Eastern
Europe for use in East European endeavors.
An administration witness was asked about that and denied it. I was
asked about it and confirmed it. And, as a result of that. I was labeled
whistleblower and eventually left the Department of Commerce.
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In point of fact, that was the tip of the iceberg. There had been
apparently intelligence through the 1970's, particularly the latter half
of the seventies, indicating that there was substantial diversion taking
place. I think some of the hearings this committee held in 1980 and
some of the hearings Senator Byrd held in another committee indicated
that, for some reason, that intelligence just didn't get to the top.
So that was my role. I eventually had to leave Government for it.
Senator Nuxx. In February 1980, you recommended the creation of
an Office of Strategic Trade to both license high technology exports but
also provide the compliance function. Do you still believe that such an
office should be created?
Mr. BRADY. I think I would like to make two points, Mr. Chairman.
One, I strongly believe that there must be an enforcement arm with
the licensing function, associated with the licensing function. It should
not duplicate Customs, it should not duplicate the FBI. There must be
a lean, efficient organization that coordinates the intelligence informa-
tion procured from the agencies with the day-to-day impact, commu-
nications, dialog, that the Department or the licensing function has
with the business community. They must be together.
Now, specifically with regard to where that entire function should
be lodged. In 1980, the Carter administration, an administration that,
although some individuals had indicated very serious concern with
technology licensing, such as Dr. Brzezinski and his military attache,
General Odem, as concerned as it should have been with the technology
transfer issue and, to a certain extent, the President's directives were
not being implemented. It is actually in that cross fire that I got in-
volved. So I felt in 1980 that this function could not be administered
by the Department of Commerce, because it was unwilling to give it the
attention and the resources that it needed.
When I took the job I now have, I had a lengthy conversation with
Senator Garn, whose proposal this is. And I promised him that I would
try to run Trade Administration, my office, which is fairly newly
created because we are not now a part of the trade promotion arm
of Commerce, as an Office of Strategic Trade. I think we have done a
pretty good job at doing that.
The only concern that one can still express is not toward the licens-
ing function although, and I accept the criticism made of the Com-
pliance Division. I do not believe that it has been as effective as it
might. Its agents are not as well trained as they should be and I
accept some of what I call the micro-criticism in the staff report. But
I do not believe the trade promotion arm impedes the enforcement. I
do not think that is the problem. I think the problem that we have got
to look at is strategic trade, or the use of the economic power of this
Nation, what has been referred to as the wealth of the Nation. Is it
being factored into the foreign policy process in a manner where. it
becomes as strong a factor as it might in trying to direct the policies
of this Nation vis-a-vis a certain project or a certain policy. I think
that may still be a legitimate criticism. I think we have done a good
job in pivoting, so to speak, what some people would incorrectly call
the elements of economic warfare, for instance, in the foreign policy
structure.
Chairman ROTH. I am sure my colleague. Senator Nunn, will want to
get into it in greater depth, but I am not sure I fully understand why
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269
policymaking and compliance should be joined together. It seems to me
organizationally you can make a pretty strong argument that it is
better to keep them apart.
One of the problems, it seems to me, is that we go up the hill and
down on this matter of exports depending on the mood, and philosophy
of the Nation at the moment. .A.s a strong believer in trade, I think we
have got to do everything we can to expedite it, but obviously not at
the cost of security risks. Doesn't it make sense to keep compliance sep-
arate as you wrestle with some of these other philosophical and policy
matters?
Mr. BRADY. Mr. Chairman, no I don't agree with that. I don't think
these ideas are philosophical. We have in the last year, immediately
upon taking office, instituted a number of senior interagency groups
that resulted in new policy directions by the President of the United
States with regard to the licensing of high-technology products. We
implemented that and are in the process of implementing that both
domestically and internationally through negotiation with our Cocom
partners.
I would point out that the list of controlled commodities to the Com-
munist world is sophisticated and lengthy. One computer requires a
license and another does not.
The committee states that Customs can easily implement or rather
enforce the munitions regulations. I don't believe that Customs can
enforce dual-use regulations because our list is much longer and more
sophisticated. Military weapons are easily defined and there are fewer
cases in this area.
Our licensing personnel are intimately involved and will have to be
regardless of where the enforcement arm is. This is one very strong
reason to keep it where it is.
Furthermore, the dialog that to a certain extent already exists and
will exist to a much greater extent between the licensing officials and
the business community and the enforcement personnel is the means by
which we get many of our intelligence leads.
As a matter of fact, the major cases we have had in this area have not
been as a result of inspection at the ports. All the major cases that we
have prosecuted in the export control area, both we and Customs, have
been the result of intelligence leads brought up by the business
community.
Furthermore, Commerce has an extensive apparatus both interna-
tionally and domestically of field offices and those field offices are out
impressing upon the business community the requirements of licens-
ing with regard to particular commodities. As a matter of fact, so
much of the field offices time is being devoted to what we a1l the
licensing or enforcement problem, my colleague has asked me to
reimburse him for the people being taken away from the trade negotia-
tions functions.
Chairman ROTH. A final question. I would like to congratulate you
on hiring Assistant U.S. Attorney Ted Wu. He is well known by my
i
staff. He s indeed an excellent choice. Could you elaborate on what his
duties will be?
Mr. BRADY. Mr. Chairman, he is going to be setting up a new
enforcement mechanism in the Department as a Deputy Assistant
Secretary reporting directly to me. That will be composed of two
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units, the Anti-Boycott Compliance as well as the Export Adminis-
tration Act provisions regarding export controls.
Furthermore, we will take the Export Control Office that we have
today and change it drastically. I believe, and Ted agrees, that it is
silly to have 4 or 5 inspectors at a couple of the ports when Customs has
200 and they are much more able than we to do the inspection Junction
and, therefore, we will most probably be abolishing the inspection func-
tion in the Department.
Our objective is to get a highly professional white-collar crime outfit
working with the intelligence agencies and all those from whom we get
leads to pursue in the best way we can with the FBI the illegal acquisi-
tion in the United States. I think we can do that and do it well.
Chairman ROTH. Thank you, Mr. Brady.
Senator Nunn?
Senator NuNN-. Thank you, Mr. Chairman.
Mr. Brady, you mentioned that a good many of your intelligence
referrals and I assume your other referrals to the Justice Department
grew out of a coordination between your Licensing Division and your
Enforcement or Compliance Division, is that right?
Mr. BRADY. I said that the dialog was a necessary one in a number of
things. One, impressing upon the business community what is con-
trolled, how the Soviets are operating and yes, we do get some leads
back from the business community, very definitely, as to where com-
modities are in the Soviet Union. Very often, where a competitor's
commodity has been exported to, with certain indications as to who
may have exported it. So to that extent we do get leads.
Senator NuNisr. How many crimi:nal cases has Commerce worked on
in the last 12 months?
Mr. BRADY. I think for fiscal year 1982, there are four criminal cases
that have been referred to Justice.
Senator NuNN. How many?
Mr. BRADY. Four.
Senator Ntric.r. For fiscal year 1982, the whole year.
Mr. BRADY. I believe that, that's right.
Senator N1TNN. The FBI was not familiar with any.
Mr. BRADY. Mr. Chairman, the FBI wouldn't necessarily be. They
are in the espionage business, they are not in the export control area.
Senator NT:rim You did all the investigative work and referred to
Justice for prosecution.
Mr. BRADY. I am sure we had help in the investigative work but it
would be referred to?
Senator No-NN. Who did you have help from?
Mr. BRADY. I am sure it, was Customs. I have to go over each specific
case but I am positive that we got help, and I don't think there is any-
thing wrong in that.
Senator NuNN. I don't either. The question is, what are you really
doing in the Compliance Division, that is the question we are going to
be coming back to over and over again in the course of my question-
ing this morning. Are you familiar with the DeGeyter case?
Mr. BRADY. Yes. I am. sir. Somewhat.
Senator NuNN. Was that a Commerce Department case?
Mr. BRADY. No, sir, it was not.
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Senator Ntricx. In the Compliance Division report, didn't they claim
that was a Commerce Department case?
Mr. BRADY. Mr. Chairman, it is my understanding that the law re-
quires the Export Administration Act to report the cases that have
been prosecuted under that act and that is why that was included in
the report.
Senator NUNN. We can get the exact language of that report but it
was very misleading, I think, in terms of reporting to Congress. When
was that report made, do you know?
Mr. BRADY. Fiscal 1980.
Senator NUNN. Fiscal 1980. Let me just go over a few of these. As I
understand it, you are saying the subcommittee staff investigation is
useful as a historic document, is that right?
Mr. BRADY. I say, Mr. Chairman that the document does not reflect
certainly what we have done in the administration. Let me be fairly
candid. I think one of the problems that I personally have with the
report is that it tends to equate the enforcement of the Export Ad-
ministration Act, particularly the Commerce Department function,
with technology leakage generally, and that is inappropriate, because
the problem is much, much greater than that. It is industrial espio-
nage, it is counterintelligence, it is scientific exchange agreement,
everything I have discussed already.
Senator NUNN. Our hearings have covered the whole scope of all
of that. As you well know, the staff report centered on some criticism
with the Commerce Department and the Compliance Division, but that
doesn't in anyway imply the subcommittee hadn't looked at the broad
scope. If you review the testimony of the witnesses we had, most of
our time has been spent in areas that don't directly involve the Com-
merce Department.
Mr. BRADY. I have accepted some of the criticisms of the Compli-
ance Division.
Senator NuNN. You call them microcriticisms and historically use-
ful. Let me just pursue "the historically useful" for a minute. Does
that mean you are here today saying you have corrected these historic
observations by the staff?
Mr. BRADY. I think we have corrected some of them. I think the
analytical unit that we have created goes a way to correcting some of
that. I think the fact that we are creating a Deputy Assistant Secre-
tary, something we have been working on for months, is going to solve
some of our problems.
As we go through and reshape and rehabilitate the division, reorga-
nize it, I think there is no question?
Senator Nurnsr. How much of this is in the future as to what you
intend to do and how much of it have you already done? Let's just
take each item now. Tell me what has been accomplished so far today
as opposed to what you plan to do? We have an awful lot of plans
when we have a hearing and that is one of the purposes of a hearing,
I think that is useful.
Mr. BRADY. I agree.
,Senator NUNN. I have never had a hearing on any criticism of any
agency where they didn't have plans to correct every item that had
been identified. When you have another hearing a year later you find
out it hasn't been done.
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Let's just talk about what has been done now so we can really dis-
tinguish what is historic and what is actual.
Mr. BRADY. Senator, before I go to the specifics, let me make a point
that I mentioned in my prepared remarks: We could not move to
rehabilitate the Division before we had an assessment of what has
happened. That is, what are the Soviets doing, how are they operating,
what, are they targeting. We didn't have that, but we do now. We have
addressed the international aspects of the enforcement. There are five
major agenda items that we will discuss with our allies on Monday.
So it is not only the Compliance Division. That is the point I am
trying to point out in terms of what we have done over the last year.
Senator NUNN. I understand.
Mr. BRADY. Let Inc go specifically to the division.
Senator N uNN. Let me ask you this; do you have to have all of that
before you can determine whether the Compliance Division officials
have proper law enforcement training? It seems to me no matter what
the Soviets have acquired, no matter what the record shows, you are
going to need a group of people with adequate enforcement training
there, would you not?
Mr. BRADY. You are right, Senator.
Senator .NuNN. Do you have people with adequate enforcement
training?
Mr. BRADY. We have some.
Senator NUNN. How many?
Mr. BRADY. I can't answer that because that is a judgment call. If
you look at some of the background. of the agents
Senator NUNN. Your judgment would be the only one we have. How
many people do you have that you think really have adequate law
enforcement experience?
Mr. BRADY. Mr. Chairman, I can't answer that in specific terms. I
can tell you that we were aware, and I was aware obviously before
1 came back to Washington, of the problems in the enforcement area.
I called it a shambles. I was aware of it.
Senator NUNN. What do you call it right now?
Mr. BRADY. Let me--
Senator NUNN. What do you call it right now?
Mr. BRADY. It is in the process of getting new life, let me put it
that way. Let me give you an example, for instance, on how to reshape
the division. I could not have made a decision on that before Customs
decided to put 200 people in the field to do its inspection, and they
did that a few months ago. Now based on that action, and I hope that
it is a permanent action, I don't need those four or five people and
the field people in New York doing inspection. I think it duplicative.
We can take those four or five positions and use them for better
purposes. I have got to be careful in public testimony because the
personnel process we will go through in the next few months is going
to reveal many problems in terms of actions taken to reshape the
division, but that is simply one of the examples that delayed us in
refashioning the organization itself.
Senator NUNN. SO the organization hasn't been refashioned then;
it is in the process?
Mr. BRADY. Well, no, I believe the order has been signed creating
the Deputy Assistant Secretary. Ted Wu will be on board within 4 or
5 weeks as soon as he winds up on the west coast.
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Senator Nurric. How do you deduct from that that the staff report is
historic?
Mr. BRADY. Senator?
Senator Nu/six. It seems to me everything you are saying is none of
these changes has been made, that they are all in the process. So how
do you conclude the staff report is historic when almost all the correc-
tions you have identified are all perspective in nature?
Mr. BRADY. Senator, what I am saying is?
Senator NuNN. You were a candid witness whe,n you were the
whistleblower. Now you are here and it seems to me you have to
maintain that same degree of candor. If you are going to correct these
problems, I think you ought to just candidly say so but to come here
and identify all the things you plan to do and then call the staff
report historic implying you have already made those changes, seems
to me is not in keeping with your past record of candor.
Mr. BRADY. Senator, some of the changes have been made.
Senator Nurrisr. Tell us what has been done?
Mr. BRADY. The analytical unit working with Customs is working
well and it has been working well for a couple of months. It is a major
addition to the enforcement apparatus in this area. The Deputy As-
sistant Secretary position has been created and an individual has been
selected and he will be on board within 4 to 5 weeks as soon as he
can sever his relationship with the Department of Justice.
Senator NuNN. He is not there yet?
Mr. BRADY. That's right.
Senator NUNN. All right.
Mr. BRADY. Third, there have been some major efforts made in the
field offices of the United States Commercial Service of the Depart-
ment of Commerce, to educate the business community as to what the
Soviets are acquiring in the United States and how they are working.
Now that program is not complete.
Senator NuNN. Every witness we had said they never even heard
from the Commerce Department on that. In fact, the amazing thing
is that Commerce is the agency that is supposed to have the liaison
with the business communities. Yet we can't find any witness who has
had a dialog with them on that subject.
We had a lot of witnesses, they talked to the FBI, Defense, but they
haven't heard from Commerce. Maybe you can detail for us what you
have done in communicating with the you
community.
Mr. BRADY. I will be happy to and it goes, Senator, from writing
to all exporters in the particular industry sector to alert them to the
fact that there is a procurement effort under way, to staaing major
conferences in various areas of the country. Ted Wu himself has
addressed. I know. at least two major conferences on the west coast.
Senator NuNN. Is he on your payroll now?
Mr. BRADY. No, but he did it because I couldn't go.
[At this point, Chairman Roth withdrew from the hearing room.1
Mr. BRADY. I specifically remembered those conferences and we had
some across this country. I personally have traveled across this country
dealing with the field offices to impress upon them the need to become
more involved in the diversion problem and they have been. The criti-
cism I have with the report is. I believe, it does not point out what we
have done internationally. It is very relevant to the Compliance Divi-
sion. The enforcement apparatus must be international if it is going to
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be any good. And that is where the large part of the problem lies.
And so I think we have moved in the last year, as I said, systematically
and quite aggressively in dealing with the problem.
And the problem is not only enforcement but it is also licensing.
We have cleaned up a backlog of 2,000 export license applications that
we inherited from the previous administration. We have the process
functioning, the interagency process functioning so we get decisions
on cases and on issues.
Senator NUNN. Have you cleaned up the backlog in the investiga-
tions and intelligence branches?
Mr. BRADY. No; we have not.
Senator NUNN. That was one of the criticisms. Is that historic?
Mr. BRADY. It is a legitimate criticism, yes, sir.
Senator NUNN. Have you really revised your whole law enforcement
training? Do you have people on board now who are capable in the
law enforcement area?
Mr. BRADY. There are announcements out for 15 positions that we
intend to put on the west coast-14 positions I guess it is?in which
we are recruiting for those jobs.
Senator NUNN. But you are not satisfied with what you have got on
board now?
Mr. BRADY. Absolutely not.
Senator NUNN. That is not a historic observation then?
Mr. BRADY. Well, it is in a sense, Mr. Chairman. I would have liked
the opportunity or another policy level official at Commerce, would
have liked the opportunity to comment on the report and to indicate
what we were doing and what we have done and, again, I want to stress
the fact that the Compliance Division specifically is one small part of
the overall enforcement apparatus that this Government directed to
this problem.
Senator NUNN. Mr. Brady, you don't have to convince us of that.
I have been in these 'hearings 5 years on the subiect. We know that, we
know you are not the only one. We don't put all the blame and efforts
on the Commerce Department. We are just simply looking as to
whether it makes sense for the Commerce Department to have a Com-
pliance. Division with a few people on board most of whom don't have
law enforcement experience, when you have a whole agency out there
that is trained in this area. That is the question. You can broaden it
and you are correct in broadening it. it is a much bigger question than
this. This is only one aspect of our whole hearing.
You mentioned that the Inspector General of the Commerce De-
partment has conducted a review of the Compliance Division whose
findings and recommendations will be published later this month; is
that correct?
Mr. BRADY. I believe so.
Senator Nuimt. Have you seen these recommendations yet?
Mr. BRADY. No, I have not.
Senator NuNN. Do you know the Inspector General?
Mr. BRADY. Yes, I do.
Senator NUNN. Have confidence in him?
Mr. BRADY. Yes, I do.
Senator NUNN. Do you think he has a broad perspective?
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Mr. BRADY. He is Inspector General. I think it is important that all
factors be put into any assessment of the enforcement arm and that
means the licensing function as well. And I know I may not be stating
this very well, but in this dual use area, you are not dealing with a
tank or an aircraft. You are dealing with a computer that may require
a license or may not. The licensing officer very often has to work very
closely with an investigator in determining whether or not a particu-
lar shipment is illegal, whether blueprints that may be exported require
a license or not.
Senator NUNN. You say you have not seen the Inspector General's
report?
Mr. BRADY. No, I have not. I have a feeling I know what he is going
to recommend.
Senator NUNN. It is our information that that Inspector General
reported started on April 19,1982, less than a month ago.
Is that consistent with your information?
Mr. BRADY. I believe that is correct.
Senator Nurrisr. We understand it was formally concluded on May
11, that is yesterday.
Mr. BRADY. That is not my understanding.
Senator NuNist. Well, in any event, the Inspector General's report
is not historic, is it, it would be rather current.
Mr. BRADY. I would hope that it would reflect the progress that we
have made, yes.
Senator NUNN. It should reflect the progress you have made?
Mr. BRADY. That's right.
Senator NUNN. We have been informed that that report will verify
all the findings, virtually all the findings of our staff. And that report
has taken place in the last 30 days. So once you read the report, we
would like for you to tell us whether that, too, is historic.
Mr. BRADY. I will be glad to, Senator. But I also think, or I would
hope, that the report would take into consideration, one, the broader
picture, and, second, the fact that we are well on our way to solving
the problems.2
Senator NUNN. You mean by the broader picture, you want the re-
port to center on the Department of Defense, Department of State,
Customs Agency.
Mr. BRADY. I want them to center on the fact it is we at the Depart-
ment of Commerce that asked the CIA to prepare this assessment, the
fact that we asked for it to be released because we have problems in
dealing with the business community.
We have problems in dealing with the press to elevate the level of
public consciousness. There are many people out there who still do
not believe that there is a problem. These are all part of an enforce-
ment apparatus.
Senator NUNN. I agree with that, Mr. Brady, but everything you
say, I grant everything you say is correct on that point but that doesn't
answer the question of whether you need a Compliance Di vision in the
Commerce Department.
2 The final inspection report of the Inspector General's Office. Department of Commerce,
regarding the Compliance Division was released to the Permanent Subcommittee on
Investigations on July 16, 1982. The report is reprinted in full beginning on p. 606.
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It doesn't answer the question .about whether you should continue
an operation that under several administrations has demonstrated very
vividly that it is not capable or it is not serious, one or the other, about
enforcing the law of the United States in this respect.
So you can broaden it all you want to and we will agree with every-
thing you say on that but that is irrelevant to the purposes of what we
are asking you, and that is whether the Compliance Division still
should be in the Commerce Department.
Mr. BRADY. Let me give you a statistic. You talk about seizures and
Customs seizures, 89 percent of the seizures made by Customs at the
ports of exit have to be returned because the items do not require a
license. That is the kind of fundamental basis that we hope to over-
come.
I accept the fact that our investigators are not well trained or the
bulk of them are not well trained in law enforcement but I think there
is a compensating factor in some cases that they do have knowledge of
the licensing system and they do have knowledge of the technological
requirements involved in the licensing process. And so I am not using
that as an excuse for not having good trained officials, believe me.
But what I am saying is, the situation is not black and white.
Senator NuNN. You are going to have maybe another 40 percent and
if you add 40 percent to what you have got now, that will get you up to
59 persons and those 59 persons in the Compliance Division, it seems
to me, are woefully inadequate to have any hope of enforcing this law
unless they largely are in a position of liaison between licensing and
Customs.
You are going to have to use Customs and the FBI to do it and the
question is: Do we need a layer between licensing and Customs in order
to communicate?
It seems to me you can shift a few of these people who are trained
in law enforcement into the licensing division.
They are probably very good people in that respect and let them be
liaison with an enforcement mechanism that is already in place and
that has hundreds of agents around the country and around the world
and has intelligence connections in almost every country of the world.
It just seems to me your position about compliance is just not a
logical position.
Mr. BRADY. Senator, you asked me about the backlog of investigative
cases. The Customs Service has 9,000 backlogged investigation cases.
Now I don't understand----
Senator NuNN. In the export area?
Mr. BRADY. No; across the board. But I would also point out that
their priorities. shift on what the crises of the moment are.
I have been informed just in recent weeks that they cannot provide
me the information I need to monitor our steel monitoring mechanism,
basic steel imports pursuant to the steel trigger pricing mechanism we
have and the 75 dumping and countervailing cases we are prosecuting
beca=, of lack of resources. So I think there is a question of going
from the frying pan into the fire with regard to Customs.
What I am trying to say is the issue is not black and white and I
think that a bard core, high level, professional establishment at the
Department of Commerce working with the FBI, the CIA, and Cus-
toms is the best way to attack
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Senator NuisTN. When can we expect that to occur? When can we
expect that high level, competent, professional group at Commerce to
be out there in the field enforcing the law?
What is the date that you are shooting for? Obviously you don't have
that now.
Mr. BRADY. That is right.
Senator NuNN. If you had it now we might not be asking these
questions.
Mr. BRADY. I think within 6 months we will have it.
Senator Nurusr. Six months from right now?
Mr. BRADY. That is right.
Senator RuratAN. We will stand in recess for the time it takes for
the chairman to get back here.
[Members of the subcommittee present at the time of recess: Sena-
tors Rudman and Nunn.]
[Brief recess.]
[Member of the subcommittee present after recess: Senator Roth.]
Chairman ROTH [presiding]. While we are waiting for the ogler
Senators to return, I believe the staff has some documents they want to
put into the record.
Ms. HILL. Thank you, Senator; yes, we do. I have three exhibits we
would like to have printed in the record. They are a signed and sworn
affidavit of John Rennish, special agent with the U.S. Customs Serv-
ice; a signed and sworn affidavit of Mike Dolphin, special agent with
the U.S. Customs Service; a signed and sworn statement of Charles L.
McLeod, special agent, U.S. Customs.
[The documents referred to was marked "Exhibit Nos. 29, 30, and
31," for reference and follows:]
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EXHIBIT NO. 29
Affidavit of John Rennish
I, John Rennish, an officer of the U. S. Customs Service headquarters in
Washington, D. C., make the following statement freely and voluntarily to Glenn
Fry, Ray Worsham and Fred Asselin, who have identified themselves to me as being
on the staff of the Senate Permanent Subcommittee on Investigations.
I am a Special Agent with the United States Customs Service. I am
assigned to the Customs Service headquarters in Washington, D. C. I have been a
Criminal Investigator with Customs for 15 years.
As a Criminal Investigator, I was assigned to the investigation of Manfred
Swarovski of Wattens, Austria in 1975. A member of a wealthy and influential
Austrian family, Swarovski, who was then about 34, owned and operated an optical
equipment business in Austria that specialized in manufacturing glass beads used in
reflection devices and paint for night vision purposes. The company was known as
M. Swarovski Ges. Mbh .3c Co. and was located in Amstetten, Austria. The
company's devices were used on highways in Europe and the United States.
Swarovski established two businesses in North America -- Swarolite of
Canada, Ltd., also known as Canasphere Industries Ltd., located in Moose Jaw,
Saskatchewan, Canada, and Swarolite, Inc., located in Columbia, Tennessee. In or
about 1974, Swarovski entered into all agreement with the Soviet Union to
construct a glass bead manufacturing plant in Russia.
In the spring of 1975, U. S. Customs agents were contacted by John Kiel,
president of Photo-Sonics, Inc., of Burbank, California. Kiel said that Swarolite of
Canada wanted to buy from Photo-Sonics a special gunsight camera, model KB25A,
used on the U. S. Air Force F-4 fighter aircraft. Kiel said the order for the camera
had been placed by Rod N. Parker, manager of Swarolite of Canada. Kiel said he
had informed Parker that he could not ship a camera to Canada. To make such a
shipment, Kiel said, would require a validated export license authorized by the U.S.
Department of State.
Kiel said he was bringing this matter to the attention of the Customs
Service because he suspected that Swarolite of Canada intended to ship the camera
from Canada to Austria. Kiel considered it very questionable that Swarolite of
Canada should want such a camera. He wondered what use Swarotite could make
of it. The gunsight camera could be modified so that it would have functions other
than its use on the F-4 fighter. However, even in a modified form, the camera
would still be an item controlled on the U. S. Munitions List and would require a
license for export. Moreover, the State Department did not want the camera
exported anywhere, not even to Canada.
Customs agents instructed Kiel to keep them informed of what Swarolite
of Canada did next. Shortly thereafter, Manfred Swarovski, through his Swarolite
of Canada company, requested that Photo-Sonics sell the camera but, instead of
shipping it to Canada, to send it to his plant in Columbia, Tennessee. Such a
shipment would not require an export license. Following the instructions of
Customs agents, Kiel agreed to ship the camera to Swarolite of Tennessee.
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With the assistance of U. S. Postal Inspectors, Customs agents monitored
the mailing of the camera. Rod Parker had indicated that the shipment would have
to arrive in Columbia, Tennessee, by a specific date.
Customs agents controlled the delivery of the package. The camera
package invoice and registered letter accompanying it were marked with these
declarations: "Above items are of U.S.A. origin and manufacture. Above
photographic equipment is under United States Department of State Munitions List
Category No. XIII (a), and as such must be export licensed by the U.S. Department
of State prior to export from the United States." A copy of the letter was also
packaged with the camera.
Customs agents conducted surveillance of the package as it was delivered
to the U.S. Post Office in Columbia, Tennessee. James Sproul, Swarolite manager
in Columbia, received the camera and delivered it to Swarovski, who was staying in
the Holiday Inn Motel at the outer city limits of Columbia.
Swarovski also was placed under surveillance by Customs agents. His
activities in Columbia seemed routine and included dining out and shopping. The
next day Swarovski was again under surveillance as he checked out of the Holiday
Inn Motel and boarded a flight to Chicago. From Chicago he flew to New York
City.
When Swarovski arrived in New York, I personally took full control of the
investigation and coordinated the surveillance activities concerning Manfred
Swarovski. Once in New York City, Swarovski checked into the Waldorf Astoria
Hotel. Customs agents, continuing their surveillance, took a room adjacent to his.
Swarovski spent the next two days in New York City. He seemed to be enjoying
himself considerably, shopping, dining out, frequenting several bars and
entertaining women friends in his room. In the midst of this round of activities,
Swarovski took steps to suggest he might be trying to alter his appearance. He
changed his manner of appearance frequently and began wearing dark glasses and
began styling his hair in a different manner. However, our surveillance went on
uninterrupted. Ultimately, 15 Customs agents were assigned to this detail.
Customs agents learned that Swarovski had reservations on a Lufthansa
flight from Kennedy International Airport to Frankfurt. He decided to leave on an
earlier Pan American flight for Munich. Swarovski checked out of the Waldorf
Astoria Hotel and went to the airport where he checked all his luggage through at
the Pan Am ticket counter. Swarovski then went to the predeparture lounge and
waited for his flight to be called.
Customs agents, operating under 22 U.S.C. 401(a), which gives them the
right to search luggage under these circumstances, went through his suitcases and
found the special gunsight camera among his belongings. Swarovski, who was
unaware that the search had taken place, was then approached by Customs Special
Agent Grattan and myself. In a routine manner, we questioned him as to whether
or not he was transporting anything of value in excess of $250.00 out of the
country. I asked, "Do you have anything that you are taking out of the U. S. that
requires a shipper's export declaration?" He was also asked if he had any
merchandise requiring a U.S. Department of State license. Swarovski said no to all
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three questions. I placed Swarovski under arrest. He was read his rights and given
the Miranda warning in English and German. Customs agents also found several
business cards of Soviet officials on Swarovski's person.
The export violation occurred, according to the U. S. Districts Courts'
interpretation of the law, at that moment when Swarovski checked his luggage
through to Munich at the Pan Am ticket counter in the JFK Airport terminal. We
believed that Swarovski intended to take the camera into Austria and there have
his freight forwarder ship the camera to a destination in the Soviet Union. If we
could have had access to official shipping documents in Austria, we could have
tried to demonstrate that he planned to transfer the camera to the Soviet bloc.
Unfortunately, however, because U. S. Customs agents received very little
cooperation from the Austrian government, we were not able to document or
otherwise establish that Swarovski intended to ship the camera from Austria to the
Soviet bloc. Austria, a neutral country which shares borders with the Soviets bloc
nations of Hungary, Yugoslavia and Czechoslovakia, was not supportive of U. S.
Customs' investigative efforts.
Records of Swarolite of Canada were given to U. S. Customs by a
cooperating co-conspirator. These records revealed that on previous occasions
Swarovski had bought American high technology equipment with military
applications and sought to export it to an Austrian freight forwarder without the
proper licenses. However, once again because the Austrian government would not
provide assistance, the U. S. Customs Service was unable to document or otherwise
establish that these items were shipped to Soviet bloc nations. Further inquiry by
Customs indicated that Swarovski had tried but failed to buy from the National
Aeronautics and Space Administration a NASA moon-mapping lens.
There is no attempt provision in the current export control statutes.
Because of that, the violator can be apprehended only after he actually does the
act of exporting; in Swarovski's case, the act of violating the law occurred at the
moment he checked his luggage containing the gunsight camera through at the Pan
Am ticket counter. It was then that he presented his merchandise for export. This
requirement means that surveillance must be continuous on a suspect until that
moment when he violates the law. The cost of such surveillance can be prohibitive
if it goes on too long. Consider, for example, that instead of staying only two days
in New York City he had stayed two months or longer. At some point, Customs
might have been forced, because of financial considerations involving a 15-man
surveillance team, to curtail the inquiry and hope to detect him at the airport. But
any number of things can go wrong once the surveillance is stopped. Swarovski
could have rented a car and driven to Boston or Newark and flown abroad from
there. The slightest change in plans could have resulted in his escaping Customs
and successfully carrying the camera out of the U. S.
The lack of cooperation in the Swarovski inquiry from Austria was not
unique to this case. U. S. Customs receives poor cooperation from Austria in many
export violations. Another neutral European nation, Switzerland, does not make a
great effort to help in export violations in many cases.
U. S. Customs was fortunate to have had cooperation from the beginning
of the case from John Kiel, president of Photo-Sonics, Inc. Had Kiel not reported
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to us when he did, Swarovski might have taken possession of the camera in Canada
and shipped it from there to Western Europe.
Customs agents enforcing export laws do not have the authority to arrest.
They can Investigate, search and seize but there is no statutory authority under the
export laws to arrest. Arrests can be made if they are in states where Customs
agents are deemed to be peace officers of that state. Customs agents have no
state peace officer certification in New York. Swarovski's arrest by Customs
agents was only one aspect of the inquiry that Swarovski's attorney challenged in
court.
The attorney, Richard H. Kuh, instituted suppression arguments and
appeals which lasted in court hearings for the next 26 months. Swarovski's search,
seizure and arrest were attacked. Ultimately, the suppression and appeals hearings
proved unsuccessful. But the arrest issue went all the way to the Supreme Court
where it was upheld as a citizen's arrest. His appeals exhausted, Swarovski pleaded
guilty and served a two-year prison term.
The judge in the trial, George C. Pratt of the U. S. District Court in the
Eastern District of New York, noted the difficulties U. S. Customs agents must
work under in export cases. Citing the fact that export laws give Customs agents
the right to seize and search in connection with munitions violations, but not to
arrest, Judge Pratt said:
The fault, if there be any, lies with Congress which has
failed to grant Customs officers statutory authority to make
arrests under the Munitions Control Act. Congress passed the
Act with broad powers of search and seizure, and commanded
the Secretary of the Treasury to enforce it. Congress did not,
however, take the additional step and grant to the Customs
agents specific statutory authority similar to that granted to
them to apprehend narcotics and revenue violators. As a result,
Customs agents are powerless to arrest on the scene those
persons who are caught in an attempt to illegally export under
the Munitions Control Act.
The lack of statutory authority to make an arrest described by Judge
Pratt is still a restriction that Customs agents must work under in export
violations.
I would like to append to this affidavit two exhibits:
1. Docket No. 75 CR 795, Memorandum and Order on
Suppression Motions, United States of America against Manfred
Swarovski, U. S. District Court, Eastern District of New York.
2. Docket No. 76-1556, United States Court of Appeals,
Second Circuit, United States of America v. Manfred
Swarovski, September term, 1976.
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I have read, reviewed and initialed each page of the foregoing statement,
and I swear to the best of my knowledge that it is true and correct.
:John pennish )
January '-2? , 1982
Sworn?apid/esubscribed to before me
,this day of January, I982
N o fa r y Public
My commis ion expires:
/
7
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7,9CHIBIT NO, 30.
AFFIDAVIT
I, Michael Dolphin, a Special Agent with the U.S. Customs Service,
Baltimore, Maryland, make the following statement freely and voluntarily to
Glenn Fry and Jack Key of the Senate Permanent Subcommittee on Investigations.
I have been a Criminal Investigator with Customs for four and a half
years. I initiated the investigation of Werner R. Hilpert in July 1980.
Later on, I discovered the involvement of Rolf Peter Hems and Volker Nast.
Nast and Hernia, natives of West Germany, conspired to purchase a Microwave
Surveillance Receiver system and smuggle it out of the United States to
Hungary without obtaining a validated export license from the State Department,
Office of Munitions Control. Nast and Hems were assisted in their plan by
Werner Richard Hilpert of Princeton, New Jersey.
The Microwave Surveillance Receiver system, known as the model MSR-903,
is offered for sale by the Micro-Tel Corporation, 6310 Blair Hill Lane, Baltimore,
Maryland. Designed to receive, display, and analyze microwave signals, it is
primarily intended for, military and other surveillance uses. The MSR-903 has
been designated as a defense article by the President of the United States and
is also included on the United States Munitions List under Category XI(c).
For that reason, a special export license or written approval from the Department
of State is necessary to export the MSR-903. An applicant for such a license
is required to reveal the country of final destination, purpose of its use, and
the intended end-user of the equipment.
Customs learned that in June, 1980, Rolf Peter Henna wrote to Werner
Hilpert requesting him to place an order with Micro-Tel Corporation, Baltimore,
Maryland for a MSR-903. Soon thereafter, Hilpert contacted Micro-Tel and placed
the order. Micro-Tel advised Hilpert that he must apply for a license with the
State Department if he intended to export the MSR-903. In August, 1980 Hems
wired $12,000 to Hilpert for a down payment on the MSR-903. Hilpert subsequently
remitted a check to Micro-Tel for a $10,000 down payment. At this time, Micro-Tel
again advised Hilpert, in writing and orally, that a license was required for
export.
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Hilpert passed that information to Harms about the export license.
Henna, after consultation with Nast, told Hilpert to go ahead with the purchase
but that an export license would not be obtained.
Before the delivery of the MSR-903 officials of Macro-Tel Corporation
once again advised Hilpert of the export license requirements.
Hilpert told the officials from Macro-Tel Corporation that the export
license would be obtained by someone else associated with the purchase.
It was arranged for the MSR to be picked up in Baltimore by Hilpert in
January 1981 after a motion activated beeper had been installed pursuant to a
Court Order, in the fiberglass suitcase used to transport the MSR-903. The MSR
weighs 78 pounds and is the size of a large suitcase. In January 1981, at the
time Hilpert was to receive the NSR, Customs established surveillance of his
residence, and Micro-Tel's location.
Hilpert's wife and Rolf Henna picked up the MSR at Macro-Tel and paid the
balance of the $47,000 purchase price. It was learned that Vblker Nast provided
part of the funds with which the MSR-903 was purchased. In particular, on
January 15, 1981, Nast purchased Bank America travelers Checks in the amount of
$39,000 in West Germany.
Special Agents of the U.S. Customs Service, with the aid of a Customs
helicopter, followed Mrs. Hilpert and Henna to Princeton, New Jersey to Hilpert's
residence. The Hilpc.rts and Hems spent that evening at Hilpert's residence.
The next morning Mrs. Hilpert and Henna placed a large package in their car and
drove to Mr. Hilpert's office. From the office they went to lunch and proceeded
to New York City. Hems left Mrs. Hilpert's vehicle in New York City with the
package and took a taxi to JFK Airport. Customs continued following Herms until
he checked all baggage with Pan American Airlines at JFK Airport. At that point
Customs agents arrested Hernia, advised him of his rights, and took custody of
the MSR-903 which had been checked in as baggage. After initially denying any
knowledge of the MSR, hex-ins admitted that he was sent by Volker Nast to pick
up the equipment.
From the time of the initial pick-up of the MSR-903 on January 19, 1931,
until Herms arrest the next day approximately eighteen (18) Customs personnel
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were involved. Four separate Customs vehicles from Baltimore followed the
1 ilpert vehicle to the beginning of the New Jersey TUrnpike when surveillance
uas taken over by personnel from the Philadelphia Office. The vehicle was
followed to Hilpert's residence in Princeton, New Jersey, where other personnel
were manning a command post. A fixed video surveillance unit was installed
in the vicinity of Hilpert's residence to monitor the activities. Customs
personnel from Newark, New Jersey, had Mr. Hilpert under surveillance at his
place of employment and followed to his residence.
The surveillance was also aided by a helicopter which followed the
vehicle from Baltimore, Maryland, to Princeton, New Jersey, on January 19, 1981.
On the next day the helicopter followed Hems from Princeton, New Jersey, to
the vicinity of JFK Airport.
Mast is a fugitive from justice residing in West Germany. ,He was
previously involved in the illegal exportation of controlled commodities in
1976 with two U.S. businessmen, Gerald R. Starek and Carl E. Story of I. I.
Industries, Sunnyvale, California.
In the United States District Court in Brooklyn, New York, Rolf Peter
Hems pled guilty on February 27, 1981, to a charge of attempting to export
the MSR-903 without the required license. Mr. Hems was confined in the
Metropolitan Correctional Center in New York from his arrest on January 20,
1981 until his sentencing on May 11, 1981. Chief Judge Jack B. Weinstein,
United States District Court, Eastern District of New York, imposed the maximum
sentence of two years, which was suspended, and placed Hems on probation for
a period of five years. Hems was permitted to return to West Germany.
On May 26, 1981, Volker Nast was charged with a two-count indictment
in Baltimore, Maryland, for conspiracy in violation of Title 18, United States
Code, Section 371, and with aiding and abetting an attempt to violate the Arms
Export Control Act, in violation of Title 18, United States Code, Section 2,
and Title 22, United States Code, Section 2778.
Werner Hilpert pled guilty, pursuant to an agreement with the Government,
on 1,kly 1, 1981, in United States District Court in Baltimore, Maryland, to a
charge of aiding and abetting the attempt to export the MSR-903 from the United
States without the requisite license. He was subsequently sentenced on
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July 9, 1981, and placed on three (3) years probation and ordered to pay a
$10,000 fine. Under his plea agreement, Mr. Hilpert agreed to cooperate with
the Government and to provide any information within his knowledge concerning
the alleged conspiracy.
During the course of this investigation the Customs Attache in Bonn,
West Germany, also played an important role in following up on investigative
leads and responding to the =,e leads within a short period of time. When
the MSR-903 was picked up on January 19, 1981, the Customs Attache in Bonn
was notified and was prepared to coordinate a continued surveillance with
the West German authorities if this was required.
The Department of State Office of Munitions Control had to research
their records in order to determine that an export license had not been issued
for the MSR-903. During the investigation it became necessary to immediately
check the names of individuals and companies which became known. An up to
date review of all applications was necessary in order to be positive that an
export license was not submitted.
The Federal Bureau of Investigation was kept aware of developments in
this investigation and provided excellent cooperation to the U.S. Customs Service.
I have read, reviewed and initialed each page of the foregoing
statement, and I swear to the best of my knowledge that: it is true and
correct.
'1/7',4LAk 7.f5,'.111AL
Miaael Dolphin
April , 1982
hwotin sod subscribed to before me
this _Ls._ day of April, 1982.
)n.-
Nofzu- Public
My comission expires:
_July 31 11/86
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EXHIBIT NO. 31
STATEMENT OF CHARLES L. McLEOD
Special Agent, U.S. Customs Service
For The
U. S. Senate Permanent Subcomrittee on Investigations
ky name is Charles L. McLeod and I am a Special Agent with the
U. S. Customs Service assigned to San Francisco, California. I have been
employed with the Customs Service for eleven years, ten as a criminal
investigator and one as a Customs Security Officer. I am a college graduate
with a B.S. degree in business administration from Babson College, Wellesley,
Massachusetts. I have, as a criminal investigator, attended U.S. Treasury
Department,Criminal Investigator School, Customs Basic School, Customs Fraud
Investigation School and White Collar Crime School. I am thirty-four years
of age:.
During my career as a criminal investigator, I have conducted and
participated in investigations involving smuggling, fraud, theft and violations
of export laws. In 1977, I was the recipient of the Treasury Secretary's Award
for the investigation I conducted of II Industries, an investigation I mill
discuss later in this statement.
I have been involved in export control cases since 1975. During a
period of three years between 1975 and 1978 I worked export control cases
exclusively. In 1980 I was assigned by Customs to set up a program in the
San Francisco office which was to be geared to work export violations that
involved the. Soviet Union or Soviet Bloc nations. The program was headed by
me with the assistance of John Bloom, a Customs Inspector. lifter two months
I concluded that no one agency appeared to have a good intelligence data base.
The FBI Ws willing to cooperate; however, it had no real in-depth information.
The State Department only had information relevant to export license applications.
It had no valuable intelligence data' that could be used ?to get a handle on
violations. There was no reservoir of information because there simply was not
but a handful of prior cases in which to refer. The intelligence community did
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not .communicate, at least to my level, what the Soviets needed regarding
technology or what the Soviets considered a priority.
Customs has been mandated to enforce violations of the Arms Export
Control Act, which is administered by the State Department's Office of Munitions
Control. To this end I can say that Customs has received excellent support
from OMC. OMC has always expeditiously provided me whatever information I
requested during my investigations. To my knowledge and experience there has
been effective coordination and cooperation between Customs and OMC.
The Department of Commerce is mandated to enforce the Export
Administration Act. Customs has delegated jurisdiction to enforce this
statute; however, Customs has been effective and is capable of investigating
violations of both statutes. My personal opinion is that .export control
violations are an area which demand thorough attention and priority,
particularly those which have an impact on national security. It is a
relatively new investigative area that contains inherent problems that few
investtgators have confronted. I would like to relate to you one investigation
I conducted during 1975 and 1976 of II Industries and Kasper Instruments.
The II Industries case related to violations of the Export Administration
Act. Many of the investigative impediments I confronted during my
investigation still exist today.
I first: became involved in the II Industries case in July, 1975
when I assisted the Department of Commerce in a preliminary investigation
of II Industries and Kasper Instruments of Sunnyvale, California. During
March or April of 1975, Commerce received an allegation that certain semi-
conductor manufacturing equipment from II Industries and Kasper was
appearing in the Soviet Union. The equipment was being shipped via an
exporting company named Semi-Con of Mays Landing, New Jersey. Semi-Con
was run by Edward Breslin, a former U. S. military intelligence officer.
It was subsequently learned that Semi-Con was a creation of Richard Mueller,
a West German businessman, whom I will describe in more detail later in this
statement. Commerce's initial action was to telephone officials at II Indus-
tries and Kasper Instruments and inquire as to whether either firm had sold
equipment for use in the Soviet Union. Officials at Kasper admitted to
trading with Semi-Con but not with Mueller or the Soviets. II Industries
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- indicated that they had not conducted business with any of the aforementioned
entities.
In July, 1975, three months later, Commerce sent one investigator to
the West Coast to interivew officials at II Industries and Kasper Instruments.
I and three other Customs agents and an Assistant United States Attorney assisted
Commerce with interviews. Examination of business records revealed that semi-
conductor manufacturing equipment originally destined for Semi-Con in New Jersey
was in fact to be shipped to USA Trade and Semitronics in Montereal, Canada.
Documentation for the equipment disclosed that although the electrical power
usage had been converted for European voltage standards, Canada was to be the
"end use destination. There were even invoices for charges of $175.00 per
unit for the conversion of the electrical systems.
Following the interviews and records examinations, Customs prepared a
report for Commerce concluding that illegal activity appeared probable. Customs
did not pprve:the investigation because, at this point in .time, its role was to
assist Commerce. In August, 1975, Commerce prepared a report which recapped the
activities of the preliminary investigation. The report had no indications of
further actions to be pursued, no conclusions, and no recommendations.
In September, 1975, the import/export manager of II Industries informed
Customs that II Industries and Kasper Instruments had in the past and were
presently exporting, through diversionary means, licensable semiconductor
manufacturing equipment that was ultimately intended for end use in the Soviet
Union. Customs learned that ,Robert C. Johnson, President of Kasper Instruments,
Gerald Starek and Carl Storey, officers of II Industries, and Richard Mueller
conspired to circumvent licensing regulations,in order to. export equipment to
the Soviet Union.
Richard Mueller is a West German buinessman who operated at least two
known businesses in West Germany named Techimex and Semitronic. Mueller was
no stringer to U.S. authorities. He had previously been implicated in 1974 where
he was involved in the illegal diversion of high technology equipment to the Soviet
Union by Honeywell, A.G. of West Germany.
Mueller allegedly established Semi-Con in Mays Landing, New Jersey, as
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a means to export semiconductor equipment to Europe. It was learned that
when Conmerce made inquiries of Semi-Con, Mueller came to the United States
and met with Johnson, Starek and Storey to determine a new export'route for
the II Industries and Kasper Instruments equipment. It was decided that
Montreal, Canada, would be the route in which to export the equipment through
two companies, USA Trade and Semitronics. Canada was an acceptable route in
that export licenses are not required when-shipping products for end use in
Canada. Therefore, equipment originally destined for Semi-Con in New Jersey
was rerouted to Montreal, Canada. Following the July 1975 on-premises inter-
views and records examinations by Customs and Commerce, II Industries and
Kasper Instruments decided to seek another exporting route. It should be
noted that Customs coordinated with the Royal Canadian Mounted Police (RCMP)
and learned that OSA Trade and Semitronics did not physically exist; however,
the address of USA Trade was occupied by Kuhn and Nagel, a Canadian freight
forwarding company. The RCMP investigated Kuhn and Nagel 's dealings with
shipmentsgreirMII'industries and Kasper Instruments and learned that the
equipment was shipped to SeMitronics in Zurich, Switzerland, without validated
licenses. This was a violation of Canadian law and Kuhn and Nagel were
prosecuted by Canadian authorities.
Customs learned that II Industries and Kasper were planning to ship
equipment, ultimately destined for the Soviet Union, via Kansas City, Kansas,
through an intermediary "dummy" company. . II Industries and KaSper recruited
a West German National, Frederick Linnhoff, who resided in the Kansas City
area, obtained and operated warehousespoce in Kansas City and traded as Paul
Allen of Allen Electronics. Linnhoff was to receive II Industries and Kasper
equipment from the West Coast, alter the supporting documentation to misrepre-
sent the description and value of the freight and to change the ultimate
destination to Hamburg,West Germany. Altering the supporting documentation
of freight is a method used so as not to arouse suspicion of Customs or
Commerce Inspectors thereby circumventing export licensing regulations. Once
the freight is shipped to Hamburg, there is little that can be done to prevent
the goods from being forwarded to the Soviet Union.
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II Industries sent two shipments of licensable equipment through
Kansas. The first shipment was ultimately traced, due to efforts between
German Customs and the U.S. Customs Attache in Bonn, through Hamburg, West
Germany, and on to East Germany. Through information received, Customs was
able to monitor the second shipment II Industries was sending through Kansas.
This shipment contained a sensitive "state of the art" piece of equipment.
Through coordinationwith Commerce, who did' no6aant the shipment to leave
the U.S., it was decided to substitute the shipment. The state of the art
equipment was substituted with sand bags through the cooperation of the
freight forwarder. The original shipment was seized. The purpose of the
substitution shipment was to trace the export route and determine its
ultimate destination without risking losing the equipment to the Soviets.
Linhoff had changed the inscription on the original shipment (did not exist)
and the destination as Reimer Klimatechnik, Hamburg, West Germany. Reimer,
we later learned, was an alias used by Volker Nast, a West Germany associate
of Richard Mueller-, who was also known to be in the business of procuring
U.S. technology for the U.S.S.R.
While the substitution was being made, searches were conducted of
II Industries, Kasper Instruments, Allen Electronics and Linnhoff's residence.
.Incriminating evidence indicating shipments were going to the U.S.S.R. was
discovered. Indictments were drawn and issued for Robert C. Johnson of Kasper
Instruments, Linnhoff, Starek and Carl Storey of II Industries. Linnhoff fled
to Germany and the others ultimately pled guilty to a felony.
Linnhoff was subsequently interviewed in Germany by German and U.S.
Customs and stated that the shipments were destined for the U.S.S.R. and that
he had been advised by Nast that the Soviets had received a shipment of sand.
During the investigation of II Industries and Kasper, I learned that
Richard Mueller elicited the services of John Marshall through Carl Storey.
Marshall is the former owner of Advanced Micro Devices, Santa Clara County,
California. Marshall, an expert in the semiconductqr manufacturing industry,
agreed to provide consulting services to the Soviet Union on behalf of Richard
Mueller: Marshall visited the Soviet Union on at least two occasions to provide
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consultation for the proposed construction of semiconductor manufacturing
facility. Marshall. eventually stopped providing consultation to the Soviets;
however, his business partner, John McCracken, succeeded him. McCracken made
at least one trip to the Soviet Union, again on behalf of Mueller, to provide
similar consulting services. McCracken, like Marshall, soon stopped providing
any services to the Soviets.
As I mentioned earlier, Richard Mueller played a role in the
diversion to the U.S.S.R. of technology involving Lother Haedicke, a
representative of Honeywell, West Germany. Customs learned that II Industries
and Kasper Instruments were linked to Haedicke during this time. Haedicke
conducted business with a West German, Jerry Gessner, who was the European
sales representative for Applied Materials, a Silicon Valley firm which
produces semiconductor manufacturing equipment. Gessner also acted as the
European sales representative of II Industries and Kasper Instruments. It
was eventually learned that Gessner was also in the employ of Richard Mueller.
Haedicke processed orders through Honeywell to export semiconductor manufac-
turing equipment from II Industries and Kasper. Kasper and II Industries
would export the equipment to Gessner at Applied Materials in Germany who
would work with Haedicke to ship it to the eventual customer. Haedicke was
subsequently prosecuted by the West German authorities for providing the
Soviet Union with information detrimental to its national security.
It is my personal observation that the Soviet Union lacks advanced
technology relating to the semiconductor manufacturing industry. During the
past six to eight years, there has been evidence which illustrates that the
Soviets have made great efforts, at a great expense, to obtain technology
relating to semiconductor manufacturing. The Soviets attempted in 1974 to
obtain, through illegal means, semiconductor manufacturing equipment through
Lother Haedicke of Honeywell, A.G. Further attempts were made in 1975 through
Richard Mueller, Volker Nast, II Industries and Kasper Instruments. Most
recently, it has been documented that from 1976 until 1980, the Soviets
obtained similar equipment through Anatoli Maluta and Werner Bruchhausen,
another West German business intermediary. The Soviets even solicited
consulting services from U.S. citizens, John Marshall and John McCracken.
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It seemed evident that the Soviet's aim was to construct a semiconductor
manufacturing facility by using U.S. technology and equipment. The equipment
the Soviets obtained from II Industries and Kasper Instruments comprised only
20% of the equipment necessary for a semiconductor facility. Assuming the
Soviets wanted 100% U.S.. technology for its proposed facility, where were they
obtaining the remaining 80% of the necessary equipment? Our law enforcement
operations, Commerce and Customs, have not assumed a proactive approach to
detecting where the Soviets intend to obtain needed equipment. It would be
possible, however, to more effectively control that which the Soviets have
targeted through adequate intelligence to the agents level of operations and
by devoting adequate resources to the investigation. For instance, if law
enforcement had intelligence that the Soviets were planning to construct a
semiconductor plant using predominatly U.S. technology, those agencies
responsible for export controls could more effectively 'monitor the most
likely.industy to_be approached by them. The Soviets have taken advantage
of the weak export control efforts of the U.S. to obtain whatever they need.
The Soviets, in most instances, know exactly what technology or equipment they
need. They contract to procurement groups such as Mueller, Nast, Bruchhausen
and others to obtain what is needed. Cost is no object to the Soviets, making
it an extremely lucrative line of work for intermediaries. These intermediaries
form companies with the U.S.to purchase equipment which is then exported to a
friendly West European nation or neutral nation (Switzerland, Austria, or
Lichtenstein) and transshipped on to the Soviet Union.
Circumventing or violating the U.S. export controls is a relatively
easy task. There simply has not been enough.attention or priority devoted to
the enforcement of this area. Most federal agencies have little or no juris-
diction in this area: Those that do, Commerce and Customs, have had limited
success. The past efforts made by the U.S. to enforce export control laws
has been weak. Today, I can state that Customs has given high priority to
this area of enforcement and I am optimistic about potential results. Export
violation cases require investigation both domestically and abroad. In the
past, the U.S. had received little cooperation or empathy from our allied law
enforcement agencies when pursuing export violators. Neutral nations strictly
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prohibit U.S. investigations of any kind within their countries whereas
other allies do not appear to consider the violations serious enough to
cooperate. This attitude may possibly be encouraged by our own lack of
priOrity to export violations.
Today, Richard Mueller, Volker Nast, and Frederick Linnhoff are
all fugitives from U.S. justice but are free men residing in West Germany.
Nast was indicted by U.S. authorities a second time, as late as 1981, for
attempting to illegally export a U.S. Munitions list item destined for
Hungary; yet he is still a free man in Germany. Starek, Storey and
Johnson never served prison sentences, and to my knowledge those U.S.
perpetrators in the past received light prison terms and even lighter
administrative sanctions. I believe it is time for our Government to
approach export control with dedication, priority and with the cooperation
and coordination of those agencies who have been mandated with the
responsibilities and jurisdiction.
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I have read, reviewed and initialed each of the eight pages of
the foregoing statement, and I swear to the best of my knowledge that it
is true and correct.
Sworn and subscribed to before me
this ic.) day of 1982.
Notary Public
My commission _expires:
CHARLES L McLEOD
Witnessed by me as Acting Special
Agent ln Charge.
-
?.;
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Ms. HILL. Also we have several other statements that I would like to
introduce as exhibits to be filed with the subcommittee.
One is a briefing on duel use technology transfer prepared by Col.
Kenneth Evans with the U.S. Army, a statement prepared for the
subcommittee by the American Society for Industrial Security, a
statement prepared by the Computer and Business Equipment Man-
ufacturers Association, a statement prepared by the Electronics In-
dustries Association and a statement prepared by the Scientific Ap-
paratus Makers Association.
[The documents referred to was marked "Exhibits Nos. 33, 34, 35,
36, and 37, for reference, and are retained in the files of the sub-
committee.]
Ms. HILL. In addition, we have a bulky exhibit which contains
numerous documents and court exhibits which have been received by
the staff durinc, the investigation which I would like to make part of
the record, and, Mr. Chairman, I would ask that the record be allowed
to remain open for about 10 days because we do expect to receive other
exhibits that we have requested at this time.
[The documents referred to was marked "Exhibit No. 38," for refer-
ence and are retained in the files of the subcommittee]
diairman Rom. So ordered.
Mr. WETLAND. Mr. Chairman, just so it is clear for the record, does
minority counsel want to have all of those affidavits and association
statements published or merely the affidavits?
Ms. HILL. We want them all in the record as exhibits. Mr. Chair-
man, we ask that the statements be introduced into the record as
exhibits but we ask that only the three affidavits be printed.
Chairman ROTH. With that amendment, it will be so ordered.
[At this point of the hearing, Senators Nunn and Rudman entered
the hearing room.]
Chairman ROTH. Senator Rudman?
Senator RUDMAN. M r. Brady, I don't know whether the reference
to historic should have been prehistoric but let me just get a few things
straight.
What was the date of your swearing in?
Mr. BRADY. June 13?
Senator RUDMAN. I thought it was last spring.
MT. BRADY. Right.
Senator RUDMAN. Around the 13th of June, which means you have
been on the job now for just a bit short of a year. In terms of results,
actually results of getting things turned around, I think you would be
the first to say that at this point that really hasn't happened, wouldn't
you agree?
Mr. BRADY. In terms of the organizational changes and retraining
the personnel, making the changes we want made, you are absolutely
right. Senator, I think, however, the changes you are implying should
have taken place, do not happen overnight.
Senator RUDMAN. That is exactly what I am getting to. There had
been really two or three major criticisms of Commerce and, of course,
the suggestion, I think, made out of frustration on the part of many of
a transfer.
[At this point of the hearing, Senator Nunn withdrew from the
hearing room.]
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Senator RUDMAN. I have read with some interest this February 1980
hearing at which you and others testified, and you, yourself, addressed
some of those very problems in that hearing.
The problem is that you are now here at this hearing and the burden
is on your back. And I think Senator Nunn is probably correct in his
assessment of the Progress made to date. But believe me, lust so we have
the record straight, in those two or three areas that you believe were
problems when you arrived there, which in response to a ouestion just
before we had to leave for that vote, you said would be addressed, you
thought with results within 6 months. Just in terms of getting the rec-
ord very clear at this point in the hearing, let me now just recap those
initiatives which you have undertaken that you think will lead to those
results over the next 6-month period, so that if we have a hearing 6 or
8 months from now we can now go back to the hearing record and
take those items, look at what you have done and see what the results
actually are.
Mr. BRADY. Senator, I would first have to preface my remarks by
saying that without the knowledge of what the threat was. knowing
how the Soviets were operating, we could not take the specific organi-
zational steps that we have taken.
[At this point of the hearing, Senator Nunn entered the hearing
room.]
Mr. BRADY. We have, one, created a deputy assistant secretary for en-
forcement which will vastly upgrade the function in terms of its visi-
bility.
Second, the Compliance Office has already received additional re-
sources in the form of 15 positions for the west coast and we now have
personnel actions in process to hire those individuals.
Third, we have created an analytical unit within the Office of Export
Administration, cutting across a couple of divisions, as a matter of
fact, including the compliance division as well as the licensing division,
that is being tremendously successful in terms of showing us the routes
of diversion, likely diversions, et cetera.
Fourth, we are creating a foreign availability assessment center.
We have an individual on board now and there is recruitment action
out for others.
Within the intelligence agency at the prodding of Secretary Bal-
drige, Secretary Olmer, and myself, there has been created a functional
unit totally dedicated to the technology transfer question in terms of
intelligence information. This information is now being made available
to us.
Every week, and my deputy twice a week, as well as the director of
the Compliance Division, the position that is now vacated, we review
all of the intelligence leads provided.
Very often we have difficulty on sources and we have to wait to use
the information, but nevertheless, we get it. We are using that.
We will be restructuring the office, abolishing positions, abolishing
certain units, and I would wrap this up by saying that the Secretary,
as well as the Under Secretary, have indicated a total commitment to
do whatever is necessary in terms of resources to get the job done.
Senator RUDMAN. So if I understand your testimony correctly, what
you are telling us here this morning is that upon taking over last June,
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with the background you have and your knowledge of some of the
problems, but obviously not all, you proceeded to evaluate the threat,
to look at the organization, to meet the threat once you had that evalua-
tion?I assume CIA and DIA probably with their input?and finally
sometime midway into your year., you started these four major initia-
tives, the latest of which has been the hiring of someone who obviously
we have a great deal of respect for who understands the nature of the
kind of litigation which is highly specialized.
Mr. BRADY. Precisely.
Senator RUDMAN. So you took about 6 months to find out what you
really needed. You are now in the process in the second 6 months of
organizing that task to meet the threat, to meet the problem, and you
are telling us sometime between now and the first of the year, you
should be able to come and show us specifically, (a) the evaluation,
(b) the implementation to meet the requirements set forth in the eval-
uation, and (c) the results.
Mr. BRADY. That is right. That is absolutely correct, Senator. I for-
got to add the major impetus that we undertook as an administration
was to deal with the international aspects of the diversion problem,
which are far, far greater than the purely diversion aspects or even the
intelligence, counterintelligence problems domestically. We did this,
beginning a year ago, when the President went to Ottawa. So to say we
have not been very active and very aggressive in the general technology
transfer area is simply not consistent with the facts.
Senator RUDMAN. I think in fairness to your committee staff and
yourself, the report done by the staff is probably historically correct
and it probably is currently correct in some areas because by your own
testimony you have only started to implement during this year what
you want to do.
In fairness to assess whether or not there ought to be legislative
action to change jurisdictional lines, I think we ought to give you
an opportunity to do what you think has to be done and then to look
at it again at some time in the future.
I have one last very brief question, Mr. Chairman.
In your testimony back in February, I believe it was February 20,
1980, one of the things that you referred to, which is quite under-
standable, was the difficulty in assessing the nature of some of the
items that had to be licensed or decisions to be made on licensing
because of their highly technical nature; you were having difficulty
at the grade levels of entry into Government service to hire the people
with the kinds of technical background to look at a particular chip,
microchip, microprocessor, a piece of laser technology, a piece of
grinding technology and you say this has very serious impl:ications.
People have to know what they are looking at. My question is:
Has that become any better?
Mr. BRADY. No; it has gotten worse. As a matter of fact, Senator,
we had thought throughout the Government that the Soviets, or gen-
erally for that matter, even the West, were not able to extract tech-
nology, to any significant extent, from a chip or a number of high
technology practices.
Frankly, we are reassessing it in that respect because they may be
able to do it in a better way than they have which makes, again, the
problem that much more difficult.
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I would not be candid if I didn't say today that this problem is
monumental. We are never going to solve it entirely; we are never
going to stop the total leakage of technology to the Soviet Union
simply because we are a free country. We have free borders. It is just
a massive problem, and the things I outline in my oral statement
today, such as the growth of multinational communications, the
mobility of people, the role of the academic institutions are all vast
problems and we will address them, and I think we can make sub-
stantial progress in stopping the leakage but it will never be shut.
Senator RUDMAN. What resources do you have available to you to
give you the kind of advice that you need to make decisions which are
going to be based on the evaluation of highly technical information?
Mr. BRADY. This is one of the areas we have addressed in the last
year, and my deputy has addressed much more directly. We are having
difficulty because of the grade structure to bring the people onboard,
the engineers we need. We have some very good engineers onboard.
We need more and we are recruiting for that.
As a matter of fact, one of the things we have done is to try to shrink
the support arm of the licensing function to get more actual engineers,
people to deliver the product. We have had fairly good success with
that. To address the backlog of the 2,000 applications that we had
when we came into office, we got on loan from the Department of De-
fense, as well as NBS, some technicians and scientists to address that
backlog.
Senator RUDMAN. Do you still have access to them? Is there any
formal or informal working relationship? That is the reason for my
question because over at the Defense Department, NASA, and a few
other agencies, there are very sophisticated scientists as well as engi-
neers who are able to do some assessments.
Do you have accessibility to them?
Mr. BRADY. We use the Department of Defense personnel, including
the people in the labs extensively. I am not sure if there is a formal
agreement. DOD has a veto over some of the actions we might want to
take and, therefore, they have a statutory responsibility. So that we
use them extensively.
Senator RUDMAN. Thank you, very much.
Chairman ROTH. I have no more questions but I would like to make
an observation.
I support both what Senator Rudman and Senator Nunn have said.
The problem, Mr. Brady, has been too often in these hearings that we
hear about plans and then when we hold hearings later, nothing hap-
pens. It is very aggravating and disappointing. I don't think that is
going to be the case here, but I think that the subcommittee has under-
scored a very important need for corrective action.
I would urge you to take that action because one of the things I am
determined in this committee is that we are going to have follow-
through hearings. We are not just going to investigate and forget. I
am sure you will agree with that being appropriate.
So I just want to urge that you proceed as expeditiously as possible
because sometime later this year or early next year we would like to
know what progress has been made.
Mr. BRADY. Mr. Chairman, as you know, the act is up for extension
in September 1983, and so we will be going through an extensive
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thought process within the executive branch. I would urge you to take
a very close look at us within the next few months to see whether or
not we fulfill the commitments that I have expressed today.
I assure you I will do everything in my power to fulfill those com-
mitments, and I have the Secretary's support in that. Again, with re-
gard to the report, I am not going to disagree with portions of that
report. I just think that it doesn't tell the whole story.
Chairman ROTH. Senator Nunn?
Senator Ntrxrc. Thank you, Mr. Chairman.
I just have a few more questions.
When you get that Inspector General's report, Mr. Brady, that we
all agree is current, having started in April and ended yesterday, I
would like for you to give us your answers to that.
Mr. BRADY. Absolutely.
Senator Nrmric. Let's get your answers and whether you think it is
historic or micro, little things like whether law enforcement people
carrying out law enforcement tasks, have law enforcement capabilities,
whether that is micro or whether that is macro, I guess it depends on
whether you are running the Commerce Department or the world.
Anyway, we would like to get your evaluation of that report.
Just a few other questions. I know you have heard about section
12(C) of the Export Administration Act. That is the section that deals
with proprietary information, and I know there has been a source of
friction between Customs and Commerce on that.
We got information from Customs that there were about 24 cases
that were held up or could not be completed by Customs because of not
getting information from Commerce on that. I am not suggesting it
is a simple problem and easy answer. But what has been done in that
area?
Mr. BRADY. Senator, with regard to those 24 cases, I have had a num-
ber of people look over those and there are some we simply are not
aware of in terms of any problems. I have to admit that there has been
a problem between Customs and Commerce and Commerce and some
of the other agencies concerning 12?C, business confidential informa-
tion. I think with regard to Commerce and to Customs, that problem
has been primarily at the working level.
I assure you that it has been worked out, that we no longer have
that problem. We have negotiated or are negotiating memorandums of
understanding with all the intelligence agencies and with Customs and
the FBI regarding sharing of information. There is still the problem
that we must, according to our law, (Yet a Secretarial determination if
the information is going to be used in thepublic, disclosed to the public.
[At this point, Chairman Roth withdrew from the hearing room.]
Mr. BRADY. I understand there is a divergence of opinion as to what
we construe as public and what the Department of Justice construes as
public, so we will address that. But the 12?C problem which has
existed, which I concede has probably been used at times by Commerce
individuals inappropriately, is behind us.
Senator NuNN. I am encouraged on that point. We will follow that
with interest.
You have been critical yourself in the past with the licensing func-
tion of the Commerce Department. We have centered so far on the
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Compliance Division in questions and so forth. But what has been done
in the licensing areas? What do you plan to do to improve the things
you pointed out in the past yourself?
Mr. BRADY. Basically three things, Senator. One, when we came into
office, we wanted to have a review of the policy, and we got that. So
that the President, before he went to Ottawa and discussed the whole
East-West trade situation with our allies, did so on the basis of an
extensive, indepth policy review which was agreed upon. We have
probably had more NSC meetings in this area in the last year than
have ever been held previously with regard to the whole subject
matter.
We have policy guidance from the highest level, both with regard to
the Soviet Union, with regard to Eastern Europe, with regard to the
PRC, and with regard to the pipeline and the oil and gas question, as
a matter of fact. That is one area.
Second, the interagency machinery that was in existence but had no
life under the previous administration has been put to use and from
the top on down. We have an Export Administration Review Board
i
which s chaired by the Secretary and that has met on a couple of
occasions to decide certain cases and policy elements. The rest of the
structure, namely what we call the ACEP, which is chaired by me at
the Assistant Secretary level, my deputy at the Deputy Assistant
Secretary's level, and staff level is working and working well. The
issues are being resolved and I believe we can verify that with the
fact that we had over 2,000 cases that were over the statutory deadlines
in the process when we came into office a year ago.
They have been eliminated. We have something like 30 or 40 cases,
depending on the particular week we are in which are over the stated
timeframes and,_ frankly, there will always be a handful of those. That
doesn't mean we have done the task in terms of, one, interagency
cooperation, or in looking at what should be controlled, because that is
based on the policy decisions that were made by the President a year
ago.
We went to our allies, both in the NATO framework as well as in
the Cocom system, and we got a political direction in January and we
are now moving to redesign the list of controlled commodities so that
we move away from what was controlled in the fifties and sixties when
we concentrated on products. We are now focusing on technology,
design, manufacturing, and production of technology.
Senator Rudman referred to microprocessor chins. In the final anal-
ysis there is no way we can keep somebody from walking into Radio
Shack or any computer store in the country and buying a handful of
those chips and nutting them in a diplomatic pouch and leaving. We
recognize that. But it's the technology to make that chin or that mi-
croprocessor which is really important to the Soviets, and that is
what we are trying to concentrate on, particularly in nondefense pri-
ority industries.
Senator NuNN-. I certainly agree with that priority, and I think that
one of the most important things is to have a continuing update of the
critical technologies that the Soviets are likely to target and are likely
to need and to really prioritize those. That is not to say that others
are not important, but to concentrate on those and to educate the pri-
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vate sector on those. I don't believe there is any way that the Govern-
ment of the United States, no matter what you do in the Compliance
Division or the Licensing Division, no matter what State, Defense,
Customs, no matter what they do, they are not going to be able to
control this problem without tremendous cooperation from the private
sector.
It seems to me, forgetting our disagreement on compliance right
now, that one of the areas Commerce really can move forward in is
this educational campaign, and you are in contact with businesses.
They do respect you. You do have a little leverage there. They will
come to meetings when Commerce talks. So I think it is very im-
portant for you to carry out this education function.
I consider that the most important function Commerce has got,
even if you have everything ironed out in the Compliance Division,
I think that pales in comparison because of the limitation of the
numbers, and so forth, and because of the ability to try to educate and
stop this stuff at the source rather than at the borders.
Mr. BRADY. Senator, I agree with you entirely.
Senator NuNN. Stuff is not a good word for high technology. We
will strike that word. Just high technology transfer instead of stuff.
Mr. BRADY. What we are talking about is a massive problem. In a
way, industry is behind the times because they are worried about cer-
tain aspects of their security and they have allowed it to go unnoticed.
That is a task in the Department. It is a task we have spent quite a
bit of attention on. Frankly, we are sending out to the field something
like 60 additional Commerce individuals that are associated with our
field offices, who are normally associated with trade activities, but
whose job is also to educate the business community on the needs if
they are exporting.
There is no exporting seminar that is ever given in this country
without either participation from the Office of Export Administra-
tion with regard to the needs of licensing. It is a complex function
and it is one that we are going to try to do a lot more of.
Senator NuNN. Regarding the critical list, you can let business know
in these seminars what is on that list. Then private industry, those who
are loyal and patriotic, and that is 99 percent of them in my view, will,
I think, pay close heed to this. A real educational campaign about in-
ternal security also would be useful. I know the bigger businesses have
it. Sometimes it is not very good. But smaller businesses sometimes
don't even think about it.
A lot of our technological innovation is coming from small business
people. I would say most of them.
Mr. BRADY. That is right.
Senator NUNN. I would hope you would really bear down in the
educational effort. it seems to me that Commerce has a unique kind of
capability in that respect because you do have people out in the busi-
ness community, with your seminars, and other programs. Of course,
I think on the other side, Customs has a real law enforcement advan-
tage because they have people who are naturally involved in that all
the time. But nevertheless, I would hope you would really give top
emphasis in the Commerce Department to that educational function.
Mr. BRADY. We will, Senator.
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Senator Nincisr. Assume all your plans take place, everything hap-
pens in the Compliance Division that you have outlined and 6 months
from now you come back here and say we have done all of these things,
we have corrected all the problems, we have all the people, so forth,
what then do you envision as your role with compliance?
For instance, will you have people that visit airports, will you have
people that visit ports? What will the Compliance Division in the Com-
merce Department in a perfect world be doing?
Mr. BRADY. Senator, assuming that Customs continues its inspection
operation, the Exodus operation, I think it would be duplicating that
action for us to be doing inspections for inspections sake. That doesn't
mean we would not send special agents when they are working on a case
to a particular port, but I think it is important that we not duplicate
what, in fact, is done by Customs and can be done better because they
do have the manpower at the ports, as far as inspections are concerned.
Senator NuNN. The same thing would be true with airports?
Mr. BRADY. Yes, sir.
Senator NuNN-. You are saying all ports?
Mr. BRADY. I am saying all ports, water and airport. So I would not
expect us to have an inspection function as such. I would expect us to
have a very strong special agent force that works closely with the CIA
and FBI to get the leads to get at the diversion problem. We do get
them, but there are sometimes problems because we can't use them be-
cause of the sources. To get at the diversion problem, our efforts will
also include an education campaign. That also spills over to other
agencies in Commerce, both in the United States and overseas, per-
sonnel helping us extensively in our enforcement efforts.
When we get a case of licensing and we don't know the end user,
we request information from our personnel overseas.
Senator NUNN. I am going to have a few observations at the close
of the hearings and one of them is going to be that licensing should
remain at the Commerce Department. So my critique of Commerce is
going to be on the Compliance end as well as other things. But what I
am trying to get at, in a perfect world when the Compliance Division
is operating effectively and efficiently as you envision it, what are you
going to be able to do that Customs can't do? That's the central ques-
tion:-If you are not going to have them at ports of exit and you are
not going to inspect and so forth, and I agree with that. I think you
are absolutely right on that, it would be duplicative. But if they are
not going to do that kind of thing, it seems to me that what you are
describing is really a liaison between law enforcement and licensing.
Mr. BRADY. I think it is more than that. Senator, it goes to the fact
that the inspection at the ports of exit which Customs does is a small
part of the problem, a very small part of the problem, and none.of the
major cases we have had have grown out of inspection of crates at the
ports. What we need are special agents who can prosecute investiga-
tive cases.
Senator N'uNN. That is the Justice Department.
Mr. BRADY. I mean prosecute to the point of turning the case over to
Justice.
Senator NuNN. You mean investigate special cases?
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Mr. BRADY. Precisely, investigate diversions, work with the FBI
and the CIA to get the information.
Senator NUNN. Why can't the FBI do that? What is it that Com-
merce brings ?
Mr. BRADY. FBI deals with espionage only.
Senator NUNN. This comes darn close to espionage. The Bell case
and other cases it seems to me are very, very close to espionage. I can't
understand what it is Commerce brings to this that the FBI or
Customs doesn't already have.
Mr. BRADY. It brings the entire knowledge and expertise of what is
licensed for dual-purposes. In other words, which computer requires
a license, which doesn't, where they are going, the fact that before we
license cases we must get a rundown on some of the end users.
Senator NUNN. Why can't the FBI or Customs do that?
Mr. BRADY. Because they just don't.
Senator NUNN. They don't
Mr. BRADY. Frankly, the working relationship with Customs has
not been all that high and it is not one sided.
Senator NUNN. I am not shocked to hear that after a year of inves-
tigation.
Mr. BRADY. And I am not pointing fingers. I think the close associa-
tion between what the enforcement arm that we envision with a li-
censing process, as well as with the intelligence community is going
to provide the insight, the expertise to go out and investigate the cases
that are truly the major cases. And the analytical unit that we are
talking about that we have established in recent months, for instance,
is coming up with a substantial number of cases. This is just as a result
of the information we have.
Senator NUNN. Looking back fcr a moment historically, has there
been a major case that you can identify that Commerce has done the
majority or the bulk of the investigative work in and has been suc-
cessfully prosecuted?
Mr. BRADY. Well, I know both the Spawr and Maluta cases, Senator,
were closed out by Customs at one point. If it had not been for a certain
inspector in our Division, there is a very good question as to whether
those cases would have been prosecuted.
They are two of the largest cases we prosecuted in recent years.
Senator NUNN. We have heard testimony that the agent that you
had who handled those cases is an excellent agent and did a very good
job. I think we are in agreement on that. Do you have any others?
Mr. BRADY. There are four cases now?well, there are more than
four cases now. But I understand there are four cases that are either
in transmission to Justice or are there for criminal prosecution so that,
again, the criticism is valid, however--
Senator NUNN. How many years have you had a Compliance Divi-
sion?
Mr. BRADY. I believe it goes back to 1949. Yes.
Senator NUNN. We would like for you to furnish for the record
all the significant cases in which Commerce has played a major?I
won't say the major, but a major investigative role.
Mr. BRADY. OK. Senator, two points. One, I do not think it is
necessarily bad that Commerce, once it discovers a lead or once it
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begins an investigation, has to go to the rest of the Government for
help.
Senator NUNN. I don't either.
Mr. BRADY. I think that is the kind of coordination this Government
desperately needs, and we are trying to accomplish it. I think that I,
Ed O'Malley, Willy Von Raab, and the CIA have made great strides
in this direction.
There is another point, however, which we have not discussed this
morning, and that has been the legislative participation in the whole
technology transfer process. Beginning in 1969, this act was changed
and over the 1970's, every extension was successively liberalized to
not only permit but actually to encourage the executive branch to be
more liberal in terms of its exports. In retrospect, that was a mistake.
But the point is that through the 1970's, there was not a very strong
compliance arm simply because the whole process was not viewed as
all that important because after all, we were establishing detente with
the Soviet Union, and we were going to industrialize them without
technology.
Senator NUNN. I certainly think that is an accurate observation. I
do not think there is any doubt about that. That is an attitudinal
situation that existed for a long time.
Let me ask you a couple of other questions. Have you looked into
the grain embargo enforcement effort by the Commerce Department?
Mr. BRADY. Senator, I am aware?
Senator NuNN. Without asking any leading questions, why don't
you tell us what you think about that since we both agree that is
historic but perhaps also indicative?
Mr. BRADY. The President lifted the grain embargo because he said
that others had moved in and simply taken up the slack that we had
tried to curtail. Grain is an impossible commodity, as you know, to
trace.
I am aware of the criticism in the report that there was one agent
assigned to the enforcement of the grain embargo.
Senator NUNN. In the Commerce Department?
Mr. BRADY. Right.
Senator NUNN. He was responsible for all compliance and enforce-
ment, is that right, for Commerce?
Mr. BRADY. I understand that he worked on an interagency com-
mittee, and he was the Commerce representative.
Senator NUNN. Wasn't Commerce the designated agency to enforce
the grain embargo?
Mr. BRADY. Yes; it would be, butit was an interagency effort in terms
of acquiring information. From what I understand, there are few agri-
cultural exporters. Unlike a computer, it cannot be packaged in a small
box. A ship leaving with a grain shipment is a fairly visible item. I am
not condoning 1 person, and I am not even sure that 15 people can
enforce the grain embargo. I don't know.
Senator IsruNbr. You would be pretty certain one can't; wouldn't you
Mr. BRADY. Absolutely. I do know that as a result of what we call the
"Great Grain Robbery" in the early 1970's, that transactions can actu-
ally, before start and finish, go through 40 different hands before a
grain shipment finally gets to its destination.
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I think there is a real problem with trying to enforce that kind of an
effort, and based on the resources that they had, Mr. Chairman, I am
not sure, in view of the high technology concerns and their impact on
the military of the Soviet Union, I would prefer the agents in the high
technology area rather than in the grain area. I was not at Commerce
at the time the decisions in this regard were made.
Senator NUNN. Even if this was a major part of the President of the
United States foreign policy at the time, one of the major moves he
made in the whole 4 years? If you were President Carter and the Secre-
tary of Commerce came over and the President said to him, "Oh, inci-
dentally, Mr. Secretary, how many people do you have working on the
grain embargo enforcement ?" Would you want to reveal to President
Carter at that stage?I am not saying whether, the policy is correct.
That is a macrodecision. Let's talk micro. "Would you want to be the
Secretary of Commerce who came over and said to President Carter,
"We have got one person who is sitting in the Commerce Department
making sure that everyone complies with your grain embargo. He
hasn't had time to leave the office for the last 6 months because he is
so overwhelmed with reports, but we have priorities elsewhere." Would
you want to be the Secretary of Commerce who conveyed that message?
Mr. BRADY. Well, if that Secretary had told the President that it was
unenforceable to begin with, I wouldn't mind being that Secretary.
But I do not know if the President was ever told that it was unenforce-
able.
Senator NUNN. I would doubt very seriously anybody told him one
person was working on it. That becomes a self-fulfilling prophesy if
you only have one person working on it.
Of course, based on Commerce records, there was 100 percent com-
pliance anyway. Maybe we didn't need enforcement.
Mr. BRADY. Senator, I am not going to condone one person being
assigned to the grain embargo.
Senator NuNN. That again, is historic and I hope we can learn by
that.
Whether Presidential policy is correct or not and whether it really
is completely enforceable or not, I do not think is a decision for peo-
ple who are supposed to carry it out to make. I think they have to do
the best job they can with resources.
Let me ask you one other question. Have you heard of the Polam-co
case?
Mr. BRADY. I am aware of it, yes.
Senator NuNic. This is a case where we heard considerable testi-
mony. William Bell, a Hughes Aircraft radar specialist, was con-
victed of selling military secrets to Polish spies. The President of Po-
lamco, or the President-designate of Polamco was convicted and ac-
cording to all information we had was really pretty much admittedly
an agent of the Soviet Union. This was a case made by the FBI.
We understand Polamco is a company that is still not on the denial
list of the Department of Commerce. Is that correct, and if it is cor-
rect, could you tell us how that situation operates?
Mr. BRADY. There is a difference between the denial list, which is the
result of an administrative proceeding where a company is denied ex- ,
port privileges, and a screen where we review license applications
against the possible problem companies. It is my understanding that
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the company is on screen and not on the denial list. It is not denied
export privileges because we do not have the authority to deny it.
Senator NU NN. What is the screen?
Mr. BRADY. The screen is a review. It is a list of the companies of
individuals against which a license application is checked initially
when it comes into the office.
Polamco is on that screen but it is not denied export privileges. It is
my understanding that we do not have "an export administration
case" against the Polamco. As you know, it is, I think a Polish com-
pany chartered under the laws of California or Illinois. That is a
growing phenomena that concerns law enforcement people through-
out this Government.
Senator NErNisr. What do you have to do to have an export admin-
istration case? I assume you are saying to be on the denial list there
has to be a case made?
? Mr. BRADY. That's right.
Senator Ntricx. Will you walk us through that? In order to get a
company on an export denial list, what has to happen?
Mr. BRADY. We either have a criminal prosecution or administrative
prosecution with sanctions being levied. As a matter of fact, one of the
real?
Senator Nurrisr. You had a criminal prosecution here.
Mr. BRADY. But not under the Export Administration Act. It was
an espionage, I believe, prosecution. And there is a difference. We do
not have the legal authority to do what you and others would like us
to do.
Senator Nurrx. Doesn't that law need to be changed, then?
Mr. BRADY. It may well, Senator, it may well. And the whole area of
Communist firms chartered in the United States is, we believe, ripe for
diversion. It is one we are looking at. There are constitutional questions
as to whether we can require Federal Government approval prior to
those companies being chartered in the United States. We are looking
at a reporting requirement.
Senator NuNx. We are talking about two things, as to whether they
are chartered and the second thing is whether they can export.
Mr. BRADY. They can export legally if they come in and get a license
application and we grant it to them, which is a big "if." If they export
illegally, then we can prosecute them. We cannot, however, prosecute
them for first, being chartered here or, second, acquiring technology
within the United States. And that is what is taking place.
In other words, these Communist-owned chartered entities are ac-
quiring U.S. technology and we are concerned that it is one of the
strong vehicles by which it is leaving the country. That is something
that a number of individuals and organizations are looking at and
working on.
Senator NUNN. What do you have to have in order to put somebody
on the denial list? Tell me that again.
Mr. BRADY. Again, a criminal prosecution?
Senator NUNN. Criminal prosecution only under the Export Admin-
istration Act.
Mr. BRADY. Or an administrative prosecution. I will have to turn
to?
Senator NuisTN. If you have a lawyer here, let's have the lawyer ex-
plain the exact state of the law here.
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MS. BREED. In order for a company?
Senator NUNN. Give us your name.
Ms. BREED. Pamela Breed.
In order for a company to be placed on the denial list, we would
have to go through an administrative procedure which is a charging
letter alleging certain acts had taken place, give the respondent an op-
portunity to answer the charges and perhaps go to a hearing on the
charges before a hearing commission.
Senator NUNN. That would be a civil proceeding?
Ms. BREED. Civil proceeding.
Senator NUNN. What are the grounds for your bringing that?
Ms. BREED. For a civil proceeding?
Senator NuNN. Yes.
Ms. BREED. A variety. Illegal export, re-export, diversion, causing,
aiding or abetting a violation.
Senator NUNN. Wouldn't the Polameo ease, when the president of
the company has been convicted of espionage?
Ms. BREED. It is a violation of the Export Administration Act.
Senator NuriN. The only thing that you can put them on the denial
list for is for violating the Export Administration Act.
Ms. BREED. That is right.
Senator Nuicx. I thought you fast listed several other reasons.
Ms. BREED. Aiding and abetting in violation of the Export Admin-
istration Act.
Senator Nuiciv. It is a very narrow statute. You can only put some-
one on the denial list if they have been convicted of an Export Admin-
istration Act violation. You bring a proceeding alleging violation of
that act.
Ms. BREED. Alleging violation.
Senator NUNN. even if they committed espionage, that is not
grounds for denial?
Ms. BREED. That is correct. You have to tie in the sanction under an
act to the violations in the act.
Senator NUNN. You are saying there would be a constitutional
problem if we were to amend the law and say if you have been con-
victed of espionage, that there be ground for civil proceedings under
the Commerce Department.
MS. BREED. There could be a problem. We have not studied that
aspect of it.
Senator NUNN. It seems to me this is a very large loophole, Mr.
Secretary.
Mr. BRADY. Senator, yes, it is, and it is one of the things that we are
looking at. I started to say that we are looking at the constitutionality
and legality of a reporting requirement to require that, one, a firm is
chartered when it is reported to us, or when they acquire technology
within the United States, they report it to us. But, again, it is a ques-
tion as to how much enforceability there is to that kind of provision. It
is a that we are all looking at and I think as we go through the
next few months, particularly later this year or early next year, in
lookmr, to the extension of this law., this is very definitely one that we
a 1 I should concentrate on.
Senator NuNN. I certainly agree.
wc,--ld like to formally ask, Mr. Brady, you give us your opinion
aftei consulting with your legal department as to exactly what that
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act provides, and what needs to be done in the view of the Commerce
Department to plug up the loophole if it is as large as it appears to be.
I am going to ask the staff to pose a similar letter to the Attorney
General and have him look at it, too.
Mr. BRADY. Senator, it may be we can actually use as one of the
sanctions in an espionage prosecution the denial of export privileges to
an individual form.
Senator Nuicx. It seems to me that is something that would be logi-
cal. Senator Rudman, I know I have taken too much time.
Senator RUDMAN. Mr. Brady, thank you very much. This concludes
5 days of hearings on this subject.
You will, of course, respond to those questions asked for the record.
Senator Nuicx. Mr. Chairman, I do have a statement.
Senator RUDMAN. Proceed with your closing statement.
Senator NuNN. Thank you, Mr. Chairman. Mr. Secretary, we thank
you for being here today. We don't agree on everything. I know you
are sincere in your efforts and will continue to work on it. We will
continue to follow your progress with a great deal of interest, both in
licensing and in compliance.
I would like to make a statement giving my observations here as to
what we have learned in the last 5 days and at least a partial list of
recommendations that Senator Chiles and I will at least make to the
subcommittee. These are certainly not subcommittee findings. That
will be for the full subcommittee to make a decision on.
The Senate Permanent Subcommittee on Investigations has con-
cluded 5 days of hearings on the transfer of American technology to
the Soviet Union and Soviet bloc nations.
The hearings, in my view, underscored the need for improvement in
U.S. efforts to halt technological drain, both in the governmental and
private sectors.
Based on information developed in the hearings, we believe the sub-
committee should recommend to the full committee and the Senate the
following legislative proposals and corrective actions.
First, the Soviets dedicate substantial resources to highly focused
and increasingly adept attempts to secure American technology. By
contrast, the _American response often has been unorganized.
A restructuring of American efforts to halt undesired technology
transfer is called for. Through improved intelligence, we must deter-
mine what it is that the Soviets want and then model our response
accordingly. Our Government should seek to prioritize the critical
technology the Soviets need for military purposes and devote consid-
erable efforts to education and enforcement of the prioritized items.
No. 2, there is a need for reassessment of the ability of the Depart-
ment of Commerce to carry out its present enforcement responsibilities
under the Export Administration Act. Commerce presently carries
primary law enforcement responsibility, with secondary jurisdiction
resting in the U.S. Customs Service.
Commerce maintains both licensing and enforcement under the act;
by contrast, under the Arms Export Control Act, those functions are
handled separately by the Department of State and the U.S. Customs
Service.
And I might add we understand from both State and Customs that
that arrangement has worked very smoothly.
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The enforcement responsibilties under the Export Administration
Act should be altered, first, by delegation of full enforcement respon-
sibility to the U.S. Customs Service, with the licensing function re-
maining at the Commerce Department. In addition, for a long-range
solution, Congress should consider the concept first put forward by
Senator Garn to create an Office of Strategic Trade that, among other
things, would absorb the functions of the Office of Export Adminis-
tration.
I reserve final judgment on that. I certainly think that should be
the focus of another hearing, Mr. Brady, after you get a little further
along with your licensing proposal. Because I can see some real ad-
vantages in having the licensing and education functions that I al-
ready enumerated that I think should be your top priority in one
department.
No. 3, the Export Administration Act should be amended to include
as a criminal offense, the possession or attemped possession of re-
stricted goods with the intent to export such goods unlawfully.
Hearing evidence established the many difficulties law enforcement
authorities encounter in the prosecution and investigation of export
offenses. One problem lies in the absence of any offense until a suspect
actually exports the goods in question.
When arrest is delayed until the moment of export, law enforce-
ment necessarily risks the loss of territorial jurisdiction if the subject
departs the country. In export cases, where the offense is often non-
extraditable, that risk can be fatal to the success of the case.
No. 4, the enforcement tools currently available to the U.S. Customs
Service should be broadened. Consideration should be given to grant-
ing Customs officers express statutory authority for warrantless arrest,
search or seizure in cases of outbound cargo and persons, generally
equivalent to that authority which Customs now possesses in cases of
inbound cargoes and persons. Express statutory authority would em-
brace Customs' effectiveness in full enforcement of the export laws.
This authority has been implied by the courts in some cases.
No. 5, the Federal electronic surveillance statutes should be amended
to permit court-ordered surveillance where there is probable cause to
believe that a violation of either the Export Administration Act or
the Arms Export Control Act is being committed. As with the recom-
mendations to Customs' authority, this revision would enhance law
enforcement's ability to investigate complex export cases.
No. 6, the RICO statute should be amended to include, as predicate
offenses in proving racketeering activity, violations of the Export
Administration Act. Export violations often have been treated as
"minor" offenses, resulting in minimal sentences. Prosecution under
RICO would expose offenders to a possible N year prison sentence.
No. 7, the Freedom of Information Act should be amended to elim-
inate the application of the act to information requests made by for-
eign nationals. Faced with the disclosure of sensitive information to
foreign nationals, "cottage" disclosures industries, and others, such
statutory revisions would inject a reasonable sense of national security
considerations into disclosure practices mandated by the Freedom of
Information Act.
No. 8, the Department of State should seek mutual assistance treaties
between U.S. allies and neutral nations to obtain greater law enforce-
ment cooperation in the enforcement of export laws.
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The State Department should seek the inclusion of export violations
as extraditable offenses in agreements with foreign governments.
No. 9, the region in Santa Clara County, Calif.. popularly known
as the Silicon Valley, the heart of America's growing microprocessor
industry, is a prime target of Soviet efforts to transfer sensitive tech-
nology. Yet we were told that a strong Federal law enforcement pres-
ence has been lacking in the Silicon Valley in the past. State enforce-
ment efforts must be supplemented by a Federal interest in the prob-
lem. We note assurances from the FBI that it is aware of this problem
and is taking steps to increase its presence in the Silicon Valley and
other high technology centers. The Bureau is to be commended for its
corrective action in this regard.
No. 10, the technology transfer problem is, by all indications, a mas-
sive one requiring the attention of both the Government and the pri-
vate sector. Law enforcement and industry spokesmen suggested that
many high technology companies remain unaware of the extent of the
problem. Reportedly, industry interaction with the Commerce Depart-
ment is inadequate; unfamiliarity with the lists of controlled exports
is common within the industry. The FBI's DECA program, aimed at
improving the level of communication with the private sector, directly
educates companies involved in Defense contracts with the problem of
technology transfer. The Defense Department has begun a similar pro-
gram with the business community. There is a need for similar govern-
mental programs designed to inform the private sector dealing in sen-
sitive but nonclassified technology.
No. 11, private industry must contribute directly to any effort to halt
the technology drain. There is a lack of sufficient security precautions
at the sources of production in the technology industries. Lax security
measures were cited in some Silicon Valley plants. William Bell, a
Hughes Aircraft engineer convicted of selling military secrets _to
Polish spy Marian Zacharski, had access to sensitive information on
the basis of a security clearance which had not been reviewed in 28
years. The private sector, through the efforts of individual enterprises
and trade and professional associations, should be encouraged to main-
tain more effective security measures in plants producing sensitive high
technology items.
Massive Soviet efforts to obtain our technology resources can be
countered only through vigorous Government and law enforcement
efforts, bolstered by the strong support of America's high fechnology
industries.
I might add, Mr. Chairman, that there will be other recommenda-
tions. We will have some detailed recommendations on the Department
of Defense and I will have others, but et this point in time, I did want
to submit those as initial observations by Senator Chiles and myself.
Senator RUDMAN. Thank you, Senator Nunn.
I am sure there will be other observations and conclusions reported
out by other members of the subcommittee and possible suggestions
that will be joined together.
Certainly I commend the chairman and the minority staff for your
leadership in these hearings which I think are informative and will
lead to improvement on a very serious situation.
This subcommittee will adjourn now subject to the call of the Chair.
rWhereupon at 12:27 p.m., the subcommittee adjourned to reconvene
at the call of the Chair.]
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APPENDIX
PREPARED STATEMENT OF SENATOR WILLIAM S. COHEN
Mr. Chairman, I am pleased to have this opportunity to
7
participate in these hearings to examine the ability of our
government to enforce our export control policy.
Congress passed the Export Administration Act and the
Arms Export Control Act to establish a mechanism for controlling
the export of materials which might damage our national security.
The administration of this policy requires a careful balancing
of competing interests. Our economic goal of promoting exports
must be weighed against protecting our technological lead upon
which our national security is based. And the freedoms of our
academic community. to conduct research without government intru-
sion must be weighed against the extent to which Soviet technology
can benefit from U.S. science.
An area that has been of particular concern to me is
that of academic exchanges. These occur through personal
letters, visits, journal articles, and conferences and can
be beneficial to the well-being of both nations. However, in
certain circumstances, exchanges can be counterproductive
and damaging to our national security. American students
studying in the Soviet Union, for example, study marriage
patterns in that country between 1897 and 1975 and the economy
of Catherinian Russia. At the same time, Soviet students '
in the United States are studying chemistry, physics, laser
technology and applied computer science.
Recent events, however, call into question the adequacy
of existing policy to address these concerns. According to press
reports; the Soviet Union has increased its covert operations
to obtain technology that can be used for military purposes.
Similarly, we must question why, for example, Soviet officials
nearly won approval of an export license for industrial material
until the Defnese Department noted that the same article is
used by the U.S. Air Force to improve the hardness of our con-
crete missile silos. Perhaps most disturbing of all is the dis-
(318)
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covery by Pentagon officials of Soviet electronic circuit boards.
The computer chips in this circuit worked perfectly when American
chips were used as replacements, providing evidence that the
technology had been copied. This is the very technology on
which the Pentagon is relying for our future weapons improvement.
would like to commend Chairman Roth for his timely
investigation of this critical issue. I look forward to
examination of how the government's resources and information
could be utilized to promote ,a more effective export control
policy. Specifically, we need to address the current staff
allocations at the Commerce Department where only 25 investi-
gators are charged with the entire responsibility for export
controls even though there are more than 300 exit points
throughout our country. Since the U.S. Customs Service has
more investigative resources, does it make sense to transfer
responsibility for the Export Administration Act to this agency?
And how can-the information collected by our intelligence
agencies be used in a more effective manner in the enforcement
of our export control policy?
I believe that the efforts of the Administration in re-
viewing our export control policy should be commended, and I
look forward to working with them to develop an improved policy.
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PREPARED STATEMENT OF SENATOR HENRY M. JACKSON
Mr. Chairman:
I congratulate you, and Senator Nunn, and the Mashers and staff for
holding these hearings. The problem of assessing the loss of our tech-
nology and developing effective treasures to control its transfer is one
of the oust important facing the United States.
Documents and other information made available to the Senate by the
Select Committee on Intelligence, of which I am a uenber, as is the dis-
tinguished Chairman of this Subcommittee and the Committee an Governmental
Affairs, Senator Roth, establish that the Soviets are pursuing a purposeful
and determined campaign in this field. Their activities are nunerous,
diverse, and well-funded. And they have, in far too many cases, been
successful. We nowlcnow, and I believe these hearings will further deMon-
strate, that in many ways the United States has in effect been supporting
the uetastasizing power of the Soviet Union. As I Stated in remarks to
the Senate several weeks ago, "There is no longer doubt that our technology
has materially aided Soviet expansion. It has improved Soviet weapons,
intelligence devices, and economic leverage."
The need for a clpar and comprehensive tedhnology transfer policy
is compelling and urgent -- yet our government atill has a long way to
go.
PRIOR SUBCOMMITTEE RECORD
The hearings we begin today continue this Subcommittee's
distinguished history of investigation and legislation concern-
ing technology transfer problems. Our past activities have
included detailed scrutiny of particular licensing issues, such
.
as the Dresser Industries case, as well as studies of broader
related issues, such as East-West financial credits. The
Subcommittee's review of this latter problem, I might note,
was conducted about five years ago, and it accurately presaged the
Soviet bloc debt issues that are causing such serious concern
today.
95-929 0 - 82 - 21
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The Subcommittee also laid the groundwork for significant
t'
legislation. During the 1970s, the Department of Commerce was
regularly approving licenses for exports of strategic goods and
technologies to Soviet bloc nations without adequate analysis
of the adverse impact on American national security. In 1974,
legislation based on tip= Subcommittee's work helped correct
this problem by amending the Export Administration Act to pro-
vide for Department of Defense review of certain applications
for export licenses and permits. In 1979 this approach was
improved and expanded w4..th further amendments to the Export
Administration Act, again based on Subcommittee work. These
amendments assigned the Secretary Of Defense primary
responsibility for identifying control list items, as well as
military critical technologies and goods.*
The critical technologies concept is intended to lead to
tighter control over transfers of design and manufacturing
know-how and production capabilities while relaxing control
over products not transferring such knowledge. A related
element of legislation requires that the implementing regula-
tions take into consideration the difficulty of devising
effective safeguards to prevent diversions of critical tech-
nologies to military use, to protect critical goods such as
computers, and to prevent the se-export of critical technol-
ogies to third parties.
Another 1979 amendment to the Export Administration Act
was designed to correct a major deficiency that the Subcom-
mittee's work had identified in U.S. licensing procedures.
Except under special circumstances an export to adversary
nations may not be denied if comparable goods or technology
is available from foreign sources in substantial quantities.
But it was found that determinations of foreign availability
had been predicated on unsubstantiated assertions by exporters
and superficial analysis.
I might add that Senators Nunn and Cohen of this Committee, as
well as Senator Moynihan, the Vice Chairman of the Intelligence
Committee, joined me in 1979 in sponsoring these and other key
amendments.
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The 1979 legislation dealt with this problem in three
ways. First, it requires that any determination of foreign
,availability must be made in writing and be supported by reliable
evidence, which specifically excludes uncorroborated repre-
? sentations by an exporter. Second, it indicates Congressional
intent that the President initiate negotiations with other
potential suppliers when he has reason to believe that they
may make controlled items available to an adversary nation.
Third, the legislation mandates that all departments and agencies
that have export control responsibilities share foreign avail-
ability information.
CURRENT PROBLEMS
Despite this effort, it has become clear that Soviet
actions to acquire our technology have seriously outstripped
our preventive undertakings.
In recent months there seems to be greater public concern
about this problem. Such concern is a promising development,
because there are so many ways that Soviet acquisition efforts
exploit our open society. Our first defense here is public
awareness. These hearings can help substantially by further
documenting the Soviet threat to our technology and providing
a better base of public information about this subject.
These hearings will, I am sure, identify many of the
improvements needed in our transfer control policies and
procedures and develop the basis for appropriate remedies. In
this context, I want to highlight five matters that strike me
as continuing sources of weakness in our national efforts.
One is the slowness in implementing the critical technolo-
gies approach called for in the 1979 legislation, In large
part, this delay has been due to inadequate funding of the
Defense Department's undertaking. In addition, the policy-
related activities in Defense -- particularly those dealing with
such crucial matters as relations with allies in NATO and
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COCOM -- are serioUsly lacking in permanent staff and support'.
These shortcomings have impeded progress on major policy matters
as well as the day-to-day processing of licensing cases. A
related problem is that current regulations do-not require
license approval for exports of most critical technical data
to most non-Communist destinations. This loophole, of course,
presents significant opportunities for leakage of our tech-
nology to the East.
Second, the government's current approach to qUestiOns of
"foreign availability" remains a source of weakness. The
Commerce Department has primary responsibility for monitoring
and gathering of foreign availability information, but its
capabilities to do so appear to have been and to remain seriously
inadequate. It is also not clear that the intelligence community's
role in these matters has been sufficiently strong, wide-ranging,
or coordinated. On the other hand, when it has been evident
that foreign availability does substantially exist, the govern-
ment has not vigorously implemented the 1979 Congressional
intent regarding negotiations for cooperative controls. Too
often, it seems, U.S. export licenses have been granted based
on untested assumptions that our allies would not cooperate
with us in controlling the items in question.
A third major weakness of current U.S. controls is the
government's willingness to accept end-use representations
to permit the export of dual-use technologies and items even
when those certificates are essentially unverifiable. The
current Administration, better attuned rhetorically than its
predecessor to the dangers of technology loss, approved the
sale of pipelayers to the Soviet Union with the understanding
that those machines would not be used on the Siberian gas pipeline
proposed for Western Europe. But because there is simply no
way that national technical means can differentiate a pipelayer
from that sale under those assurances from one that was sold a
year earlier under no such assurances, and because there is no
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on-site inspection of engine block numbers, end-use repre-
sentations are irrelevant if not downright sham. Computers
provide another example of items in which such representations
are irrelevant or spurious. There are no functionally related
observable differences in a computer when it is working on
military problems rather than civilian ones; even on-site con-
stant observation of the machine will not reveal whether it is
being "diverted" in part or in whole to military tasks.
The fourth weakness is that current U.S. controls fail to
include all equipment and technologies relating to oil and gas
development in the national controls list of strategic defense
industries. I have twice written President Reagan on this matter;
in the more recent letter, on 8 March, I urged that the Adminis-
tration act "to finally recognize the strategic importance of
energy supplies and to start treating technologies and end-
products related to them accordingly. Procedurally, this would
mean giving the Secretary of Defense the same review over exports
of oil and gas equipment that he now has over strictly military
exports." (I ask unanimous consent that the text of this letter
and supporting materials be included as part of the Record.)
The immediate problem that prompted this letter is the
proposed East-West gas pipeline between the Soviet Union and
Western Europe -- a pipeline which, when completed, would provide
the Soviet Union with huge amounts of hard currency, estimated by
some to reach $6 to $8 billion, .which in all likelihood will be
used in significant part to acquire and exploit further
Western technology for Soviet aims. In the face of such strategic
consequences, it would be disastrously short sighted to permit
the transfer of pipeline-related technology on the grounds that it
has no immediate military applications.
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Fifth, the strategic trade policy of the United States
does not include credit controls. Current Soviet and Warsaw
Pact shortages of hard currencies suggest that those countries
would be getting a lot less of our technology if they had to
pay for it on a cash-and-carry basis. The Subcommittee, as I '
noted earlier, has been a pioneer in terms of Senate attention
to the matter of Western credits for the East. Today the debt
of the Warsaw Pact countries to the West is about $80 billion.
Poland is unable to service its $26 billion share of that debit,
and there are increasing signs that Moscow's hard currency
shortages are mounting. The export of Western capital through
extensions of credit permits the Soviets to fortify their
military-industrial system every bit as much as the transfer of
technology. We need to develop comprehensive controls on credits
to the East and work with our allies to forge an effective multi-
lateral approach.
Chairman, there are other improvements that should be
made promptly in our national system of export controls; I
have not touched, for example, on the complex problem of enforce-
ment. I understand that our.hearings will address this matter,
But there is one aspect of the enforcement matter I should
mention. During the course of its oversight studies of tech- -
nology transfer and loss, the Intelligence Committee staff has
found that responsible intelligence and law enforcement agencies
have encountered significant difficulty in obtaining relevant
information from the Department of Commerce. The Department of
Commerce has asserted that, before this information can be
released, the Secretary of Commerce must make a special finding
in each case. The 'delays involved in these case-by-case determi-
nations by the Secretary of Commerce have significantly impeded
effective counterintelligence and law enforcement investigations,
particularly those. of the FBI. I understand that this problem is
still unresolved after months of inter-Departmental negotiation,
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' NEED FOR COMMITMENT
Mr. Chairman, this set of hearings will help focus top-
level attention by the Administration on these technology
transfer matters. There is, I believe, no single step that
would have greater consequences for improving our national
posture. It is unfortunately still true that there is much
that could be done here -- what is lacking, in large measure,
is the political will to do it.
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,-!_31afc,c; ,-5citate
WASDINGT011. D.C.
_
A/it...DI/Et, VICE,
GOVD/N,,,ITAL., Al/e/r.
1111,1_1_1C/D,C
March 8, 1982
The President
The White House
Washington, I). C.
Dear Mr. President:
Some seventeen months ago, on November 14, 1980, I
sent you a letter questioning the Carter Administration's
policy of excluding the oil and gas industry from the list
of strategic defense industries, and its policy of presuming
that licenses would be granted for the export of oil and gas
equipment. I urged you to reassess this position as part
of an overall national security assessment of the world
energy situation. As I received no acknowledgment or
response to my original letter, I am presuming that you did
not see it. It may have been held at the staff level.
Meanwhile, the potential catastrophe of Moscow's gas
pipeline to Europe underlines what I was warning about.
Tn view of the serious threat of that pipeline to U.S. and
allied interests and future security, and given your own
current consideration of U.S. policy toward the pipeline,
I want to be sure you see my original letter to you and my
recent speech to the Senate on the issue of technology transfer
and loss, during which I made that letter public.
In my speech, I summarized the danger of the pipeline as
follows:
"Only on the surface is this deal an economic
one, whereby the Western Allies provide funding and
technology in exchange for Soviet natural gas. Both
sides, in fact, are fully aware of the significant
political relationships involved. The pipeline deal
will provide Moscow with a substantially increased ?
flow of hard currency and political leverage for
years to come, and we would be reckiess to gamble
that these resources will not be used against us
and our European allies. For one thing, Moscow's
revenues from the pipeline will facilitate acquisition
in the West of sophisticated technology useful in
strengthening the Soviet military. Even without direct
Soviet action, the project creates the possibility that
significant portions of allied economies and societies
could fundamentally shift away from the West toward the
Soviet Union. There would be massive diversion of
energy-related capital, talent, and effort away from
Western economic development."
I know that at Ottawa you made known your own concerns
with the Siberian pipeline, but for one reason or another the
Administration did not get itself together for an effective
follow-up. You must be aware of the widespread dismay in
Congress that our government is still hemming and hawing about
a project that would indefinitely profit our adversary some
$7 to $8 billion in hard currency annually. This dismay on
the Hill has now boiled over into threats to "bring the boys
home from Europe," and into other isolationist portents which
you and your colleagues should be taking with utmost?seriousness.
I believe there is still time for the Administration to
rally itself against the pipeline.
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Specifically, I urge you to prohibit the use of any
American technology in Connection with the pipeline, to press
American lending institutions not to extend credits or other
financial assistance that might be related to this deal, and
to use your personal authority to persuade the American multi-
national oil companies involved not to participate in the
project.
We must recognize that in talking about opposing the pipe-
line we are talking about energy self-sufficiency for the
industrialized West, and so we are talking about protecting the
Western alliance, not damaging it. Therefore, I urge that you
promptly convene meetings at the highest allied levels to
develop alternatives for Western European energy. The United
States should provide substantial assistance in developing such
alternatives, including technological and financial measures.
And we should provide strong incentives for our allies to
develop Western energy supplies rather than Soviet ones.
Also, this strikes me as an opportune time to finally
recognize the strategic importance of energy supplies and to
start treating technologies and end-products related to them
accordingly. Procedurally, this would mean giving the Secretary
of Defense the same review over exports of oil and gas equipment
that he now has over strictly military exports.
It is my hope that this-letter and the enclosed material
will further encourage your personal involvement in the critical
current issues of technology transfer.
With best wishes.
Since ely yours,
Henry M. Ja kson, .S.S.
Enclosures
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COMMITTEE ON
GOVERNMENTAL AFFAIRS
SENATE PERM ANENT SUBCOMMITTEE
ON INVESTIGATIONS
WASHINGTON. D.C. 20510
C?Jr/1.
C.:110.7.0,
ICtl.
C1Clt.stly }NI /A I...VW
November 14, 1980
The Honorable Ronald Reagan
President-elect
of the United States
901 South Highland ?
Arlington, Virginia 22204
Dear Mr. Reagan:
For several years now, the Senate Permanent Subcommittee
on Investigations has been concerned with the transfer of
technology, directly and through third parties, to the Soviet
Union and other Warsaw Pact members. Evidence adduced in the
Subcommittee's studies and hearings has demonstrated that our
policies in this area have been seriously flawed and have enabled
the Soviets and their allies to acquire technology which has
contributed significantly to their military-industrial capabilities.
The protection of our technological lead times is crucial
to the maintenance of strategic parity with the Soviets. To
achieve this objective it is necessary that the U.S. develop a
coherent, consistent and effective policy to prevent the transfer
of security-sensitive technology to our adversaries.
During the past two years, some steps have been taken in the
right direction. In 1979, Congress adopted certain amendments to
the Export Administration Act which are designed to strengthen
national security controls. Also, subsequent to the Soviet invasion
of Afghanistan, the Carter Administration took some long overdue
actions to restrict exports of high technology to the Soviets.
However, these efforts are only in their early stages. Much work
remains to be done before years of mismanagement and neglect can
be corrected. In the following I have outlined my major concerns.
1. A Clear and Comprehensive Policy
During the past decade, our strategic trade policy has
been maae on an ad hoc, license-by-license basis,, generally at a
fairly low level ingovernment. Top level policy guidance has
consisted largely of short-sighted notions of detente or trade
promotion which were not grounded in a thorough national security
assessment of technologies and their relative importance in the
military balance between the U.S. and the Soviet Union and other
adversary nations. Indeed, the government has lacked an adequate
ongoing assessment capability. As a consequence, evaluations of
technical criteria such as the military significance of the
technology and foreign availability were shaded in order to justify
license approvals or were otherwise inaccurate. The quality of
analysis has also suffered due to chronic shortages of qualified
personnel who must process over 70,000 license applications annually
within statutory deadlines.
The lack of a clear and effective policy has resulted in
other problems such as U.S. government agencies working at cross-
purposes, inconsistent decisions, uncertainty for U.S. exporters,
and the weakening of COCOM as an effective multilateral control
mechanism.
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- Deficiencies in controls on technology transfer have not
-been limited to the export licensing area: The U.S. has engaged -
in educational and other technical exchange programs in which the
benefits have flowed almost exclusively to the Soviets and their
East European allies. Moreover, there has been inadequate official.
review or control over the hature and extent of technology transfer
in these arrangements.
In addition, the U.S. has not had an adequate program to
enforce our export control laws, despite aggressive Soviet efforts
to acquire controlled and classified technology through clandestine
and illegal means both in the U.S. and abroad. For example, the
Defense Intelligence Agency recently told the Senate Committee on
Governmental Affairs that the Soviets and some of their allies
have acquired interests in or have established businesses in the
U.S. in order to acquire restricted technical data and equipment.
An *portant task for your Administration will be to
develop a clear export control policy based upon a comprehensive
technological assessment and to communicate that policy downward
to the officials charged with its implementation. My views as to
additional elements of this policy are discussed below.
2. The Critical Technologies Approach and the Department
? of Defense
In response to the foregoing problems, a bi-partisan
group of Senators co-sponsored my amendments to the Export
Administration Act of 1979 which gave the Secretary of Defense
the primary responsibility for identifying, militarily critical
technologies and goods and formulating controls to prevent their
transfer to our adversaries. The critical technologies approach
is intended to lead to tightened controls on know-how and to the
relaxation or modification of controls on products which do not
-transfer technology or have significant intrinsic military capability.
On October 1, 1980, the Department of Defense published its initial
version of a critical technology list. On the same day, the
Department of Energy separately published its significant input '
to the list. Significant additional technical analysis and
regulatory work is necessary before the critical technology list
can be fully integrated into the export control system, as contain-
plated by Congress.
This work should be completed on an expeditious basis so
that we Can have the kind of assessment capability necessary for
an effective policy. To do so, DoD will require adequate funding
and staffing as well as the active support of the Energy Depart-
ment and other governmental agencies and the business community.
In its fiscal year 1981 budget request, DOD asked for $2.5 million
to continue support work on this project. I am concerned by
reports that DoD is planning to allocate only half the funds
requested. I am also concerned by the failure of DoD to adequately
staff its export control activity. In view of DOD's significant
responsibilities in the strategic trade area, I believe it would
be helpful if DOD established a separate budaet line item for this
activity.
My views concerning the critical technologies project are
discussed in more detail in my letter of October 1, 1980, to the
Secretary of Defense, a copy of which is enclosed.
3. Foreign Availability-
An'important factor in determining whether to export an
item to an adversary nation is whether the item would be available
from foreign sources in sufficient quantity and quality that
denial of export would be ineffective. My 1979 amendment to the
Export Administration Act requires that any determination of
foreign availability which is a basis of a decision to approve a
license or remove a-control.on the export of a good or technology
shall be made in writing and be supported by reliable evidence.
This provision should be gtringently enforced. "
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At the time of enactment, the Export Administration Act
in September 1979, neither the Commerce Department nor any other
agency of government had an adequate foreign availability assess-
ment capability. Unfortunately, this continues to be the case
today. Although the Commerce Department is assigned the primary
responsibility for coordinating the collection and monitoring of
information on foreign technology, this responsibility of necessity
must be shared by DOD, the intelligence community, and other
agencies with export responsibilities. In order to carry out
Congress's mandate, the agencies need to be mobilized and adequately
staffed and budgeted (including provision for travel funds to
investigate allegedly competitive technology).
When a good or technology which would make a significant
contribution to the.military potential of an adversary is determined
to be available from foreign sources, this should pot lead to
automatic approval of the export as has been the case too often in
the past. Instead, negotiations to secure cooperation in restricting
availability should be initiated immediately. .
If the United States resumes its position of leadership,
-I believe that our allies and friends will be inclined to cooperate
in multilateral control efforts. Should a nation refuse to cooperate
with the United States in denying alternative sources it hardly
enhances U.S. credibility to compete to sell the very item we had
argued would be contrary to our security interests for the other
nation to sell. If you determine that you need additional authority
to encourage other nations to cooperate in multilateral controls,
I would be happy to support appropriate legislation.
4. Exchange Programs
Since the invasion Of Afghanistan, the Carter Administra-
tion has imposed more stringent control on a nuaber of government-
to-government technical exchange programs with the Soviet Union.
There currently is an informal interagency body which reviews
some aspects of certain exchange programs. The scope of the body's
responsibilities needs to be expanded to assure that Soviets and
other adversaries are not gaining access to critical technologies
in private and commercial exchange programs, as well as in govern-
mental arrangements. To achieve this objective, I believe the
new Administration should formulate a policy to. guide the decision-
making of the review body. In this regard, the Soviet Union and
other adversaries should be denied technologies, if the Secretary
of Defense determines that such access would adversely affect
national security, subject, of course, to the final decision of
the President. This is consistent with the intent of Congress in
the Export Administration Act which gives the Secretary of Defense
such a veto in the licensing and control list area.
5. Enforcement
During the past several Months, the Carter Administration
has been conducting various interagency studies of-problems in
the enforcement of export control and other-laws which protect . .
controlled and classified technologies. Recently, the Department
of Commerce announced that it has stepped up its enforcement of
the Export Administration Act. However, that Department .still does
not have an adequate investigative and support staff to enable it-
to carry out an effective program. A thorough assessment of our
government-wide enforcement program is required, including the
adequacy of (a) 1-esources, (b) coordination of the U.S. agencies
internally and with foreign governments; and (c) existing legisla-.
ticn.
6. Post-Afghanistan Developments in Export Policy Toward the
Soviet Union
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Since the invasion of Afghanistan, there have been a number
of changes in U.S. strategic trade policy toward the Soviet Union.
These changes are generally steps in the right direction, but I
have had some reservations. One of my broader concerns is that
the Carter Administration has suggested that these steps are
intended as a short-term response to the invasion, rather than as
part of the development of tighter control policy for the long-term.
For example, President Carter stated that he hoped that, if the
Soviets withdraw from Afghanistan, we can restore normal trade
relationship with the Soviets.
A firm and consistent policy is essential if we want our
friends and allies to take us seriously when we ask for their
cooperation. The reluctance of our COCOM allies to give specific
or formal support.to some of the recent U.S. proposals may be
attributable in important part to questions about the seriousness
and steadiness of U.S. intentions. I think it would be helpful
to the successful implementation of the new policy, if you would
tell our allies that these new policy directions represent a long-
term strengthening of U.S. controls on the transfer of security-
sensitive technology. .
I also have a number of concerns about the substance and
implementation of the new policy. -
(a) The Administration has stated that it will not
approve exports to the Soviets of items which are under
COCOM control and which require formal COCOM permission,
prior to export. But the policy provides for possible
exceptions on a case-by-case basis for spare parts for
computers and other previously exported items. -A large -
'number of spare parts cases have been held in abeyance.
I see no persuasive basis for granting exceptions for
spare parts for items which we would not presently export.
(b) The new policy provides for tightening criteria
used in reviewing applications for the export of technology,
including process know-how for plants in militarily relevant
industrial sectors (e.g., trucks, aircraft, metallurgy).
A large number of significant technology cases have not
been decided because of delays in formulating specific
criteria. Development of interim criteria should proceed
as quickly as possible so that these cases .can be decided:
Long-term criteria should be developed in the critical
technologies project.
(c) The new policy provides for careful review of
proposed exports to Eastern European countries to assess
the risk of diversion to the Soviet Union. The implementa-
? tion of this policy should be carefully examined.
(d) The Carter Administration has established a presump-
tion of denial for exports of technology for manufacturing
oil and gas production and exploration equipment. However,
I understand that no effort has been made to enlist the
support of our allies for this policy. Although the U.S:
has dominance in certain oil and gas technologies, a
multilateral approach would make the policy more effective.
The Administration has also continued its policy of
presuming approval of exports of oil and gas equipment.
I believe that the equipment policy should be reassessed
by your Administration as part of an overall national
security assessment of the world energy situation.
I am gratified by your letter of October 24, 1980, expressing
support for the Jackson-Vanik Amendment. I very much hope that
you also share my basic point of view concerning our strategic
trade policy and that your new Administration will accord this
matter a high priority.
Sincerely yours
/7)-'7
Henry M. _flacks
Vice Chairman
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SENA TO
JACKSON
ews
U.S. Senator flenry M. Jackson of Washiny,ton (202) 22,19378
FOR RELEASE: P.M. 's
Thursday, February 11, 1982
TECHNOLOGY TRANSFER POLICY -- THE HIGH STAKES
Address by Senator Henry M. Jackson
U.S. Senate Floor - Thursday, February 11, 1982
Mr. President, as my colleagues are aware, my concern for the
flow of security-sensitive technology to the Soviet Union and its
allies is of long standing. For several years, the Senate Permanent
Subcommittee on Investigations, which I chaired, demonstrated through
its studies and hearings that our policies in this area have been
seriously flawed. Moscow and its associates have acquired the West's
latest technology and thereby significantly enhanced their military-
industrial capabilities. I and several others have repeatedly pressed
for tighter controls on technology transfer.
NEED FOR A CLEAR, COHERENT POLICY
On November 14, 1980, I wrote President-elect Reagan calling his
attention to this problem and suggesting several measures that merited,
his prompt consideration. I noted the lack of a clear and comprehensive
policy regarding technology transfers which had led to inadequate
technical analysis, weaknesses in export controls, serious imbalances
in rash-West exchange programs, inconsistent governmental decisions,
uncertainty for U.S. exporters, and a weakening of COCOM. I urged that
he act quickly to strengthen the government's work on critical tech-
nologies, foreign availability assessments, natiolial security safeguards
in exchange programs, cooperation with allies, and enforcement.
In the fifteen months since that letter was sent, events have
reinforced my ealier conclusion: there is much we can do, if only we
will. But we have a long way to go.
There is no longer doubt that oar technology has materially aided
Soviet expansion. It has improved Soviet weapons, intelligence devices,
and economic leverage. We are still much too far away from a vigorous
program to effectively meet the danger.
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MOSCOW'S GAS PIPELINE TO EUROPE
As proof, Mr. President, we need only consider the Administration's
handling of the Siberian gas pipeline project.
In my November 14, 1980 letter to President-elect Reagan, and my
enclosed letter of October 1, 1980 to Secretary of Defense Harold Brown,
I questioned the policy of excluding the oil and gas industry from the
list of strategic defense industries, and the policy of presuming that
licenses would be granted for the export of oil and gas equipment. I
urged the new Administration to reassess this position as part of an
overall national security assessment of the world energy situation.
Yet the Administration started off by approving a first shipment
of Caterpillar pipelayers to the Soviet Union. It is claimed that
these pipelayers will not be used on the West Siberian pipeline, a
generous supposition given Soviet practice of violating end-use
representations. More importantly, in licensing this equipment, the
Administration sent the signal that in principle the export of technology
and products relating to oil and gas production and shipment are not
considered strategic items.
- President Reagan at Ottawa made known U.S. concerns with the West
Siberian pipeline, but the Administration didn't get itself together
for an effective follow-up. It took the crackdown in Poland to
energize the government. And even now high officials are talking abut
the decision regarding U.S. technology and the pipeline in terms of
"weighing the damage to the Soviet Union against the damage to the
alliance."
What accounts for the confusion and the footdragging?
Because this pipeline project is supposed to be a strictly
economic arrangement? Nonsense. If it is, why have the Germans so
steadfastly.rejected serious consideration of any alternatives to
dealing with the Soviets? The United States has offered some alterna-
tives, and a pipeline to exploit Norwegian gas was also proposed. The
price of Siberian gas promises to be quite high. Furthermore, the deal
requires an enormous amount of Western credit, at a time when the German
government is joining many others in complaining about the price of
money.
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Only on the surface is this deal an economic one, whereby the
Western allies provide funding and technology in exchange for Soviet
natural. gas. Both sides, in fact, are fully aware of the significant
political relationships involved. The pipeline deal will provide
Moscow with a substantially increased flow of hard currency and
political leverage for years to come, and we would be reckless to
gamble that these resources will not be used against us and our European
allies. For one thing, Moscow's revenues from the pipeline will
facilitate acquisition in the West of sophisticated technology useful
in strengthening the Soviet military. Even without direct Soviet action,
the project creates the possibility that significant portions of allied
economies and societies could fundamentally shift away from the West
toward the Soviet Union. There would be massive diversion of energy-
related capital, talent, and effort away from Western economic develop-
What we should be doing is quite plain.
?
First, we should recognize the strategic importance of energy
supplies and treat technologies and end-products related to them
accordingly. Procedurally, this means giving the Secretary of Defense
the same review over exports of oil and gas equipment that he now has
over strictly military exports.
Secondly, we should recognize that in talking about energy self-
sufficiency for the industrialized West we are talking about protecting
the alliance, not damaging it. The Administration should immediately
prohibit the use of any American technology in connection with the
pipeline. It should promptly convene meetings at the highest allied
level to develop alternatives for Western European energy. It Should
provide substantial assistance in developing such alternatives, including
technological and financial measures. And it should provide strong
incentives for our allies to develop Western energy supplies rather than
Soviet ones.
RECENT IMPROVEMENTS
Mr. President, certain developments of the past months encourage
me to hope that some effective steps will be taken, both on the
Siberian pipeline and for broader issues of technology transfer.
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Most importantly, key assumptions about the importance of trade
to detente are now critically questioned. During the past decade,
three Administrations acted on the assumption that increasing economic
ties with the Soviet Union would moderate Soviet behavior in ways that
would improve our security and build a peaceful world order. With this
assumption came a consistent effort to relax controls on strategic trade
with the East and to define quite narrowly what we meant by "strategic"
trade.
Today, we can view those years as a costly experiment. The results
included an increasingly adverse military balance, both strategic and
conventional; renewed Soviet military expansionism; increased Soviet
subversion in the Third World; a sharp escalation in the anti-U.S.
Soviet political offensive around the globe; and a dramatic increase in
Soviet espionage and clandestine operations against the West. Our
technology, acquired and exploited by Moscow, contributed to each of
these developments. There is now a growing awareness that our
technology in Soviet hands is a threat to our security.
Also of importance, there is a broader appreciation that the Kremlin
is determined to try to get our technology by any means available. The
public press, as well as government reports and defense estimates, have
reported how Western developments in design, materials, components,
and production have been acquired by our adversaries. The techniques
have included classical espionage as well as the evasion of export
controls through diversion, re-transfer, and the use of foreign-owned
but U.S.-chartered front corporations. The result has been weapons
aimed at us that are higher in quality, greater in quantity, more lethal
in effect, and quicker in the field than would likely have been the
case if Moscow had to rely solely on its own technical/industrial base.
The present Administration has begun some remedial action. The
Department of Defense is taking the export control problem more
seriously than before and is beginning to improve its ability to
evaluate and control critical technologies. There seems to be more
awareness in licensing decisions about the need to safeguard national
security as well as to advance commercial interests abroad. And the
intelligence community has sharpened its awareness of this threat and
has begun implementing new procedures to monitor, evaluate, and report
on technology transfers and developments.
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CONTINUING SHORTCOMINGS
Mr. President, these new beginnings are a fragmentary start. What
is needed is a clear, comprehensive government-wide policy that frontally
addresses the hard, central issues of technology transfer and loss.
To date, the Administration has lacked the top-level conviction and
participation needed to shape such an overall policy.
Time Perspective
For one, it is not yet clear that the Administration's efforts
have deeper roots than a concern to impose sanctions. They should.
Technology transfers involve vital long-term issues of our national
security, and they should not be turned on and off for foreign policy
considerations of the moment. It may be appropriate to use normal
commercial exchanges of butter and grain to reward and punish Soviet
behavior. But national security concerns must be protected in times
of cooperation as well as strain, and judgments about the wisdom of
transferring certain technologies should be separate from the prevailing
winds of foreign policy advantage. I am not sure that we yet have a
Lire national conviction on this matter, and I am worried that our recent
efforts will not outlast the current sanctions resulting from events in
Pciland.
National Security Perspective
In this regard, it is important to emphasize that national security
involves more than strictly military considerations. The notion of
"strategic" trade needs a much broader interpretation than it received
the past ten years.
The Siberian gas pipeline is a salient example.
Even purely civilian/commercial transfers can indirectly help
increase the Soviet threat to our security. By acquiring and exploiting
Western technology, Moscow has been able to fill selectively gaps in
its industrial base and to profit from the modernizing effects of, for
example, Western microelectronic and computer technologies. It has been
able to concentrate funding and manpower on other priority projects, and
to alleviate consumer dissatisfaction. By taking Western "proven designs"
as road maps, Soviet research and development activities have saved
funds and important developmental time.
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Itie point is not that all trade should be stopped on national
security grounds. Many of our exchanges with the Soviets are only
remotely linked with security threats, and the level and quality of such
exchanges are the appropriate province of commercial and foreign policy
considerations. But the fact that a particular exchange involves
nominally commercial/civilian technologies does not ipso facto mean that
national security is unaffected. The key here is informed judgment
the United States needs to examine carefully the possible effects of
each proposed transfer.
Dual-use Technologies
This is particularly true for transfers involving "dual-use" tech-
nologies, items proposed for sale for civilian/economic purposes but
which could readily find military applications as well. There is now
a clear pattern of such diversions once Western technologies are in
Moscow's hands. The U.S. government allowed American business to build
the Soviets a truck plant at Kama River, somehow assuming that only
civilian trucks would be built there. As we all know, that plant builds
military vehicles as well -- some of which carried Red Army units into
Afghanistan.
Our experience with several other cases is similar. For example,
American bearing grinders licensed for sale to the Soviet Union contri-
buted greatly to various Soviet military programs:. In other cases,
we have seen that there is no real control over the use to which a
computer is put once it is under Kremlin control; that another "truck"
plant supported by American' technology produces missile launchers; and
that Soviet plants to produce farm machinery also produce weapons.
But requests for U.S. export licenses are still processed under a
system that is biased against protecting national security. The
political pressure exerted by commercial interests together with our
governmeAt's structure and system for processing such licenses
effectively create a presumption of license approval. The onus of
disapproval then falls on small, underfunded governmental units that
are asked in effect to prove that such transfers will be diverted to
military ends -- definitive proof that is often' only available once our
security has in fact been breached. Experience suggests reversing this
approach -- the risks of diversion are high, and great caution is
necessary.
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Allied Cooperation
I am also concerned that we have not achieved more progress toward
effective controls with our allies in COCOM. Recent discussions led
to several agreements in principle which appear to promise more vigorous
cooperation in the future. But it is particularly true of these matters
that the "devil is in the details." Alliance-level mechanisms for
oversight and harmonization of national efforts on technology transfers
are still inadequate. National-level procedures are also still quite
wo,lk: among our allies, only France has a national approach to export
licensing similar to ours in providing formally for military advice
and review.
At the same time, the inadequacy of COCOM measures has helped
corrupt our national control systems. Arguments based on the "foreign
availability" of even dual-use technologies are repeatedly and
successfully pressed within our government to permit transfers. There
is little sense in permitting transfers that could threaten our security
merely because the items could be obtained elsewhere; logic like this
would have parents supplying heroin to their children. A punitive
unilateral approach, however, risks creating a system of penalties
that would have the effect of driving high-technology firms abroad.
Daaling effectively with this type of problem requires strong allied
cooperation, which the Administration should do much more to encourage.
Other Measures
Furthermore, there is too little recognition of the fact that
problems of technology transfer and loss require more than effective
export controls. Moscow's campaign to acquire our technology is
sophisticated, diverse, and well-coordinated. opportunities are fully
exploited: visits and exchanges, exploratory contract discussions,
academic meetings and programs, public information services, and appli-
cations under the Freedom of Information Act. Covert and clandestine
methods, however, have virtually become the method of preference for
the Kremlim, apparently because they are so effective. A host of
espionage techniques are involved, including intercepting communications,
suborning or otherwise recruiting personnel, and theft and black-market
operations. And all of these techniques are in addition to the methods
I noted earlier to avoid and evade our export controls -- illegal
diversions, front and dummy corporations, and foreign re-transfers.
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ACTION NEEDED
.Specifically, Mr. President, I urge the following improvements and
innovations in government programs:
First: The role of the Defense Department needs to be considerably
strengthened. Responsibility for defense concerns with technology
transfer should be centralized in a policy level office with adequate
resources to discharge DOD's responsibilities regarding license appli-
cations as well as intelligence monitoring arid cooperation with our
allies. In previous years, DOD failed to'?fund its technology transfer
offices adequately to perform its statutory role. Congress should
consider this need specifically in reviewing the FY'83 budget and
earmark funds for it, preferably by establishing a separate line item.
Second: The role of the Intelligence Community should also be
strengthened. The Senate Select Committee on Intelligence, of which I
am a member, has been particularly interested in problems of technology
transfer and loss. Initiatives to improve our intelligence process in
this area have recently been undertaken by the Administration, and we
will look carefully at their budget requests and performance. Here
again, earmarked funds might prove helpful. Particularly important is
the structuring of the policy process so that coordinated, current
intelligence from the community as a whole can be brought to bear on
policy judgments about technology transfer and loss. Sound information
and analysis cannot alone ensure prudent policy decisions. but it will
help considerably.
Third: All U.S.-Soviet exahanges and agreements need to be
carefully reviewed for full reciprocity -- not just on paper, but in
practice. Academic exchanges, for example, should involve people of
comparable professional level and interests as well as simply equal
numbers. It is particularly important that we keep in mind the
difficulties posed by such exchanges and agreements for our foreign
counterintelligence programs, and that we strive to reduce the exploita-
tion of our political freedoms by hostile intelligence services.
acre, too, Congress should investigate how legislation could help to
accomplish genuine reciprocity in our dealings with the Soviet Union
and its allies. An important part of full reciprocity would be requiring
the disclosure of ownership for communist-owned U.S. chartered commercial
entities.
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Fourth: More far-reaching public awareness ograms need to be
imclemeuted. The FBI and Defense Department have begun awareness
programs of the hostile intelligence threat for U.S. defense contractors,
and various concerned officials have been cooperating with the press
in bringing this story to the public. Much more needs to be done,
however, particularly to make the academic community aware of the
threat from hostile intelligence agencies. Information and awareness
are more secure safeguards than censorship.
Fifth: Consistent and determined U.S. leadership is required to
forge an effective consensus on these matters within COCOM. Sustained
evidence of a serious U.S. conviction to control transfer and losses
is the key to effective allied coopiration. Both our government and
thoi governments of our allies can be victims of "union-busting"
pressuro from large commercial interests. Congress should undertake
.ngs and investigations aimed at reducing this and other obstacles
to improving COCOH'a effectiveness.
Sixth: Strategic trade polisy_ should include credit controls.
The Soviet lack of hard currency means that a great deal of the
hemorrhage of our technology might be restricted if the Soviets and
their allies had to pay for their acquisitions in cash at time of
surchase. Today the debt of the Warsaw Pact countries to the West is
ahaiL $30 billion. Poland is unable to service its $26 billion share
that debt, and there are increasing signs that Moscow's hard currency
shortages are mounting. The export of Western capital through extensions
of credit permits the Soviets to fortify their military-industrial
system every bit as much as the trassfer of technology. The United
Sfates, in concert with its allies, should begin now to develop a
multilateral approach to comprehensive controls on credit to the Soviet
daiou and its allies. This might he done under the aegis of COCOM.
Seventh: Technology transfer control considerations should be
incorporated into the design and production of sensitive advanced
products. For years, the United States government and others have
struggled with the probloms of controlling loss of selected technologies
by political and diplomatic means. Many of these problems could be
obviated at the engineering stage. Semi-conductors and integrated
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Fourth: More far-reaching public awareness ograms need to be
imclemeuted. The FBI and Defense Department have begun awareness
programs of the hostile intelligence threat for U.S. defense contractors,
and various concerned officials have been cooperating with the press
in bringing this story to the public. Much more needs to be done,
however, particularly to make the academic community aware of the
threat from hostile intelligence agencies. Information and awareness
are more secure safeguards than censorship.
Fifth: Consistent and determined U.S. leadership is required to
forge an effective consensus on these matters within COCOM. Sustained
evidence of a serious U.S. conviction to control transfer and losses
is the key to effective allied coopiration. Both our government and
thoi governments of our allies can be victims of "union-busting"
pressuro from large commercial interests. Congress should undertake
.ngs and investigations aimed at reducing this and other obstacles
to improving COCOH'a effectiveness.
Sixth: Strategic trade polisy_ should include credit controls.
The Soviet lack of hard currency means that a great deal of the
hemorrhage of our technology might be restricted if the Soviets and
their allies had to pay for their acquisitions in cash at time of
surchase. Today the debt of the Warsaw Pact countries to the West is
ahaiL $30 billion. Poland is unable to service its $26 billion share
that debt, and there are increasing signs that Moscow's hard currency
shortages are mounting. The export of Western capital through extensions
of credit permits the Soviets to fortify their military-industrial
system every bit as much as the trassfer of technology. The United
Sfates, in concert with its allies, should begin now to develop a
multilateral approach to comprehensive controls on credit to the Soviet
daiou and its allies. This might he done under the aegis of COCOM.
Seventh: Technology transfer control considerations should be
incorporated into the design and production of sensitive advanced
products. For years, the United States government and others have
struggled with the probloms of controlling loss of selected technologies
by political and diplomatic means. Many of these problems could be
obviated at the engineering stage. Semi-conductors and integrated
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TALKING NOTES FOR DR. LARA H. BARER, JR., TO THE SENATE PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS
In my testimony today, I would like to follow up on Senator Nunn's
opening statement in which the senator constructed, for purposes of
discussion, a composite of a department within the Kremlin whose sole function
is to obtain strategic and dual-use technology from the United States, Japan,
and from other Western democracies.
In an interview published in US News and World Report on March 8, 1982,
the Director of Central Intelligence, Mr. William Casey, said:
We have determined that the Soviet strategic advances
depend on Western technology to a far greater- degree than
anybody ever dreamed of. It just doesn't make any sense for as
to spend additional billions of dollars to protect ourselves
against the capabilities that the Soviets have developed
largely by virtue of having pretty much of a free ride on our
R&D. They use every method you can imagine--purchase, legal
and illegal; theft; bribery; espionage; scientific exchange;
study of trade press, and invoking the Freedom of Information
Act--to get this information.
We found that scientific exchange is a big hole. We
send scholars or young, people 4o the Soviet Union to study
Pushkin poetry; they send a 45-year-old man out of their KGB or
defense establishment to exactly the schools and the professors
who are working on sensitive technologies.
The KGB has developed a large, independent, specialized
organization which does nothing but work on getting access to
Western science and technology. They've been recruiting about
100 young scientists and engineers a year for the last 15
years. They roam the world looking for technology to pick-up.
Back in Moscow there are 400 or 500 assessing what they might
need and where they might get it--doing their targeting and
then assessing what they get. It's a very sophisticated and
fat-flung operation.
Thus, Senator Nunn's composite is basically accurate. There are offices
and bureaus within the Kremlin, throughput the USSR, and throughout the Soviet
Bloc, whose principal purpose is to transfer high technology from the West to
the Soviet sphere of influence. I will describe several of the vehicles the
Soviets use in their efforts to obtain our strategic technology, and then give
some examples of how successful these efforts are.
Classical Espionage
The newspapers are full of accounts of how Soviet and Soviet Bloc
individdals, some of whom have diplomatic immunity, have been involved with
traditional hand-in-the-safe spy rings. We have all seen photographs in
national magazines about the communications intercept apparatus at the Soviet
embassies and consulates. These traditional methods are used primarily to
obtain high-priority technology that cannot be obtained through less risky
techniques. The effectiveness of these methods is shown by the amount of
effort the Soviets put into them and by the amount of priority they give these
activities. Such traditional theft methods are most effective at obtaining
technology that is considered most sensitive by our side.
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A recent trial in California gave public evidence of the extent of
Soviet Bloc efforts in acquiring information on a proposed US satellite system
at TRW, Inc. The trial of two US citizens, Christopher Boyce and Andrew
Dalton Lee, showed the extent and effectiveness of the Soviet espionage
activities. In this case, the Soviets supposedly acquired the Top Secret
details on a proposed communications system for the CIA. I an not
.knowledgeable about the classified details of the system. In this case, all I
know is what I read in the newspapers. Regrettably, such Soviet espionage
efforts are not rare.
Open Literature and the Freedom of Information Act
We live in a free society and are proud of that fact. One of our
greatest strengths is the information transfer that our Constitution allows
and that we encourage among our .own people. Tapping into this information
flow is an extremely fruitful technique for the Soviets to use. The United
States government is the focus for much of the information flow on sensitive,
high-technology items. Through use of the US government repositories set up
to handle unclassified documents and through use of the Freedom of Information
Act (FOIA) to retrieve formerly classified or currently classified documents,
foreign agents have been able to acquire information of significant strategic
value. Also of high importance is the fact that they have been able to tie up
a significant quantity of US government resources. These resources are
dedicated to answering Freedom of Information Act requests, checking for
downgrading and classification of documents, and evaluating national security
implications of compilations of documents. Many US government agencies have
had to set up offices to handle these requests and divert highly competent
people from analysis activities to evaluation of FOIA requests, some from
foreign nationals.
In our society, one of the most treasured freedoms is free speech. This
reaches its epitome in the freedom of organizations to produce periodicals
covering whatever they wish to talk about. As a result, magazines in this
country, such as Aviation Week and Spare Technology, carry a large quantity of
information of particular defense interest. While these publications do serve
an extremely useful purpose in keeping the defense community informed about
the complex activities going on in the Free World, they also provide a conduit
for information to the Soviets. Information suggests that the Soviets place a
very high priority on Western technical journals, including providing
translations in near real time with publication. In many cases, the
information available in these journals is of higher quality than that
available in government documents.
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Student Exchanges
As part of the spirit of detente, the US and the Soviet Union entered
into student exchange programs. This was a particular coup on the part of the
Soviets, since the best technology transfer organization in the world is the
United States university system. In the US universities, a very large number
of highly qualified, highly motivated, superbly trained people spend their
working lives trying to come up with better way5 to transfer technology to
their students. These people are called university professors. Its their
job, and they do it very well.
Currently, approximately one-half of the graduate students in the United
States are not US citizens. The non-US fraction for many science and
engineering programs is higher. Projections indicate that by 1985 at some
universities, such as the University of California at Berkeley, up to 90% of
the graduate students may not be US citizens. This is particularly worrisome'
when one considers the quality of graduate education available in the United
States.
While there are US Government restrictions on Soviet participation in
graduate programs, these restrictions are not applied as stringently to Soviet
Bloc students. Strong evidence indicates that information that is transferred
to the Soviet Bloc is immediately available to the Soviet Union. Thus, the
best in US graduate studies is available, albeit indirectly, to the Soviets.
This helps alleviate the Soviet problems with training really first-rate
engineers.
As an example of the kind of information that is available, let us
examine some Electrical Engineering programs. At several United States
universities, including MIT and Cal Tech, one can start a particular program
in Electrical Engineering with a blank notebook; at the end of one year, the
successful student will leave this particular set of courses holding in his
hand a microprocessor chip, a microprocessor being a computer on one
integrated circuit. During that year, the student will have used
computer-aided design to design the microprocessor, he will have used
computer-aided layout to lay out the processor on silicon, manufactured the
chip either in the laboratory or in collaboration with a manufacturer, tested
the circuit, packaged the circuit, mounted the microcomputer on a printed
circuit board, and made the resulting computer work. Thus, in one year, the
student will have been exposed to an intense, carefully orchestrated program
covering the United States integrated circuit industry. This would have been
done under the supervision of experts, with careful hand-holding throughout
the program to make sure that the student understood his activities.
Fortunately, evidence indicates that the number of foreign students who have
gone through these programs so far is minimal.
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Foreign-Owned Corporations
The tangled web of ownership of many US corporations obscures the
identity of their true owners. In the event Eastern Bloc or Soviet
corporations exist in the United States, they can be recipients of US
technology without the donors of that technology realizing that the
information is going to a foreign government. This kind of foreign ownership
of US corporations presents a potential serious hazard. I have not delved
Into this particular topic enough to give detailed examples.
Scientific Exchanges
Again, as part of detente, the US entered into several bilateral
agreements with the Soviet Union on various scientific and technical subjects,
including atomic energy. As part of these agreements, the US furnished
technical information and equipment, such as a superconducting magnet for a
Soviet magnetohydrodynamics (MHD) system. This magnet was produced with
state-of-the-art US machining and quality control equipment, and was far
beyond anything the Soviets could build for themselves. It was loaned to the
Soviets as part of an exchange agreement in return for participation in the
MHD experiments.
The loan of the magnet to the Soviets was approved after review by the
DoD, the DOE, and various intelligence agencies. It was felt that the US
would acquire, experience operating the magnet in a facility whose equivalent
would not exist in the West before 1986 or 1987. Since all the US technical
reviewers agreed that the Soviets could not reverse-engineer the magnet to
acquire the critical manufacturing ,techniques, the loan was approved.
We received some return, but, as often happens in scientific research,
not all that we had hoped for. This kind of transfer, wherein we loaned a
multimillion dollar magnet in return for intangibles, provides a source of
technical equipment to the Soviets.
Business Intermediaries
As a final area for consideration, business intermediaries--that is. US
corporations that act as intermediaries for Bloc firms without the
manufacturers being aware of such arrangements--are a major source of Soviet
covert technology acquisition. The use of these companies provides an open
conduit, lubricated by greed, for transferring immense quantities of materiel
and technology to the Bloc.
The use of business intermediaries is an especially attractive device
for the Soviets. Much of the strategic and dual-use high technology the
Soviets obtained from the US is obtained through this particular approach.
The best known--and certainly one of the most successful for the Soviet Union,
and perhaps one of the most damaging to the US--was a business intermediary
syndicate headed by a 34-year-old West German named Werner J. Bruchhausen.
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The Bruchhausen scheme was based on his ownership of more than. ten
electronics firms in southern California and West Germany and his close ties
to other firms elsewhere in western Europe. He would meet with Soviet and
Sr.,,iet Bloc high-technology customers, they would discuss what specific
high-technology components the Soviets needed, and Bruchhausen would then have
his companies in California buy the desired goods. Then, by use of false
shipping declarations, Bruchhausen's organization would ship the goods,
illegally, out of the United States into Western Europe. From there, they
were transshipped into the Soviet sphere.'
In 1981, the west coast part of the Bruchhausen syndicate, after at
least four years of very successful operations, was immobilized, and two of
its principals brought to trial.
Of particular interest to me in the Bruchhansen case is the information
it gives us about Soviet intentions. We delude ourselves if we think the
.Soviets enter the black market in search of strategic components in a
helter-skelter style, buying up dual-use commodities without rhyme or reason.
The truth of the matter is that the Soviets and their surrogates buy nothing
they don't have specific, well defined need for. They know exactly what they
want--right down to the model number--and what they want is part of a
carefully crafted design.
As an example of this kind of acquisition, among the strategic
components that Bruchhausen directed his accomplices at the Continental
Technology Corporation (CTC) in Southern California to buy for the Soviets
were the following:
The above list of Soviet acquisitions includes many examples, but, by no
means, is it exhaustive. The equipment detailed above was a fraction of the
exports--part of the fraction used in preparing for litigation. From personal
examination of the air-waybills, I believe that there were about six times as
many illegal exports by CTC over a 3-year period.
Because my specialty is advanced computer systems, I can see an obvious
pattern. Let's consider overall what the Soviets obtained and what use they
can make of it.
The Soviets are having serious problems. developing their integrated
circuit/microcomputer industry. These problems are centered around the areas
of process control and quality assurance. The result of such problems is a
serious lack of reliable hardware for developmental systems. The
above-mentioned items alleviate this lack by significantly contributing to the
Soviet availability of hardware for developmental and production systems. In
addition to miscellaneous, but important, hardware, the categorization of the
larger hardware--test equipment, etc.--that is in the above list, is clear.
'There is no question in my mind that the major pieces of hardware
purchased from Continental Technology Corporation over the last four years of
the corporation's operation, taken together, include at least one complete
integrated circuit processing plant. This conclusion is ineluctable when you
examine the totality of information available on the case. The Soviets
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purchased everything they needed for such a plant, including: saws for
cutting silicon crystals, equipment for making masks for integrated circuit
production, plotters to draw the circuits, basic computer-aided-design systems
for integrated circuit design, diffusion ovens for circuit production,
ion-implantation systems for circuit production, photo-lithographic systems
for integrated circuit production, scribers for separating integrated circuits
on wafers, testers for testing integrated circuits on wafers, bonding
equipment for bonding connecting leads to integrated circuits, and packaging
equipment for packaging the circuits. As a result, they have purchased
clandestinely all the hardware they need for equipping a good integrated
circuit production plant. They showed minimal interest in purchasing
production hardware that was not state of the art. In summary, they showed
very good taste.
High-quality integrated circuits are the heart of modern military
electronics. Integrated circuits form the basis for military systems which
are more flexible, more capable, and more reliable than systems using discrete
electronic components. The production tooling and equipment obtained by the
Soviets from Continental Technology Corporation will significantly improve the
Soviet's capability to produce such circuits.
The Soviets purchased everything they needed for their plant, among the
many other things they bought. The sequence in which they purchased things
and the quantities indicate the production plant would be of medium size and
should be capable of delivering a 'high-quality product. There is a
significant question in my mind as to whether or not they have enough trained
people available to use this plant 24 hours per day, 7 days per week, but they
do have the hardware.
' Because of Werner Bruchhausen and his associates, the US gave up
technology, much of which the Soviets could not have obtained elsewhere. It
would have taken them considerably longer to equip the plant, if they could
have equipped it at all, with indigenous capabilities.
What is lost is lost; we cannot get it back. But there is a positive
side to the case: it is in what we can learn from it. There is a wealth of
intelligence to be learned from the Bruchhausen case. It tells us much about
Soviet shortcomings and Soviet strengths and their long-term strategic.
objectives.
Technological Development
In general, the development of a technology can be broken into several
areas: theoretical research, applied research, development, and production.
Let us examine these areas separately.
The Soviets have historically spent a large amount of their efforts
supporting theoretical research. The Academy of Sciences in the Soviet Union
is heavily populated with theoreticians. As a result, the Soviets have the
theoretical basis for almost any technology they wish to exploit. In
addition, the theoretical bases for technology in the West exist in the minds
of the theoretical scientists who develop it. Much, if not most, of this
technology is put in the open literature. Scientists would not be doing their
jobs if they didn't like to advance the cause of human knowledge. There are
many more lucrative ways to spend your life than doing theoretical research.
You don't do it if you don't want to. The way to survive doing theoretical
research is to publish. Scientists do.
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Experimental research has very slightly less support in the Soviet Union
than theoretical research but still, by Western standards, extraordinarily
good support. Again, experimental research in the West is done by people who
are advancing the cause of science and, for that and personal reasons, want to
and do, publish thoroughly. The Western literature is available to the
Soviets. Although their literature is carefully censored, much of it is
available to us. In the theoretical and experimental research areas, to
varying degrees, the two countries support each other.
In the area of development, the West has a tremendous lead. This lead
is enhanced by the flexibility inherent in the Western political and economic
system. Western countries are encouraged, by tax advantages and simple
self-interest, to do research into appropriate areas in order to increase
their profitability. In the Soviet system, on the other hand, the incentive
for doing broad-ranging and possibly risky research is low. The penalty for
failure is high. The penalty for failure in the US is economic and
professional, at worst. (It isn't always even that, of course.) The ready
availability of components and technology in the West encourages wide-ranging
developmental efforts. There is a true pyramiding effect--we build on each
other's work.
The Soviet system in preproduction can manage to produce a few of almost
any product they want, provided they are willing to devote the resources to
it. The best example of this would be the Soviet "civilian" space program, in
which they managed to put people in orbit before the US did, but at a high
cost.
In the area of serial production, i.e., the day-to-day production of
large quantities of a product, the differences between the two systems become
most obvious. The US is world renowned, and justifiably so, for the quality
of its serial production facilities. Other parts of the world, notably Japan,
are approaching the US quality and quantity in this area. The Soviet Bloc,
however, is not.
Serial production is the Achilles heel of the Soviet Bloc. Especially
in high technology areas, the big problem the Soviets have is quality
assurance. 'There may be aspects of the Soviet system which encourage poor
quality in their production--or rather, provide no incentive for high quality
in production. The Soviet system counts products, not quality products. The
monopolistic, centralized control inherent in the Soviet system provides no
incentive for the broad range of industrial workers to become better than
adequate at their jobs. One of the things that characterizes high-technology
fields is the need for superb manufacturing control. It is in this area that
the Soviets exhibit weakness and need the most help. As a secondary part of
this, they have serious problems manufacturing the tools to manufacture other
high-technology equipment. . This is what the Bruchhausen case helped alleviate
by providing a full complement of high-quality working production equipment.
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Available Manpower
One of the serious problems afflicting the Soviet economy is the lack of
qualified, highly-trained, technical people in the areas of computers and
microelectronics. One cause of this is the lack of enough computing and
electronic equipment to train the next generation of scientists/engineers.
They simply don't have enough equipment to allow students sufficient
"hands-on' practice at an early stage in their education. The Soviets are
trying to alleviate this problem by producing large, for them, numbers of RYAD
computers--copies of the US IBM System 360's and 370's.
Many of the export license requests, both in the US and elsewhere, are
for computer systems going to universities or scientific research institu'es
in the Soviet Bloc. It is, difficult to turn such requests down on the basis
of end-user since such organizations support the Soviet war machine only
indirectly. Cases like the Bruchhausen organization are more obvious.
Unfortunately, we are not making the most of the kinds of information
that result from episodes like the Bruchhausen case. When I brief various
parts of the Executive Branch on Soviet Bloc Computing, I find a suprising
lack of knowledge of the Bruchhausen case. Thus, one of the few examples of
effective compliance action is not widely understood.
Analysis
It is necessary that the US Intelligence Community coordinate
information derived abroad with data that surfaces here in the US. With
expert analysis, we can discern Soviet objectives in the area of strategic
commodities. When we know their objective, we can estimate what strategic and
dual-use items they are going to be in the market for, overtly or covertly,
and when we know what they are buying, we can make far better efforts to make
sure that such equipment and technology is not available to them. We need to
Integrate the data and, from our conclusions, we can then predict with a
satisfactory level of accuracy where the Soviets will be trying to tap into
technology.
One cannot prevent the dissemination of data forever. One can only slow
down a transfer and thereby make it more expensive for the adversary to
acquire the data. Eventually, the adversaries get any information they want
badly enough.
In the United States, the most advanced technology is often used in the
civilian sector. Fielded US military equipment is often many years behind its
civilian counterpart because of the need for greater reliability, delays in
the acquisition process, or for other reasons. On the other hand, the Soviet
military gets the best, most modern equipment as soon as it is available.
Thus, delays in the transfer of high technology to the Soviet Bloc affects the
military more seriously than it affects the "civilian' sector.
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I would like to emphasize that there is no real "civilian" sector in the
Soviet economy--it is all a State enterprise. If a plant produces civilian
shoes, and the military needs shoes, the plant's output will be modified to
fulfill the military's needs. We delude ourselves when we accept the Soviet
assurances about the "civilian" characteristics of an enterprise.
The fact that, in the long run, the information will be transferred does
not mean that we should not control it. Any obstacle we can place in the path
of technology transfer increases the amount of resources the Soviet Bloc must
devote to acquiring the information and decreases the total quantity of
information they receive. Such increases in demand on resources, albeit
increases on the seemingly inexhaustable resources of the Soviet intelligence
apparatus, are a drain on the Soviet system.
The Soviet system has difficulty in flexibly responding to new
information. As a result, the longer information is delayed, the harder it is
for the Soviets to integrate it into their production cycle. Their planning
goes on many years in advance, and the inclusion of new technology does not
automatically cause a revision in the plan. It may cause an addition to the
plan, but not necessarily a reduction in other, less productive, areas. The
highly structured environment in the Soviet Union often has a self-defeating
result: factories or enterprises will produce obsolete equipment because they
were ordered to although they have the ability to produce more modern
equipment and know about the demand for that equipment but have no authority
to produce it.
When we know better what the Soviets are attempting to acquire, we can
more effectively prevent them from succeeding. That situation is reversed
now. Many of our control efforts seem to be based on the assumption that we
can control everything. We cannot. A more thoughtful enforcement approach is
to decide which items are most important to the Soviets and focus our
attention and resources on those items.
Let as return to the Bruchhausen case for a moment. A key ingredient in
the Soviet acquired integrated-circuit manufacturing plant is a high-pressure
oxidation system. One model of this kind of system is called by the
trademarked name "Hipox." No modern integrated circuit production plant can
operate without an accurate, effective, oxidation system. The Hipcx system is
an example of the state of the art in this area. It is basically a complex
oven that precisely controls the atmosphere and temperatures involved in the
conversion of a wafer of crystalline silicon into a wafer containing several
hundred integrated circuits. Highly sophisticated integrated circuits cannot
be produced without this kind of technology.
Most high-technology components wear out over time. In fact, engineers
commonly refer to this cycle by use of the term "half-life." The half-life is
the time after which half the systems in the field will require spare parts
and/or extensive maintenance. In general, the higher the technology involved
in the system, the shorter the half-life and therefore the greater the demand
for spare parts.
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The Hipox systems, so essential to the new Soviet integerated circuit
factory, should begin to require spare parts within a few months after they
are installed. Such an integrated circuit plant is useless without working
high-pressure oxidation systems and the Hipox system does not work accurately,
if at all, if more than a very few of its components need repair. Such an
integrated circuit plant would be an integral part of ?the Soviets' economic
system for years into the future, and if the Hipox and other critical systems
cannot be serviced, that factory will slow down or be otherwise negatively
affected.
That tells us that the Soviets will soon be in the market for spare
parts for the Hipox systems, among others. Only a very few companies in the
world manufacture high-pressure oxidation systems. They are all in the West
and include, for example, Gasonics Corporation of Mountain View, California.
If our nation's investigative and enforcement apparatus were working as
effectively as it might, each of these companies could be put on notice to be .
on the alert for false documentation and other signs of a Werner Bruchhausen-
type business intermediary activity.
I do not mean to ?imply by my earlier remarks that many, or even more
than a few, of the US industrial manufacturers are venal or unpatriotic enough
to close their eyes to this kind of technology theft. However, they are very
busy; given prima-facie evidence of respectability, they do not often
investigate further. I have every reason to, believe that, given a proper
warning, the companies would report suspicious inquiries promptly and
effectively. In addition, suppliers to these companies can be alerted to
potential unusual requests.
This kind of precision targeting for export control requires the
availability of accurate technical evaluations of the components and systems
involved in an export or diversion. The expertise needed for these
evaluations is a scarce commodity. It is for this reason that the Department.
of Commerce continually calls upon technical experts from other agencies to
review complex export cases.,
The Assistant Secretary for Defense Programs, Department of Energy,
provides technical expertise and policy guidance to other regulatory agencies
with regard to export control matters; this service was also provided by the
DOE's predecessor agencies. For example, I am the chairman of the Technical
Task Group that is responsible for rewriting the US proposals to the
Coordinating Committee (COCOM) for international control of exports of
computers. Other National Laboratory experts chair other committees. My
group is devoted to computers and directly related items. Also, Department of
Commerce licensing officers call Laboratory experts, on a regular basis, to
request technical advice on complex export cases.
In other forums, I have proposed the establishment of a Center of
Expertise to provide a source of technical information for the various
government agencies involved in technology transfer/export control
activities. This will go far to help alleviate the scarcity of available
technical expertise.
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In any decision to allow or to prohibit the export of a piece of
equipment, or a technology, three factors come into play.
- First are the procedural considerations: Are the forms filled
Out correctly? Are proper concurrences received? Are the overall
characteristics of the equipment within appropriate limits, etc.?
' Second is the technical evaluation of the item to be exported.
Is the system truly appropriate for the stated end-use? Are the
statements about the end-use/end-user true?
As I have previously stated, the technical evaluation of an export case
is a very complex task-,requiring a particular expertise. The technical
evaluation is best made by an individual who is technically competent in the
field and who understands the state of the art in the West and in the Soviet
Bloc. Such individuals are rare.
The third factor in implementing export controls is policy. The
policy sets the rules: what we are allowed to export, what we are not
allowed to export.
The key consideration among the three factors--procedure, technical, and
policy--is the technical evaluation. In fact, policy is usually the result of
technical evaluation. For example, a policy that includes a prohibition
against the export of certain oscilloscopes is based on the technical
evaluation of what national security uses the adversary could make of
oscilloscopes. The US is frequently criticized for having a poorly
articulated policy on export controls or, at best, an uncertain policy.
That point may not be as clear as I would like to make it. Let me try
to say it another way. I cannot overstress the importance of having an
effective system of technical evaluation. To achieve the goal of such an
effective evaluation, we must optimize three functions.
First, we must be able to look closely at a commodity and be able to
assess its capabilities in both the commercial and the military sectors.
Obviously, the knowledge of its military uses is critical. That question can
be answered only by competent technical evaluation--implying an evaluation
done by 4 technically competent analyst.
Second, we must decide whether or not the stated end-user is who the
purchase documents and export documents purport him to be. For example, is
the end-user really a tractor factory, or is it a tank factory? That question
can be answered only with competent intalligence data. The analysis of such
intelligence data requires intelligence expertise as well as technical
expertise.
Third, we must assess the adversary's capability to use the commodity in
a manner that cound harm us. That question can be answered only with detailed
technical knowledge and competent intelligence data about the adversary's
system.
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I would like to conclude my prepared testimony with the recommendation
that, in evaluating export controls, the Committee take into account the very
important distinction between strategic and dual-use equipment versus
strategic and dual-use know-how. Even if our investigative and enforcement
capabilities were near-perfect, they would still be directed primarily against
equipment. In both the law, and in the Federal regulations, controls should
be strengthened with reference to the know-how that accompanies a product.
If the Soviets clandestinely acquire a piece of equipment, and the
equipment works, they have acquired a capability that presumably they did not
have before. Along with that equipment, especially if it is high-technology
equipment, they need the technical data that goes with it. They need the
technical manuals that support the product; they need the technical art that
enhances the equipment. ,In many ways, it may be difficult to control the
shipment of technical manuals that accompany manufactured equipment. However,
I believe that we can control the art and the support that goes with legally
acquired equipment. Showing the Soviets how to make the rope with which to
hang us does not strike me as a reasonable approach for the US to take.
I thank you very much for the opportunity to testify, and I hope that my
testimony has been useful to you.
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RESUME' OF DR. LARA H. BAKER, JR.
He received a Bachelor of Science in Civil Engineering, Master
of Science in Civil Engineering, and Doctor of Science Degree in
Environmental Engineering, all from New Mexico State University,
the last degree being granted in 1970. He is a Registered
Professional Engineer in the State of New Mexico. Since 1968 he
has been employed by the Los Alamos National Laboratory in the
Engineering Department and in the International Technology
Office. Since 1975 he has been involved half-time or more in the
area of Critical Technologies and Technology Transfer. Since 1972
he has been involved in the detailed study of Soviet Computing
Capabilities, and the study of Soviet Bloc Computing
Capabilities. He is a member of the Computer Systems Technical
Advisory Committee, a statutory committee which reports to the
Department of Commerce and to the United States Congress on
matters involving the export control of digital computers and
digital computer components. He is the DOE representative on
technology tasks groups which define the US position on the export
control of computers and which define and evaluate the rationale
for the US position.
Since 1975 he has been actively involved in export case
determinations, both for the Department of Energy and the
Department of Commerce, and in evaluating the technical risks and
merits of various export proposals. These cases, at the rate of
200 to 400 per year, involve everything from integrated circuits
through spare parts and components, through complete computer
systems, through supercomputer systems.
He has been an Adjunct Professor of Electrical and Computer
Engineering at the university of New Mexico since 1969. He
teaches Graduate Computer Science, Computer Architecture, Computer
Programming, and Computer Graphics. He has presented invited
papers at the National Computer Conference and other national
conferences. He is a member of the Association for Computing
Machinery, of the Computer Society of the Institute for Electrical
and Electronic Engineers, and various other professional and
honorary organizations. He has presented briefings on Soviet Bloc
Computing to staffs and members of Congress, throughout the
Executive Branch of the US Government, and to non-government
agencies.
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RESPONSES OF LARA H. BARER, JR., TO THE CUSTOM BUREAU, REGARDING THE
CONTINENTAL TECHNOLOGY CORPORATION CASE
CTC Invoice Number: 21 021
Manufacturer: INTEL Corporation
x
The commodity on this invoice is the INTEL System 80/20-4, a single
board microcomputer. Single board computers/microcomputers have many
commercial applications, principally in original equipment manufacturer (OEM)
applications where they are used as the controlling part of other equipment
such as a sophisticated sewing machine, a sophisticated machine tool, or a
sophisticated piece of automatic test equipment. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
21 037
INTEL Corporation
The commodity on this invoice is a Programmable Read Only Memory (PROM)
expansion board for single board computers. The board provides 16K (K = 1024)
bytes of programmable, non-erasable, memory for a microprocessor system.
Single board computer/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products would match the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
Unknown
INTEL Corporation
The commodity on this invoice is an optical isolator board, i.e. a
printed circuit board containing circuitry to isolate the input from the
output electrically. This kind of circuitry is normally used in a very high
noise environment, such as a real time military system or a civilian system
involved with aircraft or other transporation equipment.
This board is used with single board computer microprocessor systems.
Single board computer/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 010
Manufacturer: Unknown
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The commodities on this invoice are involved with single board
computers. They are the central processor with 4K (K = 1024) bytes of
read/write memory, analog input/output, that is boards for connecting to
non-digital environments, and a Direct Memory Access (DMA) controller. These
commodities are used as parts of single board computer systems. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
1194
INTEL Corporation
The commodity on this invoice is an analog input/output board which is
used to connect single hoard computers to the outside world. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 004
Manufacturer: INTEL Corporation
The commodities on this invoice are a single board computer with analog
input/output to connect to the outside world and with Direct Memory Access
(DMA) for high speed memory access. These particular commodities taken
together provide the basis for a workable control system for a relatively
small piece of equipment such as a gun firing system or a radar. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
21 033
INTEL Corporation
The commodity on this invoice is a universal prototype board which is
used in the design and development of applications for microcomputer systems.
Single board computer/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
21 016
INTEL Corporation
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The commodity on this invoice is a high speed arithmetic board used with
single board computers. It has particular application in military and
civilian signal processing applications. Single board computer/microcomputer
systems are used in most advanced weapons systems throughout the free world,
particularly in missile and aircraft systems. Their use provides a
significant increase in effectiveness with an equally significant reduction in
weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 064
Manufacturer: INTEL Corporation ?
The commodity on this invoice is a relatively small single board computer
with 1K (K S. 1024) Bytes of random access memory (RAM) and 8K Bytes of
programmable read only memory (PROM). Single board computer/microcomputer
systems are used in most advanced weapons systems throughout the free world,
particularly in missile and aircraft systems. Their use provides a
significant increase in effectiveness with an equally significant reduction in
weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
21 066
INTEL Corporation
The commodity on this invoice is a 64K (K = 1024) byte random access
memory (RAM) with a speed of 700 nanoseconds (ns) per access. This board
would be used in the design, development, and use of microcomputer systems.
Single board computer/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 065
Manufacturer: INTEL Corporation.
The commodities on this invoice are equipment for use in developing
microcomputer systems. They include an interface and execution modeling
package as well as a universal PROM (programmable read only memory)
programmer. Single board computer/microcomputer systems are used in most
advanced weapons systems throughout the free world, particularly in missile
and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 011
Manufacturer: INTEL Corporation
The commodities on this invoice are peripherals and equipment used with
microcomputer development systems. They would be embargoed because of their
direct applicability to microcomputer development systems, an embargoed
function. Single board computer/microcomputer systems are used in most
advanced weapons systems throughout, the free world, particularly in missile
and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
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These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 043
Manufacturer: INTEL Corporation
The commodities on this invoice are peripherals and equipment to be used
in developing microcomputer systems. They include an in-circuit emulator,
universal PROM (programmable read only memory) programmers, and a chassis for
mounting the above equipment. Single board computer/microcomputer systems are
used in most advanced weapons systems throughout the free world, particularly
in missile and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 006
Manufacturer: INTEL Corporation
The commodities on this invoice are used in microcomputer design and
development. One of the commodities is a very high speed (60 nanosecond) 46
(K 1024) bit Programmable Read Only Memory (PROM). One is a programmable
interface for a microprocessor development system, the others are accessories
for this effort. Single board computer/microcomputer systems are used in most
advanced weapons systems throughout the free world, particularly in missile
and aircraft systems. Their use provides .a significant increase in
effecti.eness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 009
Manufacturer: INTEL Corporation
The commodities on this invoice are peripheral integrated circuits for use
with microprocessor/ndcrocomputers. These circuits are particularly useful
for increasing the utility of microprocessors of the 8080 Family. Single
board computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21-017
Manufacturer: INTEL Corporation
The commodities on this invoice are microprocessors and other circuits.
Single board computer/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
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CTC Invoice Number:
Manufacturer:
355
21 002
INTEL Corporation
The commodities on this invoice are peripheral integrated circuits for use
with 8080 microprocessor systems. Single board computer/microcomputer systems
are used in most advanced weapons systems throughout the free world,
particularly in missile and aircraft systems. Their use provides a
significant increase in effectiveness with an equally significant reduction in
weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 007
Manufacturer: Motorola Incorporated
The commodity on this invoice is a very high speed (15 nanosecond cycle)
64 bit capacity random access memory (RAM). This speed of RAM would normally
be used in the central processor of a general purpose computer for civilian
applications, or in military hardware that probably incorporates a
microcomputer and is used particularly for signal processing. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: Unknown
Manufacturer: INTEL Corporation
The commodity on this invoice is a 2K (K = 1024) bit erasable programmable
read only memory (EPROM) which is rated for military temperature ranges (minus
650C to plus 1250C) and is packaged in a metal can. The components with
this kind of temperature range and packaging have essentially no civilian
applications; their military applications tend to be aerospace uses. Single
board computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
21 005
Motorola Incorporated
The commodities on this invoice are extremely high speed memory devices
used in the design and development of military microcomputer controlled
equipment. The random access memories (RAM's) are 256 bits in capacity and
15-26 nanosecond speeds. The quantities involved in this shipment imply use
in a production system, rather than in a development system. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
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CTC Invoice Number: 8019
Manufacturer: INTEL Corporation
The commodity on this invoice is a 2048 bit, one microsecond cycle,
erasable programmable read only memory (EPROM). This equipment is designed
for use in developing microcomputer systems. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would match the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also match the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
21 051
INTEL Corporation
The commodities on this invoice are integrated circuits of differing
compositions. The HM-1-7460-5 is a 4096 bit, 60 nanosecond cycle programmable
read only memory (PROM). This circuit: is extremely fast and is designed for
production versions of microcomputer systems. Civilian use of a circuit of
this speed would be unusual, except in systems with extraordinary speed
constraints. Single board computer/microcomputer systems are used in most
advanced weapons systems throughout the free world, particularly in missile
and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 087
Manufacturer: Motorola Incorporated
The commodity on this invoice is an extremely high speed random access
memory (RAM). The devices have a capacity of 64 bits and a speed of 15
nanoseconds. The quantity, 5,000, implies their use in a production system,
rather than in a development system. Such devices are normally used as
registers in general purpose computers and in military systems as part of
signal processing hardware. Single board computer/microcomputer systems are
used in most advanced weapons systems throughout the free world, particularly
in missile and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 8007
Manufacturer: INTEL Corporation
Tho commodity on this invoice is a 2048 bit erasable programmable read
only memory (EPROM). At a cycle time of 650 nanoseconds, this EPROM is
normally used in microprocessor development systems. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products match the state of the art of new designs in the destination country,
as of the time of shipment.
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CTC Invoice Number: 1196
Manufacturer: Motorola Incorporated
The commodity on this invoice, a 64 bit capacity, 15 nanoseconds cycle,
random access memory (RAM), is normally used as high speed registers in the
central processor of a general purpose computer or for high speed data storage
in military signal processing computers. The extremely high speed of this RAM
implies equipment of significant processing capability. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 031
Manufacturer: INTEL Corporation
The commodities on this invoice are integrated circuits used in' the design
and development of microcomputer systems. Both pieces of hardware are
extremely fast, one being a 4096 bit programmable read only memory (PROM),
with a cycle of 70 nanoseconds, the other a 4096 bit random access memory
(RAM) with a cycle of 250 nanoseconds. Both these devices are used in
microcomputer systems. Single board computer/microcomputer systems are used
In most advanced weapons systems throughout the free world, particularly in
missile and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 015
Manufacturer: INTEL Corporation
The commodities on this invoice are microprocessors and integrated
circuits associated with microprocessor development systems. Some of the
integrated circuits are particularly fast, 70 nanoseconds, 4096 bit
programmable read only memories (PROM's), most of the rest are peripheral
circuits designed to support microprocessor systems. Single board
computer/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21-013
Manufacturer: INTEL Corporation
The commodities on this invoice are integrated Circuits of varying
capacities. One of the circuits is a military-temperature-range-approved
integrated circuit in a ceramic package, a circuit particulary designed for
immediate use in military systems. Another circuit is an extremely fast (70
nanosecond) 4096 bit programmable read only memory (PROM) which is used in
microcomputer systems and microcomputer systems developments. The other
integrated circuits are faster than would normally be approved for export.
Single board computer/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
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These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 1152
Manufacturer: Various, including INTEL Corporation
The commodities on this invoice are integrated circuits and other
components, principally high speed, low powered, devices used in
microprocessor/microcomputer systems, but also used in several other kinds of
electronic hardware. The variety of the equipment in this list suggests it is
a list of spare parts for other equipment. Most of the integrated circuits on
the list are not approvable for export.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. Some of
the products also exceed the state of the art of new designs in the
destination country, as of the time of shipment.
CTC Invoice Number: 21 032
Manufacturer: Rockwell International
The commodity on this invoice is used in the design and development of
bubble memory systems. These memory systems are used in microcomputers as
mass storage and in aircraft, and spacecraft as replacements for tape
recorders.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also match the state of the art of new designs in the destination
country, as of the time of shipment.
The technical data snipped with these bubble memory boards is not
approvable for shipment under the technical data regulations.
CTC Invoice Number: 1146
Manufacturer: Unknown
The commodity on this invoice is used in the manufacture of computer discs
and would be embargoed for that reason. The equipment is within the state of
the art of the equipment being manufactured in the destination country, as of
the time of shipment. It has no direct civilian or military application
outside of the manufacture of computer equipment.
CTC Invoice Number: Unknown
Manufacturer: Unknown
This equipment appears to be spare parts and tooling for use in
manufacturing computer disc drives and, as such, is embargoed. The equipment
is within the state of the art of equipment being manufactured in the
destination country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
1137
Unknown
The commodity on this invoice is used in the manufacture of magnetic discs
for use on computer systems, and as such, it is embargoed under CCL 1355.
lhis equipment matches the state of the art of equipment being manufactured in
the destination country, as of the time of shipment.
The equipment has no direct military or civilian application except in the
manufacture of computer discs.
CTC Invoice Number: 7039
Manufacturer: Various, including Hewlett Packard
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The commodities on this invoice are equipment used in the manufacture and
test of integrated circuits. As such, it is embargoed under CCL 1355. They
are applicable to microcomputer systems. This type of equipment is often a
bottleneck on a production line for integrated circuits. The lack of fast and
accurate test equipment can virtually shut down a production facility. Often,
the throughput of the test equipment is the controlling factor in the
productivity of a plant. The test equipment can test integrated circuits for
military use equally as well as it can test circuits for civilian use.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
22 005
Unknown
The commodity on this invoice is used in checking the integrity of coaxial
cables. Coaxial cables have extensive use in radar and in signal processing
systems for the military. The need for ensuring the integrity of these
systems is very high. As a result, these commodities have direct military
application. They exceed the state of the art of equipment being manufactured
in the destination country, as of the time of shipment.
CTC Invoice Number: 8015
Manufacturer: Gasonics Corporation
The commodities on this invoice are a high pressure oxidation system used
In the manufacture of integrated circuits. This is the standard method of
high speed, high quality integrated circuit production in the United States.
Integrated circuits are used in virtually all modern civilian and military
high technology systems. The technology to produce integrated circuits is
embargoed because of the inability to differentiate between equipment that
produces civilian integrated circuits and equipment that produces military
integrated circuits, principally because there is no difference in the
equipment.
The products on this invoice far exceed the state of the art of equipment
being manufactured in the destination country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
8014
Gasonics Corporation
The commodities on this invoice are a high pressure oxidation system used
in the manufacture of integrated circuits. This is the standard method of
high speed, high quality integrated circuit production in the United States.
Integrated circuits are used in virtually all modern civilian and military
high technology systems. The technology to produce integrated circuits is
embargoed because of the inability to differentiate between equipment that
produces civilian integrated circuits and equipment that produces military
integrated circuits, principally because there is no difference in the
equipment.
The products on this invoice far exceed the state of the art of equipment
being manufactured in the destination country, as of the time of shipment.
CTC Invoice Number: 8021
Manufacturer: Gasonics Corporation
The commodity on this invoice is the technical data for the Hipox
oxidation ovens referred to in the previous two entries. This technical data
is embargoed by technical data regulations and far exceeds the data available
on production or design systems in the destination country, as of the time of
shipment.
CTC Invoice Number: 2049
Manufacturer: Rockwell International
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The commodities on this invoice are bubble memory chips and bubble memory
controller chips. These integrated circuits are used in equipment as mass
memory for microcomputers and as replacements for tape recorders in military
and space related systems. Single board computer/microcomputer systems are
used in most advanced weapons systems throughout the free world, particularly
in missile and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 044
Manufacturer: INTEL Corporation
The commodities on this invoice are microcomputer development systems.
They are used to develop microprocessor/microcomputer systems for civilian and
military applications. Single board computer/microcomputer systems are used
in most advanced weapons systems throughout the free world, particularly in
missile and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
21 035
INTEL Corporation
The commodities on this invoice are microprocessor development systems.
They are used to develop microcomputer/microprocessor systems for civilian and
military applications. Single board computer/microcomputer systems are used
in most advanced weapons systems throughout the free world, particularly in
missile and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 012
Manufacturer: INTEL Corporation
The commodities on this invoice are microcomputer development systems.
They are used to develop microcomputer/microprocessor systems for civilian and
military applications. Single board computer/microcomputer systems are used
in most advanced weapons systems throughout the free world, particularly in
missile and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
21 024
INTEL Corporation
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The commodities on this invoice are microcomputer development systems.
These are used for the development of microprocessor/microcomputer systems for
civilian and military applications. Single -board computer/microcomputer
systems are used in most advanced weapons systems throughout the free world,
particularly in missile and aircraft systems. Their use provides a
significant increase in effectiveness with an equally significant reduction in
weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 1155
Manufacturer: INTEL Corporation
The commodities on this invoice are microcomputer development systems.
These are used for the development of microprocessor/microcomputer systems for
civilian and military applications. Single board computers/microcomputer
systems are used in most advanced weapons systems throughout the free world,
particularly in missile and aircraft systems. Their use provides a
significant increase in effectiveness with an equally significant reduction in
weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
.products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
8051
Fairchild Instrument Corporation
The commodity on this invoice is a test system for the production testing
of integrated circuits. This test system is necessary and critical for the
test of civilian or military microcircuits. This is an area in which the
destination country falls far behind the United States in capability, and the
test system is applicable to integrated circuits for military applications.
Single board computers/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 1014
Manufacturer: Fairchild Instrument Corporation
The commodities on this invoice are spare parts and extensions for the
Fairchild Xincom test systems referred to on CTC Invoice number 8051, among
others. As such they continue and enhance the capabilities of the
microprocessor test system previously referred to.
The products also exceed the state of the art of new designs in the
destination country, as of the time of shipment.
CTC Invoice Number: 1016
Manufacturer: Fairchild Instrument Corporation
The commodities on this invoice are spare parts and extensions for the
Fairchild Xincom test systems referred to on CTC Invoice number 8051, among
others. As such they continue and enhance the capabilities of the
microprocessor test system previously referred to. ,
The products also exceed the state of the art of new designs in the
destination country, as of the time of shipment.
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CTC Invoice Number: 1017
Manufacturer: Fairchild Instrument Corporation
The commodities on this invoice are spare parts and extentions for the
Fairchild Xincom test systems referred to on CTC Invoice number 8081, among
others. As such they continue and enhance the capabilities of the
microprocessor test system previously referred to.
The products also exceed the state of the art of new designs in the
destination country, as of the time of shipment.
CTC Invoice Number: 8071
Manufacturer: Fairchild Instrument Corporation
The commodity on this invoice is a test system for the production testing
of integrated circuits. This test system is necessary and critical for the
test of civilian or military microcircuits. This is an area in which the
destination country falls far behind the United States in capability, and the
test system is applicable to integrated circuits for military applications.
Single board computers/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 1091
Manufacturer: Fairchild Instrument Company
The commodity on this invoice is a test system for the production testing
of integrated circuits. This test system is necessary and critical for the
test of civilian or military microcircuits. This is an area in which the
destination country falls far behind the United States in capability and the
test system is applicable to integrated circuits for military applications.
Single board computers/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 1040
Manufacturer: Fairchild Instrument Corporation
The commodity on this invoice is a test system for the production testing
of integrated circuits. This test system is necessary and critical for the
test of civilian or military microcircuits. This is an area in which the
destination country falls far behind the United States in capability, and the
test system is applicable to integrated circuits for military applications.
Single board computers/microcomputer systems are used in most advanced weapons
systems throughout the free world, particularly in missile and aircraft
systems. Their use provides a significant increase in effectiveness with an
equally significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 073 -
Manufacturer: California Computer Products
Incorporated
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The commodity on this invoice is a complete off-line high-precision flat
bed plotter system. The plotter involved, the CALCOMP-748 plotter, is precise
enough and big enough to directly draw the masks needed for integrated circuit
production. For that reason the plotter associated equipment is embargoed.
The integrated circuits produced with masks drawn on this plotter can be used
for civilian or military applications and as such are embargoed.
The products exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 074
Manufacturer: California Computer Products
Incorporated
The commodities on this invoice are accessories for the high precisionc
plotter referred to on CTC Invoice number 21 073. As such they are embargoed
for that application. These particular pieces of equipment are within the
state of the art of the country of destination, however, they could not be
shipped as part of the plotter system.
CTC Invoice Number: 21 075
Manufacturer: California Computer Products
Incorporated
The commodities on this invoice are spare parts for the plotter referred
to on CTC Invoice number 21 073. As such they would be embargoed because of
the direct military application of the plotter. The parts themselves may be
embargoed because they contain embargoed technology. These products would
exceed the state of the art of equipment being manufactured in the destination
country as of the time of shipment.
CTC Invoice Number: 22 004
Manufacturer: Tektronics Incorporated
The commodity on this invoice is an extremely high speed (350 megahertz)
oscilloscope with direct military applications in nuclear weapons testing, in
high speed signal processing systems, and in other high speed electronic
applications. This product exceeds the state of the art of equipment being
manufactured in the destination country as of the time of the shipment.
The product matches the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 1188
Manufacturer: Tektronics Incorporated
The commodities on this invoice are accessories for the high speed
oscilloscope referred to on CTC Invoice 22 004. As such they are embargoed.
These products exceed the state of the art of equipment being manufactured in
the destination country as of the time of shipment. The products also exceed
the state of the art of new designs in the destination country, as of the time
of shipment.
CTC Invoice Number: 1003
Manufacturer: Data General Corporation
The commodity on this invoice is a complete Data General Eclipse S/230
digital computer with substantial peripheral and input/output communication
equipment. This general purpose computer could be licensed if a license were
apdlied for and certain characteristics of the computer were deleted. As a
general purpose computer it is applicable to many civilian and military
applications. This particular configuration seems applicable to the control
and monitoring of the manufacture of integrated circuits.
The products also exceed the state of the art of new designs in the
destination country, as of the time of shipment.
CTC Invoice Number: 21089
Manufacturer: Data General Corporation
g5-g29 0 - 82 - 24
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The commodities on this invoice are accessories and spare parts for the
Eclipse 5/230 computer referred to on CTC Invoice Number 1003. They would be
embargoed as spare parts for an embargoed computer. These products are within
the state of the art of equipment being manufactured in the destination
country as of the time of shipment.
CTC Invoice Number:
Manufacturer:
1131
Data General Corporation
The commodity on this invoice is a complete Data General Eclipse 5/230
computer with a very large amount of accessory hardware and software. This is
a medium size general purpose computer that is applicable to large numbers of
civilian and military general purpose applications. This size machine, with
the standard characteristics of the Eclipse 5/230, would not be approvable for
export. It contains characteristics such as a writeable control store, which
are not within the allowable limits because of the direct military application
of redesigning the system. This product exceeds the state of the art of
equipmrit being manufactured in the destination country, as of the time of
shipment.
CTC Invoice Number:
Manufacturer:
1186
Unknown
The commodity on this invoice is a time delay reflectometer (TOR) cable
tester. As such it is used for testing the integrity and utility of coaxial
cables. Coaxial cables are intergral parts of military systems such as radars
and military avionics systems. These cables are also used in civilian
applications involving high frequency electronics.
This product would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
product also exceeds the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 1201
Manufacturer: Rockwell International
The commodities on this invoice are bubble memory and bubble memory
controller circuits. Bubble memories are used as replacements for tape
recorders on military aircraft and satellites. Bubble memories are also used
as bulk memory for microprocessors/microcomputer systems. Single board
computers/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number: 21 029
Manufacturer: Rockwell International
The commodities on this invoice are bubble memory and bubble memory
controller circuits. Bubble memories are used as replacements for tape
recorders on military aircraft and satellites. Bubble memories are also used
as bulk memory for microprocessors/microcomputer systems. Single board
computers/microcomputer systems are used in most advanced weapons systems
throughout the free world, particularly in missile and aircraft systems.
Their use provides a significant increase in effectiveness with an equally
significant reduction in weight and power consumption.
These products would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. The
products also exceed the state of the art of new designs in the destination
country, as of the time of shipment.
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CTC Invoice Number: 21 086
Manufacturer: Rockwell International
The commodity on this invoice is bubble memory chip. Bubble memories are
used as replacements for tape recorders on military aircraft and satellites.
Bubble memories are also used as bulk memory for microprocessors/microcomputer
systems. Single board computers/microcomputer systems are used in most
advanced weapons systems throughout the free world, particularly in missile
and aircraft systems. Their use provides a significant increase in
effectiveness with an equally significant reduction in weight and power
consumption.
This product would exceed the state of the art of equipment being
manufactured in the destination country, as of the time of shipment. This
product also exceeds the, state of the art of new designs in the destination
country, as of the time of shipment.
CTC Invoice Number:
Manufacturer:
2059
Memorex Corporation
The commodities on this invoice are very high speed, high capacity disc
storage modules and controllers. These controllers are used as auxiliary
storage on general purpose computers. Because their speed and capability make
them applicable to nuclear weapons design, and to other large hydrodynamics
calculations, such equipment is not available for export. These products far
exceed the state of the art of equipment being manufactured in the destination
country as of the time of shipment.
The products also exceed the state of the art of new designs in the
destination country, as of the time of shipment.
CTC Invoice Number: 4004
Manufacturer: Tamarack Scientific Corporation
The commodity on this invoice is a contact printer used for reproducing
the masks used in integrated circuit manufacturing. It includes ultraviolet
lighting systems, which are at the state of the art of United States
production equipment. This product is used directly in the manufacture of
integrated circuits for civilian and military applications. It is not
exportable because of the direct military utility of the equipment produced by
the product. These products far exceed the state of the art of equipment
being manufactured in the destination country as of the time of shipment.
The products also exceed the state of the art of new designs in the
destination country, as of the time of shipment.
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STAFF STATEMENT OF
FRED ASSELIN, INVESTIGATOR
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
UNITED STATES SENATE
MAY), 1982
Mr. Chairman, I am Fred Asselin. I am an investigator on the Minority
staff of the Senate Permanent Subcommittee on Investigations. Since 1969, I have
been associated with the Subcommittee either on a full time basis as a Staff
Investigator, or on loan from the personal staff of former Senator Ribicoff.
Under the Export Administration Act, the U. S. Department of
Commerce, through its Office of Export Administration, has jurisdiction over most
non-classified exports from the United States, its territories and possessions.
The Export Administration Act was passed in 1949 and has been renewed
several times since then, the most recent instance being passage of the Export
Administration Act of 1979. The Act will expire on September 30, 1983.
Mr. Chairman, 1 request that the Export Administration Act of 1979 be
received as an exhibit to these hearings and that it be printed as an appendix to the
hearing volume.
Enforcement of the Export Administration Act is carried out by the
Compliance Division of the Office of Export Administration.
The Compliance Division has three Branches -- Investigations, Intelligence
and Facilitation (Inspections).
The Minority staff of the Subcommittee has made an evaluation of the
effectiveness of the Compliance Division. An assessment of Compliance Division
resources and procedures was made. The Minority staff interviewed current and
former executives of the Division, and current and former Special Agents of the
Division. Also interviewed were law enforcement personnel from other agencies,
government intelligence officials and officials of agencies whose mission brings
them in contact with the Compliance Division.
Uppermost in our minds as we made this evaluation were the national
security implications of the responsibility vested in the Compliance Division. The
Export Administration Act itself spells out that national security responsibility
when it says that export controls shall be used?
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. . . to restrict the export of goods and technology which
would make a significant contribution to the military potential
of any other country or combination of countries which would
prove detrimental to the national security of the United States
The national security implications of the enforcement mechanism are
stated at another point in the statute when it is asserted that:
Exports of goods or technology without regard to whether
they make a significant contribution to the military potential of
individual countries or combinations of countries may adversely
affect the national security of the United States.
In addition to measuring the effectiveness of the Compliance Division in
terms of its role as an organization pledged to protect the national security, the
Minority staff evaluated the Compliance Division in terms of its being a law
enforcement entity.
It is apparent that the Commerce Department views the Compliance
Division as a law enforcement organization. Its professional personnel, who carry
the title of Special Agent, are classified as Series 1811 federal criminal
investigators. The 1811 series of federal criminal investigator is the classification
that Customs Service and drug enforcement agents and many other federal
criminal investigators are under.
The information that the Minority staff has gathered about the
Compliance Division was compared to official pronouncements which the
Department of Commerce has made about the Division -- in testimony before
Congress and in annual reports to Congress. In this regard, sources included, but
were not limited to, 1) the testimony of William V. Skidmore, Director of the
Office of Export Administration, before the Subcommittee on International
Economic Policy and Trade of the House Committee on Foreign Affairs, on March
26, 1982; 2) the Export Administration Annual Report for Fiscal Year 1980,
submitted to the Speaker of the House and the President of the Senate in February
of 1981; and 3) the Export Administration Annual Report for Fiscal Year 1981
submitted to the House and Senate in February of 1982.
Mr. Chairman, I request that these three documents be received as
exhibits to these hearings.
The investigation, which lasted more than one year, resulted in a series of
preliminary findings, which are now submitted to Subcommittee Members for their
consideration. It is our recommendation that subsequent witnesses to these
hearings from the law enforcement and national security fields be asked to
comment on the Minority staff's preliminary findings.
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1. Past Departmental Statements To Congress
In the staff inquiry we found that the Commerce Department has
overstated the effectiveness of the Compliance Division to the Congress. Whether
through deliberate action or through inadvertence, the Commerce Department has
portrayed the Compliance Division as if the Division were competently organized
and adequately staffed to enforce the Export Administration Act export controls
provisions. By contrast, our investigation found that the Compliance Division is not
effective. It is an understaffed and poorly equipped and, in certain instances,
undertrained and unqualified investigative and intelligence unit.
In his testimony before the House Subcommittee, Skidmore said that
Commerce Department officials "regard the enforcement program as an integral
part of the export control system," and that his Department's policy was to
"marshal our limited resources to exact maximum compliance with the law."
It is useful to note Mr. Skidmore's reference to "limited resources"
because the staff also will underscore the limited nature of the Commerce
Department's commitment to enforcing export controls. Moreover, the staff
inquiry concluded that the Department's commitment to export controls
enforcement is so limited, in fact, that it is impossible to expect "maximum
compliance with the law." It is optimistic to expect very much compliance at all.
In his testimony, Mr. Skidmore described the Facilitation or Inspection
Branch of the Compliance Division as being "staffed by inspectors, export control
specialists and document examiners." Then he added:
Inspectors examine cargo about to be exported from the
United States. If a suspected violation is identified, the
shipment is detained until our export control specialists can
make a determination about the legality of the export. If there
is no violation, the goods are released. Generally, those
shipments found to be in violation of the law are seized by the
U. S. Customs Service at our request. This Branch also reviews
Shipper's Export Declarations forwarded to the Compliance
Division from the Bureau of the Census. All illegal exports
detected by the Facilitation Branch are referred to the
Intelligence Branch for evaluation to determine whether further
investigation is necessary.
Our staf f investigation revealed the number of inspectors for the entire
nation is five or six ? and five of them are located at the John F. Kennedy
International Airport in New York. On a rotating basis, one of the five inspectors
is on travel much of the time, trying to conduct inspections for the rest of the
nation. Some airports and seaports never are visited by Commerce Department
inspectors in the course of a year. Other exit ports are visited one week a year. A
sixth inspector is in the Washington, D. C. area.
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The Compliance Division's five inspectors are grades 5, 7 and 9.
In fiscal year 1980, according to the Export Administration's annual report
to Congress, the Compliance Division reviewed 190,484 Shipper's Export
Declarations, or SEDs. The next year, according to the FY 81 report to Congress,
the number of SEDs reviewed increased to 230,154. These figures need to be seen
in perspective. The Department could have pointed out that about 9 million SEDs
are filed a year. That means that, while Commerce Department inspectors
reviewed 230,154 SEDs in the reporting period, they did not review about 8.7
million more.
Nor is it apparent the manner in which the SEDs were reviewed. Mr.
Skidmore testified about the SEDs being forwarded to the Compliance Division
from the Census Bureau. SEDs that arrive at Commerce through that route are at
least one month old; it takes that long for Census tabulators to key the data from
the SEDs into computers. With information from the SEDs being at least a month
old, it is likely that most shipments already have departed and been taken custody
of by the ultimate consignee overseas.
Conversely, the Chief of the Inspection Branch told the Subcommittee
staff that SEDs are reviewed by his inspectors at the airports and ports. His
explanation is more in keeping with this language from the FY '81 annual report to
the Congress:
. . . the Compliance Division reviewed 230,154 Shipper's
Export Declarations and identified 10,649 apparent
discrepancies requiring further inquiry or inspection; 10,369 of
these resulted in the physical examination of export cargo.
If the SEDs are reviewed after they are referred to Commerce from the
Census Bureau, it is very unlikely that any of the reviews could have resulted in
physical examination of cargo. By the time the SEDs arrive at Commerce, most of
the shipments will have reached their destinations. The report to Congress leads
the reader to understand that the review of the SEDs led directly to the discovery
of discrepancies and that discovery led to the physical examination of the cargo.
Mr. Skidmore's description of the Intelligence Branch of the Compliance
Division was as follows in his House testimony:
The Intelligence Branch is staffed with criminal
investigators, intelligence reporting officers and other support
personnel who develop and maintain intelligence information
regarding possible export control violations. Branch personnel
review all incoming allegations, voluntary disclosures and
referrals from the Facilitation Branch to determine whether
referral to the Investigations Branch is warranted.
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The testimony suggests a much larger operation than actually exists. The
Intelligence Branch has a Branch Chief, a Deputy Branch Chief, two fulltime
professionals and one delailee from the Drug Enforcement Administration.
The Intelligence Branch Chief, who is unique among the three Branch
chiefs because of his considerable background in law enforcement, told the staff in
a pre-hearing interview that his office is so overwhelmed with its workload and so
understaffed that it is impossible for him to provide the kind of intelligence
analysis needed for the Division's national security - law enforcement - mission.
The Intelligence Branch is supposed to be able to process and assess
sensitive information. Yet the Branch has no secured telephone. None of its
professionals has a clearance higher than top secret.
Intelligence Branch personnel often are bogged down in relatively
insignificant assignments and do not have the time to collate and synthesize
information in an effort to anticipate violations. For example, the Bruchhausen
case, one of the most important technology diversion investigations ever conducted
? and one which will be discussed in detail later in this statement -- was
investigated for the first time in an active manner by the Commerce Department
in 1980. But the existence of the network of companies in the U. S. and Western
Europe was brought to the attention of the intelligence Branch two years before in
the form of two anonymous letters. The Intelligence Branch did not see to it that
the serious allegations in the anonymous letters were checked out.
In his testimony before the House Committee, Mr. Skidmore went on to
describe the Investigations Branch of the Compliance Division. He said that it?
. . . is also staffed with criminal investigators and
conducts full-scale investigations into alleged violations. If it
determines that a violation has occurred, but does not find the
elements of a criminal offense, either a charging letter is
recommended or a warning letter is issued to the alleged
violator, depending on the circumstances. If we believe the
elements of a criminal offense are present, and our Office of
General Counsel concurs, we refer the case to the Department
of Justice for prosecution. (emphasis added)
Mr. Skidmore's use of the adjective full-scale to describe investigations
suggests a substantive effort. However, the Subcommittee staff was informed by
the Chief of the Investigations Branch and by a former Director of the Compliance
Division that a full-scale investigation can be a phone call or a letter. In its use of
the term full-scale with reference to investigations in the two reports to Congress
and Mr. Skidmore's testimony before the House Committee, no definition was given
to further explain more precisely what is meant by full-scale.
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Carrying the concept of full-scale investigation a step further, both the
FY '80 and FY '81 reports to Congress speak of "full field investigations." In 1980,
Compliance Division Special Agents conducted 61 full field investigations; and in
1981, an undisclosed number of full field inquiries were made, according to the two
reports to Congress. The Branch has about eight investigators. With such limited
resources at its disposal, the Compliance Division would be very hard pressed to
conduct 61 full field investigations in a 12-month period. The Chief of the
Investigations Branch told the Subcommittee staff that 61 full field investigations
might not have been the meaning that the report to Congress intended to convey
and that there might have been a misunderstanding due to poorly constructed
writing in the report.
The exact language from the report was as follows:
At the beginning of the reporting period, 193 preliminary
inquiries were pending, and 139 more were initiated. Further
investigation was not warranted in 50 instances; in 61 others,
sufficient information was developed to justify full field
investigations. (emphasis added)
In his testimony before the House Subcommittee, Mr. Skidmore also
noted:
A principal focus of the Investigations Branch is
preventive enforcement. We try to thwart illegal transactions
before they occur to avoid possible irreversible harm to
national security. (emphasis added)
Our investigation revealed that preventive enforcement is far removed
from the realistic objectives of the Investigations Branch. The Branch has about
eight Special Agents, some formally trained in traditional law enforcement, some
untrained. Most of their work they do on the telephone or by mail. There is some
travel but the bulk of the work is done in the Washington headquarters of the
Commerce Department. Investigative support is provided by a three-man field
office in New York. In law enforcement, the term "preventive enforcement"
suggests something quite different than an 8-member Investigations Branch that
does most of its work from the office. Preventive enforcement means sending
agents into the field, staying in close and frequent contact with the many segments
of the affected community. Preventive enforcement is aggressive police work.
Equally important, preventive enforcement means having an imaginative and
resourceful intelligence capability as well. The Compliance Division has none of
these. Nor does it practice anything even approaching preventive enforcement.
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The official pronouncements of the Commerce Department reports
to Congress and Congressional testimony are sharply different from the views
expressed by experienced law enforcement personnel who are familiar with the
operations of the Compliance Division. In pre-hearing interviews, one Special
Agent currently employed in the Compliance Division had served for more than 20
years as an Army criminal investigator and has well established credentials as an
investigator. He said the Compliance Division is "totally ineffective" in preventing
dual-use technology from being shipped to the Soviet Union and Warsaw Pact
nations. He said the Kremlin's spy organization, the KGB, could not have organized
the Compliance Division in a way more beneficial to Soviet interests. This agent's
view was not contradicted by'persons in the law enforcement and national security
field. Unfortunately, it was virtually impossible to persuade these persons to speak
for attribution.
As will be noted later in this statement, the result of this reluctance to
criticize constructively the Compliance Division in public session leads to the
current situation in which the only evaluation the Congress hears is from the
Commerce Department, which houses the Division and which is less likely to make
a candid and forthright evaluation of the shortcomings of one of its own
components. For that reason, it seemed important to the Minority staff that
Congress be informed of the widespread dissatisfaction that exists in the Executive
branch concerning the Compliance Division and the principal reasons for that
dissatisfaction.
2. Commerce Principal Objective Is Trade Promotion, Not Regulation
The Department of Commerce has as its major focus the promotion of
domestic and international trade. It is the finding of the Minority staff, based on
interviews with officials of the Department and other agencies, that Commerce is
not comfortable with the task of limiting the sale of anything, whether it is dual-
use technology or some other commodity.
As a result, the Commerce Department has devoted insufficient resources
to the Compliance Division. In 1967, for example, the Intelligence Branch of the
Division had six or seven professional analysts. Today -- 15 years later -- the
Intelligence Branch has two analysts and one detailee from another agency. This
statistic was given the Subcommittee staff by the man in charge of the Intelligence
Branch, who is deeply troubled by it. The Department of Commerce, therefore,
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has reduced its commitment of resources in the intelligence field at the very time
when the problem of technology diversions has become more pressing for the
country.
The Minority staff is not the only entity that has questioned the depth of
the Commerce Department's commitment to regulating technology transfers. In
introducing legislation to create an Office of Strategic Trade, Senator Jake Garn
of Utah said in Senate remarks on April 24, 1980 that the Commerce Department
can be criticized for its work as "lead" agency in combatting diversions. Senator
Garn said the Commerce Department had a "trade promotion bias" that prevented
it from effectively protecting the country's national security interests. The
Commerce Department has shown itself to be preoccupied with the goal of more
and more trade with the Soviets to such an extent that the Department has become
blind to national security considerations stemming from the sale of certain kinds of
high technology data and machinery, Senator Garn said.
The result of the Commerce Department's inadequacies in controlling
diversions has been an historic erosion in American technological pre-eminence,
Senator Garn said, adding:
What remains of our once vaunted military superiority, on
which our national security increasingly depends, is in part
being whittled away through a wide variety of technology
transfer mechanisms. It is well documented that technology
which the Soviet Union cannot develop will be bought from the
West, and technology which the Soviets cannot buy will be
stolen.
Mr. Chairman, I request that Senator Garn's bill, his floor remarks in
introducing it and a May 8, 1980 "Dear Colleague" letter be sent to other Senators
regarding the bill be received as exhibits to these hearings.
3. Commerce Department Has Limited Law Enforcement Tradition
The Commerce Department has limited tradition and limited expertise in
traditional law enforcement. Yet the Compliance Division is perceived and
described by the Department as being a law enforcement organization. Its
personnel include Special Agents, whose titles alone suggest law enforcement
assignments. The Special Agents are classified as Series 1811 federal criminal
investigators.
The Compliance Division asserts its "lead" role in enforcing export
controls for the entire government. The Division undertakes exercises requiring
specialized law enforcement skills and capabilities such as the conduct of
surveillances of suspected export controls violators.
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But, because of its lack of tradition and expertise in law enforcement, the
Commerce Department does not require that its Special Agents meet established
standards of formal training. "On the job" training is common at the Commerce
Department; yet there is no requirement that newcomers to the investigative ranks
undergo formal training in the enforcement of export controls or in the most
fundamental aspects of police work.
It may be a valid procedure to prepare new Special Agents by giving them
"on the job" training. But the question must be asked: from whom are the new
agents receiving their "on the job" training? If the training is provided by agents
who themselves are marginally qualified, how valuable is the instruction?
The Agent's Manual is a basic instructional document in most law
enforcement organizations. Each agent is given a copy of the Agent's Manual and
is expected to study it and be fully and currently informed about it. The Agent's
Manual describes proper procedures for the agent in every aspect of his
professional life -- on points ranging from proper dress to the opening and closing
of cases to the writing of reports of investigation.
We asked for a copy of the Compliance Division's Agent's Manual. Its
status is not clear. We asked the Acting Director of the Division if we could see it.
He gave us a bulky, loose-leaf binder and explained that it was the only such
document in the building. We did not think that it was suitable for distribution to
and retention by his Special Agents for frequent referral and updating; he
concurred.
Another executive of the Division, asked if there was an Agent's Manual,
described it as "a semblance of an Agent's Manual."
The absence of a comprehensive, compact and readily available Agent's
Manual is reflective of a procedurally uncertain law enforcement environment in
the Compliance Division.
The Chief of the Investigations Branch described the Compliance Division
to us as a "non-traditional law enforcement organization." Our staff inquiry
concurs in that judgment. In more traditional law enforcement organizations, each
investigator must meet certain standards of investigative experience and training;
and each investigator is supposed to be thoroughly versed in procedures as spelled
out in an Agent's Manual.
The Acting Director of the Compliance Division acknowledged that there
were problems in the operations of the Division. He said the problems could be
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corrected but that such a process took time. Elaborating on this point that the
government is slow to change, the Acting Director, a veteran of 25 years in federal
service, said the Compliance Division was organized more than 30 years ago at a
time when the challenge of export controls was not as great as it is today. But, he
said, as export controls became more of an urgent problem to the United States in
recent years, the Compliance Division had tended to remain in its previous
configuration, making it inadequately equipped for the current technologically
competitive world scene. We asked the Acting Director if the nation could afford
to wait while the Commerce Department and its Compliance Division adjusted to
new challenges in export controls. He had no answer to that query but he did say it
was a valid question.
Executives in the Compliance Division have had insufficient law
enforcement background and training to be supervising investigators on how to
proceed in their inquiries. (By traditional criminal law enforcement training, the
Subcommittee Minority staff means that the adequately trained official has been
instructed formally on 1) collection and preservation of evidence; 2) interview
techniques, including the handling of witnesses and confidential sources; 3) arrest
procedures, including techniques used in searches, hand-cuffing and transportation
of persons in custody; 4) criminal statutes; 5) issuance of, and training in, the use
of firearms on a continuing basis; 6) courtroom procedures, trial preparation and
testifying; and 7) surveillance techniques, including the use of electronic and
photographic equipment. In addition, most federal criminal law enforcement
agencies have specialized training courses in that area of the law they are
responsible for enforcing. Refresher courses and programs aimed at keeping
personnel informed of new developments in the law and enforcement also are
offered.) The Director of the Compliance Division from 1963 to 1979 was a former
Customs Appraiser in Chicago with limited experience and limited formal training
in law enforcement before he got the job. He told the Minority staff that he did
not believe experience or formal training were required for law enforcement work.
He was replaced in the office of Director of the Compliance Division by a
person who also had limited traditional law enforcement experience. At this time,
the position of Director of the Division is formally vacant. It is being filled on a
parttime basis by William V. Skidmore, whose permanent position is Director of
Anti-Boycott Compliance. Mr. Skidmore has limited traditional law enforcement
experience.
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The former Director of the Compliance Division told the Minority staff
that on several occasions from 1979 through the first quarter of 1982 she
recommended to senior officers of the Commerce Department that steps be taken
to increase the effectiveness and numerical strength of the Division. The
Department rejected many of her recommendations, she said.
4. Five-man Inspection Staff Is Too Small To Cover Entire Nation
Compliance Division inspectors have limited resources at airports and
seaports to detect the export of controlled high technology commodities. The
Chief of the Facilitation (Inspections) Branch told the Subcommittee staff that the
number of inspectors -- five or six -- was insufficient. Most of the work they do is
performed at the John F. Kennedy International Airport in New York.
The former Director of the Division informed the Minority staff that
several of the inspectors were parttime employees, working about 32 hours a week
and that they put in some overtime to compensate for their shorter work time.
Compliance Division inspectors are not authorized to search and seize
suspected cargo. They must rely on U. S. Customs Service personnel. Similarly,
unlike Customs agents and inspectors who have kindred and formalized working
relationships with customs employees throughout many parts of the world,
Commerce inspectors have no counterparts on any foreign soil.
5. Compliance Division Special Agents Not Required To Undergo Formal Training
Compliance Division Special Agents working in the Investigations Branch
are not required to have any formal training in investigative techniques, law
enforcement or the Export Administration Act. The approximately eight
professional members ? the Special Agents ? of the Investigations Branch have
varying degrees of law enforcement background. Some have extensive law
enforcement background. Others have limited background in law enforcement.
One Special Agent's previous job experience was secretarial.
The Chief of the Investigations Branch acknowledged that the Special
Agents in the Compliance Division were not required to attend law enforcement
training schools and that, while such educational programs were encouraged, the
Special Agents had not attended them recently. What training in law enforcement
the Compliance Division Special Agents had, he said, was what they had obtained
before joining the Compliance Division. The Chief of the Investigations Branch
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who had served for about two years as Acting Deputy Director of the Division,
himself had come to the Division with no law enforcement training whatsoever,
except for the fact that he is a lawyer.
As an introduction to their work in the Compliance Division, the
Investigations Branch Chief said, newcomers were expected to read the Export
Administration Act and were then encouraged to engage in frequent conversations
with other more experienced agents to learn what they needed to know. He said
major emphasis was placed on "on the job" training.
6. Size of Investigations Branch Backlog Is In Doubt
Most of the investigative work of the Investigations Branch is done in the
office. Agents are expected to conduct inquiry on the telephone and by mail. The
most frequent response to allegations of violations of the Export Administration
Act is to send the alleged violator a letter of warning. In its FY '81 report to
Congress, for example, the Commerce Department summed up the Compliance
Division's work this way:
The Compliance Division of the Office of Export
Administration completed 258 full-scale investigations during
October 1980 through September 1981. Of these, 33 cases were
referred to the Department's Office of General Counsel for
initiation of administrative proceedings; 145 cases resulted in
warning letters to the parties involved for various violations
considered not serious enough to warrant criminal or
administrative proceedings; in three instances, educational
advice was given to the firms; and 77 investigations were closed
after a determination of no violation or insufficient evidence.
In addition to the foregoing, three cases were referred to the
Department of Justice for possible prosecution of criminal
violations. The Division had 153 cases pending at the beginning
of the period, of which 258 have been assigned to investigators,
and had 311 cases pending at the close of the period.
The reference to 311 cases pending at the close of the period possibly
would indicate that a backlog of 311 cases existed. However, it was not possible
for the Subcommittee staff to determine the actual size of the backlog.
The Chief of the Investigations Branch said he was not sure how large the
backlog was. The previous Director of the Division said the backlog was possibly as
large as 300 or 400. The new Acting Director said he thought it was about 200
cases. However, he added that it had been the Division's policy in recent years not
to close many cases for fear the Department would be criticized for closing out
cases prematurely; this policy would lead to the conclusion that the backlog was
bigger than it actually was, he said.
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The staff inquiry concluded that a backlog of 200 or 300 or 400 with an
investigative staff of eight agents seemed to be inordinately large. So many cases
hovering over a relatively small investigative staff could create pressure on Special
Agents to close cases without sufficient inquiry.
7. Intelligence Branch Has Backlog Of 600 'Matters'
The Intelligence Branch also has a significant backlog of unfinished
business. When the Minority staff interviewed the Chief of the Intelligence Branch
in March of 1982, he said he had a backlog of about 600 cases. He said that by the
end of the calendar year, he could have a backlog of 1,000 cases.
The Acting Director of the Compliance Division said the backlog in the
Intelligence Branch was about 600 but that it was 600 "matters," a large number of
which did not qualify as actual cases. Therefore, he said, the backlog was
considerably smaller than it might appear.
It is the view of the Subcommittee Minority staff that the backlog ?
whether it is 600 "matters" or 600 cases ? is too large and its size has an
important bearing on the efficiency of the entire Division. That is because many
cases begin in the Intelligence Branch. A serious backlog there can cause delays
throughout the system. Large backlogs prevent the entire Compliance Division
from moving in a timely fashion against suspected violators.
S. Compliance Division Special Agents Lack Most Law Enforcement Tools
Compliance Division investigators have no authority to search and seize
shipments suspected of being in violation of the export controls statute. They may
detain cargo; however, as the Chief of the Investigations Branch admitted to the
Minority staff, if the persons in possession of the suspected cargo resist having
their shipment detained, Compliance Division personnel have no measure of
established force to enforce their decision to detain.
For, coupled with their inability to search and seize is Compliance
Division Special Agents' lack of authority to make arrests. In addition, Compliance
Division agents have no authority to carry firearms and have no mobile
communication equipment. Yet they carry out surveillance operations of suspected
violators.
Several surveillances have been staffed and directed by Compliance
Division personnel not extensively trained in the techniques of surveillance work.
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Trained law enforcement personnel have told the Subcommittee staff that
surveillance is one of the most difficult of all law enforcement exercises. They
said they worked on many of them before they felt confident of themselves in this
kind of pursuit; and before they felt they could direct others.
In addition, sending unarmed agents on surveillances is a procedure which
some law enforcement officials question. Moreover, to conduct its surveillances,
Compliance Division personnel have had to borrow mobile communication
equipment from the U. S. Marshals Service and other agencies.
Untrained, unarmed, poorly equipped personnel conducting surveillances
under the direction of inexperienced executives is a practice inherently risky. It
also demeans and trivilizes the efforts of formally trained, properly equipped law
enforcement agents whose surveillance work is performed according to established
procedures. It is the finding of the Minority staff that if a surveillance is worth
doing, it is worth doing in a professional, procedurally sound manner.
9. One Agent Had Job Of Investigating Grain Embargo Violations
In 1980, the Compliance Division received an assignment of national
consequence in addition to its dual-use export controls work. The Division was
given the responsibility to investigate violations of the grain embargo called for by
President Carter in response to the Soviet Union's invasion of Afghanistan. This
responsibility stemmed from language in the Export Administration Act that says it
is the policy of the government?
? to restrict the export of goods and technology where
necessary to further significantly the foreign policy of the
United States or to fulfill its declared international obligations
In his letter to the President of the Senate and the Speaker of the House
of January 21, 1980 regarding "Shipments of Agriculture Commodities to the Soviet
Union," President Carter said the Soviet invasion of Afghanistan "requires a firm
and vigorous response from the United States." President Carter went on to say
that he had directed the Secretary of Commerce to restrict exports and reexports
from the United States to the Soviet Union.
Under the heading of "Enforcement," the President's message added:
No unusual problem is anticipated in enforcing the control
on United States direct sales of agricultural products. With
respect to reexports from third countries to the U.S.S.R., the
fungible nature of the commodities makes it somewhat difficult
to control their destination. The Department of Commerce and
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other agencies will watch this situation closely and will take
enforcement action in case of violation.
Mr. Chairman, I request that the President's message to the Congress be
received as an exhibit.
A former Compliance Division investigator told the Subcommittee
Minority staff that he was given the assignment of investigating embargo
violations. He said no other agents in the Compliance Division were assigned to
assist him.
At several interagency meetings of high level officials working on
implementation of the grain embargo, the agent, himself a GS-12, was the sole
representative of the Commerce Department. His security clearance was at the
secret level and this meant that on some occasions he was not allowed to enter the
meetings until issues requiring higher classification were discussed.
The other agencies ? USDA, CIA, State Department, Navy ? felt the
matter was important enough to send senior officers while Commerce was
represented by a GS-12, he said. The agent said he was embarrassed but was
unable to persuade his supervisors than their agency was proceeding improperly by
not sending a more senior spokesman.
As for the agent's principal assignment -- the investigation of alleged
violations of the grain embargo ? the agent said he did the best he could with the
limited resources he had.
The agent said that for the most part, the majority of his investigative
work was from the office, as he relied on long distance telephone calls, cables to
American embassies overseas and assistance from the Department of Agriculture
and the Customs Service.
Not having law enforcement-minded counterparts in foreign nations was a
problem for him, the agent said. He found cooperative U. S. embassy personnel on
some of his requests for information on grain shipments. But, in other instances,
he was met with delayed responses.
I spoke with the Agriculture Department official who was chairman of the
high level inter-agency group which monitored the agricultural exports during the
grain embargo. He said the group was formed early in 1980 when it became
apparent that the Commerce Department was committing insufficient resources to
assembling information about compliance and investigating allegations of
violations. He said it was his understanding that "one or two" persons were
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representing the Commerce Department in this task and that he saw that as
"terribly limited" dedication of personnel. He said information assembled by the
high level inter-agency group reflected a much broader base than the Commerce
Department could have supplied by itself. He said, however, that "the hard core
business of proving violations " ? that is, the actual investigation ? was the
responsibility of the Commerce Department. He said members of the inter-agency
group he chaired talked openly of the unsatisfactory commitment of resources by
the Commerce Department. He said he recalled that the Commerce Department
sent representatives to the inter-agency group meetings whose security clearances
were not high enough to enable them to be there. He said in certain instances the
Commerce Department representative had to wait outside the room until more
sensitive issues were discussed.
In addition, the General Accounting Office, in a report of July 27, 1981,
entitled "Lessons To Be Learned From Offsetting The Impact Of The Soviet Grain
Sales Suspension," said the Compliance Division of the Commerce Department was
charged with investigating allegations of illegal grain shipments to the Soviet
Union. "At the outset," GAO said, "Commerce did not anticipate taking any other
actions to monitor shipments."
However, GAO went on to say, "USDA officials believed that a more
comprehensive monitoring program was necessary to ensure that U. S. grain was
not being illegally shipped to the Soviet Union." This concern led to the formation
of two groups in January of 1980 whose purpose was to provide more information.
One group was largely an internal organization within USDA. GAO said the second
group was "comprised of policy-level officials from USDA, State Department, CIA,
Navy and Commerce," GAO said.
Mr. Chairman, I request that the GAO report of July 27, 1981 be received
as an exhibit.
The Minority staff inquiry found that the inadequate response of the
Compliance Division in enforcing the grain embargo demonstrates the serious
government operations problem in which the most senior officers of the executive
branch, from the President on down, shape policy and promulgate directives on the
mistaken premise that the affected agencies have the necessary means to turn the
policy and directives into reality. President Carter's grain embargo speech might
have been received in a different light had he also announced the Commerce
Department would assign one man ? a GS-12 in the Compliance Division ? to
investigate alleged violations.
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10. Lack Of Harmony Between Compliance Division And Customs Service
A lack of close cooperation existed between the Compliance Division and
the U. S. Customs Service. The result was that effective enforcement was
reduced. Part of the tension between the two agencies stemmed from the
Commerce Department's interpretation of Section 12-C of the Export
Administration Act. The Department interpreted the Section in such a way as to
preclude sharing proprietary information with other law enforcement
organizations. In interviews with Minority staff, Customs personnel complained
bitterly about the Commerce Department's interpretation of 12-C. Section I2-C is
as follows:
(c) Confidentiality.--
(1) Except as otherwise provided by the third sentence of
section 8(b)(2) and by section 11(cX2XC) of this Act,
information obtained under this Act on or before June 30, 1980,
which is deemed confidential, including Shippers' Export
Declarations, or with reference to which a request for
confidential treatment is made by the person furnishing such
information, shall be exempt from disclosure under section 552
of title 5, United States Code, and such information shall not be
published or disclosed unless the Secretary determines that the
withholding thereof is contrary to the national interest.
Information obtained under this Act after June 30, 1980, may
be withheld only to the extent permitted by statute, except
that information obtained for the purpose of consideration of,
or concerning, license applications under this Act shall be
withheld from public disclosure unless the release of such
information is determined by the Secretary to be in the national
interest. Enactment of this subsection shall not affect any
judicial proceeding commenced under section 552 of title 5,
United States Code, to obtain access to boycott reports
submitted prior to October 31, 1976, which was pending on May
15, 1979; but such proceeding shall be continued as if this Act
had not been enacted.
In Customs and in other offices of the executive branch -- both in law
enforcement and in national security affairs -- there is an unwillingness to say
anything critical in public about the effectiveness of the Compliance Division. The
reluctance to criticize the Compliance Division exists amid a widespread sense
throughout affected areas of government that the investigative capabilities of the
Compliance Division are inadequate.
The failure not to criticize the Commerce Department ignores the fact
that because of the inadequacies of the Compliance Division significant amounts of
dual-use technology that contribute to Soviet military strength are being shipped to
the Soviet Bloc.
The Minority staff should not be the only entity to make an evaluation of
the effectiveness of the Compliance Division. It was our hope that other law
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enforcement organizations would come forward and critique the Division in a
constructive and professional manner. In this pursuit, we were met with
resistance. Working agents and senior officials alike would be candid, while
insisting on their anonymity.
The Subcommittee staff did obtain a copy of a memorandum written by a
senior Customs Service official who was critical of the Compliance Division's
procedures. The memorandum, dated October 30, 1980, was written by William
Green, Deputy Assistant Commissioner in the Office of Border Operations. The
memorandum was sent to Robert L. Keuch, Associate Deputy Attorney General and
Chairman of an Inter-Agency Working Group on Export Control. Green had this to
say about the Compliance Division of the Commerce Department:
. . . . What is particularly significant is Commerce's
(OEA/CD) continued action to impede cooperation in
investigations even while it states that it wishes to fully
participate in all cooperative ventures. Commerce continues to
take unilateral and uncoordinated action concerning either joint
or Customs initiated investigations by requesting foreign
inquiries through various U. S. embassies and consulates without
consulting with either Customs Attaches or Headquarters. Such
action is causing serious problems. These problems are not
limited to hampering instant investigations, but also the
compromising of U. S. Customs and foreign government
sources, damaging the previously close and long relationships
between U. S. Customs and their foreign counterparts, and
directly impacting on national security.
These unilateral actions taken by Commerce are not
limited to investigations initiated solely by Commerce and
being worked only by them; but more importantly, include
investigations initiated by Customs and now being either jointly
worked by both agencies, or by Customs alone....
While Customs acknowledges that, under the Export
Administration Act of 1979, OEA/CD is the agency primarily
responsible for administration and enforcement of the Act,
OEA/CD is not at this time adequately staffed to enforce the
Act. OEA/CD has stated that it is planning to establish foreign
offices, together with adequate staffs, and assume those duties
related to export control enforcement which the EDO's and
Customs Attaches now perform. Once again, OEA/CD is not
adequately staffed to assume these duties and does not have
experience concerning the conduct of investigations abroad.
OEA/CD is also at a distinct disadvantage in that they have no
foreign counterparts with whom they can relate and/or work.
They will not have access to Customs mutual assistance
agreements on which they can rely to gain access to
investigative data and/or other desirable information, nor is it
anticipated they will be able to establish such agreements. The
U. S. Customs Service is in a much better position to conduct
export control investigations and inquiries abroad because we
do have foreign counterparts with whom we work and relate; we
do have formal and informal agreements with our foreign
counterparts; we have established foreign offices with a staff
of experienced investigators and have conducted export control
investigations and inquiries abroad since at least before 1900....
The only answer is a single-agency concept for all export
control enforcement. While not faulting Commerce in its
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attempt to increase its enforcement posture, it should be noted
that Customs already has the necessary authority, has a foreign
presence that has been in place for at least 80 years, has over
60 domestic offices, has over 500 experienced criminal
investigators, and has had experience in export control matters
since early in the history of our country. Concerning additional
resources, it has been stated that if Customs should assume the
entire export control enforcement program it would need
approximately 25 additional slots. While this figure may change
due to exigencies such as workload, source development, and
foreign liaison, it should be noted that any new personnel gained
because of the resource increase would not be initially assigned
sohisticated critical technlogy cases, but would be assigned to
experienced investigators. The new agents would take up the
slack caused in lesser areas of the Customs enforcement
program.
Mr. Chairman, I request that Mr. Green's memorandum be received as an
exhibit.
11. CTC Case Demonstrated Shortcomings In Compliance Division
The many shortcomings of the Compliance Division as a law enforcement
organization are apparent in the investigation of a syndicate of businesses, known
as the CTC group, owned, controlled or utilized by a West German named Werner
J. Bruchhausen. Mr. Chairman, I have prepared a summary of the CTC case
which was drawn from information provided the Minority staff by Commerce
Department agents, Customs Service agents, the Department of Justice and other
sources. It is rather lengthy. I request that it be printed in the hearing record as if
read and that I be allowed to give a brief description of what occurred in the CTC
case.
From 1977 to 1980, the CTC network of companies in the U. S. and
Western Europe bought dual-use technology under false pretenses in the U. S. and
then exported it to the Soviet Union and Warsaw Pact.
As will be pointed out in the testimony of Dr. Lara Baker, a computer
scientist from the Los Alamos National Laboratory, the CTC syndicate of
companies was not buying up high technology equipment at random. They had been
given a precise shopping list by the Soviets. As Dr. Baker will point out, the
equipment the CTC syndicate bought was for the specific purpose of building and
equipping a semi-conductor plant in the Soviet Union. Moreover, a businessman
who served briefly as a consultant to the Soviet Union will testify during these
hearings that it was apparent to him during a visit to Moscow that such a semi-
conductor plant had been built in the U.S.S.R. and the Soviets were in the process
of equipping it with American-made machinery.
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The existence of the CTC network of companies was first brought to the
attention of the authorities in 1977 and 1978 when two anonymous letters were
received at the American Consulate in Dusseldorf. The State Department
translated the letters into English and referred them to the Compliance Division in
the Commerce Department. The Minority staff has established that the letters
were received by the Compliance Division in 1978 and that insufficient effort was
made to investigate the allegations.
Subsequent to the receipt of the letters, two U. S. producers of dual-use
technology reported to the Commerce Department that they were suspicious of the
CTC companies. Insufficient inquiry was conducted in response to the first letter.
A Commerce Department Special Agent did interview CTC's principal
executive in Los Angeles, a naturalized Russian-born American citizen named
Anatoli Maluta, also known as Tony Maluta and Tony Metz. Maluta told the Special
Agent from Compliance that he did not know anything about export controls, or the
need to have validated export licenses to ship certain controlled commodities. But,
Maluta said, because of the agent's interest, he was cancelling the suspicious order.
Maluta's cancellation of the suspect shipment should have triggered
increased curiosity in the agent's mind to want to investigate further. But there is
no evidence that he did. No further investigation of the CTC network was
conducted until a second letter arrived at the Compliance Division, this time from
another high technology producer who also voiced suspicions about the CTC
companies.
Early in 1980, a second Compliance Division agent, Robert Rice, was
assigned to the case and conducted the kind of comprehensive preliminary inquiry
that was called for. Rice, the most senior agent in the Division, came upon
considerable information indicating widespread violations of export controls.
Rice presented the evidence to the Office of the U. S. Attorney in Los
Angeles in March of 1980. A major inquiry was begun by the U. S. Attorney's
Office, under the direction of Assistant U. S. Attorney Theodore W. Wu and the
U.S. Customs Service. Customs ultimately assigned about 15 agents to the case in
California, Texas, New York and Western Europe. Compliance Division Special
Agent Rice was the only Commerce Department representative assigned to the
case on a regular basis.
Indictments were brought against Bruchhausen and Dietmar Ulrichshofer,
both of whom remained in Europe and are fugitives from American justice, and two
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Los Angeles accomplices --- Maluta and Sabina Dorn Tittel. Maluta and Tittel both
were convicted.
The CTC case demonstrated technology diversions of about $10 million
and is considered by law enforcement and national security specialists to be one of
the most important export control case ever brought to trial.
The inquiry showed that:
1. The Compliance Division did not move quickly to establish the value of
the anonymous letters.
2. The Compliance Division did not connect the anonymous letters to the
allegations that were reported by two U. S. manufacturers.
3. When Compliance Division Agent Rice turned over the results of his
inquiry to Assistant U. S. Attorney Wu in Los Angeles, it was apparent to Wu that
considerable expenditures of resources would be needed. Trained investigators
would be required to conduct interviews, evaluate shipping documents, surveil
suspected violators and carry out other aspects of a traditional law enforcement
full-scale, full field investigation. Commerce's contribution to that effort was
Agent Rice, a competent investigator in whom Wu had confidence. But he needed
more than one agent. He enlisted the assistance of the Customs Service. Later
assistance was provided by trained criminal investigators from the Internal
Revenue Service.
4. At an early point in the inquiry, it was necessary to seize shipments.
Commerce had neither the authority nor the manpower to seize shipments.
Customs did it.
5. At another point in the inquiry, it was necessary to search premises of
CTC companies and the quarters of certain of his employees in the U. S. and
Europe. The Compliance Division had insufficient resources to implement
simultaneous search warrants. The Compliance Division had no law enforcement
capabilities in Western Europe to work with German Customs in coordinating the
searches abroad. Customs executed the warrants in the U. S. and, through its
agreements with West Ger man customs, arranged for the execution of the warrants
in Germany.
6. To substitute sand for one of CTC's shipments to Moscow, a sizable
expenditure of funds was needed. The Compliance Division balked at the shipment
substitution strategy and refused to pay the cost of recrating the sand and air
freight. Customs officials approved of the substitution and agreed to pay the cost.
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7. Extensive overseas coordination, in addition to the search warrants,
was called for with West German Customs and other foreign officers. Commerce
Department's Compliance Division had no overseas law enforcement contacts. U.
S. Customs' contacts were used.
8. Extensive surveillance was necessary. Armed Customs agents and
armed Internal Revenue Service criminal investigators and an unarmed Compliance
Division Special Agent Rice provided it. Two suspects under surveillance had
firearms in the backseat of their car. The firearms were not used. But it was an
important law enforcement advantage for the agents on surveillance to be armed
as well.
9. Experienced supervisors with law enforcement background and training
were needed to direct the inquiry in the field. The Office of the U. S. Attorney for
the Central District of California, working with supervisorial personnel in the
Customs Service, provided the needed direction. Contact with supervisorial
personnel in the Compliance Division, who remained in Washington, was made on
the telephone and the persons who worked the case in California did not consider
such communication to be satisfactory.
10. When the appropriate time came to apprehend Anatoli Maluta and
Sabina Dorn Tittel, IRS agents made the arrests. Customs agents, like the trained
IRS criminal investigators, are authorized to make arrests. Even had the
Compliance Division dispatched sufficient numbers of agents to assist in the
inquiry, they could not have arrested the suspects.
It is noteworthy that in its Fiscal Year 1981 report to Congress, under the
heading "Criminal Proceedings," the Commerce Department described the CTC
inquiry, listed the charges in the indictments, identified certain companies in the
CTC network of companies which were denied export privileges and then concluded
by taking credit for the case. The report said:
The order (to deny export privileges) was issued to protect
national security and the public interest in view of the facts
revealed in the investigation of these parties by the
Department.
In fact, the CTC case does not qualify as a Commerce Department
investigation. Customs Service agents did most of the work; and executive
supervision was provided by Assistant U. S. Attorney Theodore Wu and Kenneth
Ingleby, the Chief of the Customs Service Investigations Office in San Pedro.
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In participating in the inquiry on a fulltime basis and in conducting
himself in a competent, professional manner, Compliance Division Special Agent
Robert Rice was handicapped in not being able to do the things Customs agents can
do routinely -- search and seize suspicious freight, make arrests and carry a
weapon. Capable and resourceful as he was, Rice cannot be considered to have
been essential to the CTC inquiry. It could have succeeded without him. It could
never have succeeded without the Customs Service. Customs contributed
necessary manpower and fundamental law enforcement tools. Commerce's
contribution was Robert Rice.
After the CTC case was brought to Wu, the Compliance Division played
no essential role in the inquiry. That recognition leads to the Minority staff's final
finding, which is that the Commerce Department should not have the enforcement
function under the Export Administration Act.
It is the finding of the Minority staff that the national security
implications of enforcement of the Export Administration Act are too important to
be entrusted any longer to the Commerce Department as presently organized.
For three decades the enforcement function has resided in the Commerce
Department -- through Administrations controlled by Democrats and Republicans.
Three decades is sufficient time to allow reasonably capable officials to perfect
the most challenging task. But serious procedural and operational problems still
exist in the Compliance Division of Commerce. We find the conclusion
inescapable, therefore, that effective enforcement of the Export Administration
Act is beyond the institutional capabilities of the Commerce Department.
Moreover, from a government operations and executive organizational standpoint,
the mere existence of the Compliance Division is an impediment to efficient and
effective enforcement of the Act. Understaffed, flagrantly short of resources, the
Division cannot do the job effectively; but, by its presence, prevents other
components of government from taking on the task.
It is our view that two solutions ? one short term, one long range -- are
available. Immediate relief could be found if the Compliance Division were
abolished and all its functions placed in the U. S. Customs Service. This action
would insure that competent, professional agents, trained in formal, traditional law
enforcement procedures, would be assigned to investigate alleged violations of the
Export Administration Act; that they would work under the supervision of
executives who also would have formal, traditional law enforcement backgrounds;
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and, perhaps most important of all, the entire function would exist in a Cabinet-
level Department with longtime experience in and commitment to traditional law
enforcement. It is the staff's recommendation that Subcommittee Members
consider that concept as an immediate solution as these hearings proceed.
In addition, in terms of longer range considerations, it is our
recommendation that Subcommittee Members consider the proposal put forward by
Senator Garn to create an independent Office of Strategic Trade that, in summary,
would absorb the Commerce Department's Office of Export Administration and its
components.
Mr. Chairman, that concludes my portion of the staff presentation. I
request that the summary of the CTC case be printed at this point in the hearing as
if read.
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The following summary of the CTC case was written by Fred Asselin of
the Subcommittee Minority staff. It is based on information provided by
Commerce and Justice Department, U. S. Customs and other sources.
CTC Network Was Formed In 1977
On October 23, 1974, Werner Jurgen Bruchhausen, a 34-year-old West
German residing in Los Angeles, incorporated four companies in Southern
California for the purpose of buying and selling sophisticated electronic equipment.
The firms all used the address of 4676 Admiralty Way in Marina Del Rey.
Subsequently, Bruchhausen incoporated eight other entities in Southern California.
Bruchhausen, who was born on November 5, 1939 in Dortmund, West
Germany and who listed his home as being D8019 Niederseeon 21 in West Germany,
enlisted the aid of two associates in setting up his firms -- Anatolij T. M. Maljuta
of 231 Calle Mayor, Redondo Beach, California; and Sabina Dorn Tittel of 30605
Cartier Drive, Rancho Palos Verdes.
Maljuta, who was born in Kharkov, Russia on January 25, 1920, was a
naturalized American citizen. He used three aliases -- Anatoli T. M. Maluta, Tony
Maluta and Tony Metz. Tittel was born on January 13, 1950 in Gumbsheim, West
Germany. Divorced, Titrel was unmarried, as was Bruchhausen. Maluta's wife was
named Aida.
Of the four companies Bruchhausen created in 1974, the principal
enterprise was CTC California Technology Corporation. From its inception
through 1980, CTC utilized 18 other trade styles, 12 of which were incorporated in
California. In the four-year period of 1977 to 1980, CTC and its variants, under
the direction and supervision of Anatoli Maluta and Sabina Dorn Tittel, purchased
high technlogy electronic equipment, perij)herals and components valued in excess
of $10.5 million. Most of the items they purchased were classified as strategic
commodities, controlled for national security purposes and requiring United States
export licenses granted by the Departments of State and Commerce.
In the same four-year period, CTC exported from the United States to
Germany, the Soviet Union, or the Soviet Bloc more than 300 shipments consisting
of strategic commodities. None of the commodities had proper export licenses.
The shipments were documented with fraudulent U. S. Shipper's Export
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Declarations (SED's). Most of the exports were sent to West Germany consigned to
companies controlled by or associated with Werner J. Bruchhausen. From West
Germany, most of the commodities were transshipped to Switzerland or Austria or
to other intermediate countries and then transported to the USSR or to a Warsaw
Pact nation.
The entities located in Southern California that comprised the
Bruchhausen or CTC group were as follows:
Interorga International Components.and Equipment Sales
Organization
4676 Admiralty Way, Marina Del Rey, California
Incorporated: October 23, 1974, file No. 740201
Statement of domestic stock corporation, filed August 31, 1977,
file No. 77198790
Chief executive officer: Werner J. Bruchhausen, Marina Del
Rey
Secretary: Anatoli Maluta, Marina Del Rey
Chief Executive officer: Anatoli Maluta
Directors: Werner Bruchhausen, Anatoli Maluta, Aida Maluta
Interebdo Ebdo International Inc., dba ADT International Inc.
Post Office Box 9076, Venice, California
4676 Admiralty Way, Marina Del Rey
Incorporated: October 23, 1974, file no. 740203
Statement of domestic stock corporation, filed December 2,
1974, file No. 74180292
Dissolved: February 26, 1979
President: Volker Brandlmeier, Marina Del Rey
Vice President: Barbara Brandlemeier, Marina Del Rey
Secretary/Treasurer: Barbara Brandlmeier
Directors: Herbert Abrams, Marilyn McCumber, Volker
Brandlmeier
The name of this corporation was changed to ADT
International, Inc., on March 24, 1975, file No. 153552.
CTC California Technology Corp.
4676 Admiralty Way, Marina Del Rey, California
Incorporated: October 23, 1974, file No. 740200
Statement of Domestic Stock Corp., filed December 2, 1974,
file No. 74190291
Dissolved: February 26, 1979
President: Volker Brandlmeier, Marina Del Rey, California
Vice President: Barbara Brandlmeier, Marina Del Rey, CA
Secretary/Treasurer: Barbara Brandlmeier
Directors: H. Abrams, Marilyn McCumber, Volker Brandlmeier
MTL Measurements and Test Laboratories, Inc.
4676 Admiralty Way, Marina Del Rey, California
Incorporated: October 23, 1974, file No. 740200
Statement of Domestic Stock Corp., filed December 2, 1974,
file No. 74190291
Dissolved: February 26, 1979
President: Volker Brandlmeier, Marina Del Rey, California
Vice President: Barbara Brandlmeier, Marina Del Rey, CA
Secretary/Treasurer: Barbara Brandlmeier
Directors: Herbert Abrams, Marilyn McCumber, Volker
Brandlmeier
Electronic Continental Industries, Inc.
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4676 Admiralty Way, Marina Del Rey, California
Incorporated: June 30, 1977, file No. 820513
Statement of Domestic Stock filed August 29, 1977, file No.
77186369
Dissolved: February 26, 1979
Chief Executive Officer: Werner Bruchhausen
Secretary/Chief Financial Officer: Anatoli Maluta
Directors: Werner Bruchhausen, Anatoli Maluta, Aida Maluta
Interorga Europe, Inc.
4676 Admiralty Way, Marina Del Rey, California
Incorporated: October 25, 1977, file No. 830539
Statement of Domestic Stock Corp., filed December 29, 1977,
file No. 77271373
Dissolved: February 26, 1979
Chief Executive Officer: Werner Bruchhausen, Marina Del Rey,
California
Secretary: Anatoli Maluta, Marina Del Rey, California
Chief Financial Officer, Sabina D. Tittel, Marina Del Rey, CA
Directors: Werner Bruchhausen, Anatoli Maluta, Sabina D.
Tittel
Atlantic Universal Supply, Inc.
4804 Macafee Road, Torrance, California
dba: AUS, 21515 Hawthorne Boulevard, #646, Torrance, CA
Incorporated: July 3, 1978, file No. 868824
Statement of Domestic Stock Corp., filed November 19, 1979,
file No. 79310442
Chief Executive Officer: Tony Maluta, Redondo Beach, CA
Secretary: Sabina D. Tittel, Torrance, California
Chief Financial Officer: Sabina D. Tittel
Directors: Tony Maluta, Sabina Tittel
Consolidated Protection Development Corp.
21515 Hawthorne Boulevard, #646, Torrance, California
Incorporated: July 3, 1978, file No. 868822
Statement of Domestic Stock Corp., filed December 10, 1979,
file No. 79324737
Chief Executive Officer: Tony Maluta, Redondo Beach, CA
Secretary: Sabina D. Tittel, Torrance, California
Chief Financial Officer: Sabina D. Tittel
Directors: Tony Maluta, Sabina D. Tittel
American Data Technology Corp.
231 Calle Mayor, Redondo Beach, California (2)
Incorporated: July 12, 1978, file No. 869313
Statement of Domestic Stock Corp. filed: December 10, 1979,
file No. 79324736
Chief Executive Officer: Tony Maluta, Redondo Beach, CA
Secretary: Sabina D. Tittel, Torrance, CA
Chief Financial Officer: Sabina D. Tittel
Directors: Tony Maluta, Sabina D. Tittel
Digital Security Corp.
231 Calle Mayor, Redondo Beach, California
Incorporated: May 25, 1979, file No. 931745
Statement of Domestic Stock Corp., filed August 21, 1979, file
No. 79231486
Chief Executive Officer: Rainer Hildebrand, Bonn, West
Germany
Secretary: Eric Roos, Dusseldorf, West Germany
Chief Financial Officer: Tony Maluta, Redondo Beach, CA
Directors: Rainer Hildebrand, Eric Roos, Tony Maluta, Sabina
Tittel
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Continental Technology Corp.
21515 Hawthorne Boulevard, #646, Torrance, California
23868 Hawthorne Boulevard, #100, Torrance, California
Incorporated: May 25, 1979, file No. 931746
Statement of Domestic Stock Corp., filed August 21, 1979, file
No. 79231485
Chief Executive Officer: Roland Sturm, Munich, West Germany
Secretary: Rainer Hildebrand, Bonn, West Germany
Chief Financial Officer: Tonyt Maluta, Redondo Beach, CA
Directors: Roland Sturm, Rainer Hildebrand, Tony Maluta,
Sabina D. Tittel
Universal Digital Corp.
4804 Macafee Road, Torrance, California (3)
1843 Lincoln Blvd., Suite 202, Santa Monita, CA (4)
Incorporated: May 25, 1979, file No. 931741
Chief Executive Officer: Eric Roos, Dusseldorf, West Germany
Secretary: Rainer Hildebrand, Bonn, West Germany
Chief Financial Officer: Sabina Tittel, Torrance, California
Directors: Eric Roos, Rainer Hildebrand, Sabina Tittel, Tony
Maluta
CTC Group Used Companies Overseas
In addition to the California-based entities comprising the CTC group,
Bruchhausen also controlled or was associated with several other enterprises,
including entities in West Germany, Austria and Switzerland.
The CTC group's associates in West Europe included Dietmar
Ulrichshofer, Hans-Jurgen Koenig, Sybille Ziogas, and Frank and Karin Nassauer.
Ulrichshofer, born in Austria on May 27, 1940, owned electronics supply
companies in Vienna and Bad Reichenhall, West Germany. Koenig, who lived in
Bonn, was born on May 12, 1940, and was general manager of electronics supply
firms in Dusseldorf, and the West German capital.
The foreign entities utilized or owned by the Bruchhausen group were as
follows:
ADT Analog Und Digital Technik
D-8019 Neiderseeon 21, West Germany
Commenced Business: 1978
General Manager: Werner Bruchhausen
Operation: Import, export, distribute and manufacturer
electronic building parts and equipment
Elubat Vertriebsgellschaft Fur Elektronik Und Batterien Mbh
Goethestrasse 11, 4000 Dusseldorf, West Germany
Commenced Business: December 30, 1977, under Registry
number HRB 595, dated April 7, 1978
Managers: Detlef Lackmann, Werner Bruchhausen
Ownership: ADT Analog and Digital Technik Bauelemente and
Gerate-Vertrieb, Gmbg - 50%, Detlef Lackmann - 50%
Operation: Wholesale of electronical elements, batteries and
similar articles
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Techma Technische Maschinenhandels - Gesellschaft Mbh
Koeingstrasse 10, D-4000 Dusseldorf, West Germany
Commenced Business: February 27, 1978, under Registry
Number HRB 13228, dated February 27, 1978
General Manager: Hans-Jurgen Koenig
Ownership: Hans-Jurgen Koenig - 100%
Operation: Distribution, import and export of machine and
products of the mechanical engineering, as well as
electric devices
Elmasch Vertriebsgesellshaft Fur Produkte Der Electrotechnik
Und Des
Maschinenbaues Mgh Bergstrasse 185, 5300 Bonn 1, West
Germany
Commenced Business: February 27, 1978, under Registry
Number HRB 2478, dated June 19, 1979
General Manager: Hans-Jurgen Koenig
Ownership: Hans-Jurgen Koenig - 90%, Stefan Wagner - 10%
Operation: Distribution, import and export of electrotechnical
and mechanical products
Electronic Elektronechnische Bauelmente Handelsgesellshaft
Mbh
4951 Ameisasse, 1140 Vienna, Austria
Commenced Business: October 30, 1974, under Registry
Number B-9060, dated November 23, 1964
Managers: Dietmar Ulrichshofer, Helmut Hartner
Ownership: Dietmar Ulrichshofer
Operation: Distribution of electronic component parts and
apparatus as well as other technical articles, mainly in
Eastern Europe (80%)
Ing. Ulrichshofer, Dietmar Vertrieb Electronischer Bauelmente
Und Elektronischer Gerate
Baderstrasse 5, 823 Bad Reichenhall, West Germany
Commenced Business: November 1974 under Registry Number
HRA 3530, dated 1976
Sole Proprietor: Dietmar Ulrichshofer
Ownership: Dietmar Ulrichshofer
Operation: Wholesale in (5%) import of (20%) and export (75%)
electronic components, mainly semiconductors. Exports
to European countries.
Solid State Electronics SA
DBA: SSC Solid State Commerz AG, Zurich, Switzerland
Comrnenced Business: April 26, 1971
Director: Dr. Juraj Tamas Zabratzky
Operation: Trade in products of the electronic industry and
related products, take-over of agencies of all kinds, rendering
of commercial services of all kinds, acquisition of
participations and real property as well as acquisition,
registration and exploitation of patent rights of all kinds.
Intra-engineering, GmbH
Goethestrasse 11, D-4000 Dusseldorf, West Germany
Commenced Business: December 30, 1977, under registry
HRB 13197
General Manager: Ing. Gerhard Drost
Operation: Development, planning and construction of plants.
Universal Transport GmbH
Cologne, Dusseldorf and Munich, West Germany
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Commenced Business: July 19, 1968, under Registry No. HRB
2296, dated July 27, 1978
Operation: Forwarding and transports of all kinds (air, road and
water); especially international forwarding for import and
export; customs clearance and air freight.
Panalpina AG
Zurich, Switzerland
Commenced Business: 1920
Operation: Freight forwarder to all parts of the world.
Wholesale trade with various butcher articles, such as
sausage machines, guts, etc. The firm does mainly transit
trade, and there is practically no activity in Switzerland.
Copex Air B. V.
Subsidiary of shipping and forwarding "SAFF" B. V.
Schiphol, Metherlands
Commenced Business: January 18, 1977
Managers: G. H. F. Smit, A. M. Hageman
Operation: Air freight forwarding.
1977, 1978 Anonymous Letters Accused CTC Syndicate
In June of 1977 and February of 1978, the United States Consulate in
Dusseldorf received anonymous letters alleging that entities in the CTC syndicate
were violating U. S. export control laws prohibiting the sale and delivery of certain
high technology items to the Soviet Union and Warsaw Pact.
Signed "former employee," the June 20, 1977 letter alleged that the CTC
group of companies in the United States were falsifying export documents as they
shipped commodities from the U. S.; or were routing their cargos to Western
European transshipment points through Mexico and South America.
Among the items which "former employee" alleged CTC had exported
. illegally was an underwater sonar system and accessories with a total value of
$200,000. Presently, the letter went on to say, CTC executives were working with
Intra-Engineering of Dusseldorf in assemblying for subsequent illegal sale a
"complete system for the manufacture of semiconductors, ICs, for an embargoed
system, and which will be purchased in the USA and delivered via circumvention of
export laws."
The anonymous letter said the CTC group first purchased the high
technology equipment through an enterprise in Los Angeles known as "ADT
International Interorga & CTC." The European firm that received the products and
transshipped them to embargoed nations was identified as "ADT Analog and Digita
Technik Bauelemente und Geraete Vertrieb GmbH, Talstrasse, 22, Dusseldorf."
95-929 0 - 82 - 26
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The head of the CTC network was described as being a German citizen who
maintained an apartment near Dusseldorf but whose home was in the U. S. in a
community called "Marinabay."
The name "Schneider" was signed at the bottom of the February 11, 1978
anonymous letter to the American Consulate in Dusseldorf. Much more detailed in
its allegations, Schneider's letter said the CTC syndicate included five firms --ADT
International, Interorga and CTC, all of Los Angeles; Solid State Electronics of
Locarno, Switzerland; Int ra-Engineering of Dusseldorf and Analog and
Digitaltechnik of Dusseldorf.
Using the network of six firms, CTC employees were said to arrange for
the shipment from the U. S. to West Germany of high technology products. From
Germany, Schneider wrote, the products were transshipped to embargoed nations
through a Zurich company known as Panalpina, the latter enjoying "a handsome
profit from the business."
Schneider described one series of transactions this way. In December of
1970, he said, CTC bought Watkins-Johnson electronic components for $60,000.
Schneider said the component was resold for $105,000 and the $45,000 profit "was,
according to our observations, never taxed."
Schneider went on to say that in 1976 and 1977 CTC shipped to Horst
Jonas in Dusseldorf high technology components that included controlled products
manufactured by Tektronic, Hewlett-Packard, RCA and Varian Palo Alto.
Schneider also said Horst Jonas sold an IBM high speed printer to an embargoed
country late in 1977 through a Stuttgart firm doing business as Datenverarbeitung
Klaus Huebner, GmbH.
CTC executives were bringing suit in Dusseldorf to force Horst Jonas to
pay for electronic goods shipped to him, Schneider said, adding that CTC had
realized great profits from illegal sales of controlled commodities. Schneider said
the CTC group had obtained a loan commitment from a bank in Dusseldorf to build
a German-based plant, stocked with American equipment, for the manufacture of
semiconductors.
Anonymous Letters Were Referred To Commerce Department
The two anonymous letters were referred to the Bureau of East-West
Trade in the Department of State. There, the letters were translated into English
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and, in April or May of 1978, they were sent to the Compliance Division of the
Office of Export Administration in the Department of Commerce. The Compliance
Division has the responsibility to enforce the Export Administration Act and to
investigate violations. No investigation was initiated as a result of the letters.
Perkin-Elmer Contacted Commerce In 1979
On April 19, 1979, George Hunter, a Special Agent in the Compliance
Division of the Office of Export Administration in the U. S. Department of
Commerce, was contacted by Robert Markin, director of Administration in the
Perkin-Elmer Company of Wilton, Connecticut.
Markin told Hunter that CTC California Technology Corporation of
Marina Del Rey had placed a purchase order with Perkin-Elmer on July 7, 1978 for
a sophisticated piece of semiconductor testing equipment commercially named
"Micralign," valued in excess of $150,000 and requiring a validated export license to
be shipped overseas and not licensable for shipment to Soviet Bloc countries.
Markin told Hunter that he had learned that the Soviets were offering
several million dollars for the system. It was this information, Markin said, that
had prompted him to conduct his own background check into CTC California
Technology Corporation. Based on his inquiry, Markin said, he suspected that
California Technology corporation was a "front" company whose intention was to
divert the Micralign system to East Bloc countries.
Commerce Interviewed Maluta In 1979
On April 27, 1979, Walter Blackhall, a Special Agent in the Compliance
Division at Commerce Department, interviewed Anatoli Maluta in the CTC offices,
which were then located at 21515 Hawthorne Boulevard in Torrance, California.
Blackhall arranged the interview as a result of information provided by Robert
Markin of Perkin-Elmer Company regarding the Micralign system.
Maluta told Blackhall that he had become president of CTC California
Technology Corporation in 1978. Maluta said he then renamed the firm
Consolidated Protection Development Corporation. Maluta said the founder of the
company was Joe (Volker) Brandlemeier.
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Maluta said his firm's export business was small and that it specialized in
serving as a broker for foreign companies and in locating spare parts and
components. Maluta said his company did not export the parts and components, but
rather identified for foreign clients those American enterprises that could sell the
desired items.
Concerning the Micralign system,, Maluta said the order for the equipment
had been requested by a salesman for a Dusseldorf firm known as Elubat, GmbH.
Maluta said Elubat planned to resell the system in West Germany.
Maluta said his West German purchasing agent did not order commodities
by means of formal purchase orders but placed orders by telephone instead.
Blackhall asked Maluta for documentation on the purchase of the Perkin-
Elmer Micralign system. Maluta replied that he kept no such records and that he
had no notes on his telephone conversations with Elubat representatives. Maluta
did have a purchase order, a copy of which he gave Blackhall.
Blackhall asked Maluta if he knew that the Micralign system required a
validated export license issued by the Commerce Department and an import
certificate from West Germany to export the system from the United States.
Maluta replied that he knew little about export regulations. Blackhall then said
that because of the possibility of an attempted diversion of the Micralign system,
he wanted copies of all documents relative to any license application submitted by
Maluta. Maluta replied that because of the Commerce Department's interest in his
desire to buy the Micralign system he would cancel the order with Perkin-Elmer.
Maluta Cancelled Micralign Order
Commerce Department Agent George Hunter contacted Elmer-Perkin on
May 21, 1979. Hunter was informed that Consolidated Protection Development
Corporation, formerly CTC California Technology Corporation, had cancelled its
order for the Micralign system.
Fairchild Warned Commerce About CTC In January of 1980
Fairchild Test Systems Group of San Jose, California, wrote to the
Commerce Department on January 31, 1980, to express concern about the export
activities of Consolidated Protection Development Corporation. As a result of its
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concern, Fairchild had decided to hold up delivery of several Fairchild/Xincom
semiconductor memory test systems with a total value of $740,000 and ordered by
Anatoli Maluta.
Lane Smith, manager of Fairchild's export administration, said in the
letter to Commerce that Maluta and Consolidated Protection were very secretive
about their activities. Smith went on to say:
We have sold several Xincom Memory Test Systems to
CPCD in the past, but due to very tight security requirements
at their manufacturing plants they have not purchased
installation or maintenance contracts.
They have supplied us with the proper certifications
corresponding to U. S. export regulations (DIB 629 and Purchase
Order) but, again, because of very strict security, they refuse
to allow Fairchild representatives to physically audit the
equipment.
Smith said, however, that two Fairchild executives had met at length with
Maluta and concluded that he was not violating export laws. Smith explained:
present this information to you in hope that we might
rapidly reach a decision as to whether we can conduct business
as with a normal domestic customer.
I would appreciate a call if you have any information that
would prevent us from shipping our test system to this
customer.
A January 15, 1980 letter from Paul Andre Deschenes, senior sales
manager of Fairchild in El Segundo, to Richard Noren and Jack Barnes of the
Fairchild Test Systems Group in San Jose revealed the extent of the background
data Fairchild had obtained on Maluta and his company.
Deschenes said that on the basis of the inquiry and his interview with
Maluta he felt Fairchild could no longer justify holding up delivery of the Xincom
memory system. He said he had come to this conclusion because of Maluta's
assurances that his company was a manufacturer of "perimeter protection systems"
used by the air forces of nations comprising the free world and by atomic energy
plants and by high technology equipment factories. Deschenes said:
This suggests that because of its purpose, the Protection
System must have a security of at least one order of magnitude
greater than that of the installation it is designed to protect.
Deschenes then went on to give the results of his inquiry into Anatoli
Maluta's background and character; both, he said, were good. He explained:
Mr. Tony Maluta is a naturalized United States citizen,
who has served with the United States Air Force in Berlin,
Frankfurt, Munich and Edwards Air Force Base. He held a top
secret clearance file in the military. His military obligation
completed, he accepted a position with National Cash Register.
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...With the unsolicited approval of Mr. Maluta, an
investigation was requested through the office of Defense
Intelligence in Washington and the Federal Bureau of
Investigation in Washington and Los Angeles. I personally met
with both agencies to insure the accurate transmittal of
information. Upon completion, both agencies reported that
from their investigation and information available in their files,
they see no reason why Fairchild Test Systems Group should
refuse to sell Xincom Systems to Consolidated Protection
Development Corporation.
Paul Andre Deschenes added:
In summary, gentlemen, it appears as though the decision
to hold shipment was proper . under the then existing
circumstances, but with the lack of concrete evidence as
pointed out in action 2) (the DIA and FBI checks), it is no longer
justifiable. It is my recommendation that a prompt
rescheduling of system deliveries to Consolidated Protection
Development Corporation is in order.
As further demonstration of his law-abiding intentions, Fairchild officials
pointed out, Maluta had been asked to give certification attesting to the fact that
he would make end-use application of the Xincom system in accordance with
federal laws and regulations. Maluta accommodated Fairchild, asserting in a
signed Commerce Department form:
This is to certify that all the equipment purchased from
FTSG (Fairchild Test Systems Group) if ever is resold will be in
compliance with all the rules and regulations of the United
States Department of Commerce.
Deschenes attached a copy of the certification to his letter to Noren and
Barnes.
Watkins-Johnson Told Commerce About CTC In February 1980
In a letter dated February 19, 1980, Phillip Gohr, security manager of the
Watkins-Johnson Company of Palo Alto, California, asked the Commerce
Department about the Continental Technology Corporation of Torrance. Pointing
out that Watkins-Johnson had been doing business with Continental for several
yers, Gohr wrote:
Since they have changed names frequently, we are
concerned that there may be a reason. Could you please check
on their current name and past identities and advise me by
telephone.
Gohr attached to his letter a list of names the firm had used on different
dates ? January 16, 1975, California Technology Company; September 3, 1975,
California Technology Corporation; September 16, 1975, CTC California Technology
Corporation; January 20, 1976, California Technology Corporation; December 11,
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1978, Consolidated Protection Development; and January 29, 1980, Continental
Technology Corporation.
Gohr also quoted from a Dunn & Bradstreet report on January 18, 1980,
which, he said, described the Anatoli Maluta firm as being a manufacturer of
surveillance equipment for area protection for the Air Force, Army and the Atomic
Energy Commission and that the enterprise had sales in the U. S., Europe and
Japan.
Commerce Interviewed Gohr In March 1980
Robert Rice, a Special Agent in the Compliance Division of the
Commerce Department, interviewed Phillip Gohr on March 3, 1980. Gohr said a
Dunn & Bradstreet report of January 18, 1980 raised questions about the end-use of
the products Anatoli Maluta bought from Watkins-Johnson. In addition, Gohr said,
the firm's many name changes, its undercapitalization, unusual credit arrangements
and the highly sophisticated nature of the products it bought raised more questions.
Gohr told Agent Rice that Consolidated Protection Development
Corporation -- the name the Malua company was using at the moment -- then had
four pending orders with Watkins-Johnson totalling $983,663. The largest order
was for a Model W7 1240 microwave receiving and antenna system valued at about
$700,000. Gohr said that the system would be used mainly for communication
surveillance.
Gohr said another order was for a Model W7 940 microwave receiving
system valued at $258,000. Gohr said that Anatoli Maluta had indicated that the
Model W7 940 was to be used in an intrusion detection system in Arizona at Fort
Huachuca, site of the U. S. Army's Communication Command and an Army
intelligence school. Gohr said he doubted that Fort Huachuca needed such a
complex system as the Model W7 940 microwave receiving system. Gohr feared
the system might be destined for diversion to a foreign nation.
Commerce Began CTC Inquiry In March 1980
Rice called Fort Huachuca on March 13, 1980 and spoke to John
Templeton, assistant chief of staff for intelligence and security in the Army
Communications Command. Templeton checked Fort Huachuca records and those
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of the nearby U. S. Immigration and Naturalization Service facility, and found that
neither Maluta nor his firm had any previous or current contracts for goods or
services.
Maluta Ordered Eight Fairchild/Xincom
On March 4, 1980, Special Agent Robert Rice of Commerce interviewed
R. Lane Smith of Fairchild in the firm's office in San Jose. Smith said that in
August of 1979 Consolidated Protection Development Corporation ordered eight
Fairchild/Xincom systems valued at more than $1.3 million. Smith said Maluta had
claimed that the machinery was for Maluta's own use in Arizona or in the San
Fernando Valley in Los Angeles.
Smith told Rice that Fairchild's records revealed that between 1977 and
December 1979 Consolidated Protection Development Corporation, and its
predecessor firm, CTC California Technology Corporation, had purchased seven
Xincom systems and other semi-conductor testing instruments and accessories, all
of which were subject to export control restrictions for national security reasons.
Smith said Anatoli Maluta would not allow Fairchild's salesmen on the
company's premises for installation or repair of equipment. Smith said that
because he suspected Maluta of exporting the equipment to prohibited destinations
he asked Maluta for written certification that, in the event of resale, no laws or
regulations would be violated. Sabina Dorn Tittel, Maluta's associate in the CTC
organization, signed some of the certification documents. One such declaration
was signed by Tittel on December 21, 1978 in a letter to Roy L. Jones, a Fairchild
representative in the company's office at 888 North Sepulveda Boulevard in
El Segundo. The letter said:
Dear Roy:
This is to certify that all the equipment purchased from
FTSG if ever it is resold will be in compliance with all rules and
regulations of the United States Commerce Department.
Tittel signed the letter as "Purchasing Manager" of Consolidated
Protection.
Fairchild's Lane Smith told Agent Rice that he asked for the
certifications from Maluta and Tittel to release Fairchild from the responsibility of
obtaining export licenses if the machinery was resold for foreign use; and to serve
the purpose of advising Maluta and his c:olleagues that the products could not be
shipped overseas without export licenses.
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Wu Brought Customs Service Into Case
It was at this approximate stage in the investigation that Commerce
Special Agent Robert Rice went to the Office of the U. S. Attorney in Los Angeles
where he reported on the progress of the Bruchhausen case to Assistant U. S.
Attorney Theodore W. Wu, a federal prosecutor who was experienced in technology
transfer investigations. At the moment Rice reported on what he knew of the
Bruchhausen inquiry, Wu, in fact, was in the process of putting together the
government's successful prosecution of Walter Spawr and his Spawr Optical
Research Company of Corona, California for having sold high energy laser optics to
the Soviet Union.
Rice, who also was involved in the Spawr inquiry, briefed Wu on the CTC
network. Wu was of the opinion that the inquiry was potentially too big for Rice to
handle alone. When it became apparent that insufficient additional resources could
be dedicated to the CTC case by the Commerce Department, Wu and Kenneth
Ingleby, Special Agent in Charge of the Customs Investigations Office at Terminal
Island, California, worked out an arrangement allowing Customs Service personnel
to take part in the investigation. Customs Special Agents assigned to the CTC
case at various times and for various lengths of time included Stephen Dodge,
Robert Olson, Kelly Wilson, Shelley Altenstadter, Leighton Duffus, James Stanley,
Cliff Wilson, James Lindsey, Donald Buynack, Richard Kellogg, Cornelius
Lauridsen, Frank Orrantia, Michael Peel, Thomas King, Roger Urbanski, and others.
Robert Rice remained on the case and another Commerce agent, Frank Deliberti,
assisted on the inquiry for one week.
Maluta Cancelled Fairchild/Xincom Order
Kelly Wilson, a U. S. Customs agent, and Robert Rice interviewed Anatoli
Maluta on March 7, 1980. In discussing the orders he had placed with Fairchild,
Maluta said the delays had gone on toe long. Maluta said he had cancelled the
orders.
Seized Documents Revealed CTC Plans
Documents seized in May of 1980 by U. S. Customs and German Customs
agents revealed that the Xincom machinery was to have been shipped to the Soviet
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Union. The documents were seized by Customs in court-authorized searches of
businesses of the CTC group in the U. S. and West Germany in May, June and
October of 1980.
A telex from Maluta to CTC executives in Dusseldorf dated January 10,
1980 said:
....In the morning, FSC Xincom salesman will bring a
special form for me to sign. Do not know what is on that form.
After that, sales manager and division manager will decide if I
get more Xincoms. Estimate 10 days for final answer.
Items listed on a three page, August 9, 1979 "Quotation" seized in the
offices of CTC's Techma Technische Maschinenhandels - Gesellschaft in Dusseldorf
on May 16, 1980 included reference to a Fairchild/Xincom 5581 memory test system.
Under the category of "prices," the document stated: "To be understood CIF
Moscow."
Also seized in the raid on Techma was a three page contract of August 9,
1979 between Techma and an entity known as Vsesojuznoje Objedinenije
ElectroniOrgtechnia of 32/34 Smolenskaja Square, Moscow. The contract
stiputlated the terms for the sale of a Fairchild/Xincom 5581 memory test system.
Sale price was put at $1.5 million and, the contract said, "The prices are understood
c.i.f. Moscow." The contract said payment for the goods would be made through
the Bank for Foreign Trade of the USSR.
In the raid on Techma, also seized was an August 9, 1979 telex from CTC
employees in Dusseldorf to Anatoli Maluta in which four more Fairchild/Xincom
memory test systems were ordered.
Another wire seized from Techma -- this one dated August 15, 1979 -- was
from Hans-Jurgen Koenig to a "Mr. Kedrov" of Electronorgtehnika for additional
orders of Fairchild/Xincom memory test systems.
In the raid on Techma, a four-page "order acknowledgement" of
September 15, 1979 was seized. The document, sent by Techma to
Elektronorgtehnika in Moscow, spelled out the compoments that had been sold that
constituted the Fairchild/Xincom 5581 memory system.
Maluta Wanted Two HiPox Systems
Agent Rice of the Commerce Department interviewed Robert
Chamberlain, director of international marketing operations for Applied Materials,
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Inc., of Sunnyvale, California, on March 3, 1980. Chamberlain said Applied
Materials was sales representative for Gasonics, Inc., of Mountain View, California.
Gasonics manufactured sophisticated "HiPox" high pressure oxidation systems used
in semiconductor manufacturing.
Chamberlain said that in February of 1980, Anatoli Maluta, using
Continental Technology Corporation purchase orders, tried to buy two HiPox
systems with a total value of about $261,000. Chamberlain was suspicious because
Maluta refused to provide any information regarding the end-use of the machinery
or its intended destination. The purchase orders were dated February 6, 1980.
Because he believed Maluta intended to ship the HiPox equipment abroad in
violation of federal law, Chamberlain decided to add as a condition of sale an
executed end user's certificate.
Accordingly, Brad Beaty, product manager in the marketing division of
Applied Materials, wrote to Maluta on February 13, 1980 to request an end-user's
certificate. Beaty noted that "the ultimate consignee must be the person who is
actually to receive the material for use. A bank, freight forwarder, forwarding
agent, or other intermediary is not acceptable as an alternate consignee."
Beaty also requested a copy of the export license for the HiPox systems.
He pointed out that the ordered equipment would not be sent to Maluta until the
requested certificates were received.
Maluta sent a memorandum dated February 25, 1980 to Monte Toole,
president of Gasonics, in which Maluta asserted that the end-user of the HiPox
systems would be CTC Continental Technology Corporation of Torrance. Maluta
also stipulated that the equipment would not be exported but would be used in
manufacturing processes in the United States. Maluta signed as "vice president" of
CTC.
On January 9, 1980, in a telex to his CTC superior in Dusseldorf, Maluta
said he had had a "long meeting" with a representative of Gasonics and that the
man was "very interested" in where the HiPox systems would be used. He added,
"May even have a Perkin Elmer problem here. Get plenty for this."
In the same telex, Maluta made reference to "Uli," a nickname for
Dietmar Ulrichshofer, who owned electronics distributing businesses in Vienna,
Austria and Bad Reichenhall, West Germany, and purchased electronic equipment
from the CTC group for sale to the Soviets, the Soviet Bloc and other nations.
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On March 3, 1930, Agent Rice interviewed Monte Toole, president of
Gasonics. Toole said Maluta refused to give him any information about the
destination of the two HiPox systems or their intended end-use. Maluta would only
sayd that the systems were to be used in a top security installation at Fort
Huachuca, Arizona.
Hans Witten Was CTC Frieght Forwarder
On March 6, 1980, Agent Rice interviewed Hans Witten, vice president of
Kamino International Transport, Inc., an international air freight forwarder located
at 613 South Hindry Avenue in Inglewood, California. Witten said he had known
Maluta and Tittel since 1978 and that Kamino International had served as freight
forwarder for Maluta's multi-named businesses on many occasions.
Witten had doc:uments in connection with 19 international shipments
Maluta had instigated from November of 1979 to February of 1980. Maluta
purchased the shipped goods in the United States through Continental Technology
Corporation and Consolidated Protection Development Corporation and exported
under the names of Universal Digital Corporation and Atlantic Universal Supply,
Inc. Of the 19 shipments, 16 were exported to West Germany and three to India.
None of the shipments to West Germany were made with a validated export
license. All shipments to India were made with validated export license issued by
the United States.
Commerce Asked Customs For Help In CTC Case
On March 20, 1980, Sharon Connelly, Director of the Compliance Division
of the Office of Export Administration in the Department of Commerce, asked the
U. S. Customs Service for help in the CTC investigation. Surveillance needed to be
performed on a CTC entity and its employees and a search warrant might have to
be served. Commerce Department investigators did not have the resources or
authority to utilize these law enforcement tools.
In her letter to Kenneth Ingleby, Special Agent in Charge of Customs
investigations office at Terminal Island, California, Connelly said:
During the week of March 24, it is anticipated that
Special Agents Frank Deliberti and Robert Rice of my staff will
be in Los Angeles on an investigation of potential violations of
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the Export Administration Act by Consolidated Protection
Development Corporation, 21515 Hawthorne Boulevard,
Torrance, California. Agents Deliberti and Rice will be
conducting a surveillance of a freight shipment expected to be
exported from Los Angeles to an unknown destination in the
latter part of that week. We expect that the surveillance will
culminate in a seizure of the equipment, and various interviews,
with the possibility of the service of a search warrant on the
subject firm.
It is possible that assistance from your office will be
required, at lest insofar as the anticipated seizure of the
equipment is concerned. Due to the tentative nature of the
expected events, we are unable at this time to request
assistance for a specific date, but it is anticipated that March
26 and 27 are the dates that assistance will most likely be
requested, if required.
Thank you for your cooperation in this matter. I will have
Agents Deliberti and Rice contact you as soon as they arrive in
Los Angeles.
Cal Comp Shipment Was Stored Wtih HiPox
On March 23, 1980, Rice and Customs Agent Stephen Dodge interviewed
Hans Witten. Witten said the Gasonics HiPox system cosigned to Continental
Technology Corporation in care of Kamino International had been delivered earlier
in the day. Witten said he was storing another shipment belonging to Maluta. The
second shipment was from California Computer Products of Anaheim, California,
an enterprise referred to as CalComp. Witten said he was holding both shipments
pending the arrival of shipping instructions from Maluta and Sabina Tittel.
Gasonics Delivered CTC Two More HiPox
On March 25, 1980, Rice again interviewed Monte Toole of Gasonics in the
firm's offices in Mountain View. Toole said that on that very day Maluta had
accepted delivery of the two HiPox systems. Toole said Maluta told him that
Maluta's plant in the San Fernando Valley had recently suffered fire damage and he
was unable to use the HiPox systems in that facility. However, Maluta said he
would take possession of the systems and store them at Kamino International in
Inglewood or use them at a facility he maintained in Arizona.
Agents Inspected CalComp, HiPox Shipments
On April 1, 1980, Agents Dodge and Rice returned to Inglewood and met
again with Hans Witten, who showed them the HiPox and CalComp shipments.
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Witten explained that earlier in the day he had called Sabina Tittel and asked her if
the CalComp shipment required an export license. Tittel had replied that she did
not know, but that she would find out from Maluta.
Fort Huachuca Was Termed CalComp Destination
On April 2, 1980, Agent Rice interviewed Richard Kempster, a CalComp
sales representative. Kempster said that on January 21, 1980, Anatoli Maluta had
placed an order for a $90,360 CalComp Model 7000 high performance computerized
drafting system. Kempster said Maluta told him that Continental Technology
Corporation intended to use the system to design semiconductor devices used in
electronic security systems manufactured by Kamino, Inc., of Inglewood, and that
the system would later be sent to Fort Huachuca, Arizona.
True Destination Of CalComp Was Germany
On April 2, 1980, Witten informed Customs Agent Stephen Dodge that the
CalComp shipment was to be forwarded to Techma Technische Maschinenhandels -
Gesselschaft, GmbH, Dusseldorf, West Germany. Witten said the shipper's letter of
instruction, invoices and U. S. Shipper's Export Declarations (SED's) submitted to
Kamino by Continental Technology Corporation described the CalComp systems as
"meters" valued at $14,035.64. The documentation indicated that the exporter was
Universal Digital Corporation of 4804 Macafee Road in Torrance. The SED's were
signed by "S. Dorn," Dorn being Sabina Tittel's maiden name.
W-7 Receiver Reportedly Was Shipped To Germany
Rice interviewed R. G. Orman on April 7, 1980. Orman, district sales
manager for the Watkins-Johnson Company in El Segundo, said he had known
Anatoli Maluta for about five years and had conducted a substantial amount of
business with him. Orman said Maluta had once told him that one of the Watkins-
Johnson radio receiver systems he had bought had been shipped to his contact in
West Germany.
Orman showed Rice two Watkins-Johnson internal reports in which Maluta
was quoted as having said that a recent order from his firm would be assembled in
Arizona and then shipped to an unidentified facility in Alaska.
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HiPox Systems Reportedly For Car Bumpers
On April 11, 1980, Witten told Agent Rice that he had spoken to Anatoli
Maluta. Witten advised Maluta that the CalComp and HiPox shipments required
export licenses. Maluta indicated he would obtain export licenses for them.
Maluta also said the HiPox systems were to be used for tasks such as the metal
plating of car bumpers.
Documents Show CTC Undervalued Shipments
On April 24, 1980, Hans Witten turned over to Customs Agent Dodge
shipping documents which Continental Technology Corporation had submitted in
connection with the CalComp and HiPox systems.
Regarding the CalComp Model 7000, there were two shipper's letters of
instruction. They revealed that the exporter was Universal Digital Corporation of
1843 Lincoln Boulevard, suite 202, Santa Monica. The agent was Kamino
International. The ultimate consignee was Techma GmbH of Dusseldorf. The
freight forwarder was Universal Transport of Dusseldorf. The country of ultimate
destination was West Germany. The CalComp machinery was described as being
typesetting parts and tables. Signator for Universal Digital was "T. Metz," an alias
used by Maluta. Declared customs value was listed as a total of $4,091.16.
The two invoices for the CalComp shipment gave Universal Digital's
address as 4804 Macafee Road, Torrance. They indicated that the destination was
Techma GmbH of Dusseldorf, that the total value of the shipment was $4,090.64
and were signed by "T. Metz" and "M. Maynard" and initialed "ST." Marcia
Maynard was a clerical employee who worked for Maluta. ST stood for Sabina
Tittel.
The shipper's letters of instruction were carbon copies of shipper's export
declarations (SED's), certification required of all exports. Searches were made at
Customs Services files at the John F. Kennedy International Airport in New York in
March of 1980 ? the site and time the CalComp shipments left the U. S. -- and no
copies of the SE D's were found.
Customs Service estimates concerning the CalComp shipments were that
the exporter ? Universal Digital Corporation, also known as Continental
Technology Corporation -- had underestimated the total value by more than
$86,000.
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Regarding the HiPox shipment, the two shipper's export declarations
indicated Universal Digital of Santa Monica was the exporter, Kamino International
of Inglewood the agent and the ultimate destination was Dietmar Ulrichshofer's
electronics business in Bad Reichenhall, West Germany. The products were
described as furnaces with a declared total customs value of $3,445. The HiPox
invoices listed the exporter as Universal Digital of Torrance and gave a customs
value of $3,444.85. The SED's were signed by "M. Maynard" and initialed by "ST."
The shipments were undervalued in the amount of $259,129.81.
CalComp System Shipped To Dusseldorf
On May 1, 1980, the CalComp shipment was forwarded from Los Angeles
to the JFK International Airport in New York on American Airlines flight No. 842.
In New York, the shipment was transferred to Lufthansa flight No. 461 scheduled
to depart for Dusseldorf on May 4. The CalComp shipment was allowed to be
exported, although German and U. S. Customs authorities tracked it. On May 7,
German Customs Agent Ulrich Schulz, working with U. S. Customs Agent Roger
Urbanski, identified the CalComp shipment as being in the Dusseldorf airport
marked for forwarding to Zurich by Universal Transport, a freight forwarder based
in Dusseldorf. A new consignee, Panalpina A. G., had been stipulated on the
shipping documents. Panalpina is a freight forwarder with offices at the Zurich
airport.
Sand Substituted For HiPox Systems
Meanwhile, in the U. S., the HiPox shipment was delivered to the Los
Angeles International Airport on May 5. Shipping instructions called for the cargo
to be loaded aboard a Lufthansa flight for Munich. However, Customs authorities,
working with Assistant United States Attorney Theodore W. Wu, and with
Commerce Department Agent Rice, established that the shipment was in violation
of the Export Administration Act. Wu, after advising the Department of
Commerce's Compliance Division of his operational intent, directed U. S. Customs
to seize the HiPox machinery and substitute two similar looking crates that
contained sand.
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The cost of air freight and substituting the sand shipment was estimated
to be about $10,000. Officials of the Compliance Division of the Commerce
Department in Washington opposed the shipment substitution concept and refused
to put up the money. Ingleby and Wu arrived at a solution in which the Customs
Service paid for the sand substitution, the cost of which eventually amounted to
considerably less than the original estimate.
Fake HiPox Shipment Scheduled For Moscow
The fake HiPox shipment was flown to Munich. On May 23, it was shipped
by truck to Vienna under authority of a freight forwarder named Spediton Poseidon.
Roger Urbanski, a U. S. Customs agent assigned to the American embassy in Bonn,
went to Vienna where Austrian Customs officials told him that Poseidon had
booked passage for the HiPox systems aboard a KLM Royal Dutch Airline, flight
No. 940, from Vienna to Amsterdam. In Amsterdam, the cargo was to be
transferred to Aeroflot flight No. 702 for Moscow, departing on July 7. In
scheduling these flights, Poseidon was representing Electronic Elektrotechnische
Bauelemente GmbH of Vienna, a firm owned and managed by Dietmar Ulrichshofer.
Scheduled to receive the shipment in Russia was an entity known as
Mashpriborintorg of Moscow, a Soviet state purchasing agency.
Dietmar Ulrichshofer Discovered Crates of Sand
On the evening of June 3, Dietmar Ulrichshofer went to the Vienna
storage area where the cargo was being held prior to its shipment to Amsterdam
and then Moscow. Unaware that the two crates contained not HiPox systems but
sand, Ulrichshofer opened one of them to insert an operating manual which had
been forwarded to him earlier. He discovered that the shipment had been
substituted. At 1:10 AM on June 4, Ulrichshofer cancelled the shipment to
Amsterdam.
German Customs Seized CalComp Shipment
German Customs agents seized the CalComp shipment on May 16, 1980 as
it was stored in a staging area at the airport in Dusseldorf. A court-authorized
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/ search of Techma offices in Dusseldorf revealed documentation proving that the
cargo was destined for Moscow where Elektronorgtehnika was to have received
delivery.
Information Showed Ties to Ulrichshofer
In late May of 1981, U. S. Customs Agent Roger Urbanski developed
information indicating that Dietmar Ulrichshofer, through his Vienna firm,
Electronic Elektrotechnische Bauelemerite GmbH, had ordered the HiPox systems
from a CTC entity in Dusseldorf.
In early June of 1981, Ulrich Schulz of German Customs, U. S. Customs
Agents Stephen Dodge and Roger Urbanski and Commerce Agent Robert Rice
developed information indicating that Ulrichshofer's firm in Bad Reichenhall was a
purchasing agent for Electronic of Vienna, which represented various firms in the
Soviet Union and the Warsaw Pact nations. Ulrichshofer reportedly bought
electrical equipment from the CTC syndicate and CTC reportedly was able to
supply equipment which was very difficult to obtain from anyone else.
Ulrichshofer reportedly sold and delivered Watkins-Johnson microwave
receiving systems and associated parts and accessories to the Yugoslavian Defense
Ministry. CTC California Technology Corporation purchase orders revealed that
Watkins-Johnson 940 series equipment was exported from the U. S. consigned to
Dietmar Ulrichshofer in November of 1977, February of 1978 and February, April
and October of 1979. All the shipments were in violation of the Arms Export
Control Act.
Ulrichshofer reportedly sold and delivered three Fairchild/Xincom 5581
memory test systems to the firm Tungsram of Budapest, Hungary. CTC purchase
orders revealed that Fairchild/Xincom 5581 memory test systems were shipped to
Ulrichshofer by California Technology Corporation in May of 1978 and May and July
of 1979.
Ulrichshofer reportedly received a Watkins-Johnson TN-600 V/3 940 tuner
for the Watkins-Johnson 940 microwave receiving system from Mashpriborintorg in
Moscow in late 1979. The equipment had broken down and the Russians wanted it
repaired. Ulrichshofer reportedly turned the tuner over to Bruchhausen's ADT
company in Dusseldorf. The tuner was shipped back to the U. S. for repair and was
seized on October 22, 1980 by U. S. Customs agents at Computer Peripherals
Industries in Chatsworth, a suburb of Los Angeles.
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Sales To Dr. Guenther Forgber
German Customs Agent Ulrich Schulz and U. S. Customs Agent Roger
Urbanski developed information on June 23, 1981 indicating that the Watkins-
Johnson 940 microwave receiving systems had not been sold to the Yugoslav
Defense Ministry but directly to Mashpinborintorg in Moscow. It was reported that
only one of the Fairchild/Xincom memory test systems was sold to Tungsram of
Hungary and three had been sold to Dr. Guenther Forgber of East Germany.
Schulz and Urbanski obtained documentation from Ulrichshofer's sales of
American manufactured electronic equipment to Soviet and Soviet Bloc customers
including the sale to Dr. Guenther Forgber of Narda microwave amplifiers and
power dividers and a Fairchild automatic testing system and Xincom manuals; and
to Mashpinborintorg of Moscow of Watkins-Johnson 940 microwave receiving
systems, manuals and tuners.
Koenig Described Work In CTC Syndicate
On June 6 and 12, 1981, Hans-Juergen Koenig was interviewed in the U. S.
Embassy in Bonn, West Germany by Stephen Dodge of the U. S. Customs Service,
Robert Rice of Commerce and Theodore Wu, an Assistant U. S. Attorney in Los
Angeles.
Koenig, reciting his recollections in fluent English, said that he first went
to work for the CTC group of companies in June of 1977, serving as general
manager of Analog and Digital Technik, or ADT, of Dusseldorf.
Koenig said ADT's sales were largely electrical components to West
German firms but one department of the enterprise, managed by Sybille Ziogas,
was devoted exclusively to the sale of electronic equipment to the Soviet Union.
Ziogas worked in ADT from August of 1977 until late 1978 when she joined another
CTC entity.
His tour at ADT lasted six months, Koenig said. While he was not trained
in technical matters, Koenig did learn the technical side of the business and how
the CTC enterprises operated. Koenig came to realize that ADT had two principal
interests ? sales to West German firms, and sales to the Soviet Union.
CTC executives explained to Koenig that all sales by ADT to the Soviet
Union were made through Electronorgtechnika, also known at Elorg, the Soviet
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state purchasing agency for electrical components, test equipment for components
and computers. Koenig said he learned while working for ADT that the CTC group
bought most of the electrical components and computers for the Soviet Union from
the United States. Koenig said CTC was managed by Tony Maluta, a Russian born
American who spoke English, German and Russian and who had technical
experience and knowledge of high technology equipment. Maluta was assisted by
Sabina Dorn Tittel, a German woman whom Koenig met for the first time in
Dusseldorf in 1977 shortly after he joined ADT.
It was the opinion of CTC executives in Germany that ADT's sales of
American manufactured high technology to the Soviet Union did not violate
German laws because the goods never formally entered West Germany but instead
were only "in-transit" -- or passing through ? in route to Switzerland and then on
to the U.S.S.R., Koenig said. They felt they were breaking no law when they
shipped high technology freight through West Germany and on to the Soviet Union
with no German export licenses.
But Koenig doubled this legal interpretation, pointing out that export
licenses were required for freight shipped 'in-transit through West Germany and
that it was apparant that West German authorities never knew about CTC's sales to
the Soviets.
West German executives of CTC also held the legal opinion that Tony
Maluta's shipments out of the U. S. did not require American export licenses
because Maluta declared the shipments in a deceptive way, describing them in
deliberately vague terms such as "electricals." Because their destination was West
Germany, CTC's shipments were undetected.
However, Koenig said, CTC officials knew that if they had listed the
Soviets as recipients of the goods, export licenses would have been refused. Koenig
said Tony Maluta declared Fairchild/Xincom computer equipment as being
"electricals" when he knew the machinery was more sophisticated than that.
Because of Maluta's "deceptive methods," Koenig said, he believed that Maluta
recognized the legal requirement for proper export licenses was being
circumvented.
While he was learning ADT procedures, Koenig said, he had differences
with management over how the firm should be run. The differences led to Koenig's
quitting ADT. However, he remained on good terms with ADT. In fact, company
officials put up 50,000 Deutschemarks of their own money to enable Koenig to
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establish another enterprise, Elmasch, GmbH. The founding of Elmasch enabled
Koenig to put into practice an idea he had of selling electrical and computer
components to the Warsaw Pact nations. Koenig explained how and why Elmasch
came into being:
By early 1978, I was knowledgeable of ADT's methods of
doing business with the Soviet Union. During this period, I
discussed...my ideas about doing business with the other Eastern
Bloc nations. As part of my attempts to establish business
contacts with the Soviet Bloc customers after the
establishment of Elmasch, I attended a trade fair in Hannover,
West Germany, in April, 1978. At that time, I anticipated
selling electrical components and semiconductors to my
customers, but I learned that certain electric components were
very easy for Soviet Bloc customers to obtain from West
Germany and Austria. I determined that....the price for such
components was relatively low and their sale to Eastern Europe
was not profitable. In about June, 1978, I obtained from
Bulgaria an inquiry for U. S. ball-bonding , die-bonding and
etching equipment used in semiconductor manufacturing, and
this inquiry became an official order in September, 1978. This
inquiry was sent by me in Bulgaria to ADT then to Maluta at
CTC.... Later on, less than a week after my return from
Bulgaria, ...I talked with Tony (Maluta) about this inquiry by
telephone from ADT's office, using a telephone loud speaker.
While Koenig was in the process of setting up Elmasch, GmbH, he
established another business, Techma, GmbH, to take over ADT's transactions with
the Soviet Union. ADT officials wanted to have no further sales to the Soviets.
Koenig was listed as Techma's general manager but Sybille Ziogas, who had
supervised ADT's Soviet sales, took on the same assignment with the new entity.
CTC executives held a party in April or May of 1978 near Dusseldorf
which was attended by about 20 persons, including Maluta and Koenig. Koenig and
Maluta were told to get to know each other and to be on good terms.
Koenig discussed an order he had received from Czechoslovakia for Intel
2708 integrated circuits and an Intel microcomputer develoment system model
MDS231. Maluta's judgement was that Koenig was on the right track in planning to
use Elmasch, GmbH, as a vehicle to supply Eastern Bloc orders. Maluta told
Koenig to accept orders from Warsaw Pact nations and to transmit them directly
to him at CTC in California. Maluta said there would be "no problem" with CTC
delivering U. S. machinery to Elmasch.
Koenig said he frequently heard CTC officials talking long distance with
Maluta. They talked about the availability of machinery and prices. It was obvious
what they were talking about, Koenig said. CTC executives in Germany were
afraid their telephones were monitored and were careful not to mention Soviet
Bloc customers by name.
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Koenig remembered one telephone conversation between one CTC
executive and Maluta that he overheard on the loud speaker. The two men
discussed a possible order from Bulgaria which Koenig knew about. But neither
man referred to Bulgaria or the prospective buyer by name.
The circuitous nature of the telephone conversations did not prevent
Maluta from knowing what was happening, Koenig said. Maluta knew that all the
orders from Elmasch were from Eastern Bloc nations.
The Soviets invasion of Afghanistan in late 1979 triggered new U. S.
government assurances that the flow of high technology to the Soviet Bloc would
be made more difficult. The grain embargo was imposed and, Koenig said, there
were indications that illegal shippers like Maluta were likely to face stronger U. S.
export controls.
To prepare for such an eventuality, the CTC group called a meeting with
Koenig and Maluta for London in February of 1980. Maluta said a tightening of
export controls might be attempted but that they would not succeed, Koenig
recalled. Moreover, Maluta added that he had noted no increase in efforts by the
U. S. government. In short, Maluta declared, there was no need to devise a new
method for shipping high technology out of the U. S. because no new safeguards
had been set up. But, Maluta did say that a Commerce Department agent had
visited him, a recollection by Maluta which was doubted by both Koenig and other
CTC representatives. They believed Maluta was exaggerating the "dangers
involved in ordering U. S. goods" as a ploy to get the CTC syndicate to pay him
more money, Koenig said.
Horst Jonas, a customer of CTC, was suspected by the West German
national police (Bundes kriminal amt or BKA) of having illegal dealings with the
Soviet Bloc. The BKA interviewed CTC executives about Jonas. The encounter
troubled them to such an extent that they moved ADT to new quarters in
Dusseldorf in 1977 and then moved the company offices to Munich in 1979, Koenig
said. Jonas was arrested and imprisoned for 18 months by German authorities for
alleged espionage activities.
Referring to his contention that Tony Maluta was well aware of the
activities of the West German businesses, in the CTC syndicate, Koenig recalled a
conversation he had during the London meeting with Maluta. He told Maluta that
Bulgaria was Elrnasch's biggest customer. To conceal the true destination of the
Bulgarian shipments, Elmasch gave them the order code of 7200. Maluta knew all
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7200 codes were for Bulgarian customers, Koenig said. Similarly, Maluta also knew
that Techma, GmbH, was selling to the Soviet Union, Koenig said. He added:
1 am of the opinion that Maluta knew all orders from
Elmasch and Techma were for Eastern European and Soviet
customers, except for a very small portion of Techma orders
for Zabel, a West German firm. My opinion is based on the fact
that I told Maluta in May 1978 that Elmasch was set up
specifically to do business with Eastern Europe other than the
U.S.S.R., and Maluta had to know Techma was selling primarily
to the U.S.S.R. because it followed ADT in the Soviet business,
and simply was a change of name for business with the Soviet
Union already being conducted by ADT.
Early in 1980 CTC executives began to suspect that Maluta and his
assistant, Sabina Dorn Tittel, were cheating them, charging them exorbitant prices
for U. S. equipment.
On a Monday morning in May, Werner J. Bruchhausen and Koenig made an
unexpected visit on CTC in Los Angeles. Their arrival caused tension between
Bruchhausen and Maluta. Later that day the two men quarreled. When Maluta left
the offices, Bruchhausen and Koenig searched the files and found evidence that
Maluta was overcharging his employer 10 to 20 percent. Bruchhausen fired Maluta
and Sabina Tittel.
Maluta's pay, Koenig said, had been $2,000 to $3,000 a month but he was
given another $25,000 a month by charging the CTC entities through a fictitious
advertising account which CTC executives had agreed to. The CTC executives set
aside another $150,000 to be used by Maluta should he be arrested and face big
legal fees. Suspicions that Maluta was stealing from CTC were well founded and
Koenig estimated that Maluta embezzled about $800,000 from CTC entities.
Koenig recalled his first meeting with Sabina Dorn Tittel, saying he met
her in August of 1977 while she was on vacation in Dusseldorf. He said Tittel may
not have known about ADT's Soviet sales at the time but that it was his "common
sense assumption that Maluta must have told her at some time."
Koenig Listed Communist Customers
In his interview with U. S. government authorities, Koenig gave detailed
information about the sales and deliveries of equipment to Soviet, Soviet Bloc and
Communist Chinese customers. The customers included:
-- China National Foreign Transportation Co. of Mainland China.
? Electronic-Export Import; and Veb Carl Zeiss Jena (Import Kontor Viw)
of East Germany.
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? Unitra Foreign Trade Enterprise; and Metronex of Poland.
Kovo Aubenhandelsunt-Ernehmen of Yugoslavia.
? Tungsram of Hungary.
Isotimpex; and Inco, lndustrial-Ernehmen of Bulgaria.
? Technoimportexport, of Romania.
Ilona Seibert Recalled Maluta's Employ
Ilona Seibert, who worked for Maluta from June of 1978 to February of
1979, told Customs Agent Shelley Altenstadter and Commerce Agent Robert Rice
that CTC bought equipment under the name of California Technology Corporation
and exported it through the company known as Interorga. Later, she said,
purchases were made through Consolidated Protection Corporation and Atlantic
Universal Supply, Inc. did the exporting.,
The use of different enterprises to buy and export was a ruse to enable
the CTC companies to prevent vendors from readily figuring out the fact that their
goods were being shipped abroad, Seibert said. She also noted that duplicate or
double invoices were prepared by CTC entities but she never asked why.
Marsha Maynard Kept Books For CTC
Similar information was provided to Customs Agents Stephen Dodge and
Shelley Altenstadter by Marsha Maynard, a CTC secretary. Maynard, who had
jointed the CTC entities in July of 1979, did clerical work and kept the books for
Continental Technology Corporation and Universal Digital Corporation.
Maynard, recalling that the CTC entities kept three sets of books, said
equipment was bought by Consolidated Protection Development Corporation and
Continental Technology Corporation and was exported by Atlantic Universal
Supply, Inc. and Universal Digital Corporation.
It was explained to her by Sabina Tittel that the CTC group of firms used
differently named firms to buy and export to prevent vendors from realizing that
the products they sold Maluta were being shipped overseas, Maynard said. Maluta
and Tittel both told Maynard that if any vendor asked where the equipment was to
be used, she was to say it would be shipped to a facility in Arizona. Maluta and
Tittel both admitted to her that the Arizona plant did not exist, Maynard said,
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adding that her instructions also included hiding all documents referring to
Universal Digital whenever a vendor visited the CTC office.
Two sets of invoices were maintained, Maynard said, explaining that one
set gave accurate dollar values and product descriptions and the second set carried
false data.
Scott McKay Was CTC Shipping Clerk
Scott McKay, a shipping clerk at CTC from October of 1978 to October of
1979, told Customs Agent Altenstadter that he prepared duplicate commerical
invoices, one listing the actual value and description of the shipped commodities
and the second stating false values. McKay said one invoice was mailed to the
CTC group in Dusseldorf, the other accompanied the exported item on its journey,
but he could not remember which went where.
Sharon Engelman Was CTC Receptionist
Sharon Engelman was a receptionist at CTC from February through July
of 1979. She told Customs Agents Altenstadter and Duffus that about once a week
CTC offices in Dusseldorf sent by wire transfer about $100,000 to the CTC entities
in California.
U. S. Customs Searches CTC Quarters
Shortly after Anatoli Maluta and Sabina Dorn Tittel were fired in early
May of 1980, the investigation into the activities of the CTC entities heated up.
The U. S. Customs Service, acting upon court-authorized warrants, on May 19, 1980
searched the premises at:
--Continental Technology Corporation, Suite 100, 23868 Hawthorne
Boulevard, Torrance.
?Sabina Tittel's residence at 30605 Cartier Drive, Rancho Palos Verdes.
?Universal Digital Corporation, Suite 202, 1843 Lincoln Boulevard, Santa
Monica.
--Continental Technology Corporation, Suite 646, 21515 Hawthorne
Boulevard, Torrance.
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--Sabina Tittel's former residence at 4804 Macafee Road, Torrance.
--Werner J. Bruchhausen's safe deposit box in the Bank of America branch
at 21615 Hawthorne Boulevard, Torrance.
On May 20, a court-authorized search was conducted by U. S. Customs
agents on a safe deposit box assigned to Consolidated Protection Development
Corporation in a Torrance Bank of America branch.
On May 30, U. S. Customs agents made a court-authorized search of
Sabina Tittel's home at 30605 Cartier Drive in Rancho Palos Verdes.
The final court-authorized search in California occurred on October 2,
1980 when Customs agents seized documents from the Computer Peripherals
Industries, 10836 Bothwell Road, Chatsworth.
German Customs Made Additional Searches
Beginning on May 16, 1980 and continuing through October 8, 1980, German
Customs agents, using court-authorized warrants, searched the premises of
Techma, GmbH of Dusseldorf, West Germany; Elmasch GmbH of Bonn; the
residence of Hans-Juergen Koenig in Bonn; ADT Analog and Digital Technik,
Neiderseeon; the residence of ADT accountant Ursula Tinte in Dortmund; Ing.
Ulrichshofer, GmbH, Bad Reichenhall; Dema Computertechnik, GmbH, Munich; and
the residence of Frank and Karin Nassauer in Bad Homburg.
Detlef Lackmann Represented CTC
Customs Agent Stepten Dodge interviewed Dance Garrett, an employee
of California Technology Corporation on June 3, 1980. Garrett said Detlef
Lackmann, a CTC representative from Dusseldorf, had flown to the United States
from Germany to begin disposing of equipment still held by the CTC group of
companies.
Dodge arid Commerce Agent Robert Rice located Lackmann on June 4 and
interviewed him in his room at the Plush Horse Inn in Redondo Beach. They
interviewed him again on June 6 in the U.. S. Customs house at Terminal Island.
Lackmann, explaining that he was an officer of Elubat, GmbH, and an
employee of ADT, said there was no doubt that the CTC companies sold products
of U. S. origin to the Soviet Union and might also do the same for Bulgaria. He
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--Sabina Tittel's former residence at 4804 Macafee Road, Torrance.
--Werner J. Bruchhausen's safe deposit box in the Bank of America branch
at 21615 Hawthorne Boulevard, Torrance.
On May 20, a court-authorized search was conducted by U. S. Customs
agents on a safe deposit box assigned to Consolidated Protection Development
Corporation in a Torrance Bank of America branch.
On May 30, U. S. Customs agents made a court-authorized search of
Sabina Tittel's home at 30605 Cartier Drive in Rancho Palos Verdes.
The final court-authorized search in California occurred on October 2,
1980 when Customs agents seized documents from the Computer Peripherals
Industries, 10836 Bothwell Road, Chatsworth.
German Customs Made Additional Searches
Beginning on May 16, 1980 and continuing through October 8, 1980, German
Customs agents, using court-authorized warrants, searched the premises of
Techma, GmbH of Dusseldorf, West Germany; Elmasch GmbH of Bonn; the
residence of Hans-Juergen Koenig in Bonn; ADT Analog and Digital Technik,
Neiderseeon; the residence of ADT accountant Ursula Tinte in Dortmund; Ing.
Ulrichshofer, GmbH, Bad Reichenhall; Dema Computertechnik, GmbH, Munich; and
the residence of Frank and Karin Nassauer in Bad Homburg.
Detlef Lackmann Represented CTC
Customs Agent Stepten Dodge interviewed Dance Garrett, an employee
of California Technology Corporation on June 3, 1980. Garrett said Detlef
Lackmann, a CTC representative from Dusseldorf, had flown to the United States
from Germany to begin disposing of equipment still held by the CTC group of
companies.
Dodge arid Commerce Agent Robert Rice located Lackmann on June 4 and
interviewed him in his room at the Plush Horse Inn in Redondo Beach. They
interviewed him again on June 6 in the U.. S. Customs house at Terminal Island.
Lackmann, explaining that he was an officer of Elubat, GmbH, and an
employee of ADT, said there was no doubt that the CTC companies sold products
of U. S. origin to the Soviet Union and might also do the same for Bulgaria. He
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The indictment cited specific high technology systems and components
which the group allegedly had exported from the U. S. illegally including:
--Watkins-Johnson Model MF 100/W7 940 main frame microwave receiver
system.
--Fairchild Systems Technology Xincom Parallel Operation Memory Test
Systems, Model 5531.
--Data General Corporation Model Eclipse S/230 computer systems.
--Watkins-Johnson Company Model TN-600 microwave tuner.
--Fairchild Xincorn Systems Model 5580 Basic Test System.
--Memorex Corporation Disk Drive System.
--Intel Corporation Single Board Computers.
--Intel Corporation and Motorola, Inc., microcircuits.
--Tamarack Scientific Company Model 142 Contact Printer.
?Intel Corporation Microcomputer Development Systems.
--Intel Corporation microcircuits.
--Analog Devices, Inc., microcircuits.
--Watkins-Johnson Company Model W7 8640 Manpack Receiver with five
tuning heads and battery chargers.
The indictment alleged that Bruchhausen, Ulrichshofer, Maluta and Dorn
conspired to export various high technology commodities from the U. S. to West
Germany and elsewhere without export licenses.
Maluta, Bruchhausen and Ulrichshofer were alleged to have exported
electronic communications systems, computer components and other commodities
with knowledge that they would be used for the benefit of the Soviet Union or
Eastern Bloc countries.
As early as 1977, the indictment alleged, Maluta and Tittel received
purchase orders for electronics commodities from Bruchhausen and Ulrichshofer
and procured the commodities from U. S. manufacturers for shipment abroad.
Maluta and Tittel were accused of 13 counts of illegally exporting to West
Germany. Maluta was charged in 23 other counts with exporting various
commodities with knowledge they would benefit the Soviets.
Maluta and Tittel were accused of filing false Shipper's Export
Declarations (SEDs) and other false documents submitted to the U. S. Customs
Service. Maluta and Tittel were also charged in nine counts with various income
tax violations involving hundreds of thousands of dollars.
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In addition, Maluta was charged with perjury, having allegedly lied to the
grand jury on June 7, 1980.
Bruchhausen and Ulrichshofer were both outside the United States when
the indictment came down. Maluta and Tittel were apprehended by agents of the
Internal Revenue Service in Palm Desert, California on August 19. Bail for each of
them was set at $800,000. The IRS had joined the investigation in April 1981 at the
request of Assistant U. S. Attorney Theodore Wu.
Maluta and Tittel were in a car when arrested and had three pistols in the
back seat. They did not resist arrest, although one of them seemed to be reaching
into the back seat just before they surrendered. Tittel's attorney told reporters
that Tittel owned a condominium in Palm Desert and sometimes went shooting in
the desert.
Disposition of Maluta and Tittel Cases
Anatoli Maluta was found guilty of conspiracy, filing export documents
containing false statements, unlawful exportation of Munitions List items,
exporting without a license, tax evasion, subscribing to a false tax return and
exporting without a license to countries barred because of national security
considerations. Sabina Dorn Tittel pled guilty to making false statements,
exporting without a license, tax evasion and subscribing to a false tax return.
In his sentencing memorandum submitted to the court, Assistant U. S.
Attorney Wu, who prosecuted the case, said the export offenses committed by
Maluta and Tittel involved more than three years of "continuous and deliberately
designed, and systematically executed criminal conduct of a serious nature."
Wu said Maluta and Tittel variously were guilty of exporting goods in
violation of the Export Administration Act, the Commodity Control List of the
Export Administration Regulations, the International Traffic in Arms Regulations
and the Arms Export Control Act.
Wu went on to say:
There is no doubt that both Maluta and Tittel at the time
of the commission of the offenses knew exactly what they were
doing was contrary to law, e.g., that the exports were
knowingly effected without obtaining the necessary licenses;
that the contents of the shipments were falsely described and
undervalued, and that the defendants' income obtained from the
illegal export operation were falsely stated to evade income
tax.
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Maluta was aware that certain of the goods they arranged to be exported
would and did go to the Soviet Union, Wu said, adding that what motivated Maluta
and Tittel was greed and that their desire for fortune was quickly satisfied.
Maluta, for example, was able to buy in 1979 alone $185,000 in gold and silver
coins. According to an affidavit given by Robert A. Lyon, an officer of Jonathon's
Coin, Inc., of Inglewood, Maluta made 17 cash purchases of coins in the months of
February, March, April, May, June and August during 1979 for a total of
$190,358.66. His purchases, all of which were made in cash, included one for
$79,974, another for $20,000 and a third for $19,987.
From 1978 through April of 1979, Tittel acquired a single family dwelling
in Torrance, California for $92,000, with a down payment of $19,400; a
condominium in Palm Desert for $125,995, with a down payment of $49,345; a
single family residence in New Cuyarna for $33,000, with a down payment of
$15,700; a single family residence in Rancho Palos Verdes for $295,000, with a
down payment of $198,400; and in 1979 a new Mercedes-Benz 450 SLC automobile
for $41,595.56, for which she paid $10,500 in cash and $31,095.56 with a cashier's
check.
Wu added:
To the defendants, it was not enough to get rich quickly
through the unlawful export operation; they were driven to do
more -- evade income tax. That was greed upon greed. Also, it
is clearly apparent that the defendants, especially Maluta, had
to know that the high technology products exported by them
illegally and the laws they breached implicated the national
security interest of this country. The defendants purposefully
ignored the risk of running afoul of the law and the risk of
compromising controlled U.S.-origin technology to governments
whose interests are inconsistent with those of the United
States.
Considering the seriousness of their crimes, Wu said, it was his
recommendation to the court that Maluta receive a prison term of six to eight
years and a fine of at least $100,000.
As for Tittel, Wu said, she told the court that she entered into the illegal
export scheme because she was in love with Maluta and, therefore, under his
influence and control. But Wu did not believe her love for Maluta excused her
conduct, as he explained:
While she may well have been "in love" with Maluta and
thus susceptible to his persuasion, the government contends
that Tittel was more "in love" with the glowing prospect of a
quick rise to affluence....
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Acknowledging that Tittel's responsibility for the exporting conspiracy
was somewhat less than was Maluta's, Wu's recommendation was that she receive a
prison term of three to four years and a fine of $100,000; along with a five-year
probation term to begin on her release from prison.
Maluta, who appealed his conviction on the grounds that he was the victim
of selective prosecution by the government, is still involved in the appellate
process at this time.
Tittel received a two-year prison sentence and was fined $25,000. She is
incarcerated at the Federal Correctional Institute in Pleasanton, California. She
has filed a motion to reduce sentence which the court has taken under
consideration.
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STAFF STATEMENT OF
GLENN W. FRY, INVESTIGATOR
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
UNITED STATES SENATE
MAY 5, 1982
The Commerce Department's ineffective response to the challenge of
technology transfer is an illustrative example of the failure of the Government, in
general, to organize itself effectively to remedy this national security problem.
We have learned of the shortcomings in the Commerce Department's
efforts to investigate violations of the Export Administration Act thereby causing
a serious deficiency in its ability to enforce the statute and its regulations. The
law enforcement effort, although critical, is only a part of the overall effort to
prevent the harmful flow of U. S. technology. Even if the law enforcement
operation were professionally administered with sufficient resources its
effectiveness would continue to suffer due in part to deficiencies within other
executive branch agencies.
The Commerce Department is mandated to administer and enforce the
Export Administration Act; however, matters concerning this act which involve
national security interests require the consultation of the Department of Defense
and the Intelligence Community as well as Commerce. Ineffective control of the
transfer of U. S. technology and the enforcement of export laws will prevail if the
Department of Defense and the Intelligence Community continue to provide less
than their best efforts to support this national security mission. Despite several
previous Congressional investigations and hearings conducted on these matters,
dating back to 1974, the responsible executive branch agencies continue to have
difficulty in organizing an effective operation.
Technology transfer can occur through the illegal export of controlled or
embargoed commodities; however, it can also occur, with equal damage, because of
inadequate control and protection of critical information and through ineffective
handling of legitimate export licensing cases. The Minority staff has made
preliminary findings that the technology transfer programs of the Department of
Defense and the Intelligence Community contain basic deficiencies which impair
the Government's overall effort to control the flow of critical American
technology.
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The following are areas within the Defense Department's program that
demand attention and ultimate resolution if the Government intends to control the
flow of U. S. technology:
(1) The Freedom of Information Act is a legal tactic available to U. S.
citizens, foreigners and even Soviet surrogates to obtain critical "dual use"
technology. "Dual use" technology, which can be used commercially and militarily,
is not excluded from FOIA requests. There is no protection or means to control the
harmful transfer of technology that does not fall within the exclusions prescribed
by the FOIA.
(2) There have been instances where classified information has been
prematurely declassified in accordance with an automatic declassification
schedule. In other instances, critical technologies which have military significance
are never classified. In either case, the end result is that such information,
although not readily distributed, becomes available to anyone. In effect, if the
specifications of a grenade launcher were not classified then such information
would be available to anyone. There is no effective system to accurately
determine whether information should be classified, declassified or remain
classified.
The Department of Defense's Offices of Research and Engineering and
International Security Policy are responsible for the review of export licensing
requests for national security interests. Presently, Defense reviews predominantly
those export cases involving the Soviet Union or Warsaw Pact nations. There is
very little review of "free world" license requests except for cases involving very
advanced computer technology. The program presently administered within the
Department of Defense suffers from several fundamental deficiencies.
(3) On August 26, 1977, the Secretary of Defense issued an "interim"
policy statement for the export control of U. S. technology. Today in 1982, there
has yet to be any follow-up to this "interim" policy. This is representative of the
weak overall priority afforded the technology transfer issue throughout our
Government. Sources within Defense have indicated that there is ambiguity
regarding which DOD office has overall accountability for technology transfer
decisions. There is apparent confusion as to who has overall accountability on the
issue of transfer of technology between the offices of the Deputy Under Secretary
of Defense for Research and Engineering and the Deputy Under Secretary of
International Security Policy. Sources have stated that this confusion has caused
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unnecessary and costly delays in the resolution of export license reviews, resulting
in the export of various technologies that are potentially not in the best interests
of our national security. On May 19, 1979, the Deputy Secretary of Defense issued
a directive delineating specific areas of responsibility within the Department of
Defense. Defense Research and Engineering was designated as the responsible
office for technological matters and processing and coordination of export
requests. It was also designated to serve as the DOD focal point on all aspects of
export technology, including COCOM, with the Department of State and other
Federal agencies. International Security Affairs (later renamed International
Security Policy) will be responsible for policy and political considerations. It
stated that disagreements should be recorded and referred to the Deputy Secretary
for resolution. Sources within Defense have explained that, to date, neither office
has overall accountability. There are instances when DR&E makes final decisions
and instances when ISP makes them; however, there is inadequate coordination or
communication between the two offices.
(4) The Office of Defense Research and Engineering does not have an
adequate number of permanent staff specialists to effectively conduct its
technology transfer mission. Temporary personnel have been assigned to this
office; however, there is an annual turnover. Consequently, much valuable time
and resources are continually used to train and familiarize new personnel rather
than attend to its primary responsibilities.
(5) Military and Department of Defense Research laboratories who are
tasked by DR&E to review licensing cases lack a charter delineating export control
or technology transfer responsibilities. There is also no specific funding for this
type of operation. Consequently, technology transfer issues are not a priority and
do not receive appropriate attention.
(6) There is no adequate data base of information available to all
participants in the technology transfer program within our Government. This
deficiency is analogous to prosecutors working without the benefit of a legal
library. There has to be a centralized repository of information that maintains
available data relevant to the decisions to grant exports.
Presently, there are data bases within various agencies; however, they
have not been consolidated and there is little coordination between agencies on
available information. Much of what is known about technology transfer lies solely
on the reliance of corporate memory. In a sense, the present system lends itself to
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the cliche that the right hand doesn't know what the left hand is doing." One DOD
research lab could review an export license case and raise no objection to its
ultimate export. Another DOD lab might receive a similar case and deny the
export based on information it independently had at its disposal. A mechanism is
needed to consolidate all available data so that all participants are aware of
relevant information.
(7) The Department of Defense does not review a sufficient number of
"free world" export license cases. Exports to free world nations many times are
improperly or illegally reexported or diverted to East Bloc nations. This has been
demonstrated by recent export violations involving nations such as Switzerland and
West Germany that were used as conduits for the illegal re-export of high
technology commodities to the Soviet Union. The U. S. trades with many nations
such as India and Pakistan who have open trade policies with the Soviet Union. To
blindly export critical technologies to nations such as those without the benefit of
the DOD's review could run the risk of having U. S. technologies end up in the
U.S.S.R.
(8) Defense Research and Engineering has not devoted sufficient
resources to the program which reviews foreign technical visitor programs. DR&E
is responsible for determining militarily critical technology that requires export
control. This effort is being done in concert with U. S. industry. In this light
DR&E has devoted tremendous resources to the development and understanding of
new dual use technologies; however, there is not an adequate operation within
DR&E to assess what areas visitors are concerned with and what technology is
obtained by these visitors. Therefore, due to this inadequate oversight, DR&E has
little control over the potential loss of U. S. technology. Consequently, there is no
way to assess what critical technologies have been obtained by our adversaries
thereby making it virtually impossible for the Intelligence Community to determine
how the loss impacts on our national security.
The effective control of critical dual use technology is largely dependent
on the proper gathering, dissemination, analysis and use of intelligence. It is the
view of the Minority staff that the Soviets, in many cases, are precise about what
technology and equipment they want from the United States. It follows then, that
if the U. S. can determine what the Soviets desire, where they are deficient, what
they need and what direction their technological efforts are aimed, we are in an
improved position to prevent them from obtaining our technology which may meet
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their needs. At the very least the U. S. could create delays in the Soviets efforts
which will impede their progress and maintain our lead time in critical areas of
technology. Testimony will be given which describes the Soviets as having an
enormous, systematic and organized effort to obtain U. S. and other Western
technology. The U. S., however, does not have a mechanism equal to the Soviets'
task. There has been no overall coordinated, systematic and organized program in
the U. S. to effectively prevent loss of our technology to the Soviets.
Intelligence is the key to anticipating the technology on the Soviets'
"shopping list." U. S. law enforcement authorities can mount effective
enforcement strategy directed towards illegal exports when they are apprised of
what the Soviets are looking for. DOD and Commerce representatives who review
export licensing cases would be in a better position to render proper decisions
based on national security interests if they had the most available intelligence.
But, after reviewing information obtained from law enforcement and technology
specialists in the executive branch, the Minority staff has reached the preliminary
finding that the U. S. intelligence effort regarding export controls is insufficient.
Coordination among affected agencies is inadequate. Commitment of needed
resources is lacking. The intelligence community is not organized to use
information to block prohibited diversions.
Specifically, the Minority staff found the following deficiencies within the
intelligence operations of the technology transfer control effort:
(1) The Export Administration Act mandated Commerce to determine the
foreign availability of critical dual-use technologies. The foreign availability of
technologies is an important ingredient in the decision making process for granting
or denying export licenses. However, authorities within the executive branch
assert that current foreign availability determinations are not adequate.
(2) The Intelligence Community has not been utilized sufficiently by
eith?.r Commerce or the Department of Defense. Sources within the Intelligence
Community state that they have virtually no communication with Commerce's
Compliance Division regarding ongoing investigations of export violations. One
representative of the Intelligence Community indicated that there is little
feedback from Commerce regarding the intelligence information it provides. The
information is submitted to Commerce's Office of Intelligence Operations and it is
not known whether it is disseminated to the Compliance Division or other Divisions
as well. Conversely, the Compliance Division rarely seeks the expertise of the
Intelligence Community regarding investigations.
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Moreover, once the intelligence apparatus is strengthened, then methods
should be devised that enable sensitive information to be sanitized and passed on to
law enforcement personnel in a form that will assist them. Several experienced
law enforcement investigators pointed out that frequently intelligence on
technology transfers has such a high classification that many agents working export
controls cases cannot see it.
It is the view of government experts in law enforcement and science and
engineering that until the intelligence capability is upgraded, law enforcement will
suffer.
(3) Defense Research and Engineering tasks_ the Defense Intelligence
Agency to conduct "end user" investigations. Essentially, DIA is to determine
whether the end user of an export is not a national security risk. DIA performs this
task as a support function to DR&E -- its license review procedures. Historically,
DIA has been utilized infrequently in this capacity. Within the last 18 months DIA
has been tasked more frequently; however, it does not have sufficient resources to
conduct end user determinations that are necessary.
(4) There is no mechanism or organized program which conducts f ollow-
up investigations of foreign exports or re-exports of U. S. technology. In fact,
there is no adequate system to accurately determine what has been exported, re-
exported, where it is used, and how it is used. There is no way to accurately
determine the adverse impact to the U. S. of that dual use technology that has
been obtained by our adversaries. Officials working in the technology field are
troubled by the fact that our government has difficulty determining a current
assessment of the "state of the art" of American technology. Given such a fact,
the difficulty in assessing what technology has been lost and its impact on U. S.
national security seems almost insolvable given the current resources and policy.
In summary, the U. S. Government, at present, has no high level
interagency task force or entity comprised of senior cabinet level officials
addressing the problem of export control and technology transfer. All past and
current efforts along this line have been done by lower echelon Government
officials who can merely make recommendations rather than needed changes.
1/
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pwrintent ii ,Itutirt
STATSMENT
OF
THEODORE STEWART GREENBERG
ASSISTANT UNITED STATES ATTORNEY
EASTERN DISTRICT OF VIRGINIA
BEFORE
E
COMMITTEE ON GOVERNMENTAL AFFAIRS
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
UNITED STATES SENATE
CONCERNING
TECHNOLOGY TRANSFER
AND
UNITED STATES v. MARC ANDRE DeGEYTER
ON
MAY 5, 1982
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TABLE OF CONTENTS
I. SUMMARY
II. STATEMENT OF FACTS
Page
1
2
A. The Cast 2
B. The Approach
C. The Offer 4
D. The Ante Raised 5
E. The F.B.I. Interviews 7
F. Discovered - The Approach Changes -
DeGeyter and the Arab Shiek
G. Summary of District Court Proceedings
11
EXHIBIT 1. Copy of $500,000 check 13
2. Complaint (New York) 14
3. Search Warrant Inventory 16
4. Complaint (EDVA) 19
5. Indictment 21
6. Motion of the U.S. to Hold a Bail
Justification Hearing
7. Motion of the U.S. to Increase Bail
and to Hold a Bail Justification Hearing 26
8. Plea Agreement 26
9. Information JO
10. Sentencing Memorandum 31
10A. Judgment and Probation/Commitment Order 34
11. Proposed Commerce Letter 35
12. $10,000 Civil Penalty 36
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I. SUMMARY
On May 22, 1979, the Federal Bureau of investigation
received information from John Maguire, President, Software,
A.G., Reston, Virginia, regarding the attempted bribery of one
of his employees by Marc Andre De Geyter,. a Belgian national,
who stated that he was acting on behalf of the Russian
Government. DeGeyter wanted to steal Software's trade secret,
the ADABAS source code.
An FBI investigation, which included the use of an
undercover agent and consensual monitoring, resulted in
DeGeyter's arrest at John F. Kennedy International Airport on
May 18, 1980, when DeGeyter gave an undercover agent a check
for 8900,000.
The investigation was monitored primarily by the Internal
Security Section of the Department of Justice. Prosecution of
the case was directed jointly by the United States Attorney's
Office for the Eastern District of Virginia, and the Internal
Security Section. I/
The investigation was orginially conducted as a foreign
counter-intelligence operation and then as a criminal investi-
gation. DeGel,ter was indicted on June 9, 1980, for violating
Title 18, United States Code, Section 1952(a)(3), interstate
and foreign travel in aid of a rackeetering enterprise, i.e.,
commercial bribery, in violation of the laws of the State of
New York and the commonwealth of Virginia. DeGeyter was per-
mitted to plead guilty to misdemeanor violations of the Export
Administration Act and the Virginia Commercial Bribery Statute,
because of significant governmeraal interests. After incarceration
in Alexandria and FCI, Petersburg, Virginia, DeGeyter was permitted
to voluntarily depart the United States.
1/ Then Deputy Section Chief John Martin and Department
Attorney George Matava handled the case on behalf of the
Internal Security Section.
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II. STATEMENT OF FACTS
A. The Cast
1. ADABAS (Adaptable Data Base System), a data base
management system. The source code is deemed to
be a trade secret worth approximately $10,000,000.
It would not be sold in the normal course of Software's
business; and, in any event it would require a vote
of the Directors to before it could be sold. It was
maintained in a safe in the corporate offices and only
selected individuals had access to it.
2. James Addis, Salesman, Software, A.G.
3. Special Agent Robert H. Bates, Federal Bureau of
Investigation
4. Marc Andre DeGeyter - Following is a description
of DeGeyter obtained through interview and observation:
Full Name:
Other names used:
Birthdate:
Nationality:
Residence:
Marital Status:
Passport:
Alien Registration:
Language:
Marc Andre DeGeyter
Marc A. DeGeyter and Marc De Geyter
February 6, 1949, Tielt, Belgium
White male, 510", 185 lbs., curly
brown hair, receding in front and
bald on top, sideburns, ruddy
complexion, Protruding stomach.
Belgium
St. Huberstuslaan 15, Schilde,
Belgium 2232
Married, three children
Holds Belgium passport number
N147192; issued 13,71 visa'in
Brussels, Belgium for travel to
U.S.
P147192
Speaks and understands German,
English and Russian
Corporations: President, Commercial Engineering and
Sales Agency (CESA), Rue de Geneve, Box 7, Brussels,
Belgium 1140, Telephone [phone]; President, TVS,
Broadcast Systems Division, Rue de Geneve 10, Box 7,
Brussels, Belgium 1140, Telephone [phone]; President,
afrabel (Africa-Belgium), Rue de Geneve 10, Box 7,
Brussels, Belgium 1140, Telephone [phone]; Managing
Director, Softelectronics, Bodegemstreet 82-A, 1000 Brussels,
Belgium, Telephone [phone]; In-Mark Associates
(International Marketing Associates, a joint venture)
Irvine, California; Inutec (joint venture) Laguna Beach,
California.
5. Special Agent Timothy B. Rlund, Federal Bureau of
Investigation
6. John Norris Maguire, President, Software, A.G. of North
America, Reston, Virginia
7. Charles Metheny, Chairman, CENTC, Inc., Reston,
Virginia.
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8. TECHMASHIMPORT - principal address USSR, Moscow.
Registered in the United States by Amtorg Trading
Corporation, N.Y.C., N.Y. Techmashimport is a USSR
foreign trade corporation which imports equipment and
machines for the chemical and oil-refining industry,
for the production of basic chemical products, for
organic synthesis, for the manufacture of chemical
fibres and plastics, synthetic rubbers, rubber, and
rubber goods, dyestuffs, lacquers, and paints, plant
protection means as well as equipment for the manufacturing
of plastic goods, refrigerating. A Registration Statement
was filed with the Department of Justice on April 1,
1974.
B. The Approach
? Sometime during the week of May 14-18, 1979, Marc Andre.
DeGeyter (hereafter DeGeyter) ccntacted James M. Addis,
salesman for Software AG of North America, Inc. (Hereafter
Software), Reston, Virginia which wholesales an adaptable data
base management system (ADABAS), at Addis' residence in
Reston, Virginia. DeGeyter told Addis that he had a 'business
proposition to discuss. They met at the Reston Sheraton,
Virginia on May 18, 3979.
Depeyter identified himself as President, Commercial
Engineering and Sales Agency, Brussels, Belgium. At this
meeting, DeGeyter indicated that the Russian Government had
retained him to obtain the "source code" (the mathematical
formula behind a computer program) to Software's adaptable
data base and computer programming technology, ADABAS, and
offered Addis $150,000 for it. DeGeyter stated that he would
give the money to Addis in $100 bills, or set up a Swiss bank
account. Addis told DeGeyter that he would have to discuss
this offer with Software's President, John Maguire. DeGeyter
then said he would be in Los Angeles and New York City until
May 25, at which time he would call Addis from New York.
DeGeyter called Addis at home on May 24, 1979. Addis
told DeGeyter that he had spoken with John N. Maguire, 2/
2/ Maguire reported DeGeyter to the FBI on May 22, 1979 and
agreed to cooperate in an investigation of DeGeyter.
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president, major shareholder 3/ and one of the three directors
of Software, concerning DeGeyter's offer and related to him
that Maguire wanted to speak with DeGeyter. DeGeyter then
stated that he would call Addis during May 28-30 to arrange
for a meeting with Maguire. DeGeyter called on the 29th, but
no meeting was scheduled.
C. The Offer
On June 20, Maguire called DeGeyter in Brussels. Maguire
expressed interest in talking with DeGeyter and made some
tentative arrangements to meet. DeGeyter called Maguire on
July 18 and 20 from Missouri.
On July 20, DeGeyter flew from St. Louis, Missouri to
National Airport, Arlington, Virginia, where he met with
Maguire. DeGeyter indicated that the Soviets were interested
in obtaining the source code and that he would purchase it for
5150,000. In discussing the method of payment DeGeyter said,
"Want a check in Zurich? You got it. Its yours. I couldn't
care less. I'm not involved." Later in the conversation, he
stated, "It's a one-time shot. No paper, no contract.
Nothing." It was absolutely clear that DeGeyter wanted
Maguire to steal the source code from his own company.
DeGeyter called Maguire from Brussels on August 7 to work.
out details of the transfer.
Maguire expressed concerns that the source code would be
obtained by him competitors. DeGeyter assured him it was
going to Russia, and nowhere else.
DeGeyter wanted 'Maguire to travel to Brussels where
DeGeyter would have the source code authenticated. Thereafter,
payment was to be made in Zurich, Switzerland. Maguire said
that he wanted to be paid in cash in the United States.
DeGeyter was hesitant about traveling with large sums of money
because of customs searches.
3/ Maguire and his immediate family own approximately 82% of
Software's stock.
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During this conversation, Maguire asked, "Do you know
about export licenses and everything? What if you get caught
with that source code?" DeGeyter responded, "I don't think
there should be any problem in that. I would then take the
whole responsibility for that. You are not supposed to know
Where it goes to and what I'm going to do with it."
On August 27, Maguire called DeGeyter in Brussels and
told him that he (Maguire) was losing interest in their
initial deal. Maguire expressed nervousness about dealing
with a Swiss Bank. DeGeyter then indicated that he was
considering raising his offer to $200,000.
On September 5, DeGeyter called Maguire from Brussels.
Maguire again expressed uneasiness about the deal. DeGeyter
responded that he was ready to pay a higher price for the
information. Arrangements were made for DeGeyter to call
Maguire from New York City on September 12.
D. The Ante Raised '
DeGeyter called Maguire on September 12 from New York
City and offered to pay $250,000 for the source code. The
money was to be placed in a Swiss bank account, or the title
to an equivalent amount of real estate in California was to be
placed in Maguire's name. DeGeyter indicated that he wanted
to avoid bringing that much money into the United States.
Maguire again stated that he wanted cash paid directly to him.
DeGeyter replied that he would probably terminate the deal.
On October 1, DeGeyter telephoned Maguire and indicated
that the Soviets had authorized additional payments, and that
he would contact Maguire when he arrived in New York City.
On October 2, DeGeyter called Maguire from Reston,
Virginia and arranged for a meeting.
On October 3, the two met for breakfast at the Sheraton
Motel, Reston, virginia. DeGeyter said that he flew in from
London for the meeing. DeGeyter told Maguire that he had
been authorized by the Soviets, to offer $450,000 and that
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Maguire could negotiate through Techmashimport, a company
owned by the Soviet Government, and responsible for negotiating
contracts for importing technology to Russia. DeGeyter
commented that Techmashimport is represented through the trade
arm of the Soviet Embassy.
Maguire asked DeGeyter during this conversation whether
he felt that exporting software technqlogy without an export
license from the Commerce or State Departments was illegal.
DeGeyter replied that it was not. Maguire said that he would
have to contact the State Department to verify this information.
DeGeyter responded that it was not necessary; that the trans-
action could be ligitimatized on paper by Maguire's licensing
one of DeGeyter's California corporations to use the source
code.
Maguire again brought up the question of the payment
for the information, noting that he was still wary about Swiss
bank accounts and land transactions. DeGeyter said that he
was unable to have the source code verified in the United
States because a Soviet computer expert would test the source
code in Brussels. He said that after the source code was
authenticated, he and Maguire could fly to Switzerland, where
they would put the source code on a Swissair flight to
Moscow. DeGeyter claimed he only wanted the information for
Tachmashimport.
DeGeyter insisted on handling this transaction either by
way of a Swiss bank account, selling the license to one of his
United States firms, or handling the matter through a Soviet
company, which would take 45 days. Maguire re-emphasized he
would not travel to Brussels, nor deal with a Swiss bank
account. DeGeyter remarked he was taking all of the risks
and did not want to go to jail. He further noted that if the
deal was not completed, his business ventures in Belgium with
the Soviet Government would suffer millions of dollars in lost
business during the next five to ten years. He commented that
if he could not get the required information, then the Soviets
would assign another businessman or agent to obtain the
technology. DeGeyter said he would contact Maguire on October
11, 1980.
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On October 5 DeGeyter called Maguire from Belgium and
told him that the offer of $450,000 was final. Maguire
rejected the offer because DeGeyter was not willing to pay in
cash.
E. The F.B.I Interviews
On February 4, 1980, the F.B.I. interviewed DeGeyter at
the Sheraton Hotel in New York City. DeGeyter was told that
he was being interviewed regarding allegations that he was
acting in the United States as an agent of the Soviet Union
without registering with the Attorney General. DeGeyter
replied that he was unaware of the regulations.
During this interview, DeGeyter mentioned that he was
formerly employed at Memorex Corporation in Stuttgart,
Germany. He noted that during his tenure at Memorex, he was
head of program engineering. He dealt with representatives of
the Soviet Union, who expressed an interest in updating their
computer technology. DeGeyter remarked that the Soviet Union
was attempting to alter and modify its computer system to
make it compatible with the systems in the United States.
DeGeyter remarked that shortly after his resignation from
Memorex, he formed his own company, known as Commercial
Engineering and Sales Agency (CESA), Reu de Geneve, Box 7,
Brussels, Belgium 1140, Telephone [phone]. He noted
that this firm was formed as a public relations organization;
intended to act as a go-between in business dealings with
other countries.
DeGeyter stated that in or about February, 1979, he was
asked by a representative of Techmashimport if he would
contact appropriate individuals at Software AG to obtain their
source code. He contended that he was not offered any money
and assumed that his payment would be a 15% commission he
would receive from the seller.
DeGeyter recounted that during the early part of 1979, he
contacted Addis and explained to him that he (DeGeyter) was
7.
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interested in obtaining software technology for the Soviet
Union. DeGeyter stated that Addis introduced him to Maguire
who also was informed of the Soviet's interest in Software's
source code. Degeyter said he did not offer Maguire any
money, but did refer to the 158 commission from the seller
when the deal was final. DeGeyter stated that his offer to
Software was still open, although he flet that Softwar was
becoming disinterested.
DeGeyter said he had been asked by Maguire how he
(DeGeyter) would export this information to the Soviet Union.
DeGeyter said that he told Maguire that Maguire would
have to handle any problems arising out of obtaining an export
license.
DeGec,ter was reinterviewed by F.B.I. agents on the
following day. During this interview, he elaborrated further
on his negotiations with Software. He stated that he had
received a $450,000 letter of credit from Techmashimport,
Ministry of Foreign Trade, Moscow, Russia, in February, 1979,
to be utilized in contracting for the purchase of the source
code from Software.
DeGeyter said that he had been in contact with Maguire to
whom he offered an introductory price of $150,000. DeGeyter
said he later offered $250,000 and made a final offer of
$450,000 two months prior to the interview. He stated that he
had notified authorities at Techmashimport that ?the deal with
Maguire was still open and that he was fervently negotiating a
sale.
DeGeyter said that he left the method of payment to the
satisfaction of Maguire; however, he suggested to Maguire that
the money could be placed in a bank accunt in Switzerland to
be obtained by Maguire when the deal was finalized. DeGeyter
told Maguire that Maguire could travel to Brussels, Belgium
where the source code would be authenticated by an experienced
individual. An unidentified company in Brussels was to be
utilized for authenticating the Software's source code. If it
were found to be legitimate, it would be placed in an envelope
and mailed to appropriate representatives of the Soviet Union.
Maguire would be given some type of guarantee that the formula
would not be duplicated and sold to his competitors in the
United States.
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DeGeyter said that Maguire questioned him as to the
proper procedures for exporting the formula out of the United
States. DeGeyter answered that this matter should be handled
by Maguire. Maguire told DeGeyter that he knew someone at the
Department of State whom he could contact regarding this
matter.
DeGeyter said that he was advised by Soviet authorities 4/
that he could offer up to $450,000 to Software for the source
code and if he could obtain the item at a lower price,
DeGeyter could pocket the difference.
F. Discovered - The Approach Changes -
DeGeyter and the Arab Shiek
On February 6, DeGeyter called Charles Matheny, Chairman
of the Board of CENTEC, Reston, Virginia and told him that he
was flying into National Airport on the following day. 5/
Matheny picked up DeGeyter at National Airport on
February 7 and brought him to a hotel in Reston. At the hotel
DeGeyter told Matheny that he wanted to discuss a deal involv-
ing an Arab bank which was headed by a Saudi Arabian shiek.
Be stated that the bank intended to implement a large scale
computer system to handle its business and that he had agreed
to assist the bank in that effort in return for free billing
for one of DeGeyter's businesses. He then said that the bank
wanted to put together a team et computer experts to monitor
the implementation and specifically wanted an expert from
Software. DeGeyter agreed to pay Matheny a finders fee of
$25,000 in cash upon finding such an individual. DeGeyter
then stated that the individual had to know everything about
Software's system and that the individual had to be ready to
bring as much of the system as possible, preferably the source
code. At the close of the conversation, DeGeyter told Matheny
that he was to keep a low profile and not let it be known
that he (Matheny) was looking for anyone. In particular,
D-Geyter told Matheny not to talk to Maguire or Addis about
the arrangements.
4/ DeGeyter specifically mentioned contacts with two Soviets
from Techmashimport-
5/ Matheny immediately contacted the F.B.I. and agreed to
cooperate in th, investigation.
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On February 21, DeGyeter called Matheny and said that the
Arabs were putting pressure on his to recruit an employee from
Software and that he would contact Matheny later for his
decision. During the next month DeGeyter inquired as to
Matheny's progress in obtaining an employee from Software.
Matheny stated that he had recruited an individual but that
this individual wanted "front money."
On April 16th, Timothy B. Klund, An F.B.I. agent who
was acting in an undercover capacity, but using his real name,
posed an employee of Software and met with DeGeyter at the
Holiday Inn in Rosslyn, Virginia. 6/ DeGeyter made in clear
to Klund that he wanted him to steal the source,code. Klund
said that he would lose his job and face criminal charges if
he were discovered. DeGeyter offered Klund a position in his
company.
On April 18, Klund met DeGeyter at National Airport. On
this occasion DeGeyter offered Klund $250,000 for the source
code. Klund indicated he wanted $500,000 and that he would
not travel overseas. DeGeyter said that he would contact the
intermediary, Matheny, with a final price on April 25th.
On April 24th, DeGeyter contacted Matheny and told him
that he was purchasing a ticket for Klund to use in traveling
overseas.
On May 15th, DeGeyter again called Matheny and said that
he would travel to New York and have a check for Klund.
Matheny reiterated that Klund wanted cash.
On May 16th, DeGeyter called Matheny and said that he was
bringing $500,000 in cash and would meet Klund at J.F.K.
International Airport on May 18th.
The F.B.I. laboratory produced dummy computer tapes for
Klund to pass to DeGeyter.
On May 18th, DeGeyter arrived at J.F.K. International
Airport from Brussels, Belgium. Klund gave DeGeyter the dummy
6/ DeGeyter called Software sometime prior to this meeting
to verify the fact that Klund was employed there.
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tapes and DeGeyter gave Klund the check for $500,000. 7/
Exhibit 1. DeGeyter was arrested by the F.B.I.
G. Summary of District Court Proceedings
Date Summary
1980
May 19 Complaint filed in EDNY (18 U.S.C. 91952(a)(3)).
Rule 5 (Fed.R.Crim.P.) hearing. Bail set at
$500,000. Exhibit 2.
May 21 Search warrant for DeGeyter's briefcase
issued.
May 22 Search warrant executed. Briefcase searched.
Exhibit 3. DeGeyter interviewed by FBI.
June 5 DeGeyter arrested in NY on EDVA Complaint (18
U.S.C. ?1952(a)(3)). Exhibit 4. $500,000
surety bond.
June 6 Preliminary Hearing - EDNY
June 9 DeGeyter indicted in EDVA - 8 counts
1952(a)(3) -bond set at $500,000 surety.
Bench warrant issued. Exhibit 5.
June 9 DeGeyter removed to EDVA.
thea
June 16
June 16 DeGeyter arraigned on Indictment. Bond
reduced to $100,000 (cash or surety) over
objection of U.S. Special conditions set.
Motions 6/26/80 -- Trial set for 7/22/80.
June 16 Bail hearing - U.S. motion to hold bond
hearing re sources of money denied. Exhibit 6.
U.S. gets informant information that DeGeyter
has stated he is KGB agent and wants to raise
bail money to flee U.S.
June 20 9100,000 check tendered to Clerk. U.S.
motion to increase bail and hold a bail
justification hearing filed. Exhibit 7.
Bond hearing stayed until June 23, 1980.
June 23 Bail hearing - DeGeyter released on
9100,000 bond. Cashier's check deposited.
July 7 Plea agreement signed (Exhibit 8) DeGeyter
pleads guilty to 2 count Information.
Exhibit 9.
August 1 Sentencing Memorandum filed (Exhibit 10).
DeGeyter sentenced. Four months Count 1;
$500 fine on Count 2. Exhibit 10A.
Export denial letter served on DeGeyter.
Exhibit 11.
7/ Subsequent investigation determined that DeGeyter only
h-gd $800 in his account.
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Date Summary
1980
October 17 DeGeyter released from FCI, Petersburg, VA
to INS detainer.
October 17
thru
October 24
December 24
1982
DeGeyter allowed to voluntarily depart U.S.
by INS.
810,000 civil penalty finally assessed
against DeGeyter by Dept. of Commerce per
plea agreement. Penalty paid. Exhibit 12.
As of April 22 No final action on Department of Commerce
Denial Letter of August 1, 1980!
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EXHIBIT NO. 1
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WASHINGTON, D. C.
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WASHINGTON, D. C.
INT71-391t I Mon! I I:W.0 Aca
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^???? ??? .nnv,;?2
473-?2004381-06
0000000011
e ? In nolo rulno? Not ocIvIjvon norl. ann,PoIon
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EXHIBIT 2
UNITED STATES DISTRICT COURT
EASTEPII DISTRICT OF NEW YORK
UNITED STATES OF AMERICA .
- against -
MARC ANDRE DeGRYTER,
Defendant.
COMPLAINT
Title 18, U.S.C. 51552
X
EASTERN DISTRICT OF NEW YORK, $S,
J/1 WADE ISOM,.being duly sworn, deposes and says
that he is a Special Agent of The Federal Bureau of
Investigation, duly appointed according to law and acting
as such.
Otter about the 18th day of May, 1980, within
the Eastern District of New York and elsewhere', the
defendant MAE: ANDRE MeGEITER did knowingly and willfully
travel in foreign commerce with the intent to promote,
manage, establish, carry on and to facilitate the pro-
motion, management, establishment and carrying on of an
unlawful activity, to wit: commercial bribery, in vio-
lation of the New York Penal Law 5180.00 (McKinney 1975),
and thereafter did knowingly and willfully attempt to
commit cemmemtial bribery in violation of said statute.
(Title .18, United States Code, Section 1952(a)(3).
The source of your deponent's information and .
the grounds for his belief are a conversation with a
Special Agent of the Federal Bureau of Investigation
(hereinafter 'unnamed Agent') wherein your deponent was
advised as follows:
1 . In or about the month of April, 1980,
the defendant MARC ANDRE DeGRYTER engaged in several'
meetings with the unnamed Agent, wherein the Agent
represented himself to be an employee of Software A.G.
of North America, Inc., a software cbmputer firm located
in Reston, Virginia.
2. At the aforementioned meetings, the defendant
MARC ANDRE DeGEYTER claimed that he represented a foreign
conglomerate and stated that he wanted to obtain the
source code for a compute= data base system entitled
"ADABAS". The unnamed Agent informed the defendant that
the 'ADABAS' source cede was a trade secret of Software
A.G. of North America, Ihc., that the sOurce'code was
not for sale and that the unnamed Agent would have to
steal the source code from its owner, Software A.G.,
in order to deliver it to the defendant.
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? 3. Thereafter, the defendant MARC ANDRE DeGEYTER
agreed to pay the unnamed Agent $500,000 for the .ADABAS"
source code.
4. On or about May 18, 1980, the defendant flew
to John F. Kennedy /nternational Airport, Queens, New York
from Brussels, Belgium.
5. Fur,uant to a pre-arranged plan, the 'defendant
MARC ANDRE DeGBYTER met the unnamed Agent at a location
in the International Arrivals Building, and delivered a
check in the sum of $500,001 to the unnamed Agent in
exchan'ie for two reels of computer tape.
WHEREFORE, your deporent respectfully prays that
the above-named defedant MAID ANDRE DeGERTER be dealt ?
with according to law.
Sworn to before me this
19th day of May 1980
,
EASTERN DISTRICT OF NEW YORK
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EXHIBIT NO. 3
FEDERAL BUREAU OF INVESTIGATION
e ve.,,,e 5/28/60
. Pursuant to the issuance of a search warrant by United
States Magistrate RUTH V. WASHINGTON, Southern District of New
York (SDNY) on May 21, 1980, a search of a black leather briefcase,
approximately 17 inches long, 13 inches high and three and one
quarter inches deep, bearing a stitched border, black leather handle,
brass fixtures and two combination locks, and located in the New
York Office (NYO) of the Federal Bureau of Investigation (FBI) was
made commencing at 8:30 AM on May 22, 1980, and terminated at 9:50
AM on May 22, 1980. The search was conducted by Special Agents
(SAS) JIM WADE ISOM and JEREMIAH W. DOYLE in the NY? of the FBI.
An inventory of the items found in the above described
briefcase are attached.
Imiemnpnionon 5/22/80 m New York New York Ref 105-167272
SAS JIM WADE ISOM and
by JEREMIAH W. DOvTE/OWT/r1
Date d'etated
5/78/A0
This document contents neither recommendaticris nor conclusions of the FBI. It is the propene of the FBI end is loaned to your agency:
Ci and its cornerrs are not to be distributed outskle yuur *genet.
------------
?--.-.--?_
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Item 1. One black leather briefcase, approximately
17. long, 13" high and 3-1/4" deep, bearing a stitched border,
black leather handle, brass fixtures and two combination locks.
Item 2. One Bag-Guard property ownership tag
identifing M. DE GETTER 41078197 as owner.
Item 3. One crone Matallurgimport, Moscow, USSR,
telephone took with handwritten names and telephone numbers.
Item 4. One American Express Company book of traveler's
checks numbered 0021-499-559 through RC21-499-577 inclusive
in denominations of $100 for a total of $1900.
Item 5. One business letter from Roth Western
Corporation, Janesville, Wisconsin $3545, dated 11/21(79 to MARC
DE GESTER.
?
Item 6. One box of business cards for TVS Broadcast
Systems Division, Brussels, Belgium, in the name of MARC DE GEYSER,
President.
Item 7. One scratch pad of notes approximately 81/2"
by 11" consisting of three pages and cardboard back.
Item 8. One "Business Week", magazine international
edition dated April 14, 1980.
Item 9, One ox-blood leather portfolio with the "Aigner"
symbol in the upper right hand corner consisting of the following
items typed and written in various languages:
a. One pad of blank lined paper.
b. One business card in the name of JUVENAIaY A.
SEELAYOV,' Vice President, Novoexport,'Moscow, USSR.
c. One handwritten List consisting of 10 items beginning
with "ADABAS" and ending with 'ADA BASICS, V. 4. 1".
d. One piece of paper bearing the handwritten name and
address of. GUNTER CAVALLAR, Sony GMBH Austria, Hauff Geese 24,
1111 Vienna, Vienna 743636.
e. Two copies of "Consulting Agreement - Radio
Production Licensing Program" between radio semiconductor, Inm?
State College, Penna. and MARC DE GEYTER dated 2/7/80.
0. One letter in the French language concerning "Cloudless
Trading Company SA, Panama" dated 4/20/79.
g. One letter in the German language concerning "ITS
Television and Broadcasting SA, Panama" dated 4/20/79.
h. One document in the German language concerning
"TVS Television and Broadcasting Si, Panama" dated 4/20/79.
i. Three sheets of blank stationery beariug the
letterhead "S.A. Commercial Engineering 4 Sales Agency N.V.,
Brussels, 3.10,..".
J.
from MARC.
MARC.
One telex dated 7/24/79 to Mr. BOLSJAROV (dep 7)
k. One telex dated 7/30/79 to dep7 (BOLSOAROV) from
1. One document in the French langUage concerning
"Cloudless Trading Company SA, Panama" dated 4/20/79.
m. One document captioned "Delivery .Acceptance Protocol"
between 0/0 Techmashimport, Moscow, USSR and DE GETTER dated
4/11/79 at Moscow, USSR.
n. Two 5 page documents in the German language.
o. Coo sheet of note pad stationery bearing the
letterhead 'Hotel Metropol, Moscow".
Incp. ten page contract No. 46-04/92211-113 between
"techmashimport*, Moscow, USSR and CESA, Brussels, Belgium
dated 2/14/79, in Moscow.
g. One addendum No. 3 to contract 46-04/92211-113
dated 4/14/79.
r. Ore appendix No. 1 to contract No. 46-04/92211-113
entitled, "Specification of the Equipment."
S. One CESA packing list for contract 446-04/91122-113
concerning 3 pcs item L= 8800 in the amount of $250,000 U.S.
dollars dated April 9, 1979 at Brussels, Belgium addressed to
Techmashirport, Moscow.
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t. One credit document dated March 19, 1979 issued by
Swiss Volksbank, Zurich, Switzerland in the amount of $450,000
U.S. dollars covering contract 46-04/91122-113.
?
u. One two page handwritten accounting worksheet.
V. One sheet on stationery bearing the letterhead
'Roland Swaeles" Rue Puccini, 44 (Boite 5) 1070 Bruxelles', with
hand writing in the French language, signed "MARC OE GEYTER*,
dated March 22, 1979.
w. One page of note paper with handwriting in the
French language.
x. One undated seven page T.V.S., Brussels, Belgium
proposal number 055791013 for the Ministry of Information.
Government of Iraq, concerning short wave and medium wave radio
broadcast systems.
y. One June 30, 1978 balance sheet for Frucodal
Holding AG.
z. One one page document in the German language
captioned 'Orconsult SA', dated August 24, 1979.
as. One December 31, 1978 balance sheet for "Orconsult
SA, Zuerich'.
bb. One bank Brussel Lambert document dated 10/19/79.
cc. One Societe Generale de Banque, Bruxelles dated 8/24/79.
dd. One 1976 - 1979 pocket calendar.
Item 10. One photocopy of Belgium Passport number
147192 in the name of MARC JOSEPH ANDRE DE GEITER with USSR
visa K number 841589 issued to MARC DE GEYTER, on 5/9/80 for
travel to V/0 Techmasimport, Moscow, USSR for the period
5/11/80 - 5/25/80.
item 11. One brown vinyl check book with Kredietbank
bank card in the name of MARC DE GEITER #473-2084381-06 08591242
and Kredietbank checks in the name of MARC DE GEYTER, Account
Number 472-2084381-06, Check Number 03 through 010 inclusive
and Cheek Number 012 through 024 inclusive.
Item 12. One Kingdom of Belgium Passport Sr 147192,
and international certificate of vaccination for MARC
DE GETTER.
Item 13. One green 1980 bound business diary containing
handwritten notes.
Item 14. One black spiral bound 1979 daily pocket
calendar and personal telephone directory with handwritten
names and telephone numbers and 3 sheets of note size paper
bearing handwritten notations.
Item 15. One black leather wallet containing,
a. One first National City Bank traveler's check
number 8172-076-160 in the amount of $20.00.
b. One sheet of paper captioned 'English for Beginners".
c. Various blank self-adhesive labels issued by
several airlines for modifying issued airline tickets.
Item 16. One "Sharp" electronic calculator model
EL-8145 and case.
Item 17. Six color photographs of an RSI. AM-FM radio.
Item 18. One black business card file containing
numerous business cards.
Item 19. One 4 page document captioned "Arrestbefehl",
dated February 7, 1980.
Item 20. One notepad bearing the letterhead "The
Sheraton City Squire Hotel", NY, NY, with a handwritten
notation.
Item 21. One pink computer card with a clipping
captioned 'Liegen', glued to the face.
Item 22. One blank notepad bearing the letterhead
'Ritz-Cmiton', Montreal, Canada. .
?
Item 23. One 541 in. by A .1.a. card captioned 'Compliments
of Benelux Home Diffusion", Brussels with handwritten notations
on both sides.
Item 24. One sheet of paper 31/2 in. sq. containing
handwritten notation beginning 'Smoke hot ?
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Item 25. Two blank guarantee cards for a 'Philips"
Audio-Visual apparatus.
Item 26. One one page document captioned Zahlungsbefehl
dated February 20, 1980.
Item 27. One sheet of "Intourise notepaper containing
handwritten notes beginning "Sample of ? ending '814/4666563.
Item 28. Two telexes to Mr. BOLEHAXOV, signed "MARC".
Item 29. One unused "Sabena' airlines ticket number
3213754603 dated April 28, 1976 for travel between Brussels,
Eanover, irussels, issued to DE GETTER.
Item 30. Three used"Pan-American" airlines tickets
numbered 88254020472, 88254020473, and 88254020474 dated March 16,
1978. for travel between Los Angeles, Washington, New York,
Brussels, Zurich, Tehran, Athens, Brussels, London, Los Angeles,
Washington, Los Angeles, issued to DE GETTER.
Item 31. One unused "Sabena" airlines ticket number
3411346302, dated June 28, 1978 for travel between Brussels,
London, Isle of Man, London, Brussels, issued to DE GETTER.
Item 32. One open prepaid "Air France" ticket number
3020678553, dtd. November 21, 1978, issued to DE GETTER for
travel anywhere on an Air France air route.
Item 33. One used "Sabena" airlines ticket number
1210734420, dated March 19, 1980 for travel between Brussels,
Zurich, Brussels, issued to DE GETTER.
Item 34. Two "Sabena" airlines tickets numbered 1410446431
and 1410446432, dated April 15, 1980 for travel between New
York, Washington, New York, Brussels, Vienna, Moscow, Vienna,
Brassels, flew York, Washington, issued to DE GETTER.
Item 35. One yellow "Bic" pen.
EXHIBIT /401. 4
(TOP is In I
11iii1ii i2tFi Digirirt Tottrt
ronTmE
EASTERN DISTRICT OF VIRGINIA - Alexandria
UNITEDSTATESOFAMEMCA
MARC ANDRE DeGEYTER
BEFORE
5'.2)
c?e No ,770
COMPLAINT for VIOLATION of
U.S.C. Title 10
s?,,? 1952 (,e1 Ill
? The undersigned complainant being duly sworn atates:
That on or about April 19 . 19 SO . at Al exandria, Virginia
Eastern Virginia
Distrktof
"' MARC ANDRE DeGEYTER
in the
knowingly and willfully travel in interstate ccrtarerce Scan Dew Ed.'s to the
Eastern District of Virginia with intent to prcroote, manage, establish, carry on
and to facilitate the promotion,. ranagerrent, establishment and carrying on of
an unlawful activity, to wit: ocrtmercial bribery, in violation 015 10.2-494,
Ccde of Virginia, 1950, as amended and thereafter did perform and att,pt to
perform acts to promote, manage, carry on and facilitate the promotion, ravage-
ment and carrying on of said unlawful activity.
And the complainant states that this complaint is ba,ed on
See Attached Sheet.
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EXHIBIT NO. 4?Continued
And the complainant further states that he belimms that
are material witn,neet in relation to this charge.
Sworn to before me, and subscrOwd in my presence
Ut COPY, TZS'i.51
.... ? W..11PRRIS tr.'"`
QUIN aON
DEPUTY &sax
United States v. PARC ANDRE DeGEYTER
Affidavit for Complaint
Page 2
18 U.S.0 1952(a)(3)
The undersigned complainant, being duly sworn, states that: / an a Special
Agent of the Federal Bureau of Investigation; and that the information set out
hereinafter has been gained from personal investigation and investigation by other
Agents of the FAX whose reports I have read.
1. On or about April 16, 1980, while acting in an undercover capacity, I
vet with hARC ANDRE DeGEDTER at the Rosslyn Holiday One in Rosslyn, Virginia.
during this meeting. I told the defendant that / was an employee of the Software
AG of North America, Inc. (hereinafter Software All, a software computer firm
located in Reston, Virginia.
2. At this meeting PARC ANDRE DeCEITER claimed that he represented a
foreign conglomerate and stated that he wanted to obtain the source code for a
oomputer data base system entitled 'MARAS.. I informed DeGayter that this source
cede was not for Sale, and that I :would have to steal it from its owner, Software
if, in order to deliver it to oomnsa.
3. On or about April 18, 1980, while again acting in an undercover capacity
and posing as an employee of Software AG, I was at Washington National Airport,
Arlington, Virginia, where I observed DeGeyter arrive on an Eastern Airlies
shuttle flight which I determined had originated in New York.
4. At National Airport DeGeyter offered no 1250,000 for the .AEUOIAS. souroe
cede.
S. Based upon FOX reports which / have read, the source code for Software
AS's compiter data base system entitled 'ARAMS is a trade secret and would not
be sold in the ordinary course of business without approval of the Board of Directors
of Software AG.
Timothy B. 140/ol
Special Agent-
Federal Bureau of Investigation
Subscribed and Sworn to Before no th
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EXHIBIT NO. 5
IN TOE UNITED STATES DISTRICT. COURT FOR TUE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
UNITED STATES or AMERICA
v. ) CR. NO.
MARC ANDRE DeGETTER
SONE 1980 TERM - At Alexandria
COUNT _I
TEE GRAND JURY CEARGES TEXT:
A. At all times material to this Indictment:
1. The defendant, MARC ANDRE DeGETTER was a citizen of
Belgium.
2. Software AG of North America (hereinafter Software) was
a Virginia corporation specializing in computer software. Among
other products Software marketed the Adaptable Data Base System
(hereinafter ADABAS). .ADABAS was a data base management system.
3. The ADABAS source code was a trade secret of Software
AG. It was the 'logic behind the ADRIAN system.
4. From in or about Hey 1979, through May I.E. 1980, the
defendant MARC ANDRE DeGETTER:
a. represented to various Individuals that he wanted to
Obtain the ADABAS source code for Techmashimport, a foreign
trade corporation organired under the laws of the Onion of
Socialist Republics and other foreign interests.
b. DeGeyter offered amounts varying from $150,000 to
$500,000 for the ADABAS source code. ? .
B. On or about May 18, 1979, the defendant MARC ANDRE DeGETTER
did travel in imterstate commerce from New York to the Eastern
District of Virginia with the intent to otherwise promote,
manage, establish, carry on and facilitate the promotion, manage-
ment, establishment and carrying on of an unlawful activity, said
unlawful activity being commercial bribery, in violation of the
law of the Commonwealth of Virginia (Section 18.2-444, Code of
Virginia, 1950 as amended) and thereafter the defendant
MARC ANDRE ne(mTER did perform and atte4t to perform acts to
promote, manage, carry on and facilitate the promotion, manage-
ment and carrying on of said unlawful activity.
(Violation of Title 16, Unit,d Stites Code, Section 1952(a)(3)).
COUNTS /7 THROUGH V/
TEE GRAND JURY FURTEER CEARGES TEAT:
A. Paragraphs Al through A4 of Count I are hereby realleged and
incorporated by reference as though set forth in full.
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EXHIBIT NO. 5--Continued
B. On or Cheat the dates set forth, the defendant MARC ANDRE
DeGETTER did travel in interstate and foreign commerce as set .
forth below with the intent to otherwise promote, manage, establish,
carry on and facilitate the promotion, management, establishment
and carrying on of an unlawful activity, said unlawful activity
being commercial bribery, in violation of the law of the
Commonwealth of Virginia (Section 18.2-444, Code of Virginia.
1950 as amended) and thereafter the defendant MARC ANDRE D.aGEITER
did perform and attempt to perforl acts to promote, manage, carry
on and facilitate the promotion, management and carrying on of
?said unlawful activity.
,COUNT DATE FROM TO
III July 20, 1979 Missouri Eastern District of
Virginia
'III October 2, 1979 United Kingdom Eastern District of
1 Virginia
IV February 7, 1980 Pennsylvania Eastern District of
Virginia
April 16, 1980 ' New York
April 18, 1980 New York
Eastern %strict of
Virginia
Eastern District of
Virginia
(Violation of Title 18, United States Code, Section 1952(a)(3)).
COONT:VIi
A. Paragraphs Al through AS of Count I are hereby realleged and
incorporated by reference as though set forth in full.
B. On or about may 16, 1980, the defendant MARC ANDRE DeGEYTER
did use a facility in interstate and foreign commerce, namely
international and interstate telephone facilities from outside.
the United States of America io the Eastern District of Virginia
with the intent to otherwise promote, manage, establish, carry on
and facilitate the promotion, management, establishment and
carrying on of an unlawful activity, said unlawful activity being
commercial bribery, in violation of the law of the Cormonwealth
of Virginia (Section 18.2-444, Code of Virginia, 1950 as amended)
and thereafter. the defendant MARC ANDRE DeGEYTER did perform and
attempt to perform acts to promote, manage, carry on and facilitate
the promotion, management and carrying on of said unlawful activity.
(Violation of Title 18, United States Code, Section .1952(a)(3)).
took.:4,tit
A. Paragraphs Al through A4 of Count I are hereby.realleged and
incorporated by reference as though set forth in full.
B. On Or about May 18, 1980, the defendant NAND ANDRE DeCZYTER
did cause a person to travel in interstate commerce from the
'Eastern District of Virginia to New York with the intent to
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EXHIBIT NO. 5---Continued
otherwise promote, manage, establish, carry on and facilitate the
promotion, management, establishment and carrying on of an unlawful
activity, said unlawful activity being commercill bribery, in
violation of the New York Penal Law 8180.00 (McKinney 1975 as
amended) and thereafter the defendant MARC ANDRE DeGZYTER did
perform and attempt to perform acts to promote, manage, Carry on
and facilitate the promotion, management and carrying on of said
unlawful activity.
(Violation of Title 18, United States Code, Section 1952(a)(3)
land 2).
A TRUE BILL:
FOREMAN
JUSTIN W. WILLIAMS
United State, Attorney
Theocore b. reenber
By:
Assistant United States Attorney
A. \tNAD\_,S1( ?
Ma"dava
Special Assistant United States
Attorney
EXHIBIT NO. 6
IN THE UNITED STATES DISTRICT COURT FOR TOE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division -
UNITED STATES OF AMERICA
v. CRIMINAL No. 80-00102-A
MARC ANDRE DeGEYTER
mOTION OF THE UNITED STATES TO HOLD A BAIL
JUSTIFICATION HEARING
The United States, by the undersigned attorney, moves this
Court to hold a hearing to insure that any bond posted by the
defendant, Marc Andre DeGeyter actually assures his subseguent
court appearances. See United States v. Nebbia, 357 F.2d 301 (2d
Cir. 1966).
DeGeyter was indicted on June 9, 1980 for violating 18 CSC
81952(a)(3), by traveling in interstate and foreign commerce to
commit commercial bribery. An arrest warrant was issued and the
defendant is in the custody of the United States Marshal. A
8500,000 surety bond was set on the return of the Indictment.
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EXHIBIT NO. 6?Cceitinued
The Fourth Circuit has held, citing Nebbia, supra, that the
'purpose of bail is to secure the presence of the defendant at
trial.' United States v. Kirkman, 416 F.2d 747, 752 (4th Cir.
1970).
DeGeyter is a foreign national with no residence or business
property in the UnF.ted States. The Indictment alleges that
DeGeyter was trying to obtain a trade secret from Software AG of
North America, a Reston, Virginia corporation), for a Russian
foreign trade corporation and other foreign interests. A review
of DeGeyter's passport shows extensive foreign travel. At the
time of his arrest an unused airline ticket for travel amongst
the cities of Moscow, Vienna, Brussels, New York and Washington
was found in his briefcase. DeGeyter was arrested when he passed
a $500,000 check drawn on a foreign bank to an undercover agent.1/
Thus, any bond posted by the defendant may not assure his
appearance at trial, but only indicate the extent of his criminally
obtained resources.
In order to establish that money/surety posted to meet the
bond in this case will assure the defendint's presence at trial,
the United States requests a hearing pursuant to United States v.
Nebbia, suora. See also, United States v. Milville 309 F.Supp.
824 (S.D. N.Y. 1970):
Pursuant to 18 USC A146(a)(5) this Court has the power to
net whatever terms and .conditions are necessary to assure the
defendant's future court appearance and a judicial inquiry into
,he adequacy of the origin of the money being posted to secure
DeGeyter's release is proper.
WHEREFORE premises considered, the United States requests
that the Court direct the Clerk to enter on the bond, that as a
condition precedent to DeGeyter's release, a hearing inquiring
into the sources of the bail money be held.
Respectfully submitted,
JUSTIN W. WILLIAMS
UNITED STATES ATTOPNEY
By.
dare S. re be
Assistant United States Attor
CERTIFICATE OF SERVICE
I hereby certify that a copy of the foregoing Motion of the
United States to Sold a Bail Justification Hearing 411-and
delivered to David Cotner, Esquire.
The dore S. e's-erg
Assistant United States Attorney
I/ Subsequent investigation has shown that there was only
1,8800 in the account upon which the check was drawn.
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EXHIBIT NO. 6 - -Continued
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division,.
UNITED STATES or AMERICA
V.
MARC ANDRE DeGETTER
jCRIMINAL No. 80-00102-A
ORDER
On motion of the United States requesting that this Court
hold a bail justification hearing prior to the defendant, DeGeyter,
being released from the custody of the United States Marshal to
determine that any money/surety filed with the Clerk adequately
insure DeGeyter's subsequent court appearances upon the above
styled Indictment:
It is this day of June, 1980,
ORDERED that the Clerk enter on the bond, that as a condition
precedent to the defendant being releaSed,a hearing be held by this
Court to determine if the sources of the money the defendant
posts for bond will insure his future appearances in this Court.
Alexandria, Virginia
Date:
ask for this
UNITED STATES DISTRICT JUDGE--
4r
7 odore S. Gt'een erg
Assistant United States Att
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Ex= NO. 7
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF. VIRGINIA
Alexandria Division
:UNITED STATES OF AMERICA
H. ; Cr. No. 80-102-A
"PARC ANDRE DeGEYTER
NOTION OF THE UNITED STATES TO INCREASE
BAIL AND TO HOLD A BAIL JUSTIFICATION HEARING
. The United States, by the undersigned attorney, moves this
court to increase the defendant's bail to $500,000 and to hold a
1bail justification hearing should he tender the bond.
DeGeyter was arrested in the Eastern District of New York, on
'May 18, 1980 for violating 18 U.S.C. 61952(a) (3) by traveling in
l'interstate and foreign commerce to commit commercial bribery. The
iEastern District of New York set bail at 0500,000, cash or surety.
:On June 9, 1980, a Grand Jury in the Eastern District of Virginia
:returned an eight count indictment against DeGeyter, charging him
with eight violations of 18 U.S.C. 51952(a)(3). Bail was set at
5500,000. At arraignment on June 16, 1980, bail was reduced to
$100,0.00, cash or surety with certain special conditions on travel.
On June 20, 1980 his attorney tendered a $100,000 cashier's check to.
the Court to meet bail.
In view of recent information obtained through the FBI, the
United States believes that DeGeyter, a foreign national, intends to
flee the United States and the jurisdiction of this Court prior to
trial. To support its contention, the Government will present an
FBI agent who will testify that a reliable confidential informant
:has provided information indicating that DeGeyter intends to flee
after he meets the present 0100,000 bond.
Even though the testimony of the FBI agent will be hearsay, it
:".is admissible at a bail hearing.1/ See United States V. Wind, :527
:F.2d 672, 675 (6th Cir. 1975); United States v. Brown, 399 F. SuCp. !
631 (W.D.Okla: 1975)(state investigative agent permitted to testify
...regarding information received from reliable informant).
The United States does not intend to reveal the identity of
the informant, either by revealing the informant's name or by
r"disclosing sufficient information from which the individual's
::identity could be deduced because such revelations will probably
result in death to the informant and is unnecessary under the
'circumstances of this hearing.
1
i ?
18 U.S.C. 53146(f) provides that "iiInformation stated in, or offered
in connection with, any order entered pursuant to this section need
not conform to the rules pertaining to the admissibility of evidence
in a court of law.
26.
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EXHIBIT NO. 7?Continued
11 United States v. Roviaro, 313 U.S. 53, 60-61 (1953) only
'roouires the disclosure of an informant's identity when such
q.
.enformation 'is relevant and helpful to the defense of an accused,
for is essential to a fair determination of a cause. Moreover,
;the Supreme Court in McCrav v. Ininois, 386 U.S. 300, 307
1(1967), stated that whether an informant's identity must be
'compelled depends not only upon the facts of the case, but also
,upon the stage of the proceedings at which the issue arises.
:Since the, question of the informant's identity is only arising
:at a hail hearing, it should not be compelled. Cf., United
'States v. Poles, 484 F.2d 919, 922-923 (4th Cir. 1973). The
'purpose of bail is to secure the presence of the defendant,'
1
:Tnited States v. Kirkman, 416 F.2d 747, 752 (4th Cir, 1970).
"Should DeGeyter be permitted to post the $100,000 bond or should
?
l/
his bond be raised the Unite States moves this Court for a
hearing pursuant to United States v. Nebbia, 357 F.2d 303 (2d
'Cir. 1966) and United States v. Melville 309 F.Supp 824(S.0.N.Y.
1
1970). Both cases permit a judicial inquiry into the origin of
the money being posted for bail. See 18 U.S.C. 53146(a)(5).
The inquiry is to assure the Court that the 'sources of bail.. .provide
the moral responsiOility and the proper purposes to assure the
defendant's presence.' Melville, sorra at 828. "(any) demand
One anonymity leads to a suggestion that the donor is engaged in,
something furtive, stealthy 1A?suspect in mot.'ve and possibly
illegal...(and] does not enhance assurance of the presence of
the defendant.' IQ. at 829.
So this case, the defendant attempted to steal a 'trade secret'
'worth in excess of $10,000,000 and intended to remove it from
the United States.
1 The Government's evidence is very strong and consists, in part,
of body recordings and pre and post arrest voluntary statements made
lto FBI agents. The defendant, a foreign national residing in Eelgiut
i:has no family or regular business ties to this country.
Respectfully submitted,
JUSTIN W. WILLIAMS
United States Attorney
Theodore S. Greenberg
Assistant United States Attorney
Z:C1:1%s:1::::t United States Attorney
Should the 2ourt grant the Government's Motion to Increase Ball,
the United States requests that the Court net forth its reasons in
writing. 18 U.S.C. $3146(d) and (0.
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461
EDMIBIT mD. 8
United Stares Attorney
Eastern District of Virginia
117SolahlOys1owm,5inw'
. Alrxvd,j0.1222314
' July 7, 1980
70)1537 911:0
Frs1.1.I7.9100
David Cutner, Esquire
John D. Schmidtlein, Esquire
Gentlemen:
Re: United States v. Marc Andre DeGeyter
Cr. No. 80-102-A
The defendant, Marc Andre DeGeyter is charged in
an eight count Indictment with traveling in interstate and
foreign commerce with the intent to commit commercial bribery
in violation of Title 18, United States Code, Section 1952(a)(3).
Trial is set for July 22, 1980.
Confirming our discussions of July 2 and 5, 1980,
the United States, by counsel, and the defendant agree to
the following:
1. Defendant DeGeyter will plead guilty to one cougt
of violating the Export Administration Act of 1969 (50
U.S.C. App. Supp. 1, Section 2401 et sea., by
a violation of the Export Administration Act-(15
CFR 387.2) by seeking to export the ADABAS source code
("technical data"; 15 CFR 379.1(a) and (b)(1)(i) and (ii))
from the United States without the required export license
(15 CFR 370.3(a); 379.2). The maximum penalty for this
offense is one year imprisonment and/or a $25,000 fine (50
U.S.C. App. Supp. 1, Section 2405(A), Export Administration
Act of 1969 and 15 CFR 387.1(a)).
2. For knowingly and wilfully violating the Export
Administration Act, Marc Andre DeGeyter consents to an
administrative imposition of a $10,000 civil penalty by the
Secretary of Commerce or his authorized representative
pursuaht to the provisions of 50 U.S.C. App. Supp. 1, Section
2405(C)(1) and (C)(2)(B) and 15 CFR 387.1(b)(3). DeGeyter
agrees to execute any documents necessary to said consent
and collection of the S10,000 penalty.
3. Prior to the defendant's sentencing of the offense
set forth in parZgraph 1 above, the defendant is to deliver
to the United States Attorney for the Eastern District of
Virginia a cashier's check in the amount of $10,000-made
payable to the Treasurer of the United States. This check
will be held by the United States Attorney until such time
as the Secretary of Commerce or his authorized representative
imposes the aforesaid civil penalty. In the event that the
Secretary of Commerce declines to impose the aforesaid
$10,000 civil penalty, or imposes only a portion thereof,
the cashier's check or an appropriate refund will be remitted
to the defendant or his authorized representative.
4. The defendant will plead guilty to one count of
attempted commercial bribery in violation of Title 18,
United States Code, Section 13 assimilating 18.2-444(1);
18.2-27, Code of Virginia (1950, as amended).
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462
EXHIBIT NO. 8--Continued
tvt
5. folio.idg sentencing on the aforesaid counts,the
United States will dismiss the pending eight count Indictment-
and agrees not to further prosecute the defendant for his
activities regarding Software AG of North America, Reston,
a
Virginia from May 1979 through May 18, 1980 which are now
known to the Government. --------
--V??
Should the defendant seek at any time to withdraw his
plea of guilty to the aforesaid counts or should the District
Court decline to accept his plea for any reason, this agreement
is null and void and the United States will proceed to trial
on the eight count Indictment returned June 9, 1980.
The defendant has been released from custody on a
$100,000 cash bond with special travel restrictions. The
United States has no objection to the continuation of the
present bond pending sentencing.
72
P117--
TS
David Cutner, Esquire
John D. Schmidtlein, Esquire
Page Three
At sentencing the United States will take no position as
to the sentence to be imposed.
No additional promises, agreements or conditions have
been entered into other than those set forth in this letter
and none will be entered into unless in writing and signed
by all parties.
Very truly yours,
JUSTIN W. WILLIAMS
ilted States Attorney
By:
.. . ???1 ... ?
-0. ore S.A..ee. ..?
erg
Assistant United States
Attorney
Agreed and consented to:
//
Marc Andre DeGeyter
,
David Cutner, Esquire
6AQQL
John D. S.9hmidtlein, Esquire
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463
77,XIIIBIT NO. 9
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
UNITED STATES OF AMERICA
V.
MARC ANDRE DeCEYTER
) CRIMINAL NO. 80-102-A
THE UNITED STATES ATTORNEY CHARGES THAT:
COUNT ONE
On August 7, 1979 in the Eastern District of Virginia and
elsewhere, the defendant MARC ANDRE DeGEYT:R did knowingly,
wilfully, and unlawfully counsel, command and induce the doing of
an act prohibited by the Export Administration Act and proclama-
tions, orders, rules and regulations issued thereunder, to
wit: counseling, commanding and inducing an officer of Software
AG to export the ADABAS source code from the United States to
Belgium without obtaining a validated export license.
(All in violation of the Export Administration Act of 1969, 50
United States Code App. Supp. 1, Section 2401 et sea.; 2405(A);
15 C.F.R. 370.3(a); 379.1(a) and (b)(1)(i) and (ii); 379.2;
387:1(a); 387.2).
COUNT TWO
On April 18, 1980 at Washington National Airport, in the
Eastern District of Virginia, within the special maritime and
territorial jurisdiction of the United States, the defendant MARC
ANDRE DeGEYTER did knowingly, wilfully and unlawfully attempt to
offer to an agent, employee and servant a gratuity without the
knowledge and consent of the principal, employer and master of
such agent, employee and servant with intent to influence his
action to te prejudice of his principal's, employer's and
master's business, to wit; to purloin the ADABAS source code.
(All in violation of 18 U.S.C. 57(3); 13 assimilating 18.2-444(1);
18.2-27, Code of Virginia (1950 as amended)).
44JSTIN W. WILLIAMS(
NITED STATES AT
By:
Theo re 5. Gr be
Assistant United States Attorney
0011.12
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464
EXHIBIT NO. 10.
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
UNITED STATES OF AMERICA )
)
V. ) CRIMINAL NO. 80-102-A
)
MARC A DeGEITER )
SENTENCING MEMORANDUM
Sentencing is set for August 1, 1985.. On June 9, 1980 the
defendant was indicted on eight counts of interstate and foreign
travel with the intent to commit commercial bribery, in violation
of 18 U.S.C. 1552(e)(3). On July 7, 1980 DeGeyter entered into
a plea agreement with the United States and pled guilty to a two
count information charging violations of the Export Administra-
tion Act of 1969 and the Virginia commerc.ial bribery statute.
On Only 30, 1980 the United States reviewed the pre-sentence
report in this case. The 'Official Version" section of the
report is incomplete in that the report depicts DeGeyter's actions
as merely an attempt to legitimately buy the ADABAS source code.
Accordingly, the United States submits the following facts for
the Court's consideration:
A. Background
1. Software AG of North America (hereinafter Soft-
ware) is a .Virginia corporation specializing in computer
software. Among other products, Software markets the Adaptable
Data Base System (hereinafter ADABAS). ADABAS is a data base
management system.
2. The ADABAS source code is a trade secret of
Software and 55 worth at least $10 million.
3. The ADABAS source code constitutes "technical
data' under the provisions of the Export Administration Act of
1969.
4. Export from the United States of the ADABAS source
code is prohibited without a "validated export license' or other
authorization granted by the Office of Export Administration,
United States Department of Commerce.
5. Export of technical data is defined, in pertinent
part, as an actual shipment or transmission of technical data out
of the United States Or any release of technical data in the
United States with the knowledge or intent that the data will be
shipped or transmitted from the United States to a foreign
country.
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465
EXHIBIT NO. 10--Continued
B. The Information
DeGeyter pled guilty to wilfully commanding and inducing
James Maguire, President, Software AG to export the ADABAS
source code from the United States to Belgium without obtaining
a validated export license.
Beginning in May 1979 DeGeyter started making contacts with
Maguire and James Addis (a Software salesman) to get them to sell
him the ADABAS source code without the knowledge of the company.
On May 18, 1979, DeGeyter met Addis, offered him
$150,000 for the source code in $100 bills or to set up a
Swiss bank account. Addis told DeGeyter to talk to Maguire.
DeGeyter contacted Maguire and at their first meeting on
July 20, 1979, told Maguire, 'It's a one-time shot, no paper,
no contract'.
During his dealings with Maguire, DeGeyter made it clear
that he wanted Maguire to bring the source code to Belgium, where
its authenticity could be tested, following which it would be
sent to Techmashimport, Moscow. This was the substance of the
conversation which took place on August 7, 1979 and which forms
the basis of Count One.
' The following colloquy on August 7, 1979 between Maguire
(JM) and DeGeyter (MD) is germane to this offense.
JM: In general, I say yes, but I got
some questions. You know, I'm a little bit
nervous. I mentioned some of the concerns
before. This source code, my understanding
is, that, as far as moving something out of
the U.S., you know, it may be an administra-
tive technicality. Do you know about the
export licenses and everything? What if you
get caught with that source code?
MD: I don't think there should be any
problem in that. I would then take the whole
responsibility for that. You are not supposed
to know where it goes to and what I an going
to do with it.
JM: Okay. It's what's, you know, is,
is, is there any way they can trace it?
MD: No.
JM: Back to us.
MD: No, no way whatsoever. ? There's
really no way. Nothing, but you know, you
have to trust me on that. I'm telling you
there's no way.
?
MD: Okay, we'll try to head fur the last
days of August.
JM: Okay.
? MD: And be in Brussels. And we do the
tests, we fly to Zurich, and you get the
money, and that's it.
In or about November 1979, Maguire, who had been cooperating
with the FB/ broke off contact with DeGeyter.
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466
EXHIBIT NO. 10--Continued
Unable to obtain the source code directly from Eaguire,
DeGeyter sought to recruit a Software employee through an
intermediary in another company. The intermediary contacted the
FBI. . On April 18, 1080 DeGeyter offered an FBI agent posing as a
5,,Etware employee 1230,000 to purloin the source code. At this
time DeGeyter changed the represertations he made to Maguire and
told the agent that ha was trying to obtain the source code for an
Arab group. This transaction was charged as Count Two in the
Information to which DeGeyter pled guilty.
On May 18, 1980 DeGeyter gave, the FBI undercover agent a
check for $500,000 in return for the source code which the agent
was to have stolen from Software. Following the exchange DeGeytar
was arrested.
Respectfully submitted,
JUSTIN W. WILLIAMS
UNITED STATES ATTORNEY
By: P flAD ku CI,
? ,
Theodore S. Gteen:lerg
Assistant United States Atto
CERTIFICATE OF SERVICE
I hereby certify that a copy of the foregoing Sentencing
Memorandum was hand delivered this fist day of July, 1980 to
John D. Schmidtlein, Esquire, Suite 506, 320 King Street,
Alexandria, Virginia 22314.
Theodore S. Greenberg
Assistant United States A't,tAney
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United Scam of America Ys.
DEFENDANT
467
EXHIBIT NO. 10A
United State District Court for
MARC MORI: DEGEITER
Cr. 80-102-A
In the presence of the attorney for the government uOuTu
lthe defendant appeared in person on this date ?.- 08 Or 00?1
COURSED L__J WITHOUT COUNSEL No.eher the coon adriard defendent or nem to coons, and asked v..... Otfrogoort ?orod re
hare counrul appointee by the to. and tha defendant thereupan war.. Yu:1W. a Torage.
X John
WITH COUNSEL L. Schmidtlein 'sc/
L._.J .1
PLEA there is a factual basis for Me plea,
} X
1..--.1 GUILTY, and the court being satisfied that L____I NOLO CONTENDERE, .. I____I NOT GUILTY
(Name of a.m.',
FINDING
JUOGMENT
SENTENCE
OR
PRORATION
ORDER
SPECIAL
[GNOMONS
OF
PRORATION
ADDITIONAL
CONDITIONS
OF
PRORATION
[0..MITtIENT
RECOMMEN.
DATION
There being a findingX,A= of
Gun.ry,
a, charged or u.;;'Offc.rials) of
'.Seeking. to. export the ADXBASsource.dodi'vithisui an-export license -
Export Adoin_Lstrat_ion Act of' 1969, .50..CISC.App':'pupp. I, Sec.-24:4
.42405(A)1 1$ CFR-370.2(a); -379.1(0 and (b)(1)(1):end_.;(11/;
. 387.11a/r 387.2 .,'Comet
Attempted .commercial bribery., 18 USC 7(3), 13 nsstnilatingz,,-
18.2 -444(1);.. 18.2-27,..Code'of.7irginia,(1950 as amended) - COmmt 2
1 L--) NOT GUILTY. Defendant is discharged
LL

T. court mated whether del ...... hog anything to Ur TrITY judgment rhould not be prOncxeccd. etearese turruernt ?ure ue Cht toe.,
Too Noun. or >poser. to the [Our% the coon adjudged defendant piny marsta eoh..ad Tnt orrcre-L,
Tway ,onn.ttcdI, ttO,00t000t of Gen.( or his authorized reprountuire for imprironment . ge-ed cr' .f.GTS.T. (4)
months as to Count 1 and a fine of $500.00 shall be imposed as to
Count 2. The defendant shall be given credit for tbrs already spe-t
incarcerated on these charges.
In additihn to The special condition, od prObation inipeTed atrOrt. It ia hereby oroeree Oat sahara: euheit?chn pree.len *else, an,.
fere. side of this. judgment by (merged. The Goren may change conditions. of proper:or, reduce or seteue Pedre. Orohe-en.e.
any time Curio; The 'meaten nu:04 or witAin a Maximum probation period oLti.e.yeara_rermated on a .....h.ust nhohe
'me... for a rieriatrun occurring during Pre probalibn per..
.>The court orders commitment to the custody of the Attorney General and recommends,
SIONOO Iry
Ihrurret /ogre
crearstret?
34.
.;.. 08-01-80
It is Or Pered tn. Pre Carl C..or I
edror.ed ten or .",..Phe-a
Cdhlueignaf TRUE COIN, r.
.1.3(0.4.T2
0
/C,E?r<
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468
EXHIBIT NO. 11
? :3ttc Acre Du/ter
rtus1aaa 15
? l!lgia.m 2232
1-22a:
? Office of Bxport Administration, International Trade
O.S. Department of Commerce, hereby charges that
yci, larc Andre OeGeyter, have Knowingly violated the Provisions of
3ections 37.2 and 337.3 of the Export Administration Regulations
13 da.R. Part 368 st sod. (1979)). (the Regulations), issued
pars:cent
to tne F.port Administration Act of 1969, as amended (50
U.S.C. app. 2401, et :Isa. (1976)).
? Office of Broort Administratica has reason to believe that,
aring the period from May 18 to November 6, 1979, you counseled and
induced an employee of Software AG of North America, Inc., Reston,
Virginia, to procure for you 0.S.-origin rentricted technical data.
? procur2oent Attempt was made by you with the intention that the
tcAnical 3t os neported to the U.S.S.R. without applying for and
o,La:h:ng a validated export license from the Office of x'port
.wich you knew or. Ghould have knowl was reguired.
Accordingly, you ore hereby notified that administrative proceedings
2re in5titated against you pursuant to Section 11(c) of the Export
Alministration Act of 1979 (P.D. 95-72) (to be codified at SO U.S.C.
? 2401 nt sec.) (the Act) and Part 323 of the Regulations (44
5,257, Octoocr 12, 1579) for the purpoie of obtaining an Corder
al.aini3rrative sanctiono.incluiing any or all of the
7:evocation of validated export licence.; under Section
332.3(2)(1);
of export privileges unier Seotion 328.3 (a)(2);
practice under Section 382.3(a)(3); and/or
imposition of a civil penalty under Section 322,3(a)(4).
dc?ies of Parts 357 and 323 of the Regulations are enclosed.
ion the c4azgea colltaine?1 in lois Latta.: ,:itnin
(33) 2e.:vic,2 es proviivd in Section 333.7 of
m.,:oo failure wIll Oe treated as a default under Section
JS3.3.
'fou 2:2 fur:ther rotifeed tnat you are entitled to an agency hearing
.2n tnL, record raided in Section 333.7 ot the Regulations if a
,r:Gtta ..!:3110 tnOrerur It illul with your ans.:et/ to be repdesented
an?.! Soction ii() of tie Act, to sect a cor.Lent
5p35c.r: 5t; ce.rton,Iaruts againct you.
? nit to 5,-2Ctio.1 33ti. 23, 5 fal refarring t!-:Is metier to the
COMfAia, r. jO3tC aJOMir your answer in aocor,iance with
2ct.on 333.b, tnizt it anouid to, addressed to the Hearing
internationei Trade Adminiatration, Roma 3805, 0.3.
;.,,i;Arc:7--..nt. of Co=arce, .1.ZtO Street caa' Constitution A.venua,
20230.
:zaat Knowis, Olrector
Dffl.L:.! of Wiport Administration
?
cc: Comras/McClelland/Chrono/OEA/Case file 11(75)-20
cp:7/25/20 Wang 42529A
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_Theodore S. G e erg .
ssistant. United States A
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Theodore S. Greenberg, Esq.
Assistant United States Attorney
Eastern District of Virginia
117 South Washington Street
Alexandria, Virginia 22314
470
,ENERAL courisEL OF THE
UNITED STATES DEPARTMENT OF COMMERCE
washington, D.C. 20230
DEC 2 2 198o DEC 24 12 is
4TIN.?iErS OFFI
Re: United States v. DeGeyter
Criminal No. 80-120-A
Dear Ted:
Pursuant to our telephone conversation, enclosed is a
certified true copy of an Order entered by Eric L. Hirschhorn,
Deputy Assistant Secretary for Export Administration, on
December 19, 1980, assessing a t10,000 civil penalty against Marc
Andre DeGeyter in accordance with the terms of the plea bargaining
agreement signed by Mr. DeGeyter and you on July 7, 1980. In
accordance with that plea bargaining agreement and the terms of
the Order, payment of the S10,000 civil penalty is to be made by
transfer of the check provided to your office by Mr. DeGeyter to
the Treasury of the United States through the Department of
Commerce. .
Thank you very such for your assistance in this regard.
Enclosure
Sincerely,
*mn
Thomas C. Barbour
Attorney-Advisor
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P.,..o0k/LO
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471
SHEA & GOULD
330 MADISON AVENUE
NEW YORK. NEw YORK 10017
12121 COI- 320L1
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BY HAND
RAVIpi?LI
Theodore S. Greenberg, Esq.
Assistant United States Attorney
United States Attorney's Office
117 South Washington Street
Alexandria, Virginia 22314
Dear Mr. Greenberg:
I have enclosed a certified check drawn on our
escrow account and made payable to the Treasurer of the
United States in the amount of $10,000. This payment is
remitted by Marc DeGeyter in accordance with numbered
paragraph 3 of the letter agreement dated July 7, 1980 among
ycurseff, Mr. DeGeyter, myself, and John Schmidtlein.
Pursuant to the above agreement, I understand that
ycur office will hold this check until such time as the
Secretary of Commerce imposes a civil penalty against
Yr. DeGeyter, which penalty shall i no event exceed $10,000.
Very ly yours,_
\ 6.
David A. Cutner
38.
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U. s . i oRCE
December 22,
19 80
an Order issued in the
FEY CERTIFY that the annexed is a hue copy of
maJof Marc Andre DeGeyter by Eric L. Hirschhorn, Deputy
t Secretary For Export Administration, on December 19,
ompliance Division, Office of Export Administration
International Trade Administration
/
Director, Compliance Divisicin
(OUmmInde)
EREWYthw Sharon R. Connelly
?
>C-4
7,71,7
egoing certificate, is now, and was at the time of signing,
Division
her
and credit should be given 7f-e4 certificate as such.
4
Director
IN WITNESS WHEREOF, I have hereunto subscribed my name,
and caused the seal of the Department of Commerce to be af-
fixed this 2.2 day of
one thousand nine hundred and
December
eighty
For the SECRETARY OF COMMERCE:
uscomm-Dc 133.1.71
39.
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I UNITED STATES OF AMERICA
DEPARTMENT OF COMMERCE
In the Matter of )
MARC AVORE DEGEYTER )
ORDER
On July 7, 1980, the United States of America, by the United
States Attorney for the Eastern District of Virginia, and Marc Andre
DeGeyter entered into an agreement which, inter alia, contained the
following provisions:
1. Defendant DeGeyter will plead guilty to one count
of violating the Export Administration Act of 1969 (50
U.S.C. App. Supp.I, Section 2401 et seq., by
counseling and inducing a violation of the Export
Administration Act (15 CFR 387.2) by seeking to export
the ADABAS source code ("technical data"; 15 CFR
379.1(a) and (b)(1)(i) and (ii) from the United States
without the required export license (15 CFR 370.3(a):
379.2). . . .
2. For knowingly and willfully violating the Export
Administration Act, Marc Andre DeGeyter consents to an
administrative imposition of a t10,000 civil penalty
by the Secretary of Commerce or his authorized
representative pursuant to the provisions of 50 U.S.C.
App. Supp.I, Section 2405(C)(1) and (C)(2)(B) and 15
CFR 387.1(b)(3). DeGeyter agrees to execute any.
documents necessary to said consent and collection of
the $10,000 penalty.
3. Prior to the defendant's sentencing on the offense
set forth in paragraph 1 above, the defendant is to
deliver to the United States Attorney for the Eastern
District of Virginia a cashier's check in the amount
of t10,000 made payable to the Treasurer of the United
States. This check will be held by the United States
Attorney until such time as the Secretary of Commerce
or his authorized representative imposes the aforesaid
civil penalty. In the event that the Secretary of
Commerce declines to impose the aforesaid t10,000
civil penalty, or imposes only a portion thereof, the
cashier's check or an appropriate refund will be
remitted to the defendant or his authorized
representative.
40.
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On August 1, 1980, Marc Andre DeGeyter appeared in the United
States District Court for the Eastern District of Virginia and
entered a plea of guilty to a two count charge filed by the United
States Attorney. One of those counts was the violation of the
Export Administration Act and implementing Regulations referenced in
paragraph 1 quoted above.
ACCORDINGLY, pursuant to the authority delegated to me by the
Secretary of Commerce by Department Organization Order 10-3 (45 Fed.
Reg. 6141, January 25, 1980), and International Trade Administration
Organization and Function Orders 41-1 (45 Fed. Reg. 11862, February
27, 1980) and 41-4, effective August 26, 1980, I hereby find:
1. On August 7, 1979, Marc Andre DeGeyter knowingly, willfully
and unlawfully counseled, commanded and induced an officer of
Software AG to export the ADABAS source code from the United States
to Belgium without obtaining a validated export license, in
violation of the Export Administration Act of 1969, 50 U.S.C. app.
?2401, et seg. (1976 and Supp.I 1977) and the implementing
Regulations, 15 C.F.R. ??370.3(a); 379.1(a) and (h)(1)(i) and (ii);
379.2 and 387.2 (1979); and
2. Marc Andre DeGeyter has consented to an administrative
imposition of a t10,000 civil penalty for the violation of the
Export Administration Act and the implementing Regulations
referenced in paragraph 1 of this finding.
IT IS THEREFORE ORDERED, that Marc Andre DeGeyter., within 20
days of the date of this Order, pay to the Department a civil
penalty in the amount of t10,000. Payment of the $10,000 may be
made by the Office of the United States Attorney for the Eastern
District of Virginia out of funds provided to that Office by
Mr. DeGeyter pursuant to the agreement signed by that Office and
Mr. DeGeyter on July 7, 1980.
This Order is effective immediately.
Eric L. Hirschhorn
Deputy Assistant Secretary
for Export Administration
Entered this 1141day of December, 1980.
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STATEMENT OF
DOUGLAS K. SOUTHARD
DEPUTY DISTRICT ATTORNEY
COUNTY OF SANTA CLARA, CALIFORNIA
BEFORE THE
U. S. SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
MAY 5,1982
Senator Nunn, Members of the Subcommittee and Staff:
My name is Douglas K. Southard. I am a Deputy District Attorney for the
County of Santa Clara, California. I have been employed by the District Attorney's
Office, the chief prosecuting agency in that county, for a period of five years.
Prior to that I practiced general civil law for a period of two years in a small law
firm in the county. I am a graduate of Stanford University with a degree in
Philosphy, and of Hastings College of the Law, the University of California, having
attained a ID. Degree in 1975. Like many people in law enforcement, I have no
technical background in the area of semi-conductor manufacture or electronics in
general, but have, of necessity, learned some of the basics of the industry which
was necessitated by my involvement in high technology theft prosecutions. In the
District Attorney's Office I have been assigned for a period of three and one-half
years to felony prosecutions. For the last two years my primary assignment has
been high technology thefts, including trade secrets thefts, integrated circuit
thefts, electronic equipment thefts and the investigation and prosecution of related
criminal conspiracies.
In learning the technical necessities of this area I have been greatly
assisted by numerous people in law enforcement and in the industry itself; and
particularly, have received training and assistance from Intel Corporation,
Signetics Corporation, National Semiconductor, Synertek Corporation, Hewlett-
Packard Corporation, and the NBK Corporation.
Investigation agencies with whom I have closely worked investigating and
prosecuting these cases primarily have been the organized crime and criminal
investigation section of the Santa Clara County Sheriff's Office, the Federal
Bureau of Investigation, and the Santa Clara County Police Department, with
notable assistance from the Los Angeles and Orange County Sheriff's Departments,
United States Customs Service and the Department of Commerce. The preeminent
police expert on these matters in our county is Detective Patrick Moore of the
Sheriff's Office.
95-929 0 - 82 - 31
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In the last two years we have investigated literally scores of technology-
related theft cases, resulting in numerous convictions, but also, sadly, numerous
unsolved thefts or thefts wherein the property was never recovered.
Like you, we in local law enforcement are very concerned with the
national security implications of the technology thefts that we have seen.
However, as our expertise is in the field of investigating and prosecuting these
crimes, and not in the international ramifications thereof, I will limit myself in my
comments to the problem as seen by the local investigator and prosecutor and some
suggestions as to where law enforcement has to go to help stem the tide.
First, however, I think it would be instructive to explain somewhat the
integrated circuit manufacturing process and the history of the industry. I think
this will help the Subcommittee understand the sophistication of the technology
involved, the sophistication of the manufacturing process, and the areas in which
security problems can arise. The focus of my presentation will be on integrated
circuits themselves and not upon the finished products into which they are
constructed.
Overview Of The Technology
A semiconductor is merely a description of the material from which
integrated circuits are made. All integrated circuits, as we know them, are
semiconductor integrated circuits. However, all semiconductor circuits are not
necessarily integrated circuits. The concept of integration infers that large
numbers of transistors or diodes or other electrical elements are combined
together to perform a function. Large scale integration ("LSI") is now the norm.
An integrated circuit is nothing more than a super miniaturized electronic
circuit constructed on a substrate of silicon crystal. Silicon provides an ideal
medium in that it has the electrical properties of both a conductor and an
insulator. Like metal, silicon is cold, clammy to the touch, grey and semi-metallic
in appearance. Like an insulator, such as glass, silicon is fragile -- it can be broken
or chipped much like, for instance, quartz or obsidian. Because of its molecular
structure, the addition of certain types of impurities to a pure silicon crystal
structure can create free electrons which may alter its electrical properties. By
adding these impurities, (such as phosphorus, boron or arsenic), which are often
called "dopants" to the pure silicon crystals structure, in measured amounts, and at
specific locations, the electrical properties can be altered in different areas of a
silicon chip, giving one area an excess of electrons and another area a dearth of
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electrons, so that current flow between the two adjacent areas can be induced with
the appropriate input. Given these basic compositions, super-sophisticated
geometries can be constructed by semiconductor engineers connecting hundreds or
thousands of different "doped" areas in a particular fashion to achieve the result
desired. These designs are three-dimensional in nature, interconnecting different
. layers of an integrated circuit device vertically with different areas horizontally.
Horizontal and vertical connections are made by alternatively photo-lithographing
circuit designs upon the silicon and building up layers in the silicon by exposure to
corrosive chemicals which cause the silicon, in effect, to grow.
The net result is a three-dimensional electronic circuit as small as one-
quarter inch square or as large as an inch square which may contain anywhere from
four thousand to hundreds of thousands of transistors or other electrical devices.
For instance, a "2114" type integrated circuit, which is a relatively simple memory
device, has the capacity of retaining four thousand bits of information, that is four
thousand binary encoded memory units. The memory portion of the chip alone will
contain approximately eight thousand transistors and the entire chip ten to twelve
thousand transistors. This particular chip is a very basic chip which is quickly
becoming outmoded and serves as a building block upon which computer systems or
other electrical systems can be constructed.
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Design Process
The product flow of a typical integrated circuit device can be graphically
summarized as follows:
MARKET EVALUATION (Need)
PRODUCT DEFINITION (Solution)
COMPOSITE
DRAWINGS
LOGIC DESIGN (Schematic Mock-up)
) CIRCUIT DESIGN (Limited by physical
limitations inherent
in available process-
ing techniques)
LAYOUT (Hand or Computer
assisted circuit
drawings)
DIGITIZING (Magnetically encoded
Layout Design)
DATA EASE TAPE (Governs Equipment
Producing Reticles)
200x
OVERLAYS
RETICLES (10x or 20x Final
Device Size)
MASKS (Actual Device Size)
WAFER PROCESSING (Masks create patterns
on Wafers via Photo-
graphic Techniques)
FINAL PACKAGE TESTING
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The market evaluation and product definition stages define the need and
the envisaged solution to the problem. This is followed my meticulous design work
culminating in a layout either drawn by hand or computer aided design equipment.
The resulting design is then "digitized" by translating its physical dimensions and
qualities into quantifiable data which are encoded by a computer onto a memory
tape, called a data base tape. This tape can then be used, with some intermediate
computer language translations, to run special machinery which creates reticles.
Reticles are groups of glass plates, one for each layer of the final chip, which have
the layer designs very precisely photographed upon them. From the reticles, by use
of a step and repeat camera, are made the chromium masks with which the wafers
are actually processed. Each mask has scores of circuit layers upon it, each
exactly the same. Usually the mask actually contacts the wafer to print the
circuit design upon it.
As is indicated on the diagram, constant design re-evaluation goes on,
leading to continual upgrading of designs.
Any person who was able to steal or otherwise acquire a data base tape,
reticle or mask set for a given product would have tools incorporating the original
designer's trade secrets, arrived at only after hundreds of thousands, even millions,
of dollars in design effort. With these tools an unscrupulous competitor could
undercut the original designer's prices and compete with him almost overnight.
Although basically the same data could be obtained by "reverse-engineering" a chip
purchased on the open market, such a process is expensive, time consuming, and
less precise than stealing the original designs.
Manufacturing Process
The actual manufacture of the integrated cirucit is a very complicated
process, which is difficult to understand for someone like myself who is not very
well versed in physics and chemistry, but I think we can describe it in such a
fashion that you get a feeling for it. I have brought some samples of the items to
be discussed to aid in understanding the technology.
First of all, an integrated circuit is a micro-miniature structure
comprised of several key materials. The basic material is highly pure, single
crystal silicon. The process starts with a single silicon crystal called a seed
crystal. The seed crystal, like the yeast in French bread, is sort of the magic
ingredient. It is a pure silicon crystal which is dipped into an essentially rotating
vat of liquified silicon, and is extracted under a controlled rate so that the molten
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silicon material adheres to it and grows upon it. The result of this process is a long
sausage-like poly-silicon ingot, with an almost perfectly pure crystal lattice
structure, consistent throughout the entire ingot.
The ingot is then sliced into thin round silicon wafers. After the wafers
are polished they are subjected to a diffusion and photo-lithography process which
imprints the completed circuits upon them. Each wafer, approximately three to
four inches in diameter, can be imprinted with hundreds of individual circuits for
rectangular chips, each of which is essentially identical to the other.
The diffusion process consists of placing the wafers into furnaces at very
high temperatures in different gaseous atmospheres containing the desired dopants.
By this method oxide layers are grown on top of the wafers. This is really just a
very accelerated and sophisticated "rusting.' process such as we are all familiar
with. These deposits are called epitaxial growth.
Each diffusion or oxidation step is then followed by a photo-lithography
step.
The patterns lithographed upon a wafer are introduced through the use of
several successive masks and processed very similarly to the taking and developing
of pictures. The process requires a very clean, particle-free environment
containing much complex and expensive processing equipment. Patterns on masks
are projected into an emulsion film on the wafers from a light source with a
machine called a "projection printer." The picture of the mask on the wafer is
developed through regular "dark room" developing techniques, the purpose being to
delineate areas from which to remove the unwanted portions of the deposited
silicon or metal. This is in turn done by use of suitable acid rinses, which etch
away unwanted materials. After each acid etch a long rinse in very pure water is
necessary.
Under newer processes ion implantation is used instead of or, in
conjunction with diffusion. With this method, ions are literally shot into the silicon
wafer by an ion beam generator. Laser e-_tLtag equipment is also now coming into
general use.
The process continues in successive layers, sometimes as many as eight or
ten layers thick. Although the variables are many, the process is basically the
same for each successive layer: diffuse (grow oxides), photo-lithograph the circuit
pattern, etch, then repeat. The final layer, called the "metal mask," is an
aluminum film which interconnects all the vertical and horizontal geometries
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within the design. This is the layer that is most visually apparent when looking at
the chip.
All this construction is done in a micro world that approaches the size of
bacteria. For instance, a common dimension of a typical circuit "wire," if you can
call it that, may be as small as four microns -- that is, four millionths of one inch.
All of this, of course, is done by super sophisticated equipment and
trained personnel in highly controlled atmospheric conditions. The designs
themselves, and the processes which are used to grow the layers on the chip, are
the result of years of design and re-design effort, leading finally to a design which
not only is workable but is makable, given the physical and technical limitations of
the manufacturing technology of the day.
After the chip manufacture process, the chips are separated from each
other by the wafer with special machines, so that each rectangular
individual chip may be encased in a protective housingand connected to the outside
world by means of precious metal leads that go to the familiar pins that plug into
printed circuit boards. Prior to doing that, of course, there is laborious,
painstaking and precise testing process wherein each individual chip is electrically
tested for defects. The defective chips are marked and ultimately discarded,
usually for later reclamation of precious metals.
The resulting chip is a high-reliability product which will perform in
adverse conditions for a substantial period of time without failure. Internally the
chip has no wires to come loose, no terminals to corrode, nor any other of the
physical attributes of traditional electronics devices which make them susceptible
to malfunction. Moreover, the incredible miniaturization achieved makes it
possible to literally construct a computer on a chip, and therefore make it
available for applications not previously dreamed of.
The variety and types of chips produced in this fashion are limited only by
the imagination of the engineers. The two basic types involved are: memory chips,
which can be broken down into numerous sub-categories depending upon the type
and properties of the memory and the input-output capabilities it has; and micro
processors, which are the commonly referred to "computers on a chip." They are
central data processing units designed to work in conjunction with other chips (for
instance, memory chips) to process information.
The applications of these chips are likewise as diverse as man's
imagination. They can be used in everything from digital watches to auto emission
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control systems; video games to intercontinental ballistic missile guidance systems;
desk top computers to smart bombs and cruise missiles. This technology presents
such significant opportunities for the human race, that it may be the most
significant advance in technology since the industrial revolution. With it, we are
anticipating a quantum leap in man's ability to do tasks that need to be done.
Brief Industry History
The integrated circuit was invented in the late 1950's. Commerically
useable integrated circuits, known as "I-C's" in the parlance, were first available in
1961. The technology expanded rapidly and in 1971, a then small Santa Clara
company produced an entire computer on a single silicon chip. The computer on a
chip, technically called a micro processor or micro computer is revolutionizing the
electronics industry. As certain periodicals have recently pointed out the micro-
computer chip will have more impact on our society in the next twenty years than
any other invention. Already the micro-computer is being used in microwave
ovens, refrigerators, electric ranges, cash registers, taxi meters, gas pumps,
typewriters, television, computers and military applications. By the end of this
decade we may expect that they may be found in virtually every home and
business.
The integrated circuit was a uniquely American development. It was first
marketed in 1961, and integrated circuits are now already more than a five billion
dollar world-wide industry. Only over the last five years or so has foreign
competition become substantial factor in the state-of-the-art, leading edge portion
of the business. The micro-computer started from nothing in 1971. Recently sales
were in the range of half a billion dollars, and are expected to grow at
approximately fifty percent annually for the foreseeable future.
Continued development of integrated circuit memory chips has reduced
the cost of information storage in computers a hundred fold in the last ten years.
In the late twentieth and early twenty-first centuries integrated circuitry will be
as basic to an industrial economy as steel in the nineteenth and early twentieth
centuries. Leadership in this technology will be vital to any nation that would be a
world leader in economic and military power.
In the wake of this new technology has sprung an industry centered in
what has come to be known as "Silicon Valley," Santa Clara County, California,
which is among the most fast-moving and competitive in the world. Any individual
who can build a better electronic mousetrap using this technology has potential
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immediate access to great wealth and recognition. Companies spring up over
night, based upon one good idea and sometimes die just as quickly when that idea is
overcome in the marketplace by new and better ideas. The leading semiconductor
manufacturers in the country and in the world are often companies who did not
even exist fifteen years ago and have literally gone from a backroom type of
operation started in somebody's garage to a billion dollar corporation in the space
of ten or fifteen years. Up to now, in my view, the rapid growth of these
companies has prevented a proper assessment of their security operations and has
caused a substantial lag in public and official appreciation of the national secuirty
implications of the new technology.
According to available evidence, in the past five years probably one
hundred million dollars or more in electronic technology and product has been
stolen in the Santa Clara County area alone. We in law enforcement have only
recently, within the last three years, almost stumbled across the problem. At the
time we were totally unprepared to deal with it. Now we are beginning to make
some headway.
What follows is a summary of some of the cases we have dealt with, the
problems we have encountered, and some suggestions aimed at strengthening law
enforcement's position.
Silicon Valley Thefts
In recent years increasing press coverage of high technology thefts has
gained the headlines across the country, and particularly in Silicon Valley, Santa
Clara County, California, where high technology electronics is centered. So what's
all the fuss about? In the last five years I would estimate that in excess of a
hundred million dollars of technology and products have been stolen, illegally
copied or counterfeited from Silicon Valley firms. Most of that theft is by
employees. The cases we handle involve technicians, inventory clerks, draftsmen
and engineers. Quite commonly, security personnel are also involved. They steal
circuit designs, process information, precious metals, and the chips themselves.
There is also an increasing propensity to stealing finished goods, such as computer
disc drives, and personal computers which have become increasingly smaller in size
and therefore more easy to steal.
This is not difficult to do. A complete set of glass reticles, which are
essentially production tools incorporating all details of a sophisticated new circuit
design, can be taken out of a plant in one's coat pocket. The same would apply to a
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computer tape describing all details of the design. When a sophisticated new
circuit design may have cost as much as a half million dollars or more to research,
develop and engineer through the manufacturing stage, these items become
increasingly attractive targets of crime. With these reticles or computer tapes,
and available production technology, a competitor could go into direct competition
within a few months, undercutting the original firm's price because of less capital
investment. Where a company or country has not developed technical expertise to
actually design these products effectively from scratch, as is the case in Eastern
Europe, the availability by theft of proprietary product designs makes the
establishment of semiconductor manufacturing possible where it otherwise might
not have been.
The "Gray Market"
The most common problem, however, is much more crude and direct. An
employee can take out one thousand high priced, high demand chips selling for as
much as one hundred dollars each in his briefcase, the lining of his jacket or in his
lunch bag. He may sell them for five to fifty cents on the dollar to one of the
numerous fly-by-night independent distributors operating out of low rent office
suites, their homes, or even the back of their cars. Usually no questions are asked.
Independent brokers are not about to share with their customers the source of their
product, as the customer could then go directly to the source and cut the broker
out of his percentage.
As often as not the buyer purchasing stolen parts is an otherwise
respectable appearing businessman, who either uses his business as a front for
criminal activity or just can't pass up the opportunity to make some fast money. In
one recent case in Santa Clara County, resulting in a conviction of two persons, an
undercover officer offered to sell to a local distributor purportedly stolen Intel
memory chips which were then in very high demand. The officer flat out told the
defendants that the chips were stolen. After snapping up the parts for $10,000.00
cash, the common method of payment, the defendants the same day shipped the
parts via air freight to Werner Bruchhausen, a notorious international chip broker
in Germany. Bruchhausen is widely reputed to be a Soviet East German agent, is
under indictment by a federal grand jury in Los Angeles, and is currently in the
custody of the German federal police. This transaction was in violation of federal
export control regulations prohibiting such transactions without prior approval
because of the military applications of these products.
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Now the principal here was no back-alley crook. He had a fine home in
one of the exclusive hillside residential areas in Santa Clara County. He and his
beautiful wife drove Mercedes and sent their kids to the best private schools. He
was an armed forces veteran and a member of the reserves. He was president of a
successful parts distribution firm and all in all a typical American success story.
And yet, here he is selling stolen integrated circuits to an internationally known
fence. The reason is the same as always, greed. This kind of greed is not unusual
in the context within which he worked: Silicon Valley, a prime example of
capitalism on the rampage. Everyone wants to become an overnight millionaire
and money flows like water, tempting the otherwise honest citizen to scramble fast
to get his share of the pie.
Greed has spawned what is often called the "gray market". To understand
what the "gray" market is one must understand the hierarchy in electronics
commerce. The manufacturers such as Intel, National Semiconductor, Texas
Instruments, Signetics, Synertek and others, actually create the technology and
design and manufacture the integrated circuits for later use in a variety of
electronic equipment. At the end of the line is a customer such as Burroughs,
General Electric, Westinghouse, Siemons of Germany, or any of the numerous
defense contractors in this country.
In between are the middlemen. At the top of the distribution heirarchy
are the so-called franchised distributors. These include such companies as Elmar
Electronics, Hamilton-Avenet, and Western Microtechnology, which have
continuing written contracts with various manufacturers to represent them and sell
their parts in the market place. Major customers deal directly with the
manufacturers, but franchised distributors take up the production slack and provide
the means to connect supply with the demand by locating the demand. These are
reputable firms who prize their business name and deal only in first line products.
No evidence of false or fraudulent dealings or dealing in stolen property, by these
companies, has ever been brought to my attention.
Down line from the franchise distributors are the so-called independent
distributors. They obtain their product either directly from the company which
manufactures it when surplusages occur or from franchised distributors or from
such other means as might be available. Other means might include, and often do
include, purchasing surplus inventory from the end users. Because of the volatile
nature of the market, the end user customer will often find itself in a situation
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where it has a surplus of parts. It might, for instance, have purchased large
numbers of scarce parts which had been allocated to it by the manufacturer as a
hedge against a rainy day. It may not have needed the number of parts it had
allocated to it, but purchased them anyway to insure that it had a supply so that its
production would not be interrupted. Down line if demand fell off the need for this
inventory evaporates and the customer finds himself with a "white elephant"
inventory, which often he is eager to dispose of quickly for cash. Or a customer
might purchase inventory in preparation of a new product introduction and then
scrap the product, leaving itself again with a surplus of unneeded parts. These too
would be sold in the independent distributor market.
Another source cif parts for the independent distributor is used parts.
Numerous types of products incorporate printed circuit boards into which the
integrated circuits themselves are literally plugged. As customer needs change
sometimes the old printed circuit boards are scrapped and new ones with more
updated capabilities replace them. Again, surplus parts are now available and are
often sold at low rates in the independent broker market. Because of the basic
reliability of integrated circuits, used integrated circuits are often quite reusable.
What is created by this system is an "anything goes" marketplace where,
especially in times of high demand and short supply, such as occurred in the 1977 to
1980 time frame, speculation runs rampant. It's really no different from pork belly
futures. Brokers buy large quantities of parts at fire sale prices, hoping to be able
to turn them over quickly if a need is found elsewhere. Numbers of these people
made a lot of money doing just this sort of speculation during the parts shortage of
1977 to 1980.
Gray Market Case History: Larry E. Lowery
Larry E. Lowery first came to the attention of law enforcement in
January 1978. In that month an employee at Elmar Electronics, a franchised
electronics distribution house in Mountain View, California, was cautiously
approached by a fellow employee, Paul Hernandez, about the possibility of stealing
integrated circuits from Elmar's warehouse. The employee alerted police and
cooperated in an undercover investigation. Hernandez was observed to steal one
hundred thousand dollars worth of late model circuits and transport them to David
Henry Roberts, who in turn delivered them to Larry Lowery's house, where
Lowery's wife paid Roberts. Larry Lowery was at the time away in Las Vegas.
Roberts and Hernandez were arrested, but due to a series of mis-cues by law
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enforcement their cases were dismissed by the courts. Neither would testify
against Lowery, and Lowery's wife claimed marital privilege. Lowery, therefore,
escaped prosecution.
Through investigation it was learned that Lowery operated a company
called L. & M. Electronics in Mountain View, California, and had since mid-1977
successfully solicited electronics thefts, via Roberts, on a continuing basis.
In early 1979 Roberts was again arrested and convicted for two integrated
circuit thefts perpetrated by forged invoices written on his employer's account.
Again he named Lowery as his instigator and fence, but police were unable to
acquire evidence other than Roberts' statement with which to prosecute. It's
interesting to note that Roberts' employer was unaware of Roberts' previous
criminal activity.
In April 1980, it came to the attention of the Santa Clara County Sheriff's
Office Organized Crime Unit that a large quantity of Synertek Corporation's
E-prom type circuits, then in high demand, were being offered for sale by a local
independent broker. An undercover investigation was initiated which ultimately
led to the arrest of Lowery, and the search of his business premises. By now he had
changed his business name to Brut Electronics. Over eleven thousand stolen
Synertek integrated circuits valued at between one hundred and one hundred and
fifty thousand dollars were seized. Search warrants also led to the seizure of his
business records and the records of a "paper company" used by Lowery called
O.C.S.
Leg work and forensic examination disclosed that the records relating to
Lowery's acquisition of the stolen Synertek parts were phoney. Handwriting
experts determined all were authored by David Roberts, although they purportedly
showed transactions with numerous different companies. Innumerable hearings and
motions followed Lowery's arrest. Prior to the preliminary hearing a prosecution
witness was lured out of his home, attacked and severely beaten by a total
stranger. He was therefore unable to testify at that hearing. On the eve of a jury
trial, Roberts, then under subpoena by the prosecution, was murdered
execution-style, and his body dumped in a shallow grave in the Santa Cruz
mountains.
After six weeks of trial, necessitated by execessive technical testimony,
Lowery was convicted on November 2, 1981 of knowingly receiving stolen property.
He was allowed to remain free on bail pending his sentencing. On January 18, 1982,
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Lowery was sentenced to two years state prison and remanded into custody by the
judge.
On Thanksgiving weekend 1981, while Lowery was still free on bail after
his conviction, Monolithic Memories, Inc., of Sunnyvale, California suffered a three
point four million dollar theft, notwithstanding extensive electronic security
measures and twenty-four hour security personnel. The theft was undetected until
workers returned from the long Thanksgiving weekend. Many of the circuits taken
were reportedly specially designed units with direct military application. In all,
about a ton of boxed first line parts were taken, necessitating at least two truck
loads to make off with all the booty.
It was quickly determined that this had to be an inside job in that
somebody with knowledge of security measures would have to have disconnected,
or otherwise rendered inoperative, electronic security measures which included
perimeter alarms, closed-circuit television, ultrasonic motion detectors and
locked-cage part storage areas. Lie detector tests were given to various security
personnel who had worked shifts coinciding with the theft. One security guard,
Ronald Washington, notably failed the polygraph test, but was informed that he
passed, in hopes he would be put off his guard by that information.
Soon thereafter an acquaintance of Washington's, lured by the $50,000.00
reward offered by MMI, contacted MMI and law enforcement authorities, with
information regarding the case. It was learned that Washington had bragged about
having participated in the theft and stated that he was using the $7,200.00 payment
he had received for his part in the theft to finance his fledgling cocaine sales
business.
An undercover operation was initiated wherein an experienced narcotics
officer was introduced to Washington and proceeded to purchase cocaine from him
on five occasions. During the course of the conversations attendant to those drug
purchases, further statements were made by Washington incriminating himself and
others. He described the "big man" in the theft operation in such a manner as
clearly described Larry Lowery.
After weeks of negotiations with Washington the undercover officer told
him that he had a friend who would soon be quitting Synertek, a local integrated
circuit manufacturer, and who wanted to make one last killing by stealing parts
from his employer before moving east. A sting operation was thereby initiated
wherein a half million dollars in stolen Synertek parts were offered to Washington
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and Washington's superiors. A purchase date was set up and bait parts were
acquired from Synertek for the operation.
On February 24, 1982 the operation went into effect. The plan was to
deliver the purportedly stolen parts to Washington and his confederate and to tail
them as they delivered them to the broker for whom they were purchasing the
parts. The operation was partially successful in that Washington, Abel Urbina and
*a third individual took delivery of the parts, but did not take them immediately to
their broker's location. They were monitored in regular telephone communication
with the leader of their operation, but waited to have the entire delivery made
before taking them to their storage location. Because Synertek was understandably
unwilling to risk a half million dollars worth of parts to the undercover operation
for fear the thieves might get away with them, the officers were unable to
complete the operation according to plan.
The three subjects were arrested and evidence was seized implicating
both Larry Lowery and his partner, Larry Kizer. One of the vehicles used by the
three young thieves was Larry Lowery's personal Lincoln Continental automobile,
registered in his name. The other vehicle, a truck, was owned by a Nevada
Electronics company run and owned by Larry Kizer. Subsequent search warrants
revealed numerous business documents in Brut's (that is, Lowery's) business
premises showing Kizer's relationship to Brut and Lowery. Telephone records were
seized, pursuant to warrant, which indicated that at the very time of their arrest
the three arrestees were talking to Kizer in Nevada on the pay phone in Santa
Clara County. To date, despite extensive efforts by law enforcement, the parts
themselves have not been located or recovered. It is feared that they may have
already been transported overseas, most likely to a European location.
To date, the trail of investigation is littered with dead bodies, assault,
sophisticated thefts, drug sales, and more. Scores of criminal conspirators appear
to be involved. It represents the clearest case of consistent, habitual, organized
criminal activity aimed at Silicon Valley as yet uncovered. Because of the
complexity of the case and the circumstantial nature of the evidence available, it
would be a very difficult task to fully prosecute and bring to justice all of the
people involved. Undoubtedly it will take years before the investigation is
completed and prosecutions culminated.
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Gray Market Case History: John Jackson
John Jackson, when he first came to the attention of Santa Clara County
law enforcement officials had previously been convicted five times elsewhere of
felonies involving theft, forgery and theft by false pretences. He had never been
sentenced to state prison for any of these offenses.
In November 1979, around Thanksgiving time, Intel Corporation suffered a
theft of approximately one million dollars worth of "2732" E-Prom devices. These
were at the time state-of-the-art memory devices in very high demand throughout
the world. They were capable of holding thirty-two thousand bits of binary
information in the memory and of being erased and re-programmed at will by the
user. This combination of memory capacity and flexibility made them a standard
memory unit around which such devices as main-line and desk-top computers were
built.
After the theft, corporate investigators had no leads as to how the items
had been stolen. Shortly thereafter, however, in December 1979, it came to the
attention of Intel employees in Europe that a large number of 2732's had surfaced
there. Specifically, Siemons AG of West Germany, a huge electronics
manufacturer and one of Intel's best customers, had apparently just received a
large shipment. At this particular time these particular items were in such short
supply, and in such high demand, that Intel was using a rationing system whereby
preferred customers were allocated a monthly allotment of parts based on various
criteria. Siemons was among Intel's highest allotment consumers, receiving one to
two thousand of these parts per month.
Within a short time Siemons began to notice a high failure rate of Intel
2732's it had purchased in a bulk. Siemons contacted Intel to complain. Samples of
the questioned chips were sent to Intel in the United States for analysis. Forensic
analysis disclosed that the devices in question, had in fact, been counterfeited.
Although they were authentic Intel parts, they had been forged with falsified Intel
part numbers, logo and markings. The reason for this was that the ten thousand
2732's stolen in the November 1979 theft had not yet been marked. The marking of
a device with the logo and part number is the last stage in the final testing and
quality assurance process. The parts that had been stolen had not yet reached the
final phase and had in fact not finished the testing process. As a result of that, a
substantial number, perhaps thirty percent, were parts that would not have passed
Intel's strict quality control standards. Thus, in use by Siemon's customers
equipment had begun to fail.
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After putting some pressure on Siemons, Intel learned the source of parts
in question. Siemons, had purchased a bulk lot of approximately ten thousand parts
from E.B.V. Corporation of Munich, West Germany. Further pressure was brought
to bear on E.B.V. and the admission was made that it had received parts from two
sources: Republic of Virginia in Arlington, Virginia, another parts broker, and
Mormac, Incorporated of Torrance, California. Until the execution of search
warrants on these premises in February 1981, the trail had grown somewhat cold and
no further back-tracking could be done.
A break in the case occurred in January 1980 when an anonymous
telephone informant informed police that John Henry Jackson lived at a specific
location with a house and garage full of stolen integrated circuits. An undercover
investigation led to the issuance of a search warrant, the seizure of thousands of
stolen integrated circuits, and Mr. Jackson's arrest. However, the case was later
dismissed after the judge found the search warrant to have been issued based upon
improper evidence.
In the course of investigating the case, however, law enforcement
officials contacted employees of Jackson who provided information linking Jackson
to improper dealings with integrated circuits.
It was learned that Jackson had been in business as a printed circuit board
"stuffing" house and aspiring computer maker, with a parts brokerage business on
the side.
Another employee of Jackson's came forward, spurred in part by
continuing revelations in the press regarding the seriousness of the stolen chip
problem. This individual literally walked into the investigator's offices and plunked
down upon their desk an assortment of printing plates which he stated he had used
while in Jackson's employ to counterfeit Intel integrated cirucit devices. Further
forensic analysis was done comparing the printing plates provided by this informant
to the printing on the confirmed stolen parts recovered from Siemons in Europe.
The printing plates matched the printing on the stolen devices.
This witness told of having been hired by Jackson for a menial job and
being 'induced by him into participating in his chip marking and marketing
operation. In the period of less than a year that he worked for Jackson he had
marked tens of thousands of integrated cirucits, primarily Intel 2732's and 2716's.
He provided information corroborated by another Jackson employee that Jackson
had been doing business in large part with the firm of Mormac in Los Angeles, and
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in particular an individual by the name of Patrick Ketcham. Ketcham had
previously been convicted in a federal court in Los Angeles in another forgery
scheme wherein parts acquired on the open market were falsely represented and
documented to meet the stringent military specifications required by the
Department of Defense. At the time of the Jackson investigation, Mr. Ketcham
was still on probation for that offense.
With the cooperation of this informant the Sheriff's Department and Intel
Security set up an undercover operation whereby the informant continued to work
for Mr. Jackson, marking with counterfeit markings stolen Intel parts and
informing the police of their disposition. After one such counterfeiting session, an
associate of Jackson's was arrested in Long Beach, California, attempting to sell
the parts to a broker at that location. At that point, in February 1981, law
enforcement officers arrested Jackson, Ketcham, and one of Jackson's associates,
a former Intel employee. This employee had, according to both informants, been
seen to deliver Intel parts to Jackson's business premises on multiple occasions. On
one occasion the parts were delivered in the lining of the subject's leather jacket.
The subject, in fact, had worked in an area of Intel, a Reliability Testing area,
where he had access to the stolen 2732's and stolen 2716's. Intel business records
reflected that the subject had signed in on the "off hours" signing sheet on one of
the days of the Thanksgiving weekend in which the ten thousand 2732's were stolen.
Concurrent with these arrests, extensive search warrants were prepared
and served on Mormac, Space-Age Metals, Jackson's business and home, and on
Republic of Virginia, the parts distributor in Arlington, Virgina. No business
records were discovered memorializing Jackson's role in any of these transactions.
However, the business records of Space-Age, Mormac and Republic clearly
indicated that shortly after the theft in November 1979 or early December 1979,
Space-Age Metals sold Mormac five thousand Intel 2732's and sold Republic
another five thousand 2732's. Mormac and Republic in turn each sold all of those
parts to E.B.V. in West Germany, from which they went to Siemons. All of this in
the space of approximately one and one-half months after the theft. In one
business letter discovered at Space-Age Metals a Republic vice president told a
Space-Age official that he was amazed at the quantity and price that was being
offered for these parts given the scarcity of the parts in the marketplace, but that
he wanted to close the deal and wasn't stupid enough to ask any questions.
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The Jackson case is still pending trial. Charges against Patrick Lyle
Ketcham were dismissed due to insufficient evidence that he had actual knowledge
that the parts received by Mormac were stolen. Although the informant witnesses
had initially linked Ketcham directly to receipt of large quantities of integrated
circuits, in the relevant time-frame, subsequent investigation proved that Ketcham
in fact had received the five thousand parts in November and December of 1979
from Space-Age, not Jackson. In fact, at that particular time Ketcham's
relationship with Jackson was strained because Jackson had provided him with so
many sub-standard parts. Charges against the president of Mor mac, one of
Ketcham's associates, were also dismissed for lack of evidence of personal
knowledge on his part. Charges against Space-Age Metals or any of its employees
or officers were never filed. No direct evidence of whom in that organization was
responsible for the acquisition of those parts was ever found.
The Jackson case points out the difficulty of proving knowing receipt of
stolen integrated circuits. Although the various business records of the affected
companies, mainly Siemons, E.B.V., Republic, Space-Age, and Mormac, indicate
transactions amongst them in Intel 2732's during the relevant time-frame, it is
impossible to prove which Intel 2732's were actually involved in the transactions.
Once the parts actually got to E.B.V., all were incorporated into products which
were later sold. Only a handful were actually extracted and preserved by Siemons
after defects began to be discovered. Siemons wasn't about to recall all the
finished products into which these chips might have been incorporated just to rip
them apart to find stolen chips. As a result the web of circumstantial evidence
becomes strained. Direct evidence is simply not forthcoming. The records-keeping
systems employed by the brokers are not sufficiently specific to be able to trace
the particular part. Nor are knowing thieves likely to keep such records.
Finally the cost for such a prosecution would be almost prohibitive for a
local jurisdiction. The estimated costs of producing the minimum one dozen
witnesses from Europe and the East Coast necesssary to prove the evidentiary
chain in the Jackson case is in excess of the entire witness budget for the County
of Santa Clara for an entire year. Public safety considerations simply will not
allow property crimes prosecutions to take precedence over violent crimes
prosecutions.
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Modes of Thievery And Problems Of Prosecution
The most common means of theft involve company employees. They are
the following types:
(1) Finished Goods Thefts: Usually these are from warehouse
or storage areas, although armed robberies and truck
hijack thefts have also occurred. Usually the storage area
has some sort of security, sometimes including elaborate
electronic measures. A determined thief, however, can
usually defeat these systems without detection. The
common denominator here in the intent to resell the
stolen product in the "gray tnarket."
One of the primary difficulties investigators face is
the identification of the stolen product. Integrated
circuits are fungible goods without clearly traceable
identification markings. Usually the devices bear a
manufacturer s' logo, part number, and bottom-side
markings indicating place of manufacture (usually
overseas, mostly in Southeast Asia), and a date code.
Some manufacturers also mark the parts with lot
numbers, identifying a part as being one of a finite group
of parts (usually a few thousand) which were processed at
a certain place and time.
Lot numbers provide the minimum amount of
identification necessary for law enforcement to be able to
trace back stolen parts. Some manufacturers have also
resorted to the use of chemical taggants in their printing
inks, much as the Bureau of Alcohol, Tobacco and
Firearms has required of gunpowder manufacturers.
Unfortunately, limited experience has shown that these
additives can interfere with the electrical functioning of
the part.
Another problem is sloppy inventory control. Many
of these companies have grown so quickly that proper
inventory tracking policies have not been insitituted.
Company philosophies emphasizing speedy, inexpensive
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production and quick product turnover are not conducive
to accurate record keeping. On numerous occasions
stolen chips have been recovered and confessions given,
when the company involved can't even prove anything is
missing! With many products substantial inventory
shortages have become so common that the companies
have just given up and accepted the losses as normal
inventory attrition which is factored into product
planning.
Apparent lack of commitment to reasonable
security goals also thwarts detection of theft. To many
companies the security department is a bastard stepchild
which is always well down on the list of priorities.
Apparently it is felt that security costs more than it's
worth. As a result, many crimes are never detected or, if
they are, are not reported. It's interesting to note that a
number of the largest companies have, to my knowledge,
never reported any integrated circuit thefts. Others
report them only when a thief is caught red-handed. Yet
companies which have made a substantial commitment to
improved security, especially Intel and Signetics
Corporations, which have their own full-time corporate
investigators (as opposed to just security managers), have
regularly reported, investigated, and actively prosecuted
thefts. Given the number and seriousness of the thefts
that are reported by such companies, one can only
conclude that the other companies are either unaware of
or do not report their own thefts. One can hardly
conclude that a company with tens of thousands of
employees suffers no thefts.
The ironies that occur as a result of this lax attitude
are worthy of note. On one occasion Sheriff's detectives
warned one of the largest manufacturers that, based upon
intelligence information, a major theft was planned for a
specific date in the near future. The potential thief, a
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convicted murderer, was identified. Although the theft
was thwarted, the thief was not fired, and reportedly still
carries out a thriving cocaine business.
Almost every time we serve a search warrant on a
chip black marketeer we find integrated cirucits made by
one large manufacturer, without appropriate paperwork
accounting for its acquisition. (The situation appears so
hopeless we don't even bother to try to determine if it's
stolen or not).
At another company, the security manager had
evidently been a thorn in the side of management for
some time, since he continually decried the lack of
funding for the security department, warning that this
prevented him from doing his job properly. When a
substantial theft occurred, management's response was to
effectively disband the security department and
decentralize security by transferring those responsibilities
to the unit managers of each production unit, thus
multiplying the opportunities for corruption.
(2) Unfinished Goods Thefts: Integrated circuits can't be
considered finished goods until they have not only gone
through the actual manufacturing and assembly process,
but also have been thoroughly tested. The testing process
is vital to the reliability of the chip, and serves to cull out
sub-standard parts (which do not meet the manufacturer's
published specifications), and grade those parts which
meet or exceed specifications.
Almost all United States semiconductors actually design and fabricate the
semiconductor chips themselves in their U. S. facilities. This is a capital and
technology intensive enterprise requiring a relatively skilled labor pool. After chip
fabrication on the wafers and initial electrical testing, however, the wafers are
usually sent to overseas plants. Here they are sorted and fabricated into the actual
protective plastic package which contains the chip. The chip is placed in the
package and connected by fine aluminurn or precious metal wires to the external
pins which are ultimately used to plug the device into a printed circuit board.
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These operations are relatively labor intensive, and the low wage rates overseas,
especially in Southeast Asia, make it cost effective to do this work there.
At this point the fully fabricated but untested devices are shipped back to
the United States for final testing, quality assurance work, and then marketing.
The industry practice is not to imprint the devices with logo, device type or lot
numbers until stateside final quality assurance testing is completed. Thus, any
unmarked part is presumptively either a reject or an untested part.
Since there can be an much as a 30% to 40% rejection rate at this stage,
especially for the more complicated devices, a good number of bad parts have to be
disposed of in some fashion. This is normally done by a reclamation process which
involves grinding up the parts in a shredding machine and flushing out the precious
metals in an acid bath. Although some companies maintain their own reclamation
facilities, most sub-contract this task out to metal reclaimers. Varying degrees of
security are used to insure the parts are in fact ground up.
These measures are taken because the manufacturers want to maintain a
reputation for quality. One obviously doesn't sell defective products with one's
logo on it. Nor would a company normally want to put its unmarked rejects on the
market. They could easily have counterfiet markings printed on them, and be sold
as good parts. The resulting warranty claims and injury to reputation would be
costly. As a result, the manufacturers almost uniformly maintain a policy of not
selling unmarked or reject parts. Thus an unmarked part should be presumptively
stolen.
If this were in fact the case, law enforcement's job would be easier.
Unfortunately, the truth is more complicated. Many parts which do not meet
specifications and are therefore technically rejects are useable for lesser tasks,
and thus still have value, often above their scrap value. For example, a 16K
EPROM (an eraseable, programmable memory with a 16,000 bit memory capacity),
may not meet factory specs, yet still have 4,000 or 8,000 bits of usable memory
capacity. As such it may not be usable in, say, computer or guidance system
applications, but it would be usable in less critical applications, for instance a
video game. If cost effective, the company might sell it with special customer
markings or no markings at all. In such a case the part could be remarked and
fraudulently sold as first grade product. Or, if a company were particularly cash
poor at a given time, it (or an unauthorized department head), might be tempted to
sell the unmarked parts for the short term benefit involved. This has happened on
numerous occasions.
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When combined with the fact that many reclaimers fail to destroy rejects
because their intact value is worth more than the scrap value, these practices have
created a more or less established grey market for unmarked parts (either untested
or rejects). Rejects are especially easy targets, since very sloppy inventory control
and security practices are used with respect to them. Often they are stored for
months in rows of large barrels in various out-of-the-way areas without security
protection. The same can be true, to a lesser degree, with untested parts. It's only
when the parts are market grade that security becomes serious.
With easy access to unmarked parts, parts counterfeiters can have a
relatively easy time of it. John Jackson used stolen or counterfeited printing
plates to mark his parts. Larry Lowery stamped his with "generic" device names,
not even bothering to put cn a logo. With the legal availability of unmarked parts,
proving guilty knowledge by one who possesses them is difficult.
All in all, however, the primary problem with the unmarked parts market
involves consumer safety, not national security. When defective chips installed in
medical equipment, airplanes, microwave devices and the like start failing, people
are going to get hurt. Hopefully the problem can be cured before that happens.
Trade Secrets
Trade Secrets thefts pose a potentially more serious security problemn
than theft of product, since such thefts provide the very means of obtaining the
technology upon which to establish an industry and develop competitive expertise.
I've heard it authoritatively said that the United States at one time possessed a ten
year lead over the Soviet Union in micro-electronics technology, but that that lead
has already shrunk to maybe five years, based primarily on the easy access the
Soviets have had to our technology. I'm not in a position to attest to the veracity
of that proposition, but what I have seen would certainly not negate it.
By its very nature Trade Secret theft is the most difficult to detect and
solve. What is taken is generally not a physical thing, but an idea. Original
documents, computer tapes, reticles, masks, and technical drawings can be easily
copied by any of a number of photographic or electronic means without anything
corporeal ever being taken. Hence, it is never missed.
California at least is among the few states that at least have a criminal
trade secrets theft statute. It reads as follows:
Penal Code Section 499c
(a) As used in this section:
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(1) "Article" means any object, material, device or
substance or copy thereof, including any writing, record,
recording, drawing, sample, specimen, prototype, model,
photograph, micro-organism, blueprint or map.
(2) "Representing" means describing, depicting,
containing, constituting, reflecting or recording.
(3) "Trade secret" means the whole or any portion or
phase of any scientific or technical information, design process,
procedure, formula or improvement which is secret and is not
generally available to the public, and which gives one who uses
it an advantage over competitors who do not know of or use the
trade secret: and a trade secret shall be presumed to be secret
when the owner thereof takes measures to prevent it from
becoming available to persons other than those selected by the
owner to have access thereto for limited purposes.
(4) "Copy" means any facsimile, replica, photograph or
other reproduction of an article, and any note, drawing or
sketch made of or from an article.
(5) "Benefit" means gain or advantage, or anything
regarded by the beneficiary as gain or advantage, including
benefit to any other person or entity in whose welfare he is
interested.
(b) Every person is guilty of theft who, with intent to
deprive or withhold from the owner thereof the control of a
trade secret, or with an intent to appropriate a trade secret to
his own use or to the use of another, does any of the following:
(1) Steals, takes, or carries away any article
representing a trade secret.
(2) Fraudulently appropriates any article representing a
trade secret entrusted to him.
(3) Having unlawfully obtained access to the article,
without authority makes or causes to be made a copy of any
article representing a trade secret.
(4) Having obtained access to the article through a
relationship of trust and confidence, without authority and in
breach of the obligations created by such relationship makes or
causes to be made, directly from and in the presence of the
article, a copy of any article representing a trade secret.
(c) Every person who promises or offers or gives, or
conspires to promise or offer to give, to any present or former
agent, employee or servant of another a benefit as an
inducement, bribe or reward for conveying, delivering or
otherwise making available an article representing a trade
secret owned by his present or former principal, employer or
master, to any person not authorized by such owner to receive
or acquire the same and every person who, being a present or
former agent, employee, or servant, solicits, accepts, receives
or takes a benefit as an inducement, bribe or reward for
conveying, delivering or otherwise making available an article
representing a trade secret owned by his present or former
principal, employer or master, or any person not authorized by
such owner to receive or acquire the same, is punishable by
imprisonment in the state prison, or in a county jail not
exceeding one year, or by fine not exceeding five thousand
dollars ($5,000), or by both such fine and such imprisonment.
(d) In a prosecution for a violation of this section it
shall be no defense that the person so charged, returned or
intended to return the article. (Emphasis added)
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Subsection (b) thus makes it a crime to take or copy any article containing
a trade secret. Subsection (c) makes it a crime to offer a bribe to another to
obtain a trade secret.
Note that Section 499c does not prohibit competitors from exploiting
trade secret where they honestly gain access to them, such as by analysis of and
reverse engineering from a finished, marketed product. The emphasis is on
dishonest acquisition. Nor is novelty required. As is explained in the Restatement,
Torts (1939), Section 757, Comment "b":
...A trade secret may be a device or process which is
patentable; but it need not be that. It may be a device or
process which is clearly anticipated in the prior art or one
which is merely a mechanical improvement that a good
mechanic can make. Novelty and invention are not requisite
for a trade secret as they are for patentability. These
requirements are essential to patentability because a patent
protects against unlicensed use of the patented device or
process even by one who discovers it properly through
independent research. The patent monopoly is a reward to the
inventor. But such is not the case with a trade secret. Its
protection is not based on a policy of rewarding or otherwise
encouraging the development of secret processes or devices.
The protection is merely against breach of faith and
reprehensible means of learning another's trade secret. For this
limited protection it is not appropriate to require also the kind
of novelty and invention which is a requisite of patentability.
Unfortunately, very few states have criminal trade secrets theft laws. In
an informal survey I did, I discovered that most of the western states where
significant semiconductor and defense plants exist have no trade secrets laws. I
see this as a serious deficiency.
Trade Secrets Thefts Case History: Peter K. Gopal
Peter K. Gopal first came to the attention of industry security personnel
in approximately January 1978. At that time, Intel Corporation learned from an
anonymous source that one of its biggest competitors, National Semiconductors
Corporation was in possession of a computer data base tape containing the design
for a late model Intel microprocessor chip. This chip, the 8085, was a new, original
Intel design representing a substantial advancement from previous microprocessor
design.
Investigation revealed an individual by the name of James Catanich, an
employee of National Semiconductor and their Microprocessor Division. Catanich
told investigators that Gopal had directed him to take a untitled data base tape for
inspection on National's computer system to see if the data contained in it was, in
fact, genuine. Catanich reported that he picked up this tape from one of Gopal's
associates and took it to National Semiconductor to view its contents with the use
of National computers.
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According to Catanich, upon viewing the contents he immediately
recognized that the data thereon was proprietary Intel design information and, in a
panic, took the tape off the machine and returned the tape to Gopal. However, it
appears that in his haste he forgot to erase the data from National Computer's
memory banks, and another National employee subsequently discovered the data.
That employee thereupon apparently sought to convince his superiors that he could
reverse engineer the Intel design, without telling them that he had acquired the
original Intel data. After the incident was discovered, the employee was dismissed,
as was Catanich. The corporate investigators, who later contacted the police
regarding the incident, were unable to directly link the information to Gopal.
National cooperated with Intel, returning all information to them. Intel let the
matter lie.
Thereafter, in September 1981, one Andrew Moore, an independent
manufacturer's representative, indicated in conversations to a National
Semiconductor employee that he represented a principal who owned original Intel
design information available for sale. The National employee immediately
contacted his superiors, who contacted Intel and law enforcement authorities.
An undercover investigation ensued. The National employee, Larry
Worth, re-contacted Mr. Moore, and set up a meeting with his principal, who turned
out to be Peter K. Gopal. Equipped with a body transmitter-recorder, Mr. Worth
and another undercover operator, Tom Dunlap of Intel Corporation, met with
Mr. Gopal on numerous occasions. Dunlap posed as a National Semiconductor
employee. Dunlap was used, rather than a police officer, because his technical
expertise was needed to authenticate the genuineness of the data Gopal proposed
to sell. During negotiations, Gopal offered to sell both chip designs and process
information for numerous Intel Corporation products. One of the products offered
was a highly proprietary state-of-the-art design not yet even marketed by Intel or
any other corporation. The purchase price proposed for the entire package was in
the millions of dollars. Gopal indicated that he had past and continuing access to
proprietary Intel designs via insiders within Intel corporation. He stated that he
had already sold his designs in Europe and the customers were quite satisfied with
their performance and authenticity.
The undercover operation culminated in late September 1978, with the
sale by Gopal to undercover operators of Intel 2114 chip designs. The 2114 is a
standard memory chip. Search warrants were prepared and served leading to the
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seizure from Gopal's business premises of scores of computer tapes, glass reticles,
masks and other design materials for Intel, National, Zilog and other corporations.
The value of the items seized ran well into the millions of dollars. Some of the
items seized were designs still in the research and development state, which had
never been marketed.
Also seized were business and personal records of Gopal's indicating
numerous trips to Europe in 1977 and 1978, including trips to the Soviet Union and
Poland. Business cards of numerous Soviet consular level and ministry officials
dealing in technology exchange and purchase were found. These items can be
summarized as follows:
(1) Money exchange certificate, in both Russian and English,
signed by Gopal, dated November 28, 1977, showing a
transaction wherein Gopal exchanged $100.00 U.S. for
71.48 rubles. From personal experience I know that the
maximum amount of foreign currency one can bring into
the U.S.S.R. is $100.00. One must exchange it for rubles
at the port of entry and then re-exchange the rubles for
dollars when you leave. Thus the certificate indicates
Gopal entered the U.S.S.R. on November 28, 1977.
(2) Russian coins of various kopek denominations.
(3) Diary entries showing trips to Vienna in August, October,
and November 1977, plus airline tags, etc., for Austrian
airlines.
(4) Diary entry of November 1977, with the following name
and address:
Zdzilaw Przychodzien
Deputy Director
Ministry of Machine Industry
36 Krucza Street
00-921 Warsaw, Poland
(5) Separate personalized business cards of the following
persons, listing their address as "Ministry of Electronics
Industry," Usieuicha 24/2, Moscow 125315, Tel. [phone]:
(a) Alexander I. Rublsov
Dipl. Engineer Semiconductors
(b) Alexander S. Ivanov
Mgr. of Special Technological Equipment
Department
(c) Leonid F. Dymov
Chief of Department
(d) Vasily V. Kurdin
Director of Marketing
(e) Gennady V. Verklovenko
Sales Mgr. Semi-conductors
(6) Separate personalized business cards, listing the address
as "V/O TEchnoproimport" Moscow C-200, Smolenskaja -
Semaya Place 32/32, Tel. [phone]":
(a) L. A. Pavlov
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Expert (This card bears the pencil-written words
"Terms of contract negotiation in what appears to
be Gopal's handwriting.)
(b) Valerie N. Kodsnev
Dipl. Engineer
Separate personalized business cards, listing the address
as the Soviet Consulate at 2790 Green Street, San
Francisco, California [phone]:
(a) Stanislav N. Nosov
Commerical Counsel
U.S.S.R.
(b) Yuriy V. Palov
Vice Counsel, Science, Technology, and Education
Exchanges.
Business records seized indicated continuing international transactions
between Gopal and Austrian and Swiss firms. The primary Austrian firm, Sacher-
Gesellschaft AG, of Vienna, Austria, was headed by Dr. Rudolf Sacher. He was
also a one-half shareholder with Gopal in Gopal's business, Semiconductor Systems,
International, Inc. Subsequent investigation of the Swiss firms indicated they were
probably nothing more than shell corporations, serving as middlemen for the
transactions in which they were involved. Efforts to track the course of the
transactions past the Swiss firms were fruitless. Gopal has refused to cooperate
with the authorities.
The investigation continued after Gopal's arrest. A business associate was
located who told authorities that Gopal had bragged of having purchased certain
integrated circuit testing equipment and selling it to Poland via one of his Swiss
intermediaries. Gopal bragged to him that he had received three times the fair
market value of the equipment in cash, and had successfully smuggled the cash
back into the United States without interdiction by Customs or Commerce
officials. A check of available business records confirmed that Gopal had indeed
acquired the equipment in question and had sold it, but its ultimate purchaser could
not be determined. My understanding is that the Department of Commerce, after
a diligent investigation, concluded that it was unable to prove a violation more
serious than a misdemeanor, for which the only penalty was suspension of export
licensing privileges. Since Gopal had, by that time, been effectively blackballed
from the indsutry, it was felt that such a prosecution would not be worth the
effort.
Gopal and his co-cospirators were charged with various state law
violations, including conspiracy, bribery to obtain trade secrets, and theft and
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possession of stolen trade secrets. (It is interesting to note that during one of the
tape recorded conversations Gopal had with undercover operatives, he offered
Larry Worth, the National employee, ten thousand dollars each for each late model
data base tape Worth could smuggle out of National Semiconductor. Based upon
these conversations, the bribery count was included.) This prosecution represented
one of the first major prosecutions under California's Trade Secret Theft Statute.
That statute, as previously pointed out, is a departure from traditional
common law notions of property subject to theft. At common law, property must
be physical to be subject to theft. The Trade Secrets Law expands this concept of
property by specifically making ideas which qualify as Trade Secrets property for
purposes of penal statutes. This statute was designed to fill some of the logical
gaps left in the law by existing patent and copyright legislation. It protects ideas
which are not patentable nor copyrightable, but which have substantial business
value to its owner or competitors. For instance, a semiconductor device, such as a
"memory" device would not be patentable because it is not a product of new
technology, but merely builds upon existing technology. Under copyright law it
would not be copyrightable even though such a design is in large part based upon its
designer's creativity. Yet such a design can and increasingly does represent the
expenditure by its owner of hundreds of thousands, even millions, of dollars of
manpower, time and materials, before a single chip can ever be produced.
After initiation of the Gopal prosecution a novel problem presented itself
and led to the suppression of all of the physical evidence against Gopal. While
serving the search warrant the police had taken with them technical
representatives of Intel and National Semiconductor in order to help identify the
numerous items at Gopal's business which might be stolen. The police officer
involved, having no technical background, had no idea of what they were looking at,
or for. Trained engineers were required merely to identify those items which
belonged to the victims,. The majority of the items seized were reticles,
photographs and tapes. None of them obviously had the word "stolen" on them.
Many had the victims' logos and other identifying criteria deleted. Only an expert
would be able to identify ihem.
The trial court ruled that the police had abdicated their responsibiilty of
personally conducting the search by using these outsiders and suppressed all the
evidence. Thankfully, on the People's appeal, the Appellate Court reversed and
reinstated the evidence to the case.
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After literally years of motions and other proceedings the case finally
came to trial in November 1980. As neither side was comfortable with the prospect
of a jury of lay people understanding the complex evidence being presented, both
agreed to trial before a judge only. In the six months that followed extensive
technical testimony was required to establish the case and to identify the items in
Gopal's possession as being copies of originals in the possession of Intel Corporation
and the other victims. On one occasion the court had to be recessed to the
Computer Facilities room at National Semiconductor Corporation so that computer
tapes could be played and displayed to court and council for analysis. Forensic
analysis, including comparison of microscopic defects in the stolen reticles verses
Intel and Zilog master reticles, consituted key evidence in the case. It was thus
proved that the copies in Gopal's possession were directly made from original
proprietary design data in the custody of one of Intel's sub-contractors and
accessible to an employee who was a friend and part-time employee of Gopal's.
Gopal was convicted by the court of six counts of receiving and possessing
stolen trade secrets, bribery and conspiracy. He was sentenced to two years, eight
months in the state prison in California, but is currently free on bail pending his
appeal, which is expected to take at least a year. The transcript of the
proceedings has not yet been transcribed, it was so voluminous. Three and one-half
years after the offense and one year after the conviction, Mr. Gopal has yet to go
to jail. Moore and Catanich, Gopal's co-conspirators, were each convicted by their
plea of guilty to one count, one felony count. Each received probation and a
substantial fine. The actual thief of the Intel trade secrets had his case dismissed
for insufficient evidence, which was purely circumstantial and insufficient to
support a reasonable expectation of conviction.
Copyright Protection
The U. S. Copyright Office has maintained a general rule that it will
accept and maintain registration for a chip design incorporated into a schematic
diagram, mylar sheet, photolothographic reticle or mask, or similar representatives
in the nature of scientific or technical drawings. However, chip makers are
hesitant to rely solely on registration of these for at least three reasons:
First, the final chip configuration represents the integration of a number
of individual "drawings," so that the final product may be different from each
individual layout itself. Not only are revisions made, but the total is more than
just the sum of its parts.
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Secondly, the diagrams, sheets and masks which the Copyright Office will
register are not items which are exposed by the chip maker on the market. You
can't buy them. When unauthorized duplication does occur, it is usually done by a
primarily photographic process of "reverse engineering" from the finished chip, not
from the design layout itself. Since the items registered were not in fact copied,
it's questionable whether copyright protection applies under Section 113(b) of the
Copyright Act. In the past, the Copyright Office has refused to concede that the
chip itself is a published version of the drawings, so that while the drawings were
protected, the chips were not.
Finally, even if copyright protection is available, proof of infringement
poses difficult problems. Those who reverse engineer commonly alter the design
cosmetically to disguise its origins from all but expert analysis. For instance, in
the Gopal case, where stolen designs were used, naturally all logos and other unique
company identifiers were removed. In addition, memory arrays were flip-flopped
in a mirror image manner, address arid input-output buffers were enlarged, and
metal mask circuitry was rearranged in visually different but functionally
irrelevant ways. The resulting chip would have been created and sold in plastic
protective carriers so that a sample device would have to be purposely dissected
and technically analyzed for the offense to be discovered. Once discovered the
offender would undoubtedly argue no violation since substantial cosmetic
differences exist ed.
Patent Protection
Although I don't presume any expertise in patent law, I think it's fair to
say that the standards of patent protection, whether under state or federal law, are
much more severe than those of copyright protection. One must show (1) novelty,
(2) uniqueness, and (3) improvement over the prior art, which is not required for
copyright purposes.
The standards of novelty and invention are high, and cumbersome to
obtain. Although certain basic building blocks of semi-conductor technology, such
as the semi-conductor transistor or "gate," are patentable, the patent process is
generally not amenable to design advances. Like a novelist using established words
and alphabet, the chip designer's genius is in his creative mastery and manipulation
of the basic building blocks which enable him to get from a functional point A to a
functional point B in the most electrically efficient and mass-producible package
he can. Continual revision and redesign is the rule. A design which is state-of-the-
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art today may be obselete in the market place next year. The tedious patent
process does not fit into such an industry.
Suggested Responses To The Problem
Although the problems outlined are often centered in California, they are
becoming increasingly national in scope as the industry, spreads out across the
country. Most western and eastern seaboard states have an electronics
manufacturing industry of some sort. Even relatively isolated states as Idaho and
Utah have significant branch manufacturing facilities run by companies based in
California. This trend will continue as the industry seeks new locations with
relatively cheap labor pools and inexpensive employee housing opportunities. Both
of these commodities are becoming extremely scarce in California.
As a result of this, it appears unreasonable to expect local law
enforcement agencies to be up to the job of such specialized investigations. Some
sort of national or regional approach is necessary.
priorities which would address the problem:
(1) Increased Staffing of Investigative Personnel In Export
The following is a list or
Regulatory Agencies And Amendments Of Their Enabling
Legislation
Neither the U. S. Customs Service or the Export Administration
Compliance Division of the Department of Commerce is adequately staffed to
enforce existing laws regarding export of high technology goods.
The Customs Service's mission is not really even defined to include export
activities. Its emphasis has always been monitoring of imports. It is suggested
that amendments of applicable law to expand its mission in this area is desirable.
Many of the export laws now on the books provide inadequate penalties to
deter criminal conduct. As was mentioned with respect to the Gopal case, an
export violation discovered there was only a misdemeanor, for which the only
penalty was suspension of export licensing status. A re-evaluation is in order.
(2) Creation Of National Or Regional High-Technology
Crimes "Task Force" Or Information Clearinghouse
The Santa Clara County experience suggests that creation of a central
intelligence clearinghouse is a mandatory first step toward combatting high tech
crime. The "gray market" in particular consists of large numbers of interconnected
companies and individuals, whose activities and relationships can only be
establsihed by a continual monitoring effort, much like a narcotics bureau. Since
these people operate on at least a regional scale, it is impossible for a local agency
95-929 0 - 82 - 33
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to keep track of them. By a pooling of information into a central intelligence unit,
a broader, more complete picture can be constructed. From this vantage point, the
major problem can be isolated and addressed.
To date the Santa Clara County Sheriff's Organized Crime Unit is the only
such unit in the country that I'm aware of. Despite effective efforts by those in
the unit, its staffing level (less than 5 people), is insufficient to deal with the cases
arising just in Santa Clara County, much less in the region as a whole.
(3) Mandating Crime Reportg
If a centralized intelligence unit were created, laws making reporting of
thefts to such agencies mandatory would be useful in gathering information and
assessing patterns of criminal activity. Sanctions for violations need not be
criminal sanctions.
(4) Electronics Broker Regulation Legislation
The obvious "choke point" of the gray market is the broker. Without the
unscrupulous broker, the thief would have no one to sell to, and thus no reason to
steal. If the brokers can be controlled, so can the crime problems. This should be
the focus of the investigative efforts. The restrictions imposed need not be much
more onerous than those almost everywhere imposed on pawnbrokers. Among the
possibilities include the following:
(a) Federal broker licensing statutues: Require all
electronics parts brokers to be licensed, conditioned upon
identification of all parties holding an interest, disclosure of all
current business and inventory locations, agreement to keep full
and complete records of all transactions, to follow specified
procedures to assure property acquired is not stolen, and to
abide by other applicable laws and regulations, on pain of
criminal penalties.
(b) Inspection statutes: Enabling designated law enforcement
agencies access to brokers inventories and business records to
assure compliance with the rules set forth in the licensing
regulation. This should specifically include authority to search
and seize with probable cause, but without a warrant. Again,
this is generally no more severe than current pawnbroker
statutes.
(c) Prohibition against possessing, buying or selling unmarked
integrated circuits: Or other specified electronic devices,
except by the manufacturer or its designated agent for
scrapping purposes.
(d) Prohibition against remarking or counterfeiting integrated
circuits, etc.
(e) Creation cd an evidentiary presumption: That a broker in
possession of specified stolen electronics goods has knowledge
of its stolen character, unless he can show excercise of
reasonable efforts to assure himself it was not.
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(5) Enactment Of A Federal Trade Secrets Law With
Criminal Penalties
Such a law, patterned on traditional civil law concepts (as was California's
criminal statutes), would help fill the gaps in federal patent and copyright laws,
and would give law enforcement an additional tool with which to combat espionage.
In specific cases, prosecution under such a law might be much more manageable
than having to prove actual diversion of classified information to a foreign power.
Such a law could be tailored to fit federal subject matter jurisdictional
requirements, if necessary, and would lend uniformity to an area which now has
only spotty coverage.
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pepartaant 4aumice
STATEMENT
OF
THEODORE WAI WV
ASSISTANT UNITED STATES ATTORNEY
CRIMINAL DIVISION
CENTRAL DISTRICT OF CALIFORNIA
BEFORE THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
UNITED STATES SENATE
CONCERNING
UNITED STATES v. EDLER INDUSTRIES, INC., AND VERNON EDLER
UNITED STATES V. SPAWR OPTICAL RESEARCH, INC.,
WALTER 3. SPAWR AND FRANCES A. SPAWR
UNITED STATES V. ANATOLI TONY MALUTA AND SABINA D. TITTEL,
SUB NON, UNITED STATES V. WERNER J. BRUCHHAUSEN
ANATOLI TONY MALUrA, SABINA TITTEL AND DIETMAR ULRICHSHOFER
MAY 5, 1982
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Good morning, Mr. Chairman and members of the Subcommittee,?
my name is THEODORE WAI WU. I am an Assistant United States
Attorney of the Criminal Division, Central District of Califor-
nia. I have been investigating and prosecuting illegal exports
of Munitions List articles and controlled technology and pro-
ducts since 1976. In this respect I have worked closely witt
special agents from the U.S. Customs Service and the Compliance
Division of the Commerce Department, as well as concerned membErs
of other federal agencies.
My testimony today will focus on the three cases I handled
in the area of illegal technology exports.
Mr. Chairman, with your permission I would like to read
the salient points of a prepared statement.
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UNITED STATES v. EDLER INDUSTRIES, INC., AND
VERNON EDLER (CENTRAL DISTRICT, CALIFORNIA)
A. The Initiation of the Investigation
The federal investigation into the technology export
activities of Edler Industries, Inc. (Eli) of Newport Beach,
California, was instituted by the U.S. Customs Service in
Los Angeles in July 1975. The Office of Munitions Control
(OMC) of the U.S. Department of State had asked Customs to
investigate whether Eli was engaging in illegal export in
violation of the International Traffic in Arms Regulations
(ITAR) and 22 U.S.C. ? 1934, then in effect. Thus in July
1975, pursuant to a search warrant, Customs agents seized
numerous corporate records and documents from Eli. Subse-
quently, the matter was referred to the United States
Attorney's Office in Los Angeles and was ultimately assigned
to me. A number of witnesses were interviewed; they included
several former Eli technical and non-technical employees, as
well as OMC licensing officials and a government solid fuel
rocket expert.
B. History of Proceedings
On July 12, 1976, a federal grand jury in Los Angeles
returned an indictment against Eli, and its president-owner,
Vernon Edler, for illegally exporting controlled technical
data and assistance to France, in violation of then 22 U.S.C.
S 1934, now 22 U.S.C. S 2778(c) (Section 38
of the Arms Export Control Act (AECA)); the Internationa3.
Traffic in Arms Regulations (ITAR) and 18 U.S.C. S 1001.
Two months later, a federal jury found both the corporation
and Vernon Edler guilty of exporting, without license, to the
Societe Europeenne de Propulsion (SEP) of France, certain
technical assistance and data related to the fabrication of
graph se and carbon-carbon advanced lightweight material
components having missile and aerospace applications. El/
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was sentenced to pay a $25,000 fine and Vernon Edler receiveil
a two-year prison sentence. The execution of Vernon Edler's,
prison sentence was suspended, and he was placed on probation?
for five years on the condition that he serve ten (10) weelt,
ends in jail and donate 1200 hours of work to a charitable
organization. Thereafter, Eli and Vernon Edler appealed theirc
convictions. On appeal, the Ninth Circuit Court of Appeals-
remanded the case for a new trial, on the basis that the triaa
court should have permitted Eli and Vernon Edler to offer
proof that the technical information exported to SEP had non-
military uses. The court of appeals opined that evidence
concerning non-military applications was relevant to the
question "whether a defendant knew or should have known that
the recipient of the exported information would use the infor-
mation to produce or operate Munitions List articles."
appellate court also concluded that Eli and Vernon Edler shoUlt
have been allowed to show a lack of significant relationship.
between the technical information and Munitions List items.
Accordingly, the case was remanded for a new trial.
On February 7, 1979, as a result of a new trial, Eli
and Vernon Edler were convicted by a federal jury of illegally
exporting Munitions List technical data to SEP and they
received the identical sentences as those previously imposed
by the district court. Eli and Vernon Edler again appealed
but the appellate court affirmed their convictions. Their
subsequent petition for certiorari was denied by the United
States Supreme Court.
C. The Exports and Technology Involved in
Edler
From as early as 1968 through 1976, Vernon Edler was
owner and president of Eli, a Newport Beach aerospace
engineering firm. He was the decision-maker of the corporation
and had close, daily working contacts with its engineers and
technicians. Eli began as a machine shop and gradually
evolved into an aerospace manufacturing and engineering firm
engaged in the fabrication of missile and rocket components --
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particularly nozzle components for missile and rocket motors.
Eli had from time to time performed Government defense con-
tracts and worked on rocket motor components for such
missiles as the Polaris, Minuteman, Tartar, Hawk and Navy
Standard Arms. Sometime during 1968-1969, Vernon Edler
applied to OMC for approval for Eli to enter into a Tape Wrap
technical assistant agreement with a French entity called
Societe d'Etude de la Propulsion par Reaction (SEPR) of
Paris, France. (Tape Wrapping was then a sophisticated
technical process for making components out of lightweight
silica preimpregnated material.) Under that agreement, Ell
would provide SEPR with technical assistance related to the
fabrication of tape wrapped components for rocket motors.
The application was disapproved and Vernon Edler was informed
by OMC that the disapproval was based on foreign policy and
national security reasons. Specifically, OMC informed Vernon
Edler that "the policy of the United States was not to assist
a foreign country in the development of nuclear strategic
delivery capabilities," and that the assistance which Edler
proposed to provide REPS was in the "strategic delivery area.."
Notwithstanding OMC's refusal to grant an export license,
ELI implemented the Tape Wrap program and provided SEPR with
technical data, drawings, job travelers, and conducted
critiques with SEPR engineers and technicians from France on
tape wrap processes related to the fabrication of nozzle
throat inserts and other nozzle components for missiles and
rockets. French engineers and technicians from SEPR made
technical visits to Eli facilities and Vernon Edler sent his
manufacturing supervisor to SEPR's missile manufacturing
site in Lyon, France, to furnish technical assistance to
SEPR. The tape wrap program was completed in 1971. EII-SEPR
contacts continued, however.
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In January 1974, Vernon Edler sought OMC export
license to enter into a Lightweight Technical Assistance
Program (LTAP) to provide the Societe Europeenne de
Propulsion (SEP) with technical assistance related to
lightweight material processing for the production of rocket
motor components. According to former Eli employees, SEP and
SEPR were so related that the technical personnel whom Eli
dealt with at SEPR under the Tape Wrap agreement were also
representatives of SEP. To Eli, SEPR and SEP were one and the
same. Just five months later in June 1974, EII applied for
OMC authorization to export carbon-carbon technology to SEP
under a Carbon-Carbon Technical Assistance Program agreement
(C/CTAP) which Eli, without OMC's knowledge, had already
sig.led with the French. Based on the C/CTAP, Eli was now to
provide more sophisticated technical know-how that related to
the fabrication of carbon-carbon rocket motor components. The
technology involved in the production of carbon-carbon
material components was a technical upgrade compared to the
know-how covered by the earlier LTAP and the Tape Wrap agree-
ment.
While the export license applications for the LTAP and
C/CTAP were still pending, an OMC licensing officer informed
Vernon Edler that those technical assistance programs were
covered by OMC licensing requirements and that Eli was not to
act on them without "specific written approval" from the State
Department. However, unbeknownst to OMC at the time it gave
this caution, Eli was already well into the performance of
the LTAP and C/CTAP. French engineers and technicians from
SEP were given detailed technical instructions, job travelers,
drawings, data on specific gravity measurement and calcu-
lations, configuration analysis, and on-site demonstrations
on how to process lightweight silica, carbon and graphite
ablative materials for the fabrication of rocket motor com-
ponents. Eli technicians again went to SEP manufacturing
sites to observe and critique material fabrication processes
for nozzle throats, entrance caps and exit cones. Eli .
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personnel saw those components being qualitatively verified
at SEP for quality acceptance. According to one Eli engineer,
if accepted, those components would be put on the applicable
missiles. At another SEP manufacturing facility, an Eli
engineer observed exit cones of the size and configuration
which he associated with the submarine-launch Polaris missile-
Another Eli engineer saw exit cones at various stages of com?
pletion as well as completed nozzle assemblies attached to
rocket motors. Indeed, Eli personnel demonstrated to Frenclia
technicians at SEP "techniques" of fabricating hardware
"associated with missiles and rockets." As trial testimony
showed, Eli personnel knew SEP was buying Eli technical
knowledge to fabricate aerospace products. Under the carbo
carbon agreement, programs which involved carbon/carbon
rocket motor components were assigned various female names.
For example, there was the "Irene" program which related to
exit cones for solid fule rocket motor; "Marcella" which
pertained to nozzle throats; and "Nancy" which concerned
entrance caps.
According to the trial testimony of one former Eli
employee, the diameters of the nczzle throats and entrance
caps of the "Kathleen" program fit the same "ballpark as a
Polaris or Poseidon" submarine-launch ICBM. This witness
testified he had no doubt that the carbon/carbon agreement
was to give SEP technical know-hew and manufacturing tech-
niques to fabricate rocket nozzles and that SEP's attempt
to reach"highdensity" for the carbon/carbon material
indicated to him that the technology transferred to the
French could only be used for rocket motors.
Throughout the summer of 1974, French engineers con-
tinued to receive instructions from Eli on "fabrication
parameters" and were shown manufacturing techniques for the
components under the various "girl" programs. Vernon Edler
himself participated in these activities.
In October 1974, OMC informed Vernon Edler that
Eli's license applications for the LTAP and C/CTAP agreements
had been disapproved. Yet, notwithstanding OMC's refusal to
grant approval, Vernon Edler continued to export to SEP the
controlled technical information.
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Two government missile experts testified at trial
that the technology Eli transferred was significantly and
directly related to rocket nozzles for military missiles.
According to one U.S. Air Force rocket expert, the data
exported by Eli "uniquely speak to, without exception, rocket
nozzles." Indeed, some of the techniques transferred to SEP
were then currently used in a major U.S. missile program,
according to an expert from the aerospace industry. Vernon
Edler himself admitted to a Customs special agent in my
presence that he (Edler) was aware that SEP was involved in
missiles and missile components production, and he believed-
that the technology Eli conveyed to SEP would be utilized In
that vein.
The Edler case represents the first successful govern-
ment prosecution of illegal exportation of Munitions List
II
UNITED STATES V. SPAWR OPTICAL RESEARCH, INC.
WALTER J. SPAWR AND FRANCES A. SPAWR,
No. CR 80-789-NNE (C.D. Cal. 1980
A. The Investigation
In February 1978, Compliance Division, Office of
Export Administration (DEA), Department of Commerce, received
a report of possible interest from a government agency regard-
ing the alleged sale of laser mirrors to the Soviet Union by
Spawr Optical Research, Inc., (Spawr Optical), Corona, Cali-
fornia, in violation of the Export Administration Act of 1969,
as amended. The referring agency gave its approval for Compli-
ance Division to contact the concerned citizen who furnished
the information on the alleged violations. DEA licensing of-
ficers confirmed that laser mirrors, of the type described in
the report, were controlled by the Commerce Department for na-
tional security reasons and would not be authorized for export
to the Soviet Union. Licensing officers also confirmed that
Spawr Optical had applied for authorization to export certain
high energy laser mirrors to a research institute in the USSR
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in 1976, and that the license application had been rejected
for national security reasons. Further research revealed the
license application had specified 14 water--cooled laser optics
(mirrors) of various diameters valred at approximately $30,800.
One week later, a special agent from the Compliance Division
and a Customs special agent (from the San Francisco Customs Of-
fice) contacted the concerned citizen and two former employees of
Spawr Optical, who furnished substantive facts to support the
previous report. Based on this information, a federal grand
jury subpoena was issued in March 1978, for Spawr Optical
corporate records and documents related to the export of laser
mirrors.
On March 9, 1978, special agents from Customs and the Cum-
merce Department interviewed Walter d. Spawr and Frances A.
Spawr at the company premises and obtained a voluntary, signed
statement from Frances Spawr. According to Frances Spawr's
statement, she had undervalued several shipments of laser mir-
rows to a Wolfgang Weber in West Germany at the latter's recinsEs-
Following the interview, the agents served the grand jury
subpoena on Frances Spawr as the company's custodian of records-
Investigation then followed.
Subsequently, Special Agent Rice of the Commerce Department
Compliance Division, initiated a foreign inquiry through the LLB..
Consultate General in Frankfurt, West Germany concerning the
disposition of the Spawr laser mirrors exported to Weber. Weber
admitted that the mirrors had been transshipped to the Soviet
Union and agreed to come to the United States to disclose to the
Compliance Division his involvement in the transshipment scheme._
In September 1978, Weber traveled to the United States sordi
was interviewed by special agents of the Compliance Division,
at-which time Weber disclosed in detail his participation
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with Walter Spawr in,the transshipment of Spawr laser mirrors
to Mashpriborintorg, a state purchasing agency of the Soviet
Union. Thereafter, the matter was referred to the United States
Attorney's Office in Los Angeles for consideration, and in the
spring of 1979, I was assigned to oversee the investigation and,
if appropriate, to prosecute the case. Investigation continued
and additional witness interviews were conducted by Customs and
Compliance Division special agents and myself up through the
summer of 1980. In August 1980, Compliance Division Special
Agent Rice and I went to Switzerland in an attempt to elicit
the cooperation of the Swiss Government in our investigation of
Spawr Optical and ofanother export control matter. Represent-
atives of the Swiss Government declined to lend assistance
based on their political neutrality and the restrictions of
their own business secrecy law.
Investigation and trial evidence disclosed that Spawr
Optical held a DOD facility security clearance and had performed
contracts on government defense programs. Walter Spawr and the
company had performed laser optics polishing work for companies
like TRW and Rocketdyne, and government agencies such as Los
Alamos Science Laboratory, Redstone Arsenal and Naval Weapons
Laboratory. Moreover, Spawr had furnished the Air Force Weapons
Laboratory at Kirtland APB, New Mexico, high energy laser mirrors
of the identical specifications as some of the mirrors illegally
sold to the Soviet.Union.
B. The Indictment
On September 3, 1980, a federal grand jury returned
a 15-count indictment against Spawr Optical, and Walter J. and
Frances Spawr, charging conspiracy, submission of false state-
ments to the government and illegal exportation of laser mir-
rors to the Soviet Union.
C. The Exports and the Technology
Witness statements and evidence presented at trial
established the following:
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In 1974 and 1975, Spawr Optical, led by its president
and founder, Walter J. Spawr, sought additional markets for
the Spawr laser mirrors in Europe. One of the firms contacted
there as a possible sales agent was Oriel GmbH, Darmstadt,
West Germany, whose managing director was the previously men-
tioned Wolfgang Weber. Weber was a young and ambitious en-
trepeneur with good contacts in the USSR. In early 1975,
Weber became Spawr's West German sales representative. Weber
testified that he went to Moscow in late 1975 for the purpose
of exhibiting Spawr mirrors in the Soviet Union with Walter
Spawr's approval_ Initial contacts between Weber and repre-
sentatives of Mashpriborintorg were encouraging to Weber, and
he contacted Walter Spawr by telerhone in December 1975 to
convey the Soviets' interest in him. According to Weber, Sp6aur
was enthusiastic about possible large sales of his laser mirmers
to the Soviet Union.
Weber testified that, in about January 1976, he obtained
a large order for Spawr Optical water-cooled laser mirrors
from Mashpriborintorg. These mirrors of various diameters
ranging up to twelve (12) inches, were the finest manufactured
by Spawr Optical, which was noted in its field for the superior
quality of its mirror surfaces. Weber transmitted the order
to Walter Spawr after receiving his approval in January 1976.
Almost immediately thereafter, Walter Spawr assigned a production-
order number to the Russian order, and work was begun on fill-
ing the order. Even though the firm's general manager had over
one year earlier warned both Walter and Frances Spawr of the
U.S. Department of Commerce requirement for export licenses for
such laser mirrors, no export license application was submitted
by the firm to the Department of Commerce for export of the
mirrors.
The majority of the laser mirrors in the January Russian
order were exported to Weber in West Germany in July 1976. Ex--
port documents, containing false statements, were executed by
the Spawrs to facilitate the shipments and to deceive U.S.
authorities as to the value of the contents and shipments, and
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thereby to evade scrutiny and export licensing requirements.
Weber testified that, after the arrival of the mirrors at Frank-
furt Airport, he arranged to forward them to Moscow. Weber
subsequently learned from the Russians that they were very
pleased with the Spawr mirrors they received, and he communi-
cated the Soviets' satisfaction to Walter Spawr. Weber also
testified that he called Walter Spawr on several occasions
from Moscow concerning the mirrors for Russia. This was
confirmed by the firm's former secretary, who was told of the
:Moscow calls by Frances Spawr.
In April 1976, Weber received another large order for
additional Spawr water-cooled mirrors from Mashpriborintorg.
The order included mirrors of various diameters ranging up to
15.74 inches. Weber was told by the Russians that these mirrors
would be used by the Lebdev Institute, Moscow, for "laser experi-
mentation." As he had done with the first order, Weber sent the
order to Walter Spawr and informed him of the intended customer..
According to a former Spawr Optical employee, Frances Spawr toad
her that the Spawrs believed they should apply for a Commerce
export license to cover the larger mirrors in the second order
because there was a possibility that the larger mirrors would be
detected and stopped by Customs officers. An export license
application for 14 of the 29 mirrors odered by the Soviets in
April 1976 was sent to the Commerce Department's Office of Export
Administration in May 1976. In October 1976, the license appli-
cation was denied for '"national security reasons." The Spawrs
were expressly informed by Commerce in writing that
"these laser mirrors . . . have signifi-
cant strategic spplications. They have
been denied in view of the predominant
use with CO2 lasers which have important
applications in the military arena."
Weber testified that, during the period before the
license application rejection, he discussed with Walter Spawr
what to do if the application was denied. According to Weber,
he and Spawr devised a plan to send the mirrors to Switzerland,
from where they would be forwarded to the Soviet Union. A
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former Spawr Optical secretary testified that Frances Spawr
told her that if the Department of Commerce did not approve
the license application, they would ship the mirrors to Russia
anyway, by way of Switzerland.
After the application was rejected by the Commerce De-
partment, Spawr Optical continued with the fabrication of the
mirrors for the second Russian order. Walter Spawr cautioned
his employees to no longer refer to the pending order as the
"Russian" order as they had formerly done. As part of the
conspiracy to export the second order of mirrors to the Soviet
Union without licenses and to deceive U.S. export licensing
people, Walter Spawr asked Weber to send him an order cancella-
tion on that second Russian order; but to really keep the order
open. Testimony and documents obtained at the firm showed that
it was Frances Spawr who received from Weber the address of
the Swiss freight forwarder used to divert the mirrors to the
USSR.
By February 1977, Spawr Optical had completed the second
Russian order, and had begun to ship the mirrors to Switzerland
in four shipments. In order to avoid scrutiny by U.S. author-
itites, Frances Spawr, as she had done earlier with another
employee, instructed the firm's new secretary to falsify the
value of the mjrrors on Shipper's Export Declarations. Francos
Spwr told her secretary to place on the export declarations
the false value of $500 or less per mirror. This Was the
same tactic used by the Spawrs to effect the July 1976 ship-
ments. The second Russian order had a price tag of about
$40,000.
On December 12, 1980, after 13 days of trial which spanne-d
over a five-week period, the Spawrs and their firm were varicmtsiy
convicted by a jury of conspiracy, submission of false state-
ments, and illegal exportation of laser mirrors to the Soviet
Union. Frances Spawn was sentenced to five years imprisonment_
Her sentence was suspended and she was placed on five years pro-
bation. Walter Spawr was sentenced to ten years imprisonment?
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with all but six months suspended; he was also placed on five
years probation. Both Mr. and Mrs. Spawr were ordered to con,
tribute 500 hours to a charitable organization. The firm wee
fined $100,000.
The Justice and Commerce Departments and the Customs Ser-
vice considered the prosecution to be an important milestone
in export control enforcement because of the seriousness of
the offenses and because of the important laser optics tech-
nology made available to the Soviet Union as a result of the
unlawful exports. Colonel Bob L. Francis, USAF, Commander of
the Air Force Weapons Laboratory, Kirtland AFB, assessed that
the mirrors exported by Spawr Optical not only advanced the
laser mirror technology in the USSR, an area where the Russians
were felt to be deficient, but it also saved the Soviets mil-
lions of dollars and nearly one hundred manyears in research
and development costs. Even though the commercial value of
the mirrors was relatively low (about $60,000), the technological
value received by the Soviet Union was significant. According
to Colonel Francis:
"The free world, and especially the United
States, has actively pursued the technology
investigations of high energy lasers as to
their weapons lethality capabilities. In
this pursuit it became evident that sophis-
ticated heat exchangers using water cooling
of the mirrors substates were very important
and necessary elements. This eight-year
development effort, of improving and per-
fecting the heat exchangers on water-cooled
laser mirrors, has involved many millions of
dollars and nearly a hundred manyears of R&D
effort. The illegal sale by Spawr, et al,
has now provided the Soviets with over 50
water-cooled high energy laser mirrors as
well as the capability to disassemble and
back engineer this mirror heat exchanger
technology."
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The assessment that the mirrors illegally exported to the So-
viet Union had real potential military application paralleled
what was evidently known to the Spawrs at the time of the corn-
summation of the offenses. In October-November 1976, the Spawrs
had asked of their prospective secretary during an employment
interview how the latter felt about working for a company that
makes things that might harm people.
In the respect of national security interest, then, the
Spawr Optical prosecution was particularly important to the gow-
ernment. It also resulted in the largest fines and longest prisrua
sentences levied for export control offenses up to that time.
It should be noted that the assistance of concerned cit3.--
zens and cooperative witnesses were crucial to the successful
investigation and prosecution of the Spawr Optical case.
III
UNITED STATES v. WERNER J. BRUCHHAUSEN,
ANATOLI T. MALUTA, SABINA D. TITTEL, AND
DIETMAR ULRICHSHOFER (CENTRAL DISTRICT,
CALIFORNIA)
A. The Origin of the Investigation
In March 1980, while conducting the Spawr Optical
Research investigation, I was advised by the Compliance
Division special agent who was on the Spawr case that he was
also concurrently working on another investigation involving
possible diversions of controlled high-technology goods to
the Soviet Bloc by a Los Angeles firm. He furnished me with
the following information:
In January 1980, Fairchild Test Systems Group, San Jose,
California, contacted the Compliance Division concerning sales
of advanced semi-conductor test instruments to an entity
styled Consolidated Protection Development Corporation. Fairchild
had previously sold four of the systems to Consolidated Protection
and had current orders for eight more systems, valued at about
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$1.3 million. In February 1980, Watkins-Johnson Company,
Palo Alto, California, and Applied Materials Corporation, Sunnyvale,
California, also contacted Compliance Division inquiring about
Consolidated Protection and its president, Anatoli Tony Maluta.
The Compliance special agent then contacted Fairchild, Applied
Materials, and Watkins-Johnson. What emerged from these contacts
was information pointing to the possibility that Anatoli (Tony"))
Maluta was purchasing U.S.-origin high-technology products for
possible diversion to proscribed countries. Maluta's method of
operation was consistent with traditional diversion procurement
attempts, although it was apparent that Maluta had refined thome
methods. Further investigation showed that Maluta was purchaqii,ng
goods under one name and exporting under another. In 'fact, Malutm;,
over a three-year period, was determined to have actively usefl:
some six trade styles to conceal his activities. Maluta's frmIght
forwarder in Los Angeles confirmed to the special agent that
Maluta made only export shipments, contrary to Maluta's ass,,rifimms
to his suppliers that he was purchasing for domestic consumptilmn
only. most of the shipments through the freight forwarder wemm
made to West Germany through Los Angeles International Airport..
Inaddition, records made available to the government indicate3
Maluta had apparently undervalued and misdescribed the commodi,
ties on Shipper's Export Declarations to disguise the nature mud
value of the goods.
Further leads revealed that Maluta had devised elaborata
cover stories to mask his true activities. These cover stories
generally followed the line that Maluta was enaged in the
manufacture of perimeter protection systems for military imstaala-
tions in Alaska, Arizona, Southern California, or elsewhere in
the "Free World." Maluta also falsely represented to his sup
that his work was classified by the government. These cover
stories were apparently designed by Maluta to prevent instal/mm
or repair technicians and salesmen from the manufacturers from
visiting Maluta's asserted installations, and also to allow
Maluta to evade manufacturers' questions about the intended uses
and locations of the equipment. Maluta's apparent intent was
clear to the investigators: the fewer questions asked, the better.
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The Compliance special agent also learned that Maluta
was then in the process of purchasing considerable amounts of
equipment, including two highly sophisticated Gasonics, Inc.,
HiPox high-pressure furnaces, valued at about $300,000, used
in the manufacture of semi-conductor devices.
B. The Investigation Upgraded
Upon receiving the foregoing information, I advised
the Compliance special agent and the Customs special agent
on the Spawr case to increase vigilance on monitoring Maluta's
activities in addition to working on the Spawr case. In late
March 1980, the Gasonics equipment was tracked from the manu-
facturer in Sunnyvale, California, to the Los Angeles freight
forwarder, where it was to be shipped on Maluta's orders. It
was held there by the freight forwarder awaiting eventual export
to West Germany. Maluta had instructed the freight forwarder
to ship the equipment to a consignee in West Germany. We
ascertained Maluta had not applied for the necessary export
license.
It was readily apparent to me then that the investigation
was taking on major importance and scope and that the one or
two Commerce Department Compliance agents assigned to the case
did not comprise sufficient manpower to handle the investigatiom_ a
then requested the Special Agent in Charge of the U. S. Customs
Office of Investigation in Los Angeles to enter the investigation and
assign additional Customs investigators to the case, which he did..
Itwas clear that we could not risk the Gasonics furnac
falling into the hands of a Communist Bloc nation because of the
strategic nature and the state-of-the art technology of the equipment
being readied for export. I also considered it important not mmag
to our potential case against Maluta, but also to our national security
interest, to ascertain the final destination of the equipment, wthich
we suspected to be a Bloc nation. For this reason, I, after r-
cussion with the Customs and Commerce agents, requested Custuu, tm
prepare a substitute Gasonics shipment containing sand or some reth=
suitable material for a controlled delivery. I also asked CulFhErrris
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to seize the real high-pressure furnace systems when they were pre-
sented for export at Los Angeles International Airport. The sub-
stituted crates would then be allowed to be exported in place of
the real equipment. It was our considered opinion that if the
controlled delivery worked, we would have a good chance of trend:rig
where the equipment was really going.
The substituted shipment was exported in early May 1950 tm
Vienna via West Germany. . Documents showing the ultimate destination
of the equipment as Mashpriborintorg, Moscow, USSR via Amsterdam
were subsequently recovered by the U. S. Customs Attache Office,,
Bonn.
Throughout the investigation, there was an efficient and
cooperative relationship between working level U. S. Customs
investigators, U. S. Commerce Department investigators, the
U. S. Justice Department personnel involved in the investigation
and prosecution, the U. S. Customs Attache's Office in Bonn,
and West German Customs officials in Bonn and Duesseldorf. As
you will see, later on, special agents and revenue agents from the
Internal Revenue Service entered the investigation with excellent
results.
The continuing investigation by U. S. Customs in Bonn
and the Duesseldorf West German Customs Office revealed an
extensive and complicated web of diverters and firms
wittingly and unwittingly providing assistance to the network. of
Maluta and his West German co-conspirator, Bruchhausen, who pro-
cured goods primarily for the Soviet Union. It was also learned
that Elmasch GmbH, an additional West German firm in the network
was established to procure U.S.-origin technology goods for
other Soviet Bloc nations, principally Bulgaria, Poland, East
Germany, Czechoslovakia, and Hungary.
By mid-May 1980, search warrants had been obtained to
search Maluta's firm, now named Continental Technology
Corporation, in Torrance, California, bank deposit boxes and
former offices of Maluta's California firms. Warrant searches
were also conducted at the residence of Sabina Tittel, who
was then suspected of being a part of Maluta's illegal export
activities. Voluminous export documents were obtained in the
search of Continental Technology which were crucial to the
investigation. It was also apparent that many other documents
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had been destroyed before the searches. Searches of entities
allegedly operated by Bruchhausen in West Germany, were also con-
ducted by West German Customs authorities, which resulted in
the discovery of significant amounts of incriminating documents.
I arranged for travel to West Germany for one Commerce
investigator and one Customs investigator and myself in July
and August 1980. On arrival in Bonn, I Met with U. S. and
West German officials to elicit West German cooperation in
our investigation of what was considered to be the most
significant and elaborate diversion scheme yet unearthed.
After some frank discussions with West German officials, they
agreed to allow the Commerce Department investigator and me to
work with the West German Customs authorities. U. S. Customs
investigators were already authorized by an existing U.S.-German
Customs Agreement to conduct certain inquiries in West Germany.
I must say I was personally gratified and extremely appreciative
that the West German authorities were willing to assist our effort
in this way.
During our three-week stay in West Germany, we reviewed
the large number of business and export documents seized by the
West Germans from Techma GmbH, Elmasch GmbH and other Bruchhausen
related entities. We worked closely with a very talented and
cooperative West German Customs agent during this period. The
documents we reviewed clearly established that Techma and
Elmasch were set up solely to receive U.S.-origin goods and to
divert to the Soviet Bloc. Of the literally hundreds of shipments
we reviewed, only one or two involved non-U.S.-origin goods.
After a cursory summation, we estimated that the Soviet Bloc
paid more then $12 million for the U. S. high-technology products
' bought through Maluta over a period from 1977-1980. The apparent
domestic value of the goods purchased in the U. S. over the same
period was approximately $8 million. As you can see, the scheme,
up to the time of its discovery, was extremely lucrative for
those who were part of it. At the same time, the system was
virtually impossible to detect on its own. This was because
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(1) Maluta's cover stories were apparently effective in discour-
aging manufacturers from questioning his activities; (2) his use
of two sets of firms, one to purchase and one to export, made it
difficult for the curious to make a face value connection between
purchaser and exporter; and (3) the use of in-bond shipments
through West Germany and a neutral country, either Switzerland
or Austria, precluded undirected discovery of the diversions
by foreign governments.
After our visit to West Germany in July and August 1980,
I traveled to Switzerland with the Compliance agent to ask
the Swiss authorities to help with our investigation. In dis-
cussions with Swiss government officials, we were told that '
American export control enforcement involved political considera-
tions and that the. Swiss government could lend no assistance
because.of that country's political neutrality and because their
own business secrecy laws prohibited even the government from
making certain business-type inquiries.
In February 1981, based on what we had already learned
about Maluta's and Tittel's activities at Continental Technology,
I asked the Internal Revenue Service to enter the case. Infor-
mation and documents reviewed by the Custom's and Commerce inves-
tigators and myself pointed to the strong likelihood that Maluta
and Tittel had not declared significant parts of their gains from
the illegal export activities from 1978 and 1979. Within the aegt
five months, IRS special agents and revenue agents amassed enough
information to support several felony counts against Maluta ana
Tittel for tax evasion and subscribing to false income tax returns-
This was a considerable achievement on the parts of the IRS
investigators, who played no small role in the government's ultmatte
success in the prosecution of Maluta and Tittel.
The investigation team comprising one Customs special agent
and one Compliance special agent and myself again traveled to
West Germany in May and June 1981 to interview additional witrrroxr-
and to finalize our pre-indictment investigation and prosecution
documents. I again met with West German officials and received.
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their continued, effective cooperation, which was crucial in
developing our case against Maluta and his associates. The tem
returned to the United States after three weeks of investigatimr4,
having secured the cooperation of crucial prosecution witnesses..
C. The Indictment
On August 19, 1981, a federal grand jury in Los .Angelses
returned a sixty-count indictment against Maluta, Bruchhausenfl
Maluta's secretary, Tittel, and Dietmar Ulrichshofer of Vienna?
variously for conspiracy to violate U. S. export laws, making
false statements on Shipper's Export Declarations, violations of
the Export Administration and Arms Export Control Acts, perjury,
and income tax violations.
D. Maluta and Tittel Convicted
On October 26, 1981, Sabina Dorn Tittel pleaded guilty
to six counts of the original indictment, including two false
statement counts, two income tax violation counts, and two counts
of illegal exports to West Germany.
On October 27, 1981, as a result of a court trial before
United States District Judge William Matthew Byrne, Jr., on stip-
ulated facts, Anatoli Tony Maluta was convicted of the fifteen
felony counts charged in a Superseding Information, including
conspiracy, making false statements on export declarations,
illegal exportation of high-technology and Munitions List
commodities to the Soviet Bloc, including the Soviet Union, in
violation of the Export Administration and Arms Export Control
Acts, and of tam evasion and subscribing to a false income tax
return. On December 7, 1981, Maluta was sentenced to five years
imprisonment and to pay a fine of $60,000. Maluta is currently
at liberty on bond pending appeal. Tittel was sentenced to two
years imprisonmerr, and to pay a 829,000 fine. Tittel was taken
into custody in January 1982 and is currently serving her sentence
at the Federal Correctional Institution, Pleasanton, California.
On April 2, 1982, Tittel filed a motion for a reduction of her
two-year sentence, and the court has taken the motion under
submission.
variously for conspiracy to violate U. S. export laws, making
false statements on Shipper's Export Declarations, violations of
the Export Administration and Arms Export Control Acts, perjury,
and income tax violations.
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D. Maluta and Tittel Convicted
On October 26, 1981, Sabina Dorn Tittel pleaded guilty
to six counts of the original indictment, including two false
statement counts, two income tax violation counts, and two counts
of illegal exports to West Germany.
On October 27, 1981, as a result of a court trial before
United States District Judge William Matthew Byrne, Jr., on stip-
ulated facts, Anatoli Tony Maluta was convicted of the fifteen
felony counts charged in a Superseding Information, including
conspiracy, making false statements on export declarations,
illegal exportation of high-technology and Munitions List
commodities to the Soviet Bloc, including the Soviet Union, in
violation of the Export Administration and Arms Export Control
Acts, and of tax evasion and subscribing to a false income tax
return. On December 7, 1981, Maluta was sentenced to five years
imprisonment and to pay a fine of $60,000. Maluta is currently
at liberty on bond pending appeal. Tittel was sentenced to two
years imprisonment and to pay a $25,000 fine. Tittel was taken
into custody in January 1982 and is currently serving her sentence
at the Federal Correctional Institution, Pleasanton, California.
On April 2, 1982, Tittel filed a motion for a reduction of her
two-year sentence, and the court has taken the motion under
submission.
E. The Importance of the Case and the Exported
Technology
I am informed by the Justice and Commerce Departments
and the Customs Service that the Maluta/Bruchhausen illegal expart
operation was the most sophisticated and complex, as well as the
largest, yet uncovered .involving high-technology commodities
to Soviet Bloc nations. Not only were the firms involved in the
scheme established solely to procure technologically advanced.
military and "dual-use" commodities for shipment to Communist--
controlled nations, the personnel chosen to execute the scheme
were carefully selected. More than eight million dollars of
some of the most advanced hardware were exported illegally 017E5
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a three and one-half year period in the scheme, and most of the
equipment was highly prized and dearly paid for by the Soviets
and their satellite countries in hard currency. Some of the
computers, micro-circuit test systems and manufacturing equipmmart
and peripherals purchased and exported by Maluta, could greatly.
increase their computer technology and production capability.
The controlled commodities also included military microwave
surveillance equipment intended for the Soviet Union, and micro-
computers and state-of-the art solid state electronic devices.
for the Soviets and other Bloc users. The equipment illegally,
exported from the United States in this case represents a vast
gain by the Soviet Bloc in advanced technology equipment that
would not have been licensed by U. S. authorities for shipment
to the Soviet Bloc. Equally important is the fact that our
investigation frustrated Maluta and his co-conspirators from
obtaining millions of dollars of additional equipment, including
a $1.3 million order for semi-conductor test equipment for the
USSR, a $700,000 microwave surveillance system which, according
to the manufacturer, was capable of missile-tracking applications,
and the $300,000 high-pressure furnace systems also for the
Soviet Union. These are only some of the items Maluta had on
order for export. There were considerable quantities of addi-
tional sophisticated equipment that Maluta was in the process of
ordering for Bruchhausen's firms when the network was uncovered.
The investigation and prosecution closed down a highly successful
and established procurement system.
I am convinced that Soviet Bloc efforts to obtain U.S.-origin
state-of-the-art technology are relentless and very much alive.
This is a critical challenge facing our country and its allies
today, and this is a challenge we must meet with resources and
resolve.
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"CONTROL OF TECHNOLOGY TRANSFERS ,
TO THE SOVIET UNION"
TESTIMONY
OF
THE HONORABLE
JAMES L. BUCKLEY
UNDER SECRETARY FOR SECURITY ASSISTANCE,
SCIENCE AND TECHNOLOGY
BEFORE THE
SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATION
OF THE
COMMITTEE ON GOVERNMENTAL AFFAIRS
MAY 6, 1982
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MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE,,
I AM DELIGHTED AT THIS OPPORTUNITY TO RESPOND TO
YOUR INVITATION TO TESTIFY ON THE ROLE OF THE STATE
DEPARTMENT IN CONTROLLING OF THE TRANSFER OF MILITARILY
CRITICAL TECHNOLOGY TO THE SOVIET UNION AND THE
EASTERN BLOC. WHATEVER THE RECORD OF PRIOR ADMINISTRATIONS,
REPUBLICAN AS WELL AS DEMOCRATIC, IT IS CLEAR THAT
THIS ADMINISTRATION HAS PLACED A VERY HIGH PRIORITY
ON IMPROVING THE EFFECTIVENESS OF THE EXECUTIVE
BRANCH IN ENFORCING EXPORT CONTROLS. IT HAS LAUNCHED
IMPORTANT INITIATIVES WHICH WE BELIEVE WILL GREATLY
IMPROVE THEIR OVERALL EFFECTIVENESS WHILE SHARPENING
THE FOCUS ON THOSE ELEMENTS OF ADVANCED TECHNOLOGY
AND PROCESS KNOW-HOW WHICH ARE OF THE MOST CRITICAL
IMPORTANCE TO THE SOVIET BLOC. WE FREELY ACKNOWLEDGE
THAT MUCH MORE NEEDS TO BE DONE; AND WE ARE ACTIVELY
WORKING WITH OTHER AGENCIES TO IMPROVE COORDINATION
OVER A RANGE OF ISSUES. IT WILL TAKE TIME, HOWEVER,
FOR ALL THESE EFFORTS TO TAKE HOLD IN PARTICULAR
AREAS, ESPECIALLY BECAUSE OF THE LARGE AMOUNT OF NEW
DATA THAT HAS HAD TO BE GATHERED BY VARIOUS AGENCIES,
AND THE ANALYTICAL WORK THAT HAS TO BE DONE.
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IN YOUR LETTER INVITING ME TO TESTIFY, YOU ASKED
THE STATE DEPARTMENT TO RESPOND TO SIX SPECIFIC
QUESTIONS. I HAVE DONE SO IN THE ATTACHMENT TO MY
PREPARED STATEMENT, WHICH I WOULD APPRECIATE YOUR
INCLUDING IN THE PROCEEDINGS.
NATIONAL SECURITY EXPORT CONTROLS ARE A BASIC
ELEMENT IN OVERALL U.S. POLICY TOWARDS THE WARSAW
PACT COUNTRIES. TO PUT IT BLUNTLY, THESE CONTROLS
ARE A RECOGNITION OF THE FACT THAT THE GLOBAL
OBJECTIVES OF THE SOVIET BLOC ARE INNIMICAL TO OUR
OWN, AND THREATEN EVERY VALUE FOR WHICH OUR NATION
STANDS. THEREFORE, IT IS SIMPLY HARMFUL FOR US TO
PROVIDE THOSE NATIONS WITH WESTERN, MILITARILY USEFUL
TECHNOLOGIES, TO BE TURNED AGAINST US.
AS MOST OF THESE SENSITIVE TECHNOLOGIES ARE NOT
WITHIN THE SOLE CONTROL OF THE UNITED STATES, IT HAS
BEEN ESSENTIAL FROM THE OUTSET TO ACHIEVE AMONG THE
MAJOR WESTERN INDUSTRIALIZED POWERS FUNDAMENTAL
AGREEMENT AS TO WHAT TECHNOLOGIES ARE MILITARILY
CRITICAL AND HOW THEIR TRANSFER TO THE SOVIET BLOC
SHOULD BE CONTROLLED.
THE INSTRUMENT THAT HAS BEEN DEVELOPED FOR THIS
PURPOSE IS THE COORDINATING COMMITTEE FOR MULTI-
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LATERAL EXPORT CONTROLS, OR "COCOM" TO WHICH JAPAN
AND ALL NATO COUNTRIES, WITH THE EXCEPTION OF ICELAND,
BELONG. COCOM WAS CREATED IN 1949 BY INFORMAL AGREE-
MENT AMONG ITS MEMBERS, AND HAS THUS BEEN IN EXISTENCE
FOR MORE THAN THREE DECADES.
COCOM HAS THREE MAJOR FUNCTIONS:
-- THE FIRST IS THE ESTABLISHMENT AND UPDATING OF
LISTS OF EMBARGOED PRODUCTS AND TECHNOLOGIES. ALTHOUGH
COCOM LISTS ARE NOT PUBLISHED, THEY BECOME THE BASIS
FOR THE NATIONAL CONTROL LISTS ADMINISTERED BY EACH
MEMBER GOVERNMENT. THE MEMBER GOVERNMENTS ARE NOW
PREPARING FOR A MAJOR REVIEW OF THESE EMBARGO LISTS,
WHICH WILL BEGIN IN OCTOBER.
-- SECONDLY,. COCOM ACTS AS THE CLEARING HOUSE FOR
REQUESTS SUBMITTED BY THE MEMBER GOVERNMENTS TO SHIP
SPECIFIC ITEMS TO SPECIFIED END-USERS IN THE PROSCRIBED
COUNTRIES. (THE COCOM-PROSCRIBED COUNTRIES ARE THE
SOVIET UNION, THE OTHER WARSAW PACT COUNTRIES, CHINA,
AND THE OTHER COMMUNIST COUNTRIES IN ASIA).
-- THIRDLY, COCOM SERVES AS A MEANS OF COORDINATING
THE ADMINISTRATION AND ENFORCEMENT ACTIVITIES OF THE
MEMBER GOVERNMENTS.
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THE COCOM LISTS SET UP FAIRLY SPECIFIC LIMITS ON
THE TECHNICAL CHARACTERISTICS ABOVE WHICH MEMBER
GOVERNMENTS AGREE THAT THEY WILL PROHIBIT EXPORTS TO
PROSCRIBED COUNTRIES, UNLESS COCOM ITSELF APPROVES
EXCEPTIONS.
IN AGREEING TO A NATIONAL REQUEST TO EXPORT
ITEMS ON ONE OF THE CONTROL,LISTS, COCOM WORKS ON THE
PRINCIPLE OF UNANIMITY. NO APPLICATION, IN SHORT, IS
APPROVED IF ANY MEMBER STATE OBJECTS. ONE OF THE
EVOLVED STRENGTHS OF COCOM IS THAT IN OVER 30 YEARS
OF OPERATION, THERE HAVE BEEN VERY FEW CASES IN WHICH
A GOVERNMENT HAS EXERCISED ITS SOVEREIGN RIGHT TO GO
AHEAD WITH EXPORTS OVER COCOM OBJECTIONS. THIS IS
ALL THE MORE REMARKABLE GIVEN THE ABSENCE OF ANY
TREATY OR EXECUTIVE AGREEMENT UNDERGIRDING THE
ORGANIZATION.
OVER THOSE DECADES, COCOM HAS GENERALLY BEEN
SUCCESSFUL IN INHIBITING THE OVERT FLOW OF STRATEGIC
TECHNOLOGY TO OUR ADVERSARIES. DURING THE 1970S,
HOWEVER, IN THE HONEYMOON DAYS OF DETENTE, THE U.S.
AND THE WEST RELAXED CONTROLS OVER A NUMBER OF
EMBARGOED COMMODITIES. IT WAS BELIEVED THAT WIDE-
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RANGING TRADE WOULD SOMEHOW ALTER THE INTERNATIONAL
BEHAVIOR OF THE SOVIETS AND MODERATE THEIR MILITARY
INVESTMENT. DURING THIS PERIOD, THE U.S. WENT FROM
BEING THE LEAST, TO THE MOST FREQUENT, SEEKER OF
EXCEPTIONS TO MULTILATERAL CONTROLS. COCOM ITSELF
CAME TO REFLECT SUCH ATTITUDES, AND EXCEPTIONS TO
THE EMBARGO WERE ALLOWED TO THRIVE. WE NOW KNOW
THIS WAS A MISTAKE. DURING THE PERIOD OF DETENTE,
THE WORLD STOOD WITNESS TO THE GREATEST MILITARY
BUILD-UP IN HISTORY, ALONG WITH THE INCREASED SOVIET
ADVENTupism THAT GREW OUT OF AN INCREASED SELF-
CONFIDENCE.
THE REAGAN ADMINISTRATION CAME TO POWER FIFTEEN
MONTHS AGO DETERMINED TO STEM THE FLOW OF THE TECHNOLOGY
THAT THE SOVIET UNION AND ITS WARSAW PACT ALLIES
WERE USING TO IMPROVE THEIR ALREADY VAST WAR-MAKING
CAPABILITIES. IT WAS CLEAR THAT THE WEST'S CRUCIAL
QUALITATIVE EDGE IN MILITARY SYSTEMS WAS BEING
UNDERMINED BY THE SOVIETS' INCREASINGLY AGGRESSIVE
EFFORTS TO BUY OR STEAL OUR MILITARILY-RELEVANT
TECHNOLOGIES AND EQUIPMENT.
MORE PRECISELY, WE SAW THIS WELL-ORCHESTRATED
ACQUISITION PROGRAM GIVING THE SOVIETS:
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(1) A VERY SIGNIFICANT SAVINGS IN TIME AND
MONEY IN THEIR MILITARY RESEARCH AND
DEVELOPMENT PROGRAMS,
(2) RAPID MODERNIZATION OF THEIR DEFENSE
INDUSTRIAL INFRASTRUCTURE,
(3) THE OPPORTUNITY TO ACCELERATE THE CLOSING
OF GAPS BETWEEN OUR WEAPONS SYSTEMS AND
THEIRS, AND
(4) THE CHANCE TO DEVELOP, WITH ALARMING ,
SPEED, NEUTRALIZING COUNTER-MEASURES TO
OUR OWN TECHNOLOGICAL INNOVATIONS.
AS A CONSEQUENCE, THE ADMINISTRATION HAS
INITIATED EFFORTS TO FILL IN GAPS IN THE MULTILATERAL
EXPORT CONTROL SYSTEM. AT THE OTTAWA SUMMIT MEETING
LAST JULY, PRESIDENT REAGAN RAISED THE PROBLEM OF
WESTERN TECHNOLOGY TRANSFER TO THE SOVIET UNION. AN
AGREEMENT AT OTTAWA TO CONSULT ON THIS ISSUE CUL-
MINATED IN A HIGH LEVEL MEETING IN PARIS DURING
JANUARY, THE FIRST MINISTERIAL LEVEL COCOM MEETING
SINCE THE LATE 1450S. THE OTHER COCOM GOVERNMENTS
HAVE ASKED THAT THE RESULTS OF THAT MEETING BE KEPT
CONFIDENTIAL, AS INDEED ARE ALL COCOM PROCEEDINGS.
I CHAIRED THE U.S. DELEGATION TO THAT MEETING, HOWEVER,
95-929 0 - 82 - 35
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AND I CAN SAY THAT THERE WAS A CONCRETE CONSENSUS THAT
THE MEMBER GOVERNMENTS SHOULD RENEW THEIR EFFORT TO
IMPROVE COCOM EFFECTIVENESS. WE HAVE BEEN ENCOURAGED
BY WHAT APPEARS A NEW, AND MORE CONSTRUCTIVE ATTITUDE
OF OTHER COCOM GOVERNMENTS, AND FEEL THAT THIS MEETING
FORMS A BASIS FOR A REVITALIZATION OF THE COCOM SYSTEM.
SUCH A REVITALIZATION WILL TAKE MUCH HARD WORK
AND IT WILL TAKE TIME, AMONG OTHER REASONS BECAUSE
COCOM DEPENDS ON THE NATIONAL ADMINISTRATION OF
CONTROLS BY 15 INDIVIDUAL GOVERNMENTS. BUT SOME
SPECIFIC STEPS ARE UNDERWAY. EFFECTIVENESS, FOR
EXAMPLE, REQUIRES PRECISE DEFINITIONS OF MANY COMPLEX
TECHNOLOGIES. WE HAVE MADE PROGRESS TOWARD AGREEMENT
ON A NUMBER OF SPECIFIC, TECHNICAL PROPOSALS IN THIS
AREA TO TIGHTEN THE EMBARGO.
SECOND, THE U.S. IS NOW WORKING ON PROPOSALS
THAT WILL EXPAND COCOM CONTROL LISTS INTO PREVIOUSLY-
UNCOVERED PRIORITY INDUSTRIES. THESE INCLUDE GAS
TURBINE ENGINES; LARGE FLOATING DRYDOCKS; CERTAIN
METALLURGICAL PROCESSES; ELECTRONIC GRADE SILICON;
PRINTED CIRCUIT BOARD TECHNOLOGY; SPACE LAUNCH
VEHICLES AND SPACECRAFT; ROBOTICS; CERAMIC MATERIALS
FOR ENGINES; CERTAIN ADVANCED COMPOSITES; AND COMMUNI-
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CATIONS SWITCHING AND COMPUTER HARDWARE AND SOFTWARE
TECHNOLOGY AND KNOW-HOW. THIS PROCESS WILL CONTINUE
INTO THE TRIENNIAL COCOM LIST REVIEW, WHICH WILL
TAKE PLACE THIS OCTOBER, WHEN A GENERAL REAPPRAISAL
OF EVERYTHING ON THE CONTROL LISTS WILL TAKE PLACE.
THIRD, WE HAVE DEVELOPED WORKABLE PROPOSALS FOR
HARMONIZING THE EXPORT LICENSING PROCEDURES OF THE
15 MEMBER STATES SO AS TO MAKE COCOM DECISION-
MAKING MORE EFFICIENT. WHAT WE ARE SEEKING ARE WAYS
TO BRING NATIONAL ENFORCEMENT PRACTICES TO A LEVEL
OF EQUAL EFFECTIVENESS. THESE TWO QUESTIONS WILL BE
ADDRESSED AT A SPECIAL COCOM MEETING WHICH WILL
CONVENE IN PARIS LATER THIS SPRING -- AND THE FACT
THAT ALL PARTNERS HAVE AGREED TO THAT SPECIAL MEETING
IS TESTAMENT TO OUR SHARED GOALS.
FOURTH, ILLEGAL DIVERSION ACTIVITIES ARE A
PROBLEM OVERSEAS AS WELL AS AT HOME. WE HAVE BEEN
COOPERATING WITH OUR COCOM ALLIES TO IMPROVE ENFORCE-
MENT AND INVESTIGATIVE CAPABILITIES IN THIS AREA.
THE STATE DEPARTMENT, WORKING CLOSELY WITH OUR
INTELLIGENCE AND INVESTIGATIVE AGENCIES, HAS BEEN
CHANNELING APPROPRIATE INFORMATION TO OTHER GOVERN-
MENTS TO ALERT THEM TO POTENTIALLY ILLEGAL ACTIVITIES
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WITHIN THEIR BORDERS. WE HAVE ALSO ENCOURAGED THEM
TO INCREASE THE INVESTIGATIVE RESOURCES AND THE
SANCTIONS AVAILABLE FOR EXPORT CONTROL ENFORCEMENT.
COMMERCE, AND IN TURN CUSTOMS, HAVE DETAILED OFFICERS
TO STATE TO SUPPORT THIS OVERSEAS COMPLIANCE EFFORT.
COCOM HAS THUS, WE BELIEVE, MADE MEASURABLE
PROGRESS TOWARDS STRENGTHENING STRATEGIC EXPORT
CONTROLS SINCE THIS ADMINISTRATION CAME INTO OFFICE.
BUT IT IS ALSO CLEAR THAT THE CONTINUING REVITALI-
ZATION PROCESS WILL BE LONG AND HARD. IN ATTEMPTING
TO STRENGTHEN STRATEGIC EXPORT CONTROLS ON EXPORTS
TO THE SOVIET UNION AND THE OTHER WARSAW PACT
COUNTRIES, WE ARE FACED WITH THE PERENNIAL PROBLEM
OF SECURING AGREEMENT WITH ALL THE OTHER COCOM
ALLIES ON JUST WHERE TO ESTABLISH THE TECHNICAL CUT-
OFFS FOR COMMODITIES AND TECHNOLOGIES UNDER EMBARGO.
DETERMINING IN MANY SCORES OF DIFFERENT TECHNICAL
AREAS WHAT IS SUFFICIENTLY STRATEGIC TO WARRANT
CONTROL IS NOT AN EASY TASK. WE DO NOT ALWAYS AGREE
ON WHAT ARE MILITARILY CRITICAL TECHNOLOGIES, YET
THE PURPOSE OF THE ORGANIZATION IS LIMITED TO SUCH
TECHNOLOGIES. MEMBERS EXERCISE CONSIDERABLE CARE TO
AVOID CONTROLS WHOSE PRINCIPAL IMPACT WOULD BE
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ECONOMIC RATHER THAN MILITARY, AND EACH HAS ITS OWN
VIEWS AND PERSPECTIVE. WESTERN EUROPEAN AND JAPANESE
ECONOMIES WOULD, GENERALLY SPEAKING, BE AFFECTED
MORE THAN THE U.S. ECONOMY BY SWEEPING CONTROLS ON
MANUFACTURED PRODUCTS. BUT SUCH DIFFERENCES BETWEEN
OURSELVES AND OUR COCOM ALLIES SHOULD NOT BE OVER-
EMPHASIZED. WE SHOULD REMEMBER THAT OUR ALLIES HAVE
COOPERATED WITH US FOR OVER THIRTY YEARS TO CONTROL
SIGNIFICANT AMOUNTS OF EQUIPMENT, MATERIAL AND
TECHNOLOGIES THROUGH COCOM. THAT IS, FIRST AND FORE-
MOST, BECAUSE WE SHARE A COMMON BELIEF THAT SUCH
CONTROLS CONSTITUTE AN IMPORTANT ELEMENT IN OUR
MUTUAL DEFENSE.
AS YOU KNOW, THE STATE DEPARTMENT IS ALSO
RESPONSIBLE FOR ADMINISTERING MUNITIONS EXPORT
CONTROLS WHICH COVER DEFENSE ARTICLES AND SERVICES.
MUNITIONS ARE NOT APPROVED FOR EXPORT TO WARSAW PACT
COUNTRIES. ACCORDINGLY, THE MAIN ISSUE IN ADMIN-
ISTERING THESE CONTROLS RELATES TO SECURITY CONCERNS
AND OUR FOREIGN RELATIONS WITH OTHER COUNTRIES.
YOUR LETTER OF INVITATION MENTIONS THAT, IN AN
EXECUTIVE BRANCH MORE EFFECTIVELY ORGANIZED TO SHAPE
AND ENFORCE EXPORT CONTROL POLICY, YOU ENVISAGE A
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PRINCIPAL AND EXPANDED ROLE FOR THE DEPARTMENT OF
STATE. WE, TOO, ENVISAGE SUCH A ROLE FOR THE
DEPARTMENT.
UPON TAKING OFFICE, THIS ADMINISTRATION UNDER-
TOOK A FULL REVIEW OF OUR POLICY CONCERNING THE
TRANSFER OF STRATEGIC TECHNOLOGY TO THE SOVIET UNION
AND THE OTHER WARSAW PACT COUNTRIES. THE STATE
DEPARTMENT WAS A MAJOR PARTICIPANT IN THIS REVIEW,
WHICH CULMINATED IN THE COCOM HIGH LEVEL MEETING.
THE STATE DEPARTMENT LED OUR DELEGATION TO THAT
MEETING. SINCE THEN, ON A NUMBER OF OTHER OCCASIONS
SENIOR OFFICIALS AT STATE HAVE DISCUSSED WITH OUR
ALLIES SECURITY CONCERNS RELATED TO TECHNOLOGY
TRANSFERS. WE ARE PERSUADED THAT IMPROVED ALLIED
COOPERATION ON SENSITIVE TECHNOLOGY TRANSFER ISSUES
IS A REALISTIC OBJECTIVE. tHERE WILL, OF COURSE,
CONTINUE TO BE SOME DIFFERENCES ON THE DETAILS OF
CONTROLS AND THEIR APPLICATION TO INDIVIDUAL CASES.
BUT, WITH HARD WORK TO IDENTIFY CLEARLY AND TO
JUSTIFY PERSUASIVELY WHAT NEEDS TO BE CONTROLLED AND
HOW CONTROLS SHOULD BE ENFORCED AND ADMINISTERED,
SUCH DIFFERENCES, WE BELIEVE, WILL BE THE EXCEPTION
RATHER THAN THE RULE.
* * *
* * ?
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1. Q: We believe there may be a need for legislation to
define certain kinds of dual-user technology as
being of national security significance. This is
a very difficult question. The Department's general
response would be valuable.
A: The Department believes that it is not feasible to
define in legislation what dual-use technology is
of national security significance. To be effective,
controls must be technically precise. This not
only requires detailed lists, too lengthy for legis-
lation, but'also continuing review to take into
account new technologies which are emerging more
frequently and more rapidly than can feasibly be
accomplished by the process of amending legislation.
Consultation, in a case like this, can of course meet
needs not readily solved by legislation. The
Export Administration Act now contains broad authority
to control exports for security reasons, and specific
guidance on the need to control militarily critical
technologies. There may be a few refinements which
would improve this legislation. However, we believe
that the general approach of the Export Administration
Act of 1979 is sound. The review of technologies to
determine what is militarily critical is difficult
and time-consuming. However, we have benefitted greatly
from the work done to date. One important indication
of this benefit is that we are much farther advanced in
our preparation for the 1982/1983 COCOM List Review than
we were at comparable periods in preparing for previous
List Reviews.
2. Q: The Department's experience in enforcing the Arms
Export Control act is of special interest to the Sub-
committee. We would find very useful an assessment
from the Department of its working relationship with
the U.S. Customs Service, which handles the investi-
gative function for the AECA. We would look forward
to the Department's views on the problems caused
by the separation of the licensing role from the
investigative responsibility.
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A: The International Traffic in Arms Regulations (22 CFR)
121-128 and 130) promulgated by the Department under the
authority of the Arms Export Control act require the
persons intending to export defense articles and defense
services from the United States obtain a license from
the Department authorizing the exports. When a license
has been granted, it must be filed with the U.S. Customs
Service prior to the actual export. Additionally, a
Shipper's Export Declaration must be filed with, and
be authenticated by, the U.S. Customs Service. Customs
is therefore in a position to review exports of defense
articles or defense services for conformity with the
statute and regulations.
The U.S. Customs Service has a longstanding and well-
established presence at the ports of the United States.
The Service is so organied that the performance of the
function fits in with its other responsibilities at the
ports. The alternative would appear to be the estab-
lishment of a second organization at the ports solely
for the purpose of processing the export of defense
services. In our judgment, this would be r(,dundant,
extravagant and wasteful.
The working relationship between the Department's
Office of Munitions Control and the U.S. Customs
Service's Office of Investigation is excellent. The
Department refers to Customs those cases in which there
is reason to believe that a willful violation of the
statute and regulations may have occurred. Customs
informs the Department of instances that come to its
attention. On a continuing basis the offices exchange
information relating to investigations. Customs
regularly provides to the Department reports of investi-
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gations on significant cases. Both offices make a
concerted effort to ensure that the special agents
assigned to investigate alleged violations are know-
ledgeable as to the statute and regulations, and are
furnished such assistance as may be needed. The
exchange of views by personnel of the two offices is
informal and candid. Customs is apprised of the
foreign policy and security interests that may bear upon
an investigation In turn, Customs alerts the Depart-
ment to any investigation that may involve such interests,
and seeks guidance as to a course of action that might
be taken.
With some 600 special agents assigned to fifty-eight
U.S. ports, Customs can react quickly to a request
for an investigation. The particular expertise of
special agents and inspectors, with regard to the
movement of goods through ports, results in avenues
of inquiry being explored that might not otherwise
be looked into. The relationship, through the Customs
Cooperation Council, of the U.S. Customs Service with
the customs servicesof eighty-seven other nations
enables it to obtain information expeditiously which
might otherwise take some time to obtain, or which
might not be made available. Because of the close
working relationship between the Department and Customs,
any problems that arise are settled in an atmosphere
of understanding as to each other's concerns.
In a separate but related activity, Customs participates
actively in the inter-agency committee advising State
on approaches to other governments on dual-use exports
and has detailed an officer to work on a full-time
basis with the office in State charged with this respon-
sibility.
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Finally, our experiences suggest that 'the advan-
tages of separation of the licensing role, from the
investigative responsibility, outweigh problems that
may arise in the coordination of the two operations.
Customs, not being involved in the licensing process,
approaches a question of violation from a different
3. 0. The Department's views would he sought on the efficiency
of the executive branch in enforcing the Export Adminis-
tration Act. We would find especially valuable the
Department's comments on the possible need to improve
coordination and communication between the intelligence
community and investigative agencies charged with making
inauirv into export control violations regarding dual-use
technology.
A. There have been major exports to the USSR and other Warsaw
Pact countries of items nominally subject to control by
the United States and other COCOM member countries.
Therefore, improvement of enforcement is a high priority.
Specifically, we recognize the need to improve coordination
and communication between the intelligence community and
investigative agencies. Substantial progress has
already been made. An informal inter-agency group chaired by
the Department of Justice has brought the investigative
and intelligence communities closer together. The
intelligence community, Commerce and the Customs service,
have reorganized to give a higher priority to this work.
The State-chaired Working Group II of the Economic
Defense Advisory Committee, charged with international
enforcement activity, has increased its activities
markedly and has methodically sorted out vast amounts of
intelligence and taken remedial action where the informa-
tion available to us warranted such action. The Adminis-
tration has been active in alerting other governments to
possible illegal activities within their borders and in
establishing cooperation between U.S. intelligence and
investigative agencies and counterpart agencies in other
countries. Economic Defense officers stationed in our
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Fmbassies overseas provide useful leads and other informa-
tion on diversion activities and consult with outher
governments freouently and in depth. The COCOM Subcommittee
or Fxport Controls has also been active in developing
improved means of international coordation of enforcement.
We are preparing for a meeting of this Subcommittee later
this spring which will consider a number of proposals to
improve coopration on export control enforcement and
better protect sensitive items in transit.
4. Q: Please provide the Subcommittee with the specific
steps the Department is taking to improve the
efficiency of the executive branch in defining and
then executing export control policy.
A. Our export control policy is reflected by what is
actually controlled, how these controls are administered,
and what can actually be licensed for shipment. We are
taking the following steps to improve the efficiency
of the executive branch in these areas:
a) State is working closely with interagency Technical
Task Groups which have been established to define
specific items of strategic concern. These groups
are developing technical proposals and justifications
for revising the COCOM lists. They are identifying
items which should be considered for addition to
the lists and items now on the list which need to
be clarified or which may no longer be of strategic
concern.
b) State is expediting the U.S. review of COCOM cases
and its own agency consideration of domestic export
license applications submitted either to Commerce
(dual-use items) or to the Office of Munitions
Control (munitions items). State's role includes
efforts to insure that case decisions are consistent
with policy and are equitably applied by researching
precedents and other data available from earlier
COCOM list reviews, from cases, from industry, and
from intelligence agencies.
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C) State is leading negotiations with our allies to
strengthen the enforcement of multilaterally
agreed contrcds and to harmonize licensing pro-
cedures, including the development of standards
for the consideration of license applications in
COCOM member countries.
5 Q: Preliminary inquiry has revealed that COCOM nations
have not always made export controls a high priority
with reference to technology transfers to the Soviet
Union and Eastern Bloc. We would want to know the
Department's assessment of that preliminary finding.
Moreover, we would want to know if the Department
believes the goal of achieving full-scale cooperation
from COCOM is a realistic objective for this
nation's foreign policy.
A: Cooperation from COCOM is a realistic objective, as
evidenced by the continuing effectiveness of the
organization for more than 30 years. We are doing
all we can to further the objective of "full scale"
cooperation.
Of course, "full scale" cooperation is unrealistic
if, by that expression, is meant Allied acceptance of
whatever the U.S. proposes. Indeed the very concept
of cooperation involves a willingness to listen to
what the other party can constructively contribute
to solving the problem. However, there has been a
good track record of COCOM acceptance of those U.S.
proposals which have been technically precise and well
justified in terms of military criticality and Soviet
deficiencies, and there are also many useful proposals
from other COCOM members to strengthen and/or clarify
controls.
Other COCOM members have not devoted as much resources
as we believe necessary to the enforcement of controls.
We are stressing to them the need to increase their
resources as we are doing. As a result, their aware-
ness of the need to improve enforcement has definitely
increased.
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6. Q: A preliminary finding in the inquiry is that the U.S.
Customs Service could be more effective in investi-
gations of export control violations if it had more
agents assigned to U.S. missions in certain countries
with high technology industries. What is the Depart-
ment's general response to the preliminary finding?
A: The Department of State agreed that Customs would be
more effective in investigations of export control
violat'ons if it had more agents assigned to U.S.
missions in certain countries with high technology
industries. State is now reviewing Customs Service
request for'such additional overseas slots. The ultimate
decision will rest with the Chief of Missions overseas.
There is, of course, a continuing need for close
coordination of U.S. Government activity overseas,
under the leadership of the Ambassador. Moreover, there
are frequently extremely sensitive political and legal
aspects in the conduct of overseas investigations
occasioned by host government insistence on juris-
dictional rights which need to be addressed by
other elements of our overseas missions. But the
degree of Allied consensus on the need to strengthen
enforcement of COCOM Controls in combination with
the professionalism of the Customs Service leads us
to believe that mutually satisfactory arrangements
will be possible in the future as they have been
in the past.
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PREPARED STATEMENT OF MICHAEL LORENZO
STATEMENT ON ROLE AND RESPONSIBILITIES OF DEFENSE
RESEARCH AND ENGINEERING IN EXPORT CONTROL
Mr Chairman:
Thank you for the opportunity to testify before the U.S.
Senate Permanent Subcommittee on Investigations.
Dr. Frank Napper, Director of Military Technology Sharing
and Dr. Oles Lomacky, Director of the Office of Technology
Trade are also here to support this testimony.
This statement deals primarily with the technical policy
and assessment aspects of technology transfer functions as they
pertain to West-East strategic trade (Dual Use Technology).
This statement on East-West trade is divided into three
parts; Defense roles and responsibilities, Defense accomplish-
ments and Defense concerns as related to export control.
Roles and Responsibilities:
In accordance with current Department of Defense
Directives, the Under Secretary of Defense for Research and
Engineering is the principal advisor to the Secretary of
Defense on all technological and scientific matters, including
the formation of policy thereto. Within Research and
Engineering, International Programs and Technology (IP&T) is
charged with a variety of specific technology related duties.
In addition to its international program responsibilities,
which in themselves involve a number of technology transfer
issues, IP&T is alse responsible for development and main-
tenance of the Militarily Critical Technologies List which is
so necessary for the important function of performing technical
assessments, reviewing control lists (CoCom, CCL) as well as
providing overall technical policy direction for the Department
of Defense. One of my first requirements as an incumbent in
office since I October 1981 was to distinguish between techni-
policy and international security policy in order to clearly
delineate responsibilities between IP&T and its counterpart in
the Office of the Under Secretary for Policy.
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Technical policy is that which is pertinent to the opera-
tional, technical and acquisitional aspects of technology
transfers (T/T), including Foreign Military Sales (FMS), muni-
tions, and dual-use export control cases, critical technologies
identification, U.S. and Coordinating Committee (COCOM1)
embargo list reviews international programs and related activ-
ities, Committee on Exchanges (COMEX) activities and NATO
technical matters, such as Data Exchange Agreements (DEAs), and
Memoranda of Understanding (MOUs). International security
policy is the responsibility of the Office of the Under
Secretary for Policy. The Policy Office responsibility is per-
tinent to the broader considerations of international security,
political and economic aspects of export control, which tie
national policy with military interests with respect to
countries and/or regions. In these efforts the Services, other
Defense Agencies and the Intelligence community support both
the OUSDRE and Policy offices in threin primary roles.
Notwithstanding the delineation of responsibilities, the
primary goal of Defense is national security which includes
prohibiting the export or acquisition of critical equipment and
technology by potential adversaries that could add "signifi-
cantly" to their military capabilities. This includes all
transfer mechanisms both legal and illegal whether the acquisi-
tion is from the United States or involves a direct sale or
reexport from other countries. In order to achieve this,
Defense has established goals with respect to the improvement
of source documentation (MCTL2, data base, etc.), control lists
(COCOM, CCL3, etc.) and case processing (timeliness, con-
sistency, substance, etc.).
1COCOM (Coordinating Committee) - A voluntary organization con-
sisting of thc, NATO Countries less Iceland plus Japan that
controls dual use export to the East bloc of countri,s.
2MCTL - Military Critical Technology List as required by the
Export Administration Act of 1979.
3CCL - Commodity Control List under cognizance of the
Department of Commerce.
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Pursuing these goals has resulted in major workload
increases in the last year, particularly with the focus on
export controls by this Administration. Both the State and
Commerce Departments have increased the level of activity in
compliance matters, thereby necessitating more technological
inputs and other help from Defense. As an ancillary require-
ment, it is important for Defense to support Customs' officials
to aid in identifying equipment being exported to ascertain
whether a validated license is required. According to the
Export Administration Annual Report for Fiscal Year 1981,
Customs detained 628 questionable shipments of which 160 were
attempted illegal exports. By training customs officials and
providing some basic guidelines on how to recognize or identify
high technology items that are subject to national security
controls, Defense hopes to raise the batting average of customs
in detaining illegal shipments. It is important to our
national security interests that violations of our export
controls are quickly identified and properly detained. It is
equally important from an economic standpoint that legitimate
exports are not unnecessarily detained. In establishing our
technology transfer policy, we are mindful of the fact that we
work in a free trade system and open society that is a fun-
damental source of our greatness. It is also recognized that a
strong and viable economy is necessary to develop and maintain
a strong defense.
Accomplishments
A number of corrective steps have been taken to enhance our
performance in these areas. The staff was increased for
license application reviews, trained in efficient application
of the necessary technical skills to the review process, and
management procedures were instituted for orderly and thorough
application processing. All agreements with the Department of
Commerce have been reviewed, including Delegations of Authority
and procedural agreements. An interface has been structured
with the Services in seeking their technical and military
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expertise, and an excellent relationship exists with the
Defense Intelligence and National Security Agencies leading to
their active participation in license application review. As a
result of these actions, the old backlog of applications
awaiting review has been eliminated in recent months completely
adhering to the time limits imposed by the Export Administra-
tion Act of 1979. We are holding no applications for more than
60 days, and currently are processing only 44 applications for
a period of more than 30 days. Coincidentally, industry mem-
bers are now beginning to appreciate that many of the licensing
delays which they have experienced had been unfairly laid at
the door of Defense.
. The involvement by the Intelligence Community has increased
now to processing over 100 cases a month compared with the pre-
vious figure of 25 per year and their increased efforts have
aided the Defense effort immeasurably.
Defense has achieved consistency and efficiency in pro-
cessing applications. This was done by pursuing an approach,
not only in license processing, but in the many other efforts,
which stress the control of technology. This is best exempli-
fied by the work on the Militarily Critical Technologies List
(MCTL).
As you know, the MCTL was generated in response to the
Export Administration Act of 1979, and the first version was
published in October of 1980. We set about refining the list,
adding some items and rejecting others. The generation of the
list and its refinement represented a large, cooperative under-
taking among our technical people, technical specialists from
the Services, Services laboratories, other government agencies
and industry. The first major opportunity to implement the
MCTL was to improve the multilateral controls on export control
to the Warsaw Pact in the COCOM List Review preparations that
began with the formation of Technical Task Groups (TTG's) last
fall. The government is now in the midst of reviewing the
CoCom list and finalizing U.S. proposals for negotiations sche-
95-929 0 - 82 - 36
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duled next October in Paris, the headquarters of COCOM.
Defense participation in the List review has concentrated on
ensuring that the U.S. government proposals for COCOM con-
sideration include all the Militarily Critical Technologies as
well as removing products from control where possible so that
we and our Allies will be acting in concert in controlling only
what is important. The U.S. is working more closely with the
COCOM nations although potential for real problems exist as we
move to close the rather wide gaps in coverage of flown of cri-
tical technologies and goods to the Warsaw Pact.
The MCTL has provided an important mechanism for cementing
our relations with industry and for exposing our concerns and
the mechanics of our operations. The results have been most
rewarding. An association of industry associations, the
Multi-Association Policy Advisory Group (MAPAG), has been
working with us on these issues, and approximately 80 companies
are currently reviewing the 1981 revision of the MCTL.
Defense continues to examine the Export Administration
Regulations to see if there are constructive suggestions we
might make to improve their effectiveness. It was determined
that Section 379, Technical Data, was indeed the major sieve
through which our technology had been leaking. This section
was deemed both arcane and ineffective. As a result, we called
upon the MCTL once more and extracted from it the lists of
"arrays of know-how" developed in the famous Defense Science
Board Bucy Report. A proposed revision of Section 379 has been
drafted, based on these arrays of know-how and is currently
being coordinated throughout the Department of Defense. In due
course, it will be submitted to Commerce for their considera-
tion, and to industry for review and comments.
Excellent progress has been made in the development of our
data base. Our approach has been to develop a system which,
though simple at first, is always useful as it grows since it
is formatted to fit the future automated DOD Management
Information System known as FORDTIS (Foreign Disclosure and
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Technical Information System). It started as a modest system
on word processors which provided the data for our monthly
reports. It has since been expanded and moved to a greater
computer capability. The next step is to integrate our system
into FORDTIS which will be the primary DOD management tool to
be shared by other agencies for tracking all high technology
exports. Into this data base we have entered a large number of
cases from 1980 and 1981 as well as the present ones to afford
consistent guidelines of a scientific analytic predictive
nature. Also included in FORDTIS is the MCTL data base. The
MCTL together with a keyword in context index and an index to
the Commodity Control List (CCL) are already included. Defense
now has an effort underway to revise, update, and reformat the
10,000 pages of supporting documentation for all items on the
MCTL so that all of this information may be available to
FORDTIS users. The management improvements available from
better use of this vast store of concentrated information are
expected to be considerable. This data base will greatly sup-
port control lists, COMEX and other case reviews as well as
policy activities.
As a related activity, significant efforts to collect a
volume of information on foreign availability of critical tech-
nologies and related keystone equipments are underway. The
intelligence community and the industry establishments have
been requested to thoroughly assess foreign availability and
adversary capabilities on each and every item in the MCTL.
Although the Department of Commerce is the focal point for such
information per the Export Administration Act, the Department
of Defense believes that, by definition, the assessment of
foreign availability (in similar quality and quantity) requires
primarily technical and intelligence capabilities. We will of
course provide such information to the Department of Commerce
as the primary repository.
In summary, Defense has made major strides in stressing
technology control, such as the MCTL development and applica-
tion. It also developed a cooperative relationship with
industry and brought efficiency and effectiveness to our review
of license applications.
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Concerns
Currently there is not sufficient specificity with respect
to Country/Regional guidelines to enable a case processor to
differentiate between various countries and/or regions. This
is not too much of a problem from a technological standpoint if
one is dealing with the countries of Eastern Europe because
technologically all the Bloc countries should be treated essen-
tially the same. The only advantage would occur in handling
borderline cases. However, lack of specificity is a major con-
cern in viewing exports to the free world. Defense is working
with State and Commerce to improve the situation. Under the
Export Administration Act of 1979, Defense has the authority to
review and object to proposed sales to free world countries
provided the equipment is controlled for national security.
For the purposes of clarifying this point, an example is the
sale of production equipment and know-how for the manufacture
of state-of-the-art integrated circuits, an area in which the
United States is a leading supplier in the world today. If
sales of this equipment are not carefully controlled and spe-
cial negotiations completed with the governments of the reci-
pient companies, the thrust of our control efforts within COCOM
may be readily undermined by the ensuing foreign availability
sources created by such sales. This is a very complex issue
which has significant National as well as International over-
tones. The true scope of this problem is not fully known at
this time, but Defense will have to become more directly.
involved.
Our national security interests are not truly represented
when we group all our NATO Allies, Japan, Australia, and New
Zealand into the same Country Group for export purposes as
Neutrals and Third World Countries. Commerce has proposed a
change to this Country Group structure to which Defense has
heartily concurred. In the interim, it is incumbent on Defense
to establish more specific strategic and technical policy
guidelines with respect to the Neutrals and Third World
Countries, based on the integration of our political, economic
and military interests. Exports to those countries that are
not supportive of U.S. policies or to which intelligence advi-
ses us to be wary, may appropriately require Defense review.
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The Soviet Union has made a concerted effort to exploit
scientific exchanges and all technical information available in
order to enhance their military posture. The extent of the
problem has caused Defense to review its own procedures of
controlling unclassified technical data. The Services and
other Defense Agencies have established procedures to limit the
unstructured release of technical papers from their labora-
tories and research centers. Other representatives from
Defense who are scheduled to testify before this Committee will
more appropriately address this subject. In an open society
such as ours, the opportunity for a potential enemy to collect
meaningful information is extensive. However, the diffusion of
technology and information to all sectors of our society, par-
ticularly academia and the small R&D firms, is one of the U.S.
cornerstones to solve Defense's technological problems and to
Maintain our technological lead. Different sectors must talk
to each other and exchange data to lead to innovation and tech-
nological advancement. This is a strength of our society com-
pared to the closed society of the USSR. Defense relates its
technology transfer concerns to small industry and academia
which generates much of our new technologies. The Soviets know
this and will exploit these segments of our technology base if
we don't communicate better and more directly with them.
A significant cross-section of highly skilled executives,
technicians and scientists from Industry, Academia and
Government has been trained in the fundamentals of export
control through participation in the development of the MCTL
and our COCOM proposals. These personnel constitute a major
resource for license application review. It is equally impor-
tant to keep them current with respect to the status of export
control issues. This would have an ancillary benefit by pro-
viding an expeditious channel for identifying emerging tech-
nologies for consideration of possible control. In order for
the Defense facilities to support export control on a con-
tinuing basis, it is necessary to identify a centralized
program element in the Defense budget for this purpose. The
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Services have been requested to do theirs starting in POM-84.
These specific actions are necessary management improvements
within the context of improving and simplifying our directions
to the Services and Defense Agencies to better support us in
technology policy development and technology assessments for
improved export control for national security purposes. This
will help close the loop in the control of technology transfer
within Defense.
There are other areas which require Defense's attention.
These include more active participation in the various commit-
tees chaired by either State or Commerce, such as the Committee
on Exchanges (COMEX), Working Group 2 on compliance issues and
the Technical Advisory Committees. An increase in permanent
staff would obviously overcome this problem.
In closing, I an certain that Administrative policy
regarding improved controls on technology transfer to the
Warsaw Pact is clear. As a result of. our dedicated effort to
implement that policy, Defense has achieved significant suc-
cesses and incurred significant problems. To follow-up and
maximize the value of our present successes, we need to improve
upon our resources in all technical and intelligence sectors of
Defense. There is a need to improve the direction and man-
agement control of these resources via new DOD Directives and
Program Elements. Attempts are being made to communicate more
effectively with industry and academia. And, finally, Defense
needs to improve multilateral controls in concert with our
Allies and other parties having mutual interests. These areas
represent major challenges and opportunities for us in the
coming months and years. Thank you, Mr, Chairman.
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MICHAEL LORENZO
Michael Lorenzo, P.R., was appointed as the Deputy Under Secretary
of Defense (International Programs and Technology) in the Office of the
Under Secretary of Defense for Research and Engineering (OUSDR&E) on
October 1, 1981. He is responsible for technology transfer issues and
for all international activities in Defense research, development, and
acquisition, serving as the focal point for international cooperative
R&D efforts related to defense and for the management of activities
involving export control, munitions cases, and equipment transfer to
foreign nations.
Prior to this appointment, he served in a variety of application
engineering and managerial positions at the Defense and Electronic
Systems Center and Civil Systems Division of the Westinghouse Electric
Corporation for sixteen years. At Westinghouse, his responsibilities
included Manager of Military Planning for Defense, Oceanographic and
Space activities; Manager, Air Resources of Westinghouse Management
Services, Inc.; Director, Westinghouse Environmental Quality Control
and DOD Marketing Specialist. Mr. Lorenzo joined Westinghouse following
a distinguished thirteen-year Civil Service career with the USM and USAF
where he served in mechanical, aeronautical and aerospace positions
including PEM of the USAF Manned Orbiting Laboratory Program during its
initiation in 1964. Throughout this period, management and executive
functions included work with and for the U.S. intelligence communities
with respect to the collection, processing and production of information
with additional responsibilities to provide guidance to Westinghouse
and Department of Defense organizations while serving on active status
as a reserve Rear Admiral. He directed and managed efforts in planning,
programming, budgeting, systems analysis, operations research, financial
investment and analysis, conceptual engineering, systems development,
political assessments and human sensitivity evaluations in the markets
of Defense, Intelligence, Environmental Quality and-Civil Systems.
Other experiences included three years with the Fischer and Porter
Company as a field industrial instrumentation engineer, association with
the Stanford Research Institute as a consultant developing models for
simulation of 0E0 programs, and airline pilot with TWA.
In addition to his industrial and governmental experience,
Mr. Lorenzo also had a distinguished military career which included
over 140 combat sorties flown as 'a naval aviator in combat zones during
WWII and the Korean conflict. During this time, he was the recipient
of sixteen military decorations including the Distinguished Service
Medal, two Distinguished Flying Crosses, and seven Air Medals, and the
Air Force Commendation Medal retiring from the Active Reserves as a
Rear Admiral (upper half) in 1973. Admiral Lorenzo started his military
career as a member of the Army Corps of Engineers transferring to the
Navy as a seaman 2/C immediately after the Pearl Harbor attack. He
received the earliest possible accelerated promotions to the maximum
attainable ranks permitted by law for reservists.
A Registered Professional Engineer in the District of Columbia
and the State of Maryland, Mr. Lorenzo holds three Civil Service
engineering ratings and is the author of approximately 70 publications
in aerospace and other technological areas including a book and a
patent. He is a member of the National Society of Professional
Engineers, American Society for Engineering Management, and an Associate
Fellow of the American Institute of Aeronautics and Astronautics.
Mr. Lorenzo graduated from Pennsylvania State University in 1947
with a B.S. in Chemistry and Physics. He received his MEA from George
Washington University in 1956 and later completed further graduate work
toward a Ph.D at GNU and the USDA Graduate School.
Mr. Lorenzo was born in 1920 in Newton, New Jersey. He and his
wife; the former Anastasia Hackett, have five children and three
grandchildren.
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MILITARY TECHNOLOGY TRANSFER
delivered to
American Society for Engineering Management
at
George Washington University
11 March 1982
by
MICHAEL LORENZO, P.E.
Deputy Under SecretarY of Defense
, Research and Engineering
-(International Programs and Technology)
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Fellow members of the American Society of Engineering
Management, it gives a warm feeling to be.invited back to my
Alma Mater. . This is the institutionof higher learning that
awarded me an MEA degree in accordance with the academic
demands of Dean Mason, Dr. Jack Walters, et al, befitting the
style of Kate Turabiam. This degree has been a great manage-
ment tool for me over the years, particularly in my present
assignment--the OUSDR&E International Programs & Technology
(IP&T) is responsible for all technology transfer functions
among the DoD to all nations and is a truly multi-discipled
set of functions.
Technology -.The International Language
? When the super beings, in my case the good Lord, created the
Earth, he endowed all peoples with creative and logical powers
in all ethnic groups barring none. At the same time, endowed
in everyone on the surface of this earth were the Physical
Scientific Laws of Nature.
As different groups evolved, some developed these Laws
more than others for the fundamental purposes of enhancing
and improving the quality of life, property and welfare. Free
societies like ours soon learned that we had to protect these
wonderful assets from others with some form of security such as
police and armed defense capabilities. While good peoples
developed the Laws of Nature for the good of society in general,
others used technology to capture or destroy the life, property
and welfare of others. Accordingly and unfortunately, some
forms of high technologies have to be controlled from the
use of potential adversaries. This is a very difficult thing
to do and short-lived at best.
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For many centuries, engineers and scientists like you and
I who have done various forms of scientific research in
Universities, Industry and elsewhere were bonded by a Code of
Ethics to help our fellow beings by sharing our findings,
particularly in the fields of health and comfortable living.
This rapport and environment is essential to academia and
others to promote a healthy research environment and to promote
human understanding. As a result, the Physical Scientific Laws
of Nature are in reality an International Language.
In recent months, I have headed U.S. Defense Technological
country-to-country cooperation teams in several foreign
countries and experienced this phenomenon first hand. As a
guest of the Japanese Government and the Kyoto Ceramic Company
in the Cities of Kyoto and Kagoshima, we became involved with
the Japanese researchers concerning their ceramic gun barrel
and engine developments among other things. The interpreter
was needed for most conversations except during the two-way
discussions concerning the ceramic automobile engine, when
such subjects as Carnot's Laws of Thermodynamics, dynamometers,
torque, stoichiometric temperatures, etc were discussed.
Only scientists and engineers could ever experienee such an
event and understand each other Internationally! It is indeed
too bad that our lawyers, political scientists and politicians
cannot ever experience such a dialogue!
Incidentally, the ceramic hot parts, (pistons, piston
sleeves, piston head caps, turbo supercharger shaft and turbine
assemblies including blades) permit stoichiometric combustion
temperatures, hence an approximate 8 to 15 percent increase in
fuel efficiency is achievable in a diesel engine requiring no
water cooling system! After establishing this International
Technology rapport, the chief researcher levied with me saying
that they expected such an automobile engine to enter service
in.approximately I to 2 years and attain a 500,000 mile line.
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The management of Kyoto Ceramics (KYOCERA) paid a heart-warming_
compliment to me by connoting that I was now a member of this
International Language Team by awarding me a company work
uniform jacket with insignia. A recent article describing
Kyocera's products, organization and management appeared in
the February 18, 1982 issue of the New York Times Business
section. The Japanese are using ceramics widely making other
products like false teeth, semi-conductors (mostly packaging
for sophisticated silicon chips), ceramic cutting tools, pen
tips, solar cells, synthetic gem stones, artificial bones and
other biological implants.
Here we go again, the U.S. was the original leader of
robotics and ceramic engine parts research ten years ago, and
now lags behind Japan in its application! Why? There are a lot of
reasons, most of which I will leave for the Q's and A's to
follow. However, before leaving this subject, one must give
Japan credit for their progress principally due to one major
reason; namely, they have a great Government-to-Industry
relationship, not adversarial like ours which this Administration
is changing with time.
The bottom line of technology transfer is, "Yes, you can
control some critical technologies, but this is_ goOd. for the
most part only for a few_years because when one country has
demonstrated something, this generally provides enough motivation
for another country to pump in the resources and achieve a like type
- capability" -- nuclear energy is a classic example. However, we
can and must do two things; namely, keep our technological
R&D base strong with a healthy lead time and be smarter than
any potential adversary.
"DoD Technology Transfer 1981"
During CY 1981, IP&T processed almost 8,000 munitions cases
that were referred to us by the Department of State (DOS).
Another 23,000 cases were processed by the State Department
without'referral to DOD. These cases included such things as
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exports of 12 gauge shotgun shells and .22 ammunition going
to a NATO nation for 'example. These exports of goods and
technologies are covered by a National Security Decision
Directive entitled, "Conventional Arms Transfer
Policy" signed on July 8, 1981 by the President, and the Arms
Export Control Act of 1976 (as amended). Most of these goods and
technologies go to our Allies and other friends .and are made
for the primary purpose of enhancing military capabilities of
mutual interest. We find this new Presidential Directive to be
an excellent policy, rather straightforward to implement and
effective in nature. The number of ITAR (International Traffic
in Arms Regulations) cases have been increasing at a rate of
25% per year and are becoming ever more complex in nature. This.
is a rapidly expanding market. Included in these technology
transfer (T/T) functions are Foreign Military Sales, dual-
development, co-production, Data Exchange Agreements and
selected sections of numerous Memoranda of Understanding.
"T/T Rejection Rates"
That's the good news--growing at a rate of 25% per year.
Now for the bad news, the rejection -rate was greater than 5%
in 1981 compared to less than 2% one year prior. Along with
the 1981 rejection rate of 5%, one must add that a lot of
cases were approved wil;.11 exceptions--some people call these
constraints, gates or fences. For example, we quite.
often approve an export license for an advanced turbo jet engine
to a foreign country while retaining all of the design, .
manufacturing and production of the hot sections,which have
to be purchased from us.
Needless to say, an unworthy "friend"
could reverse -engineer these hot sections but at a tremendous
expenditure of resources. The Munitions List contains
Military or Single-Use technologies.
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Many technologies are primarily developed for civilian
use but have military significance. These are called Dual-Use
technologies. Industries with these products seek license for
export from the Department of Commerce Commodity Control List,
which is screened for "significant" enhancement of the
military capabilities of a potential "adversary" as outlined
in the Export Administration Act of 1979. Of the approximate
86,000 cases received by the DoC in 1981,. 3,500 were referred
to DoD of which 1,500 were of .a. COCOM consideration. Here
again, many. "precedent" cases are delegated to Commerce by DOD
once the "performance thresholds" are established and all
parties agree to them, which is rather hard to achieve. The
acronym COCOM stands for Coordinating Committee which is a
voluntary organization established in the 1950's consisting
of the NATO nations less Iceland plus Japan. -COCOM convenes
in Paris for the primary purpose of controlling East-West
trade of Dual Use technologies. Computers and associated
products are the most prevalent products of the Dual Use
technology category that have military implications.
Some people -- consisting of politicians, lawyers and
political scientists for the most part -- have created the
buzz words "technology hemorrhaging" fcr the decade of the 1980's.
Such a dual use technology transfer case creating this image
is Kama River. We must regret the Kama River truck facility..
The U.S., France, Italy, UK, West Germany and Austria financed
and built the most modern and largest heavy truck facility in
the world. The general contractor was. Mack Truck Inc. of
the U.S. Assurances that these trucks would be for the civilian
sector were not kept; many of the heavy vehicles used in the
invasion of Afghanistan were manufactured at the Kama River
facility. Incidents such as these are not the norm, yet
they have happened; and we are insuring that our mistakes are
not repeated. The bid has been tightened considerably in this
area since, in 1981, we experienced a 15 percent rejection rate
compared to less than 2 percent a few years ago. However,
the number of Dual Use cases is growing 15-20 perdent Per year.
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In other words, 'PST processes a combination of 1,000
'T/T cases per month, plus approximately 3,000 MOU's/DEA
international programs per year, which makes it one of the
busiest shops in DoD. The International Programs Which have
a lot of T/T in them are very synergistic with the T/T cases
in general. It is interesting tO note that.over 90 percent of the
T/T case processing activity within DoD is technical assessment,
the other being Policy and Military considerations.
Sensitive technology.is not licensed for sale to potential
adversaries. To insure that such technology is not acquired
by unfriendly countries, MOD's concerning USG-approved security
procedures and re-export assurances are negotiated with all
friendly countries and apply to their companies that receive
sensitive U.S. technology.
Further assurances that sensitive technology is transferred
only to destinations that will not adverselyi 'affect U.S. national
security are gained through the National Disclosure Policy Committee
(NDPC) review process. The NDPC is chaired by DoD and includes
representatives from DOS, DoE, CIA, OJCS, and the military
departments. The purpose of the NDPC is to establish policy
-concerning the release of classified/sensitive military information
and systems to countries with which the U.S. has trading relations and
to consider requests for exceptions to that policy. The NDPC also
also participates in the decision making process on export license
applications involving the the release of classified information
when special concerns arise with respect to foreign
eligibility.
T/T Enforcement
Enforcement responsibility resides with DoC
government
Compliance
Division and Bureau of Customs; prosecution is handled through
Department of Justice. Currently efforts are underway to
improve export control enforcement through the Interagency
Working Group on Export Control Enforcement. The departments
and agencies participating are Justice, Treasury, Commerce,
State, CIA, FBI, Defense and the National Security Council.
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l.iultilaterali Ex,ort Control enforcement is also being
studied through the COCOM High Level Group (HLG) and the
NATO Technology Transfer Study Group. The COCOM HLG is
evaluating current COCOM controls on the nine defense priority
industries in an effort to strengthen those controls. The
NATO Technology Transfer Study Group has been established tO
involve the foreign MOD's in the export control arena and
possibly establish an overriding veto for the MOD's in third
party transfers. Recent analyses conducted by competent
authorities show that less than 25% of the adverse critical
technology leaks have gone through legal means which leads
us to the conclusion that the current regulations mechanism is
more effective than some people think. The efforts underway to
improve enforcement are focused on clandestine and illegal
acquisitions and should prove quite successful in reducing
undesirable T/T.
In closing, DOD will continue to stress as its primary
role in technology transfer;
1. Improving and maintaining the U.S. technology base
through adequate /IDEA resources;
2. Improved armament cooperation with our allies including
technology transfer; and
3. Control of transfer of military technologies and
dual-use technologies to potential adversaries.
You have been a wonderful audience; the podium will now
entertain questions.
Thank you.
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STATEMENT OF
CHARLES P. LECHT
FORMER PRESIDENT
ADVANCED COMPUTER TECHNIQUES CORPORATION
NEW YORK, NEW YORK
BEFORE THE
U. S. SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
MAY 11, 1982
Mr. Chairman, Senators, my name is Charles Lecht. I am pleased to
appear here today to contribute to this Subcommittee's examination of the transfer
of American technology to Soviet Bloc nations. During the course of your staff's
investigation and these hearings, you have studied that problem, mindful of the
views and interests of government, the intelligence and defense communities, law
enforcement, and the public itself. Let me now focus your attention on the issue
from the viewpoint of that sector which, by all reports, is the target of these
Soviet efforts: America's high technology industries.
Until April 26, 1982 I was President and Chairman of the Board of
Advanced Computer Techniques Corp. (ACT), a computer software consulting firm
which I founded in 1962. Holding a Bachelor of Sciences degree in mathematics
from Seattle University and a Masters of Sciences degree in mathematics from
Purdue University, I have been actively involved in the computer field since 1951,
including the authorship of five books. My company has been in existence now for
some twenty years, regularly conducting business with foreign governments, U.S.
subsidiaries abroad, multi-national corporations, as well as the United States
government. ACT currently employs over 350 persons in both national and
international offices, with over fifty per cent of the company's income currently
derived from business abroad. We produce computer program software, synthetic
languages, and operating systems. On numerous occasions, we have been chosen as
subcontractor on U.S. government contracts. As but one example, ACT is
responsible for some of the software used in the production of the F-16 airplane.
My years of experience in the field reinforce what this Subcommittee has
already heard: the Soviets are engaged in a concentrated effort to seek out and
obtain the secrets of America's technology giants. From a personal standpoint, the
problem has "hit home" on several occasions during my years with ACT.
One of ACT's frequent sources of business and consulting contracts has
been the country of Yugoslavia. ACT has become one of the best known American
firms operating in that country. Consultant work is prohibited in Yugoslavia
except by consent of the government. ACT prospered there, under the auspices of
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the necessary government approval. As a systems analyst, we provide advice on
what the Yugoslays should buy and at what prices so that they will not be easily
cheated on the American marketplace.
About seven years ago, I had been conducting some ACT business with
Honeywell's Yugoslavian sales agents. A Yugoslav Honeywell representative
invited me to lecture in Yugoslavia on the current state of computer technology.
At first blush, this was not an unusual request -- I had already given numerous
speeches in Yugoslavia, as well as in the United States and elsewhere. I understood
that the lecture was to be given to Yugoslays. I did not expect nor was I prepared
to address a select corps of the Russian military. Nevertheless, in my discussions
with the sales agent just prior to the speech, he told me, somewhat reluctantly, /
that more than a few representatives of the Soviet military had come "from all
over Russia" simply to attend my lecture. I responded by flatly refusing to give the 1/
speech. He was visibly upset, but I remained firm in my refusal.
Later that evening, I received a phone call in my Yugoslav hotel roon
from an individual who identified himself as a general in the Soviet military. He
told me that he made the trip to Yugoslavia solely for the purpose of hearing my
lecture. He urged me to reconsider my decision. Despite my refusal to do so, the
"General" persisted. Finally, he asked me, at the least, to meet him for a drink. I
had no desire to speak or drink with the Soviet military and politely declined his
invitation.
That incident occurred at least seven years ago. As of last fall, I had not
seen nor heard from the sales agent since. Strangely enough, on the very day after
this Subcommittee's staff first interviewed me on this subject last October, he
phoned me to set up a meeting in my New York office. At that meeting he
introduced me to a Yugoslavian businessman who accompanied him. When I
reminded him of the aborted lecture incident, he responded with a somewhat
nervous laugh and quickly changed the subject.
In another setting, our company has also been confronted with the
problem of Soviet approaches to American subsidiaries working abroad. ACT has
had a subsidiary located in Milan, Italy. Milan is recognized as an international
center for businesses involved in highly advanced technology. In fact, most of
America's high technology companies do research and development work in the
area.
95-929 0 - 82 - 37
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As a booming technology center, Milan also accommodates companies
from Western European as well as Soviet Bloc nations. In fact, after General
Electric began selling computers directly to the Soviets through their Italian
subsidiary, they established a GE center in Milan for the express purpose of
training Soviet personnel in computers. The Soviet contribution in Milan, however,
goes beyond the placement of trainees arid legitimate technology companies. It is
common knowledge amongst the Milan technology community that Soviet
intelligence agencies are more than amply represented in Milan. A restaurant, La
Notte, was a favorite hangout.
ACT's business manager in Milan, Jean Patrick Rousseau, was directly
approached for information by the Soviets. Identifying himself as an of ficial of the
Soviet Chamber of Commerce, the individual asked Rousseau to provide software
information and services. The Soviet was specific to Rousseau as to the manner
and method to be employed in the proposed deal: he was to pay Rousseau
personally with an agreement that there would be no record of the payment or the
work performed. When Rousseau related the offer to me, I told him not to deal
with that individual or with any other Soviets. Some time after this incident,
Rousseau was again approached by another individual from the Soviet Chamber of
Commerce with a similar request. As before, Rousseau refused to cooperate.
Clearly, and from all reports, there is a serious and focused attempt by
the Soviets to unveil the inner workings of our high technology. Although
American initiatives are as yet ill-equipped to deal effectively with the problem,
there is, at least, growing recognition that the problem exists. I also see, however,
a disturbing development which does not bode well for our future ability to combat
technology transfer. The United States, in both government and public circles, has
been seriously misled as to the true nature of Soviet efforts to transfer technology.
We continue to operate under an absolutely crippling misconception of what the
Soviets are stealing and why they are doing so.
It is of ten said that the Soviets are seeking our technology on a broad
scale in order to copy what they are incapable of creating themselves. Mr.
Chairman, over twenty years of experience in high technology tells me that their
true purposes are much more precise. The Soviets are stealing our technology
selectively for military purposes, and military purposes only.
Contrary to popular belief, the Soviets are not significantly behind the
United States in the level of technology achieved. In 1980 the Soviets estimated
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their yearly production in computer technology at $10-11 billion and growing. Even
by American estimates, their yearly production nears $6-7 billion per year. By
comparison, American production of new computer technology was $11 billion in
1980.
An analysis of those figures exposes the obvious fallacies in what 1 will
term the "underdeveloped Soviets theory. Soviet production is by and large new
production -- in contrast to the United States, there is, by deliberate choice, no
mass production of consumer goods in the Soviet Union. Moreover, theirs is a 75%
agrarian economy -- with no banks, no consumer sector, no hotel industry. There is
therefore no real need for the white collar computerization which we recognize as
a fact of life in the United States. Our industry is 75% of white collar. Thus one
wonders what Soviet technology production, currently very near our production, is
used for, if not primarily military purposes. To be sure, some is in factory
automation, but I am of the opinion that this could not but account for a fraction
of the massive production under way.
By contrast, American high technology production is spread over a vast
spectrum of industries in both the public and private sectors. Frankly speaking, it
is pure "myth" that the Russians are so far behind us technologically. There is
more scientific literature printed in the Soviet Union than anywhere else in the
world. Intelligence is not, unfortunately, a privileged or solely American
commodity.
Years ago, the Soviets were, by comparison, more interested in purchasing
American technology for use and for copying. The reason was simple -- they were
just starting out in the field and they were broke. If you are surrounded by a sea of
countries characterized as technological supermarkets (to the Soviets, a circle of
traditionally high technology countries), and have very limited investment capital,
you buy what is easily available in order to better focus capital on what you most
have but cannot easily buy. To the Soviets this has always meant food and arms.
In the 1980s, the Soviets have far less dependency on surrounding
technological "supermarkets". They have acquired some of them (Czechoslovakia,
Hungary, Poland, East Germany) as well as the means and the know-how to create
and operate their own. The truth is that the Soviets no longer want our technology
solely to copy it or because they can't make it. They want it, primarily, because it
is the purest reflection of our military capabilities.
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??
That they are stealing computers and microchips from the USA is
unquestionable, but it is not because they are inherently incapable of building
equivalent technology. The evidence shows that such stealing is primarily devoted
to military purposes. In that vein, they are primarily stealing our technology in
order to find out, for example, how the F-16 embedded computer systems
technology works, how to defend against the power this gives us, and how to
incapacitate it in the quickest and most effective way. Their focus on military
intelligence and exploitation does not, however, preclude their interest in U. S.
technology for their commercial sector in either export operations or internal use.
Unfortunately, current American policy on technology transfer ignores
that fact, resting instead on a totally outdated conception of what the Soviets are
stealing and what they are stealing it for. With this improper focus, we are not
only ineffective in stopping technology transfer, but we are also hurting our own
technology in the process. Wholescale, generalized attempts to scuttle all
technology transfer on unspecified and unfocused bases do not solve the real
problem and are totally unresponsive to the needs of our own technology industry.
One example occurred when the U.S. government prevented a Soviet
scientist from delivering a planned speech to a scheduled conference in California
in 1979. The speech had been the result of concentrated planning and scheduling
efforts by respected members of the American technology community. The Soviet
was to deliver a paper on the science of "holography", an area believed to be the
key to future military victory and an area in which the Soviets are undisputedly
recognized as experts. As a result of unfocused and unrealistic efforts to curb
technology transfer, the speech was cancelled. This was done despite protests by
IBM as well as other respected members of the American scientific and high
technology community. Such actions do not stem the flow of technology to the
Soviets. They do seriously halt the flow of expert and needed Soviet technology to
American industry.
There are other serious shortcomings in our current policy on technology
transfer. The CoCOM control "sieve", once effective, is now begging of revision.
Dramatic changes in technology require that we re-evaluate CoCOM's basis. Most
of our legal controls on technology transfer center on the export laws and a belief
that we can effectively police the transfer of listed materials at our borders. In
view of the changes in restricted technologies, just in the last five years that
policy is unrealistic and hopelessly outdated. The huge computers of fifteen years
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ago are no longer the "jewels" of our technology industry. Today's most powerful
computers (and in the foreseeable future) are composed of tiny microprocessor
chips, the elements of which vanish into the microscopic world. We should be
selling our big computers for as much profit as they will bring, rather than
expending resources to restrict their export to the Soviets and elsewhere. Clearly
a new computer can be very large in size, so old and new are not equivalent toI2ig
and small all the time; just most of the time. But new and 1:ig machines are
ultimately decomposable into microprocessor chips, bringing me to the point of this
part of my testimony.
Even the largest computer systems can be shipped piece by piece and
reassembled at their point of destination.
The transfer of microprocessor chips defies detection by currently known
means. These are so thin that they can pass through the eye of a needle. Only half
a centimeter square, they are essentially undetectable by metal detection devices.
No surveillance device is truly effective.
This makes detection at borders virtually impossible. Instituting controls
at our borders are therefore impossible. We must institute some policy of controls
on technology for previously mentioned reasons. Most important, that policy must
be effectively communicated to and instituted at the source ? the companies that
make these products and deal in them. Unfortunately, to date the government has
done little in this respect. Current export control lists are (1) hopelessly outdated
and (2) not visibly circulated within the industry sectors. I have seen lists of
controlled products which are so outdated that they go back to the days of
delivering B-29 parts.
The government should initiate serious efforts to give guidance on foreign
involvement and the true strategy of foreign technology transfer to key officers in
companies producing the targeted technology. Private briefings of the very top
people in these industries by responsible and knowledgeable American officials
would be the best beginning to an effective program. Sadly, many USA
microprocessor manufacturers have some measure of foreign ownership, including
control.
Today the People's Republic of China is currently in the "supermarket"
situation which the Soviets were in fifteen years ago. I met with the first
purchasing mission from the People's Republic of China in my New York offices.
We spent nearly twelve hours together, discussing the scope of their knowledge and
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interest in the technology area. All of, certainly most of, the members of the
group were university graduates, mostly from schools like Harvard, Princeton, and
Yale and well experienced in high technology. They indicated that they, too, had a
deep knowledge of microprocessor chips, modern nuclear reactor technology, etc.
In passing, I remarked that "you certainly know a lot about modern technology."
The Chairman of the Chinese group responded, "We're not stupid. We're just
broke."
Like the Chinese, the Soviets are not "stupid". And, unlike fifteen years
ago, they are no longer "broke". They do not need to steal all our technology and
they know it. By design, they have for the most part chosen to selectively target
and secure those areas of American technology which are critical to the secrets of
our military defense. They need to know such things as when and where our
missiles and planes take off and how to jam the electronics in these. As long as the
United States fails to recognize the bases and nature of their strategy and persists
in outmoded, ineffective, and unfocused attempts to control the export and
transfer of technology, the Soviets will, I am afraid, find their global task that
much simpler.
Thank you.
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PREPARED STATEMENT OF ADMIRAL BOBBY..R7 INMAN
Thank you Mr. Chairman for the opportunity to appear before
this Committee this morning and to continue dialogue on this most
important topic. I believe that we agree that technology
transfers to the Soviets and the Eastern Bloc represent a very
serious problem.
I would like to take this opportunity to again enter into
the public record the kinds of problems we are dealing with, and
the importance of the various Soviet Bloc mechanisms for
acquiring Western technology.
? first.'as weZlook..-at the militarily useful, militarily
related technology which the Soviets have acquired from the
West, aboUt 70 percent of these acquisitions have been
accomplished by the Soviet and East European intelligence
services, using clandestine, technical, and overt collection
operations. They are trying to get technologies of proven
Western weapons or component designs that can be applied
directly to Soviet weapons R&D and industrial needs.
--- The Soviets and their Warsaw Fact allies are concentrating
their efforts through purchases openly and legally and, if
not successful, then illegally, including espionage. The
sources of this technology may be government classified or
unclassified reports, private companies "proprietary"
report, open-source technical documents from companies and
government organizations. Embargoed equipment falls ihto
this category as well. The Soviets undertake a very
thorough vacuum cleaning of anything in the public sector
which will let them better target their espionage
activities. .
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-- Of the remaining 20-30 percent of the acquisitions of
information of military value to the Soviets, it mainly
comes through legal purchases and open-source publications
or from other Soviet organizations, such as the Ministry of
Trade and related international bodies; only a small
..perLentage comes from the-dir,ect?techn4cal-exchanvts.
tonductedlby 'scientists and s.tudents
I would like to enter into the record at this time an
unclassified study from the Intelligence Community perspective of
our knowledge of Soviet efforts to obtain Western technology and
to use it ultimately to improve their own military capabilities.
As we look out into the 1980s, where do we believe the
pressure is going to come?
-- Future Soviet and Warsaw pact acquisition efforts--including
acquisitions by their intelligence services--are likely to
concentrate on the sources of such component and
manufacturing technologies, including:
Defense contractors in the United States, Western Europe,
and Japan who are the repositories of Military
development and manufacturing technologies.
General producers of military-related auxiliary
manufacturing equipment in the United States, Western
Europe, and Japan,
Small and medium-size firms and research centers that
develop advanced component technology and designs,
including advanced civil technologies with future
inilitary applications,
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The task is likely to become even more difficult in the
future as several trends identified in the 1970s continue into
the 1980s:
First, since the early 1970s, the Soviets and their ?
surrogates among the East Europeans have been
increasingly using their national intelligence services
to acquire Western civilian technologies--for example,
, 6
automobile, energy, chemicals, and even consumer
electronics.
Second, since the mid-1970s, Soviet and East European
intelligence services have been emphasizing the
collection of manufacturing-related technology, in
addition to weapons technology.
Third, since the late 1970s, there has been increased
emphasis by these intelligence services on the
acquisition of new Western technologies emerging from
universities and research centers'.
The combined effect of these trends is a heavy focus by
Soviet Bloc intelligence on the commercial sectors in the West--
. .
setors.th:a-t,arernot.,-760".1411Y.:ProtecterL,f.rom hostjl_e,I.ntellj9Pn_cn
In idOttoT", P!e.-se.curj_tY..ptovticlodby
is no Mat-ch for the human penetration operationsof Such foreign
intelligence services.. But the most alarming aspect of this
commercial focus by Soviet Bloc intelligence services is that as
a result of these operations the Soviets have gained, and
continue to gain, access to those advanced technologies that are
likely to be used by the West in its own future weapons systems.
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I can only conclude that Western security services will be
severely tested by the Soviet intelligence services and their
surrogates among the East European intelligence services during
the 1980s. In response, the US and its Western allies will need
to organize more effectively than it has in the past to protect
its military, industrial, commercial and scientific communities,
I am pleased to say that coordination within the
Intelligence Community and intelligence support to the Executive
Branch departments and agencies regarding the'issue of technology
transfer is much better than a year ago when Bill Casey pointed
out a number of deficiencies in this area to the Senate Select
Committee on Intelligence. for example:
-- The DCI hasWablished.,a Technology Transfer
Intelligence Committee (TTIC) to serve as a focal point
within the Intelligence Community on all technology
transfer issues. The Committee is able to draw on the
highly skilleci.S&T. analysts who are located thr_ogghou.t.
the:military tEh41.4ca1-jntO11_genCe-Lcenters;,;ana.selsewhere
in the Intelligeace Commuivity to .address this'-complex
problem. The Committee also ensures that intelligence
information collected on technology transfer is
consistent with the DCI's priorities and guidance and
meets the needs of Community production organizations. A
TTIC Subcommittee on Exchanges advises appropriate US ?
Government departments and agencies of the technology
transfer implications and foreign intelligence equities
involved An exchange programs and commercial contacts
with nationals from designated foreign countries and
recommends changes as appropriate. A Subcommittee on
Export Control has recently been established to provide
foreign intelligence support, on export control issues to
appropriate US Government agencies.
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-- The intelligence agencies are now better organized to
support the functions of the export Control enforcement
agencies. 'Assistant Attorney General Lowell Jensen is
heading an interagency committee at Justice on Export
Control Enforcement. This group has the potential to
become the most significant forum for coordinating .
enforcement and investigative efforts dealing with export
control matters. As members of this Committee, we will
ensure that it draws effectively upon appropriate
intelligence data bases and support. The intelligence
agencies will also become directly acquainted with the
current state -ofthe enforcement .effort and the
-1.0telleigence_nee'di.of the:On-forcement.agencies 'but a sn
will be in a'pcisition to acqUire-first hand and peruse
significant information being developed by the
enforcement agencies that will add to and enhance the
effectiveness of the intelligence effort in the long .
run. Any intelligence issues that are developed in this
forum may be brought back to the TTIC for appropriate.
consideration in an Intelligence Community setting.
-- The NSC Technology Transfer Coordinating Committee,
chaired.* Dr. Gus Weiss, 'serves as a valuable high-level
forum for national policy assessment and developments.
It is here that the political, foreign policy,
.intelligence and enforcement elements are woven together
and decisions on jurisdictional issues or program choices
may be sought. Substantial intelligence support to this
group will result in better understanding of the threat,
greater support for the efforts of the intelligence and
enforcement agencies and result in more considered policy
determinations.
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-- The intelligence agencies are now in a position to
make substantial contributions to Commerce's Advisory
Committee on Export Policy, 'which makes determinations
concerning whether particular exports should be licensed
and what general policies should be applied by the US.
-- State's Economic Defense Advisory Committee (EDAC).
GT-dup.,n st:ructre"..prW,cies.,,an, i_mvortan.t
opObrtunity for, 1-ntelli.gence,-.epforcementand. foreign
policy considerations to be discussed in the context of
both general policy concerns and specific cases.
Intelligence support here is essential for its value in
identifying and assessing international enforcement
problems and bridging the gap where there. are both
domestic and international aspects to a particular case.
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PREPARED STATEMENT OF DR. STEPHEN D. BRyEN
I WELCOME THIS OPPORTUNITY TO SPEAK WITH YOU TODAY CONCERNING
WHAT WE IN THE DEPARTMENT OF DEFENSE BELIEVE TO BE A MOST SERIOUS
NATIONAL PROBLEM - THE CONTROL OF TECHNOLOGY WHICH IS BEING TRANS-
FERRED TO THE SOVIET UNION AND ITS ALLIES. MY DISCUSSION WILL FOCUS
ON WHAT WE HAVE ACHIEVED SO FAR, WHAT IS IN THE WORKS, AND WHAT WE
HAVE YET TO DO. IN THIS CONNECTION YOU SHOULD KNOW THAT ONE YEAR
AGO WHEN I UNDERTOOK THIS MISSION, I HAD ONLY FOUR STAFF MEMBERS,
A FULL PLATE OF RESPONSIBILITIES, NO PREVIOUS RECORDS OR ASSESSMENT,
AND NO ORDERLY SYSTEM FOR DISCHARGING MY RESPONSIBILITIES. I CAN
SAY NOW, WITH SOME PRIDE, THAT WE HAVE MADE CONSIDERABLE PROGRESS
IN SOLVING SOME OF THE PROBLEMS; OTHERS REMAIN ON THE AGENDA.
PREVIOUS TESTIMONY HAS GONE TO CONSIDERABLE LENGTH TO ILLUS-
TRATE THE SCOPE OF OUR PROBLEM. IT WOULD BE VERY DIFFICULT TO
ESTIMATE THE REAL DAMAGE DONE TO U.S. NATIONAL SECURITY BY THE
BELL CASE, WHICH HAS BEEN BRIEFED TO YOU. THAT LOSS CONSISTS OF
BOTH MILITARY DAMAGE IN MAKING THOSE WEAPON SYSTEMS VULNERABLE TO
COUNTER-MEASURES AND IN COST TO THE TAXPAYER TO OVERCOME THE
VULNERABILITIES THAT THOSE COMPROMISES ENTAIL. THESE ARE COMMON
ASPECTS OF SUCH CASES AND CAN BE READILY UNDERSTOOD WHEN BLATANT
ESPIONAGE IS INVOLVED AND U.S. MILITARY WEAPON SYSTEMS HAVE BEEN
DIRECTLY COMPROMISED BY SOVIET EFFORTS. THE SAME KIND OF DAMAGE,
HOWEVER, IS DONE IN MORE SUBTLE WAYS BY A VARIETY OF MECHANISMS
THAT ARE CENTRALLY DIRECTED BY THE SOVIET UNION TO THE DETRIMENT
OF THE UNITED STATES..
** A SO CALLED "GRADUATE STUDENT" STUDIES FUEL AIR EXPLOSIVES IN
AN AMERICAN UNIVERSITY, RETURNS TO MOSCOW AND EMPLOYS THAT
KNOWLEDGE IN THE DEVELOPMENT OF THOSE KINDS OF WEAPONS FOR
THE SOVIET UNION.
** A TOUR OF A U.S. MANUFACTURING FACILITY ENGAGED IN BUILDING
WIDE BODY AIRCRAFT IS COMPRISED OF VISITING SOVIET OFFICIALS
WITH GUMMY SOLED SHOES WHO CAN BE PRESUMED TO HAVE ACQUIRED
SUFFICIENT METALLURGICAL KNOWLEDGE THROUGH THE SOLES OF THEIR
FEET TO ADVANCE THE STATE-OF-THE-ART OF SOVIET METALLURGY
APPLICABLE TO THE SAME KIND OF AIRCRAFT FOR SOVIET MILITARY
PURPOSES.
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**
* *
* *
584
IN A PERIOD OF DETENTE AND BRIDGE BUILDING WE LICENSE THE
SALE OF PRECISION BALL BEARING GRINDERS WHICH PERMIT THE
SOVIETS TO INCREASE THE ACCURACY OF THEIR STRATEGIC MISSILES.
THE U.S. TAXPAYER ASSUMES THE COST OF UPGRADING U.S. ICBMS TO
REDUCE OUR VULNERABILITY.
OVER A PERIOD OF 3 OR 4 YEARS THE SOVIETS ACQUIRE THE BITS
AND PIECES REQUIRED TO CONSTRUCT A COMPLETE MANUFACTURING
FACILITY FOR INTEGRATED CIRCUITRY, THUS IMPROVING THE RELI-
ABILITY, THE WEIGHT AND PERFORMANCE CHARACTERISTICS OF SOVIET
MILITARY SYSTEMS FOR A WIDE VARIETY OF APPLICATIONS.
FOR A FEW THOUSAND DOLLARS THE SOVIETS ACQUIRE VIRTUALLY ALL
UNCLASSIFIED U.S. MILITARY STANDARDS APPLICABLE TO THE
PRODUCTION OF U.S. MILITARY MATERIEL.
** THE LIBRARY OF CONGRESS SENDS THE OPERATING AND MAINTENANCE
MANUALS FOR THE EMPLOYMENT OF U.S. FIELD ARTILLERY AND MISSILES
TO THE SOVIET UNION IN HONORING A 19TH CENTURY TREATY FOR THE
EXCHANGE OF GOVERNMENT PRODUCED PUBLICATIONS.
UNDOUBTEDLY YOU HAVE HEARD, OR WILL HEAR IN THE FUTURE, FROM
THOSE WHO SAY THAT ONLY BY CONSTANT INVESTMENT IN THE TECHNOLOGY
BASE UPON WHICH OUR DEFENSE IS FOUNDED, CAN THE U.S. HOPE TO REMAIN
AHEAD OF ITS STATEGIC ADVERSARY. LIKEWISE YOU WILL HEAR THAT IT
IS IMPOSSIBLE TO CONSTRAIN KNOWLEDGE AND TO DO SO IS, IN FACT,
COUNTER TO THE EFFORT TO ADVANCE THE ONWARD PROGRESS OF TECHNOLOGY.
UNDOUBTEDLY WE MUST PURSUE THE ADVANCEMENT OF OUR OWN TECHNOLOGY
BASE. LIKEWISE, WE DO NOT SEEK TO CONSTRAIN THE FREE FLOW OF IDEAS.
HOWEVER, WE BELIEVE THAT IT WOULD BE IMPRUDENT IN THE EXTREME TO
SHRINK FROM THE DIFFICULT TASK OF DEVISING AND ENFORCING REASONABLE
CONTROLS TO PRECLUDE THE USE BY THE SOVIETS OF THE FRUITS OF OUR
TECHNOLOGICAL GENIUS TO DESTROY THE VERY SYSTEM BY WHICH IT IS
NOURISHED. IT IS OUR ATTEMPT TO STRUCTURE, WITHIN THE DEPARTMENT
OF DEFENSE, REASONABLE CONTROLS OVER TECHNOLOGY; CONTROLS WHICH
WILL EFFECTIVELY INHIBIT THE FLOW OF TECHNOLOGY CONTRIBUTING TO
THE GROWTH IN SOVIET MILITARY CAPABILITY.
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IT IS A TRUISM THAT THERE IS NO SUBSTITUTE FOR CASE-BY-CASE
REVIEW OF PROPOSED EXPORTS. ONLY BY CAREFUL AND OBJECTIVE ANALYSIS
OF THE FACTS OF EACH CASE CAN THE OPERATIONAL, TECHNICAL AND PRECE-
DENTIAL IMPACT OF AN EXPORT BE PROPERLY ASSESSED. WE HAVE NO
INTENTION WHATEVER OF ELIMINATING THIS VITAL ELEMENT OF DOD'S
CONTRIBUTION TO THE GOVERNMENT'S EXPORT CONTROL EFFORT. HOWEVER,
THE CASE-BY-CASE APPROACH FUNCTIONS BEST WITHIN A FRAMEWORK OF
GUIDELINES AND CRITERIA; PROVEN STANDARDS BY WHICH INDIVIDUAL
JUDGEMENTS CAN BE MADE. IN THE PAST, OUR INDIVIDUAL JUDGEMENTS
WERE MADE IN SO FLEXIBLE A FASHION THAT WE WERE OVERLY SUBJECT TO
THE VAGARIES OF THE MOMENT. INDEED, A SMALL INDUSTRY HAS ARISEN
IN WASHINGTON COMPOSED OF INDIVIDUALS WHO KNOW HOW TO "PLAY THE
SYSTEM" WITHIN THE EXPORT CONTROL COMMUNITY. THESE PEOPLE, THOUGH
OFTEN WELL INTENTIONED, RECOGNIZE THAT TIMING AND APPROACH CAN
MAKE THE DIFFERENCE BETWEEN APPROVAL AND DENIAL OF AN INDIVIDUAL
CASE, PARTICULARLY THOSE CASES WHICH ARE RECOGNIZED AS BEING ON
THE MARGINS OF ACCEPTABILITY. THE EFFECT HAS BEEN GENERALLY TO
ADVANCE THE MARGINS OF ACCEPTABILITY OF EXPORTS THROUGH THE GRADUAL
ACCRETION OF PRECEDENTIAL APPROVALS WITHOUT PARTICULAR REGARD FOR
THE BASIC STANDARDS BY WHICH EXPORTS SHOULD BE JUDGED - - THE
NATION'S SECURITY. ACCORDINGLY, WE ARE ENGAGED IN A MAJOR EFFORT
TO DEVELOP, IN A COGENT AND COHERENT FASHION, A FRAMEWORK OF POLICY
WITHIN WHICH THE DEPARTMENT OF DEFENSE CAN PROVIDE ITS ADVICE AND
COUNSEL TO THE ULTIMATE LICENSING AUTHORITIES. SOME OF THIS EFFORT
IS BEING UNDERTAKEN IN THE CRUCIBLE OF SPECIFIC, CURRENT CASE
REVIEWS.' OTHER EFFORTS ARE BASED UPON QUIET ANALYSIS OF THE LESSONS
OF PAST EXPORT ACTIVITY. THE OBJECTIVE IS THE SAME IN BOTH ACTIVI-
TIES; TO IMPLEMENT THIS ADMINISTRATION'S VIEW THAT OUR EXPORTS
SHOULD NOT UNDERMINE OUR EFFORTS TO REPAIR THE EFFECTS OF A PERIOD
OF NEGLECT FOR OUR NATIONAL DEFENSE WHICH HAS PLACED OUR ADVANTAGE
.OVER THE SOVIET UNION IN QUESTION.
STARTING WITH FOUR PEOPLE, WE IN THE OFFICE OF THE UNDER
SECRETARY OF DEFENSE FOR POLICY, HAVE EXPANDED OUR STAFF TO TWELVE
AND HAVE INTENSIFIED OUR ROLE IN THE EXPORT REVIEW PROCESS WHILE
UNDERTAKING THIS MAJOR EFFORT IN OBJECTIVE POLICY FORMULATION. I
WOULD LIKE TO SHARE WITH YOU SOME OF THE THINGS WE HAVE DONE TO DATE,
AND SOLICIT YOUR SUGGESTIONS FOR OUR FUTURE EFFORTS.
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FIRST, AN AUGMENTATION TEAM COMPOSED OF REPRESENTATIVES OF THE
SERVICES HAS BEEN ASSIGNED TO MY OFFICE AND IS PREPARING FOR THE
SECRETARY OF DEFENSE'S SIGNATURE A POLICY STATEMENT ON CONTROL OF
TECHNOLOGY TRANSFER. THIS WILL REPLACE A 1977 INTERIM POLICY
SIGNED BY SECRETARY BROWN, DESIGNED TO SUPPORT U.S. EFFORTS TO
CONTROL EXPORTS OF MILITARY CRITICAL TECHNOLOGY AND RELATED PRODUCTS.
WHEREAS THE INTERIM POLICY FOCUSED ALMOST EXCLUSIVELY ON THE KNOW-
HOW OF TECHNOLOGY, THE THRUST OF OUR NEW POLICY WILL REFLECT A
BALANCED BUT FORCEFUL EMPHASIS ON TECHNOLOGICAL KNOW-HOW, KEYSTONE
EQUIPMENT, AND END PRODUCTS. THE POLICY WILL REFLECT SEVERAL
CHANGES THAT HAVE OCCURRED SINCE 1977. THE EXPORT ADMINISTRATION
ACT OF 1979 IS IMPORTANT IN THIS RESPECT AS IS THE INCREASED AWARE-
NESS AND CONCERN OF MANY AMERICANS TOWARD THE VAST AMOUNTS OF U.S.
TECHNOLOGY REACHING OUR POTENTIAL ADVERSARIES.
THIS TEAM IS ALSO PROVIDING MANAGEMENT ASSISTANCE TO MY OFFICE
IN THREE FORMS. THE FIRST OF THESE IS TECHNICAL ASSISTANCE TO
AUTOMATE SOME OF THE ROUTINE ADMINISTRATIVE TASKS INVOLVED IN DETER-
MINING POLICY AND PROCESSING CASES. THE SECOND IS TO ASSIST THE
INTEGRATION OF EXISTING DATA BASES USED IN ROUTINE CASE PROCESSING.
THE THIRD IS THE CREATION OF A CENTRAL LIBRARY TO PROVIDE THE BASIC
DOCUMENTS REQUIRED FOR DEVELOPING POLICY. EXISTING AUTOMATION SYS-
TEMS THROUGHOUT DOD, INCLUDING THOSE IN MY OFFICE, IN OUSDRE, AND
THE NAVAL RESEARCH LABORATORY AS WELL AS THE NEWLY EMERGING FORDTIS
SYSTEM, ARE BEING REVIEWED WITH THE END OBJECTIVE OF CREATING A
COMPREHENSIVE, EFFECTIVE SYSTEM FOR USE BY THE DEFENSE POLICY MAKERS.
IN THE SAME VEIN, WE HOPE TO IMPROVE THE PROCESSING OF PROPOSED
TRANSFER CASES BY RECOMMENDING IMPLEMENTATION POLICY AND PROCEDURES
WHICH WILL MAKE OPTIMUM BENEFIT OF AVAILABLE (AND RECOMMENDED)
MANPOWER AND AUTOMATION CAPABILITIES. THE POLICY INVENTORY LIBRARY
WILL BE A REPOSITORY OF EXISTING AND PROPOSED LEGISLATION, DIRECTIVES
AND REGULATIONS OF GOVERNMENTAL DEPARTMENTS AND AGENCIES INVOLVED
IN MAKING AND IMPLEMENTING TRADE AND EXPORT CONTROL POLICY.
THIS COMMITTEE SHOULD KNOW, THAT ON TAKING OFFICE THERE WERE
NO COHERENT RECORDS AVAILABLE ON PAST DOD DETERMINATIONS; NOR WAS
THERE ANY SINGLE SOUURCE TO APPRAISE THE RESULTS OF PAST ACTIVITY.
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THIS DEFICIENCY IS SLOWLY BEING CORRECTED, AND MY STAFF IS BEING
TRAINED TO APPLY MORE RIGOROUS STANDARDS AND FOLLOW MORE DISCIPLINED
PROCEDURES. IN THE LONG RUN, THESE EFFORTS WILL GO A LONG WAY IN
ASSURING AN INSTITUTIONALIZED LEARNING CURVE IN HARMONY WITH OUR
SECURITY INTERESTS.
IN ORDER TO FURTHER EDUCATE U.S. CITIZENS AT HOME AND FRIENDS
ABROAD ABOUT THE RISKS TO THEIR SECURITY POSED. BY INDISCRIMINATE
TRANSFER OF TECHNOLOGY AND ABOUT THE MEANS OF TRANSFER, THE AUGMEN-
TATION TEAM IS, UNDER MY DIRECTION, PREPARING A WHITE PAPER ON THE
SUBJECT. THE GOALS OF THE PAPER ARE TO DEMONSTRATE THE IMPORTANCE
OF DUAL-USE TECHNOLOGIES TO THE DEFENSE SUPPORT INDUSTRIES IN THE
SOVIET UNION; TO PROMOTE MORE VOLUNTARY COMPLIANCE WITH EXISTING
EXPORT PROCESSES; AND SECURE SUPPORT FOR AND ASSISTANCE IN DEVELOPING
METHODS WHICH MORE CLOSELY REVIEW DEFENSE RELATED TECHNOLOGIES
PROPOSED FOR EXPORT. THE PAPER WILL ALSO ATTEMPT TO PRESENT THE
ROLES AND CONTRIBUTIONS OF THE DEPARTMENTS OF STATE, COMMERCE,
TREASURY, JUSTICE AND THE'BUREAU OF CUSTOMS. WE ANTICIPATE THAT
OUR WHITE PAPER WILL BE AN IMPORTANT EDUCATIONAL TOOL AND REFERENCE
SOURCE. WE HOPE, AS WELL, THAT IT WILL STIMULATE OUR ALLIES AND
FRIENDS TO WORK WITH US IN THIS EFFORT. ACCORDINGLY, WE PLAN TO
DISTRIBUTE THIS PAPER WIDELY AND HOPE IT WILL FORM PART OF THE
DIALOGUE AND DEBATE ON TECHNOLOGY TRANSFER IN THE MONTHS AND YEARS
AHEAD.
ANOTHER MAJOR EFFORT IS OUR ATTEMPT TO WORK CLOSELY WITH THE
DEPARTMENTS OF STATE AND COMMERCE IN SEEKING TO STRENGTHEN STRATEGIC
TRADE CONTROLS IN COCOM AND, THUS, TO STEM THE FLOW OF WESTERN
.TECHNOLOGY TO THE SOVIET UNION AND ITS ALLIES. AS YOU KNOW, COCOM
IS AN INFORMAL NON-TREATY ORGANIZATION ESTABLISHED IN THE EARLY
1950'S COMPRISED OF THE NATO COUNTRIES LESS ICELAND PLUS JAPAN. IT
HAS NO FORMAL LINK TO NATO, HOWEVER. THE COCOM SYSTEM WORKS ON
THE BASIS OF CONSENSUS. THIS IS BOTH ITS STRENGTH AND ITS WEAKNESS.
BECAUSE IT IS A VOLUNTARY ORGANIZATION AND REQUIRES UNANIMITY TO
ACT, IT CAN CONTINUE TO OPERATE WITH REASONABLE EFFECTIVENESS ONLY
THROUGH A SYSTEM OF COMPROMISE, EXCEPTIONS AND PRECEDENT. THE
MEMBERS SEEK TO BALANCE THE STRATEGIC CONCERNS OVER COCOM RESTRICTED
TECHNOLOGY TRANSFERS AGAINST THEIR COMMERCIAL AND POLITICAL INTERESTS.
95-929 0 - 82 - 38
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UNFORTUNATELY, THE NEED TO SEEK COMPROMISE HAS ALLOWED CONTROLS TO
BE ERODED, ESPECIALLY IN RECENT YEARS. THIS EROSION TAKES THE
FORM OF NUMEROUS EXCEPTIONS REQUESTS WHICH HAVE THE EFFECT OF
VIRTUALLY ALLOWING THE EXPORT OF ALL BUT THE MOST ADVANCED TECH-
NOLOGIES. AS INDICATED, THE SOVIET UNION HAS SOUGHT TO ACQUIRE
THESE THROUGH ILLEGAL CHANNELS ,WITS CONSIDERABLE SUCCESS.
FROM THE OUTSET, THIS ADMINISTRATION HAS SOUGHT TO STRENGTHEN
THE STRATEGIC PURPOSE AND WILL OF COCOM. KEY TO THIS EFFORT HAS
BEEN THE COCOM HIGH LEVEL MEETING CONVENED LAST JANUARY IN PARIS.
THE PURPOSE OF THIS POLITICAL MEETING WAS THREEFOLD: TO REAFFIRM
THE STRATEGIC PURPOSE OF THE COCOM EMBARGO; TO GAIN AGREEMENT TO
STRENGTHEN CONTROLS OVER CERTAIN KEY MILITARY-RELATED TECHNOLOGIES
SUCH AS ROBOTICS, COMPUTERIZED MESSAGE SWITCHING, METALLURGY AND
MICROELECTRONICS; AND TO HARMONIZE COCOM PROCEDURES AND INCREASE
COOPERATION AMONG MEMBERS IN ENFORCING CONTROLS. WE ALSO SOUGHT
TO ESTABLISH A COMMITTEE OF MILITARY TECHNOLOGY EXPERTS TO ADVISE
COCOM. EXCEPT FOR THE U.S. AND ONE OR TWO OTHER COUNTRIES, DEFENSE
MINISTRIES ABROAD PLAY LITTLE OR NO ROLE IN THE REVIEW OF STRATEGIC
TRADE EXPORTS.
IT WAS OUR RESPONSIBILITY TO PREPARE FOR COCOM AN ELABORATE
BRIEFING, POINTING OUT THE GAPS AND LOOPHOLES IN THE PRESENT
SYSTEM AND THE HARM THIS WAS BRINGING TO THE INDIVIDUAL AND COLLEC-
TIVE DEFENSE EFFORTS OF THE COCOM NIMBERS. COUPLED WITH A GRAPHIC
AND EFFECTIVE OVERVIEW OF SOVIET TECHNOLOGY ACQUSITION SUCCESSES,
U.S. PROPOSALS PRESENTED AT COCOM BY UNDER SECRETARY OF STATE
BUCKLEY, UNDER SECRETARY OF COMMERCE OLMER, AND UNDER SECRETARY
OF DEFENSE IKLE. FOR THE RECORD, YOU SHOULD KNOW THAT THESE
BRIEFINGS REQUIRED CONSIDERABLE EFFORT, AS WE HAD TO CONDUCT THE
INVESTIGATIVE WORK AS WELL AS PREPARE THE ACTUAL PRESENTATIONS.
THE LACK OF A CENTRAL DATA BASE AND HISTORICAL DOCUMENTATION (AS
WELL AS EVALUATION) REQUIRED A FAR MORE EXTENSIVE UNDERTAKING ON
OUR PART THAN OTHERWISE MIGHT HAVE BEEN NECESSARY.
I AM PLEASED TO REPORT THAT THE GENERAL STRENGTHENING PROGRAM
SOUGHT BY THE U.S. WAS WELL RECEIVED BY OUR ALLIES AND WE ARE
WORKING TOGETHER TO ESTABLISH A SOLID FRAMEWORK TO REVITALIZE
COCOM AS AN EFFECTIVE MEDIUM FOR THE CONTROL AND ENFORCEMENT OF
THE STRATEGIC TRADE EMBARGO.
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SEPARATELY, MY OFFICE HAS SUPPORTED A MAJOR NEW NATO STUDY
ON THE SECURITY IMPLICATIONS FOR THE ALLIANCE OF THE TRANSFER OF
MILITARILY RELEVANT TECHNOLOGY TO THE WARSAW PACT COUNTRIES. THIS
UNDERTAKING WAS THE RESULT OF SECRETARY OF DEFENSE WEINBERGER'S
INITIATIVE AND IS THE FIRST NATO REVIEW OF THE TECHNOLOGY TRANSFER
ISSUE. THE STUDY GROUP ASSESSED THE SOVIET ORGANIZATION AND
MECHANISMS FOR ACQUIRING TECHNOLOGY, AND IDENTIFIED A REPRESEN-
TATIVE LISTING OF TECHNOLOGIES THAT ARE ESSENTIAL TO NATO MILITARY
MISSIONS. ALTHOUGH THE FINDINGS OF THIS SEVEN MONTH EFFORT WILL
NOT BE APPROVED UNTIL LATER THIS MONTH, SOME OF THE BENEFITS
WHICH HAVE EMERGED FROM THE EFFORT INCLUDE A BETTER UNDERSTANDING
OF THE MAGNITUDE OF THE SOVIET EFFORT TO ACQUIRE WESTERN TECHNOLOGY,
THE APLICABILITY OF "CIVILIAN" TECHNOLOGIES TO MILITARY WEAPONS,
AND A GREATER APPRECIATION OF THE RISK TO NATO RESULTING FROM
TECHNOLOGY TRANSFER TO THE SOVIETS. WE ARE ENCOURAGING NATO TO
CONTINUE THE DIALOGUE BEGUN BY THIS INITIATIVE THROUGH ESTABLISHING
AN OFFICE AT NATO HEADQUARTERS TO ALERT THE ALLIANCE TO SOVIET
EFFORTS TO ACQUIRE ADVANCED TECHNOLOGY. I WANT TO EMPHASIZE OUR
BELIEF THAT THE TRANSFER OF TECHNOLOGY IS FAR MORE THAN A PAROCHIAL
U.S. CONCERN. IT IS A POTENT ALLIANCE ISSUE WITH WIDE RANGING
IMPLICATIONS.
THE INCREASING IMPORTANCE OF ADVANCED DUAL-USE TECHNOLOGIES
TO MILITARY APPLICATIONS HAS RAISED DEFENSE DEPARTMENT CONCERNS
ABOUT THE LOSS OF TECHNOLOGY THROUGH ACADEMIC ACTIVITIES TRADITION-
ALLY CONSIDERED OUTSIDE THE AREA OF GOVERNMENT CONCERN. THIS NEW
CONSCIOUSNESS OF THE MILITARY IMPORTANCE OF DUAL-USE TECHNOLOGY
HAS RAISED SUSPICIONS IN THE ACADEMIC COMMUNITY ABOUT THE INTENTIONS
AND MOTIVES OF THE GOVERNMENT, WHILE THE GOVERNMENT HAS BEEN
DISMAYED BY THE LACK OF COOPERATION OR SYMPATHY FROM THE COLLEGES
AND UNIVERSITIES OVER THE PROBLEMS OF TECHNOLOGY TRANSFER.
WE ARE CONCERNED WITH ESTABLISHING A DIALOGUE BETWEEN THE
GOVERNMENT AND THE UNIVERSITIES, AS WELL AS PRIVATE RESEARCH LABS.
WE HAVE TAKEN STEPS TO INCREASE COMMUNICATION WITH UNIVERSITIES,
TO PRESENT OUR POINT OF VIEW, AND TO LISTEN TO THEIR RESERVATIONS
AND FEARS. THE NATIONAL ACADEMY OF SCIENCES HAS FORMED A PANEL
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ON SCIENTIFIC COMMUNICATION AND NATIONAL SECURITY TO STUDY THE
PROBLEM OF TECHNOLOGY TRANSFER IN UNIVERSITY-RELATED AREAS AND TO
ASSESS WHAT CAN OR SHOULD BE DONE ABOUT IT. WE HAVE COOPERATED
WITH THIS GROUP IN PRESENTING OUR VIEWS FOR CONSIDERATION IN THEIR
DELIBERATIONS.
THERE IS ALSO A UNIVERSITY FORUM ON EXPORT CONTROL IN WHICH
DEFENSE DEPARTMENT PERSONNEL PARTICIPATE IN DISCUSSION OF THESE
ISSUES. OUR OFFICE IS INTIMATELY INVOLVED IN A WORKING GROUP OF
THIS FORUM, AND WE ARE ATTEMPTING TO PROVIDE THE INFORMATION AND
ORIENTATION THAT IS NECESSARY FOR TME MEMBERS TO UNDERSTAND THE
DEFENSE PERSPECTIVE AND BE ABLE TO ASSESS THE PROBLEM OF TECHNOLOGY
TRANSFER TO THE SOVIETS.
IT IS ESSENTIAL THAT THIS KIND OF COMMUNICATION BE FOSTERED TO
KEEP LINES OPEN BETWEEN THE DEFENSE DEPARTMENT AND THE UNIVERSITIES.
WE CANNOT DO OUR JOB WITHOUT UNIVERSITY COOPERATION IN R&D, AND WE
NEED THEIR SUPPORT FOR OUR EFFORTS TO IMPROVE OUR DEFENSE READINESS.
WE BELIEVE IMPROVED COMMUNICATION AND UNDERSTANDING IS CRUCIAL.
WE HOPE WE WILL AGREE ON VIABLE WAYS TO DECREASE SOVIET ACCESS TO
OUR TECHNOLOGY WITHOUT INHIBITING SCIENTIFIC AND TECHNOLOGICAL
DEVELOPMENT.
MY OFFICE HAS ALSO BEEN WORKING CLOSELY WITH ENFORCEMENT
AGENCIES TO PREVENT ILLEGAL DIVERSIONS OF SOPHISTICATED TECHNOLOGIES
TO THE SOVIETS. AS A RESULT OF THE JANUARY HIGH LEVEL MEETING,
SPECIFIC MEASURES DESIGNED TO CLAMP DOWN ON ILLEGAL EXPORTING AND
DIVERSIONS WILL BE NEGOTIATED AND DEVELOPED SHORTLY IN COCOM. FOR
ITS PART, THE DEPARTMENT OF DEFENSE IS IN THE PROCESS OF DRAWING
UP A "MUSHROOM BOOK" - A DESCRIPTIVE LIST DESIGNED TO AID CUSTOMS
OFFICIALS IN IDENTIFYING THE MOST CRITICAL TYPES OF SOPHISTICATED,
.TECHNOLOGICAL EQUIPMENT. USING THIS BOOK AS A TOOL, U.S. CUSTOMS
AGENTS WILL BE ABLE TO CONCENTRATE ON IDENTIFYING WHETHER SOPHISTI-
CATED EQUIPMENT IS BEING EXPORTED LEGALLY OR NOT. WE HOPE TO GET
OTHER COCOM MEMBERS TO USE THIS BOOK ALSO.
THE DEPARTMENT OF DEFENSE HAS BEEN SERIOUSLY CONCERNED ABOUT
THE IMPLEMENTATION OF U.S. DISTRIBUTION LICENSES. DISTRIBUTION
LICENSES ALLOW THE BULK SHIPMENT OF ITEMS INCLUDING COMPUTERS, TO
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A HOST OF COUNTRIES OUTSIDE THE SOVIET BLOC. HOWEVER, A NUMBER OF
THESE COUNTRIES ARE WILLING TO ALLOW, IF NOT COOPERATE WITH, SOVIET
ACQUISITION OF COCOM EMBARGOED EQUIPMENTS. THE CURRENT SYSTEM
LEAVES A LARGE LOOPHOLE OPEN FOR DIVERSIONS TO THE USSR OF SOPHIS-
TICATED EQUIPMENT. WE ARE URGING THAT THIS LOOPHOLE IN THE SYSTEM
BE CLOSED AS COMPLETELY AS POSSIBLE. THERE ARE SOME WHO QUESTION
WHETHER THE EXPORT ADMINISTRATION ACT IS SUFFICIANTLY CLEAR TO
CARRY THIS OUT. IF IT PROVES INADEQUATE, WE WILL ASK THAT THE STATUTE
BE AMENDED TO ENABLE US TO CLOSE DOWN THIS GAP IN OUR COVERAGE.
WE HAVE BEEN CLOSELY INVOLVED IN THE ADMINISTRATION'S REVIEW
OF THE DRAFT LAW OF THE SEA CONVENTION. OUR FOCUS IS ON ITS POTEN-
TIAL IMPACT ON THE TRANSFER OF TECHNOLOGY TO THE SOVIET UNION AND
ITS CLIENT STATES. IN THAT CONTEXT, A CRITICAL EXAMINATION OF THE
DRAFT TREATY TEXT WAS UNDERTAKEN TO REASSESS THE POTENTIAL FOR THE
TRANSFER OF MILITARILY SENSITIVE TECHNOLOGY. A MAJOR OBJECTIVE IS
TO ASSURE THAT THE CONVENTION WILL NOT FORM THE BASIS FOR ANY
WEAKENING OR UNDERMINING OF OUR DRIVE TO STRENGTHEN THE COCOM
SYSTEM. I WOULD LIKE TO EMPHASIZE THAT, IN ITS PRESENT FORM, THE
CONVENTION CONTINUES TO HAVE SERIOUS IMPLICATIONS FOR THE TRANSFER
OF U.S. TECHNOLOGY. FOR THAT REASON, IT MUST BE CAREFULLY WEIGHED
AGAINST OTHER NATIONAL SECURITY CONSIDERATIONS.
ONE CURRENT EFFORT OF PARTICULAR INTEREST TYPIFIES BOTH THE
PROBLEMS OF DEVELOPING ADEQUATE CONTROLS AND THE RISKS OF NOT
DOING SO. THAT EFFORT CONCERNS THE VHSIC PROGRAM. VHSIC, WHICH
STANDS FOR VERY HIGH SPEED INTEGRATED CIRCUITS IS DESIGNED TO FILL
THE GAP BETWEEN OUR HIGH PERFORMANCE MILITARY NEEDS AND CURRENT
TECHNOLOGY IN MICROPROCESSORS. THE RESULTING PRODUCT WILL PERFORM
ADVANCED SIGNAL PROCESSING FUNCTIONS FOR WEAPONS SYSTEMS INCLUDING
ELECTRONIC WAREFARE, COMMUNICATION, RADAR, AND PRECISION GUIDED
MUNITIONS AND DO SO WITH LESS COST, VOLUME, POWER, AND WEIGHT THAN
CURRENT DIGITAL TECHNOLOGY. THE PROTECTION OF THIS TECHNOLOGY, SO
IMPORTANT FOR OUR FUTURE DEFENSE NEEDS AND WEAPONS SYSTEMS, IS OF
THE HIGHEST PRIORITY. CONGRESS SPECIFICALLY MANDATED THE CONTROL
OF THIS TECHNOLOGY WHEN IT FUNDED THE VHSIC PROGRAM. TO DATE, THE
WHOLE SYSTEM OF INTENDED CONTROLS HAS NOT BEEN IMPLEMENTED. WE
ARE NOW DOING OUR BEST TO REMEDY THIS SITUATION AND TO PROTECT
THIS TECHNOLOGY FROM OUR ADVERSARIES AND THUS PRESERVE OUR QUALI-
TATIVE LEAD IN CRITICAL DIGITAL TECHNOLOGIES.
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A MOST PRESSING TASK AT THIS JUNCTURE IS TO PUT THE VHSIC
PROGRAM UNDER THE PROTECTION OF THE INTERNATIONAL TRAFFICE IN ARMS
REGULATION (ITAR), AS THE CONGRESS INTENDED, WE ARE WORKING WITH
THE STATE DEPARTMENT TO ACCOMPLISH THIS. OUR IMMEDIATE TASK IS TO
PROTECT THE TECHNICAL DATA AND MILITARY HARDWARE THAT IS NOW BEING
DEVELOPED BEFORE IT IS TOO LATE TO PREVENT THE DISSEMINATION OF
THESE TECHNOLOGIES TO OUR ADVERSARIES. TO DO THIS, WE MUST PUT THE
VHSIC DEVICES THAT HAVE ALREADY BEEN DESIGNED AND THE SUPPORTING
TECHNICAL DATA ON THE MUNITIONS LIST, TO ENSURE PROTECTION UNDER
THE ITAR. SOME LEGAL PROBLEMS ARE INVOLVED IN DEFINING JUST WHAT
CAN BE COVERED UNDER THE ITAR, BUT WE ARE CONFIDENT THAT THESE CAN
BE SOLVED.
IN THE INTERIM, WE ARE TAKING STEPS TO SAFEGUARD THIS TECH-
NOLOGY THROUGH THE USE OF THE EXPORT ADMINISTRATION REGULATIONS
(EAR). THIS WILL REQUIRE UNDERTAKING SOME IMPORTANT REVISIONS OF
THE EAR TECHNICAL DATA CONTROLS AND COMMODITY CONTROL LIST.
FOR SOME ELEMENTS OF THIS PROGRAM, WE BELIEVE THERE IS NO
EFFECTIVE CONTROL SHORT OF CLASSIFICATION. WE HAVE FOUND THAT,
UNDER EXISTING CONTROLS, MUCH OF THE LITERATURE, SOFTWARE, AND
HARDWARE CANNOT OTHERWISE BE FULLY .2ROTECTED. NEITHER THE ITAR
NOR THE EAR ARE EXEMPT FROM ACCESS TO THIS SENSITIVE TECHNICAL
DATA THROUGH THE FREEDOM OF INFORMATION ACT. MEMBERS OF THE PUBLIC
CAN EASILY OBTAIN INFORMATION BY MERELY INVESTING A 20 CENT STAMP
AND THE TIME NECESSARY TO WRITE A SHORT LETTER. ONCE THIS INFOR-
MATION IS OBTAINED, IT CAN EASILY BE PASSED TO THE SOVIETS, OR PUT
IN THE PUBLIC DOMAIN WHERE IT CANNOT BE PROTECTED. IT IS PARTICU-
LARLY IMPORTANT THAT WE PROTECT THOSE INDICES AND LISTS WHICH GIVE
AN OVERVIEW OF THE PROGRAM, AND ALLOW OUR ADVERSARIES TO PINPOINT
THOSE PARTS OF THE PROGRAM THAT ARE PARTICULARLY USEFUL TO THEM.
IF OUR ADVERSARIES OBTAIN ANY OF THIS ADVANCED TECHNOLOGY, WE WANT
TO MAKE SURE THEY DO SO ONLY AFTER EXERTING THE MAXIMUM OF TIME
AND EFFORT. WE ARE SENSITIVE TO THE NEED FOR CONTRACTORS AND OTHERS
WORKING ON THE PROGRAM TO HAVE ACCESS TO THE DATA AND INFORMATION
THAT THEY NEED, BUT WE BELIEVE THAT THROUGH SELECTIVE CLASSIFICATION
WE CAN CONTROL ELEMENTS OF THE PROGRAM DIRECTLY ASSOCIATED WITH OUR
FUTURE MILITARY SYSTEMS.
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TO PROTECT AND MONITOR THE VHSIC PROGRAM, WE HAVE FORMED A
VHSIC WORKING GROUP ON EXPORT CONTROL WHICH I CHAIR. THE WORKING
GROUP IS NOW WORKING TO SELECTIVELY APPLY THE NEEDED CONTROLS. WE
INTEND TO USE THE MINIMUM CONTROLS COMPATIBLE WITH PROTECTION OF
THIS TECHNOLOGY. THE GROUP HAS ALREADY PROPOSED CLASSIFICATION OF
ELEMENTS OF THE VHSIC PROGRAM AND HAS DEVELOPED DOCUMENTATION ALLOWING
PORTIONS OF THE VHSIC PROGRAM TO BE CONTROLLED UNDER THE ITAR. WE
STILL HAVE A GREAT DEAL TO DO BEFORE WE ARE SATISFIED THE PROGRAM
IS APPROPRIATELY COVERED. BUT, WE BELIEVE, THE EXPERIENCE OF THE
WORKING GROUP, AND THE TECHNIQUES BEING USED, WILL BE OF IMPORTANCE
WELL BEYOND THE VHSIC PROGRAM. WE INTEND FULLY TO USE THE SAME
MODEL TO PROTECT OTHER EMERGING TECHNOLOGIES SUPPORTED BY THE
DEPARTMENT OF DEFENSE.
I WOULD LIKE TO TURN NOW TO AN IMPORTANT SOURCE OF THE SOVIETS'
ABILITY TO ACQUIRE SOPHISTICATED WESTERN TECHNOLOGY. ENERGY EXPORTS
TO THE WEST, PRIMARILY NATO EUROPE, CURRENTLY PROVIDE ABOUT HALF
THE HARD CURRENCY EARNINGS FOR THE SOVIET UNION. WHILE MOST SECTORS
OF THE SOVIET ECONOMY ARE STAGNANT, ENERGY REMAINS A BRIGHT SPOT.
ONE PARTICULARLY PROMISING AREA IS NATURAL GAS AND THE SOVIETS ARE
PLANNING TO DOUBLE THEIR SALES TO WESTERN EUROPE BY BUILDING A
MASSIVE PIPELINE FROM WEST SIBERIA TO WESTERN EUROPE. WHEN THIS
PROJECT IS COMPLETED IT WILL GENERATE SOME $8 BILLION PER YEAR IN
NEW REVENUES. ABOUT 25 PER CENT OF WESTERN EUROPE'S IMPORTED GAS
WILL THEN COME FROM THE USSR AND IN THE CASE OF SOME COUNTRIES,
SUCH AS WEST GERMANY, THE FIGURE WILL BE EVEN HIGHER.
WE ARE NATURALLY CONCERNED ABOUT THE POTENTIAL FOR POLITICAL,
ECONOMIC, AND EVEN MILITARY MANIPULATION WHICH SUCH LEVELS OF
ENERGY DEPENDENCE IMPLY. WE ARE ALSO PERPLEXED AS TO WHY SO MANY
OF OUR NATO ALLIES ARE EAGER TO TIE THEMSELVES TO A HIGH PRESSURE
56-INCH UMBILICAL CORD TO THE SOVIET UNION WHEN ADEQUATE, ECONOMIC,
AND RELIABLE ALTERNATIVES EXIST IN THE WEST. THE NORTH SEA ALONE,
FOR EXAMPLE, COULD SUBSTITUTE FOR MOST OF THE ENERGY FROM THE WEST
SIBERIAN PROJECT AND AT THE SAME TIME PROVIDE JOBS AND ECONOMIC
STIMULUS TO THE WEST. FURTHERMORE, ALL THE HARD CURRENCY GENERATED
BY GAS SALES WOULD REMAIN IN THE INDUSTRIALIZED DEMOCRACIES AND
NOT FLOW TO THE EAST. OTHER WESTERN OPTIONS, ARCTIC GAS, AMERICAN
COAL, AND GAS AND OIL FROM LATIN AMERICA, AFRICA AND ELSEWHERE,
ALSO EXIST.
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THE SIGNIFICANCE OF THE WEST SIBERIAN PROJECT FOR TECHNOLOGICAL
ACQUISITION FROM THE WEST IS ENORMOUS. WITHOUT THE REVENUES FROM
THE NEW GAS SALES THE SOVIETS' FINANCIAL SITUATION WOULD DETERIORATE
GREATLY. AT A TIME WHEN ENERGY PRICES ARE DEPRESSED AND RAW MATERIAL
EXPORT EARNINGS ARE DOWN, WHEN SOVIET CROPS ARE FAILING AND WHEN
EASTERN EUROPE IS ON THE VERGE OF BANKRUPTCY, NEW GAS SALE EARNINGS
ARE CRITICAL TO THE SOVIET HARD CURRENCY POSITION. REVENUES FROM
THE WEST SIBERIAN PROJECT ALONE, FOR EXAMPLE, WILL FINANCE MORE
THAN ALL THE MACHINERY AND EQUIPMENT IMPORTS THE USSR PURCHASES
FROM THE WEST EACH YEAR. WHILE WE WOULD EXPECT THE SOVIETS TO
DEFER SOME OTHER PURCHASES IF THEY DID NOT HAVE THESE PIPELINE
REVENUES, IT IS CLEAR THAT DEFENSE-RELEVANT IMPORTS, PARTICULARLY
ITEMS OF SOPHISTICATED TECHNOLOGY AVAILABLE ONLY FOR HARD CURRENCY,
WOULD BE ADVERSELY AFFECTED BY THE LOSS OF NEW NATURAL GAS SALES TO
WESTERN EUROPE.
ANOTHER MAJOR PROBLEM WITH THE PIPELINE IS THE LEVERAGE THAT
PARTICIPATION IN THE PROJECT GIVES TO THE SOVIETS IN TECHNOLOGY
ACQUISITION. WITH A $10-15 BILLION INVESTMENT IN THE PROJECT, IT
WILL BE HARDER FOR THE WESTERN EUROPEANS TO REFUSE SOVIET REQUESTS
FOR TECHNOLOGY, WHERE THE DOLLAR AMOUNTS ARE SMALL BY COMPARISON.
IT IS DIFFICULT TO REFUSE A REQUEST FOR A $1 MILLION COMPUTER WHEN
YOUR CLIENT HAS JUST PLACED AN ORDER FOR $1 BILLION IN PIPE!
FURTHER DOWN THE ROAD, WHEN BILLIONS OF DOLLARS IN NATURAL GAS ARE
WARMING WEST EUROPEAN HOMES, GENERATING ELECTRICITY, AND RUNNING
FACTORIES, IT WILL ALSO BE DIFFICULT TO TURN DOWN REQUESTS FOR
SENSITIVE TECHNOLOGIES AND EQUIPMENT. SINCE THIS PROJECT IS SLATED
TO LAST TWENTY YEARS OR MORE, WE SEE IT HAVING AN IMPACT ON FUTURE
PROPOSALS TO TIGHTEN TECHNOLOGY CONTROLS OR EVEN MAINTAIN THEM FAR
INTO THE FUTURE.
I HAVE COVERED QUITE A VARIETY OF OUR EFFORTS TO DATE. CLEARLY,
WE DO NOT HAVE ALL THE ANSWERS. WE NEED ASSISTANCE FROM THE CONGRESS
IN TERMS OF RESOURCES ADEQUATE TO THE TASK AND THE LEGISLATIVE
BASIS FOR OUR EFFORTS. AS YOU WEIGH OUR REQUESTS FOR SUCH ASSISTANCE,
YOU MAY WISH TO CONSIDER THE IMPLICATIONS OF THESE EFFORTS FOR
U.S. NATIONAL STRATEGY. ONE APPROACH MAY BE TO ASK WHAT THE
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ALTERNATIVES MIGHT BE. IF WE ARE FACED WITH A SITUATION IN WHICH
THE SOVIETS ACHIEVE QUALITATIVE PARITY WITH US IN TERMS OF THE
CAPABILITIES OF OUR WEAPONS SYSTEMS, THEN WHAT NATIONAL STRATEGY
OPTIONS REMAIN TO US? WHAT STRATEGY COULD WE SUSTAIN? WOULD WE BE
FACED WITH A CHOICE BETWEEN MATCHING THE SOVIETS MAN FOR MAN AND
TANK FOR TANK, OR ABANDONING OUR ALLIES AND DEFENDING AMERICA AT THE
'EASTERN SHORE? WE BELIEVE THAT MAJOR IMPROVEMENTS IN TECHNOLOGY
TRANSFER CONTROLS WOULD BE FAR MORE ECONOMICALLY EFFECTIVE AND
POLITICALLY ACCEPTABLE THAN THE ALTERNATIVE MILITARY SOLUTIONS.
\I
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STATEMENT OF LAWRENCE J. BRADY
ASSISTANT SECRETARY OF COMMERCE
FOR TRADE ADMINISTRATION
BEFORE THE SENATE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
May 12, 1982
I am very pleased to have the opportunity to testify before
this subcommittee on an issue which is of vital concern to the
Reagan Administration: technology transfer from the West to
the Soviet Union. Only now, as a nation, are we beginning to
understand the extent of these technology transfers during the.
past decade, and the contributions such transfers have made to
strengthening the Soviet military-industrial base.
Stopping the extensive acquisition by the Soviets of sensitive,
dual-use Western technology in ways that are both effective and
appropriate in our open society is one of the most complex and
urgent issues facing America and the rest of the Free World
today. Moreover, only now are we beginning to recognize that
the technology transfer issue is much more than just an
enforcement problem.
Apart from strengthening enforcement, in order to deal
successfully with the increasing Soviet effort to acquire
advanced Western technology, we need to:
o Understand what technology the Soviets need, how such
acquisition has helped the Soviet Union achieve its
goal of military superiority, and what methods the
USSR is using to obtain it;
o On a multilateral basis, marshall the support and
commitment of our allies to prevent further technology
leakage to the Soviet Union by Western industrial
concerns and by U.S. subsidiaries and licensees
operating abroad;
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? Build up our counterintelligence efforts to counteract
the Soviet intelligence organization;
o Work closely with industry segments involved in the
development production of high technology to assess
ways of retarding the growing industrial security
problem; and
o Examine all possible avenues for identifying and
protecting defense sensitive technologies, including
technical documents, which are not now subject to our
classification system.
Mr. Chairman, we are now approaching the problem on all these
and other fronts. I want to emphasize that today we are in a
far different strategic, political, and technological
environment than the one that shaped our export control system
30 years ago.
Strategically, we need to recognize that the USSR is far more
powerful militarily than the nation we faced at the end of
World War II, and is'far more capable of procuring and applying
our latest technological advances. We could not, however,
take adequate protective action until we had accurately
assessed the nature of that threat. Therefore, one of the
first actions taken by the Administration was to request the
intelligence agencies to prepare a comprehensive analysis of
Soviet technology acquisition methods.
Not until the Fall of 1981, when we started to receive these
analyses, did we begin to appreciate the magnitude of Soviet
activities against the West. In April of this year, the C.I.A.
released the unclassified version of its report, "Soviet
Acquis:tion of WesLern Technology," which verified the fact
that the USSR's efforts were massive and planned at the highest
levels of government, KGB and the military.
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It now appears that the USSR is placing greater emphasis on the
procurement of production equipment technology, as opposed to
actual weapons designs in some cases. The commercial sector,
which generally is not adequately protected against penetration
by hostile intelligence services, is being targeted.
Industrial espionage has become one of the most productive
areas for Soviet and East European intelligence services. We
anticipate greatly enhanced activity in automobile technology,
energy, chemicals, consumer electronics, and computers.
Politically, we face a much more formidable task in working
with our allies to stem the flow of security sensitive
technology to the USSR. For them, trade in high technology
products means relief from the growing pressures of high
unemployment. The past ten years of Detente and expanded trade
with the USSR has also created interdependence and
vulnerabilities in the West to subtle and ,not-so-subtle Soviet
blandishments to ignore national security in favor of
commercial considerations. Also, the pressure to export and to
retain access to the Soviet market is, for certain industries
within these countries, enormous.
Revolutionary advances in technology and in the structure of
business enterprises have also created enormous new obstacles
for our efforts to regulate strategic trade with the Warsaw
Pact. The rate at which new technologies are conceived and
applied to industrial process continues to accelerate. We are
in the midst of perhaps the most rapid period of technological
advance in human history.
The private sector has now risen to prominence in technology
leadership, with the governments following behind.
Leading-edge technology -- once primarily generated by the
military -- is now frequently developed first in the civilian
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? sector. It has thus become more difficult for national
governments to control the dissemination of technology to
foreign recipients. Identification and protection of new and
emerging technology remains one of our toughest challenges.
At the same time, the rise of multinational corporations,
combined with the speed of modern communications and
transportation, has intensified the proliferation of advanced
technology. Overseas corporate acquisitions, joint ventures,
manufacturing associations, cross licensing, multinational data
communications transfers all make the task of national
enforcment more difficult.
We also discovered that Third country diversions constitute the
largest source of illegal transfers to controlled destinations,
.far exceeding the number of illegal shipments from the United
States. It therefore became obvious that the magnitude and
international scope of technology leakage far exceeds our
previous assessments.
Mr. Chairman, this Administration, even prior to taking office,
was acutely aware of the technology transfer problem. In the
months since assuming office, we have moved systematically to
ascertain the threat posed by this leakage, to ascertain how
the Soviets and East Europeans are working to acquire Western
technology, and finally taken remedial actions to deal with
this matter. Since the major bulk of the technology transfer
problem is international, we addressed that aspect first.
At the Ottawa Summit in July 1981, President Reagan made a
personal appeal to the leaders of Europe, Canada, and Japan to
join with us in this endeavor. As a result, agreement was
reached to hold a high level meeting of the Coordinating
Committee (COCOM) -- the first in twenty-five years -- to
discuss the U.S. proposals.
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This meeting, in which Commerce played a key role, took place
in January of this year. Important progress was achieved.
There is now a political commitment from our COCOM partners
which will serve as the foundation for refocusing and
strengthening international control efforts toward critical
technologies and equipment.
Such a commitment is vital to the mutual security of the West.
.COCOM controls have played a major role in stemming the tide of
technology transfer to the East, and have proved most
successful in the computer area. As a consequence of these
controls, the Soviets lack the most advanced Western computers,
even though such computers have been commercially available in
the West for more than a decade.
Since the high level meeting we have devoted many months to
striving for tighter controls on lege/ sales and increased
enforcement efforts within COCOM member countries. We have
stressed, and our fellow COCOM members agree, that without
immediate remedial action, the growing leakage of technology
from the West to the USSR would reach proportions too great to
rectify.
This Administration has repeatedly pointed out that our
short-sighted export licensing policies during the detente of
the late sixties and early seventies has encouraged the most
extensive raid on Western technology by the Soviet Bloc since
World War II. In the process, they have gained expertise in
electronics, computer sciences, manufacturing techniques,
aviation, and a host of other disciplines that has been of
incalculable value to their military establishment and, thus,
of immeasurable harm to our own interests on this planet.
There is no conceivable way in which our short-term financial
..gains could ever balance the damage done to our national
security as a result of past export control policies.
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Thus, Mr. Chairman, these hearings come at a propitious time.
The security of the Free World demands responsible, united
action by Free World governments to deprive our adversaries of
those industrial and technical tools they covet. It is in this
spirit that I welcome the hearings and the review conducted by
your staff of Commerce's compliance organization.
I have reviewed the Minority Staff report. Based on both my
experience as Assistant Secretary and my earlier tenure as
Acting Director of the Office of Export Administration, I agree
that the report has identified some of the fundamental problems
in the Commerce enforcement mechanism. The Staff Report is a
useful historical document in that respect. Unfortunately, it
only addresses a small part of the technology transfer
problem. Moreover, it does not recognize that the policies of
this Administration represent a sharp change from the practices
of the past; that we view the pressing need for more effective
control as a top priority.
The report also does not address the organizational realignment
and enhancement of the Compliance Division we now have underway
I must also disagree with the report's assertion that Commerce
has trade promotion as its major objective to the detriment of
enforcing the Export Administration Act. From the President on
'down, the clear policy is that trade must be carefully weighed
against national security considerations. I would not object
if you said past administrations emphasized trade promotion
over all other concerns. I, too, was a severe critic of such
past practices. But we are in the present; circumstances have
changed.
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Within the organization that I oversee, Trade Administration,
our management focus has been on effective and efficient
execution of our regulatory mission.
On the Import Administration side, we are charged with
enforcement of the laws governing unfair trade practices. Our
mission was spelled out unambiguously by the Congress in its
deliberations leading to passage of the 1979 Trade Agreements
Act. In transferring this function to the Department of
Commerce from Customs, Congress instructed us to protect
American industry from injurious and unfair foreign trade
practices by administering the countervailing duty and
antidumping laws of the Unites States; and, before its
suspension, the provisions of the Steel Trigger Price
Mechanism. This we are doing.
The challenges were similarly pressing in Export
Administration. Various factors had combined over the past
several years to cause unacceptable delays in the processing of
export license applications. These factors ranged from a lack
of clear policy guidance to a simple manpower shortage.
However, Congress and the private sector had become
increasingly critical with respect to the delays and
bottlenecks encountered in the licensing process.
In the early days of this Administration, both Secretary
Baldrige and Under Secretary Olmer told me to solve the serious
backlog problem we had inherited so that, by the end of fiscal
year 1981, the number of application not processed within the
statutory deadlines would be reduced to as near zero as
possible.
To this end we dedicated ourselves, mustering the necessary
resources, enlisting the temporary aid of the Department of
Defense's export licensing analysts, and streamlining the
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administrative inhibitions to getting the job done. The result
by last October was elimination of the backlog of over 2,000
cases and maintenance in the six months since then of only a
modest number of extraordinary cases in process beyond the
statutory timetables.
Our thesis was, and remains, that export controls can be both
effective and efficient; export controls should reflect clear
Administration policies and be applied with reasoned judgment
.by technically qualified people using that policy guidance.
These are instances of the Reagan Administration's proven
ability to reverse some serious regulatory obstacles of the
past and to make the export control system function in the
manner .originally intended by Congress.
We also took steps to evaluate the enforcement function of the
Office of Export Administration in order to improve its
performance. Approximately one year ago, Under Secretary Olmer
asked the Inspector General of the Commerce Department to
undertake an independent review of the programs, functions, and
activities of the Compliance Division. As Inspector General
Funk has explained to your staff, other priorities precluded
such a survey at the time. Last month, however, Mr. Funk
directed. his staff to conduct the inspection. We expect to
receive the Inspector General's findings and recommendations
before the month is out.
Customs has upgraded the inspection effort, and I am pleased to
announce today the organizational realignment and enhancement
of the Compliance Division. The Division is itself being
elevatsd to Office status and, together with the Office of
Antiboycott Compliance, will comprise a new export enforcement
organization to he headed by a Deputy Assistant Secretary
reporting directly to me. The candidate we have selected for
that post is currently an Assistant U.S. Attorney for the
Central District of California. Theodore W. Wu is a celebrated
expert in the law enforcement community whose successful
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prosecutions of two of this country's most notorious export
diversion cases render him highly qualified for this
considerable undertaking.
In addition, with recent Congressional approval in February of
our proposed reprogramming, the resources of the Compliance
Division have been increased by about 40% and new field offices
are being established In San Francisco and Los Angeles to
supplement our Washington Headquarters and New York Field
Office.
In summation, Mr. Chairman, it is our belief that the
Administration, in office now for little more than 14 months,
has a deliberate and sensible, yet ambitious, program to
upgrade and revitalize the nation's export control enforcement
efforts. Our emphasis will be leanness and efficiency; we
don't envision it ever becoming a major law enforcement
bureaucracy housing competing missions. Rather, ours will be
an office well coordinated with the intelligence community and
other enforcement agencies reflecting the comprehensive thrust
of 'Soviet acquisition methods. Yet it will exist in an
environment that is highly integrated with the other components
of the government's international trade promotion and
regulation sectors.
The value of Commerce's close relationship with the private
sector should not be understated. As any witness from the
enforcement community will verify, the information provided by
the business sector is an essential element of an effective
enforcement effort. This partnership exists in no other
agency. The historicaL ties between the Department of Commerce
an U.S. business, along with the new steps I have outlined
regarding the strengthening of our enforcement office, make it
not only the ideal, but the only logical agency to carry on the
primary enforcement function mandated by the Export
Administration Act.
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Mr. Chairman, I want to commend you for your interest in this
vital area, and I encourage you and others in Congress to join
with us in this Administration's effort to improve our export
control system. If you do, our partnership will go far in
enhancing the security of our nation and the Free World.
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REPORT OF INSPECTION
COMPLIANCE DIVISION
OFFICE OF EXPORT ADMINISTRATION
INTERNATIONAL TRADE ADMINISTRATION
Prepared by
Office of Inspector General
U.S. Department of Commerce
June 11, 1982
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UNITED STATES DEPARTMENT OF COMMERCE
Office of Inspector General
Office of Investigations
I. REPORT OF INSPECTION
A. BASIS FOR THE INSPECTION
On April 13, 1982, the Inspector General directed that an
inspection be made of the Office of Export Administration's
Compliance Division, which oversees the enforcement of export
controls for the U.S. Government. The inspection was a direct
result of continuing concern of Under Secretary for International
Trade Lionel H. Olmer and Inspector General Sherman M. Funk
regarding the Department of Cogmerce's enforcement of tne Export
Administration Act of 1979. The inspection was conducted during
the period April 19 through 30, 1962.
B. INSPECTION TEAM
The inspection was conducted under the supervision of Michael M.
Ryman, Assistant Inspector General for Investigations. The
inspection team included two criminal investigators, two
auditors, and a management analyst from the Office of Inspector
General. Personnel for this inspection team were selected to
provide a wide range of both technical expertise and professional
judgment.
C. SCOPE OF THE INSPECTION
The focus of the inspection was on present operations, resources
and management of the Office of Export Administration's
Compliance Division (OEA/CD). Assessment of the overall
effectiveness of 0EA/CD and the Department's responsibility to
enforce the Export Administration Act was limited by the two-week
length of the inspection, the immediacy of the Division's current
problems, and the Department's plans to reorganize and strengthen
the compliance effort in the next few months. The Office of
Inspector General intends to follow up this inspection with a
more detailed management audit of 0EA and 0EA/CD operations after
the reorganization has been implemented, to ascertain the
latter's impact on the effectiveness of the Compliance function.
Our inspection of 0EA/C0 included a review of the following:
- Goals and objectives of the compliance program, and the
criteria used by management to determine their achievement;
- Procedures for identifying, initiating, and conducting
compliance inspections and investigations, and the use made
of the results;
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Pertinent laws and directives, budgets and
reports;
financial
Conditions existing within the Compliance operation which
might be hindering the Division's ability to carry out its
mission.
The inspection team conducted its evaluation through interviews
in Washington, D.C. with key management, supervisory and DEA
operational staff (e.g., investigators, inspectors, intelligence
workers, and support personnel), representatives of the U.S.
Customs Service, and intelligence community liaison personnel.
The team reviewed operational records, management information
reports, procedural and policy guidelines, and other pertinent
documents. Past evaluations of the 0EA/CD -- prepared by the
Department of Commerce, General Accounting Office, and others --
were also reviewed.
Classified information was reviewed during the course of the
inspection, but this report contains no classified information.
U. BACKGROUND ON THE COMPLIANCE DIVISION
The Office of Export Administration's Compliance Division
(DEA/CD) is responsible for enforcing the provisions of the
Export Administration Act of 1979 (50 U.S.C. 2401, et seg.),
except for those provisions relating to foreign boyTTitihich
are enforced by the Office of Antiboycott Compliance. Both
offices are part of the Department's International Trade
Administration.
The OEA/CD is responsible for the prevention of unauthorized
exports from the United States. This includes leadership of a
multiagency enforcement effort; the development of information
regarding possible export control violations; the investigation
of suspected violations; preparation of violation cases for
Department of Commerce administrative proceedings before the
Hearing Commissioner; and the referral of cases to the Justice
Department for criminal prosecution. The Compliance Division is
also responsible for preventive enforcement activities and an
ongoing program to educate exporters on export control
regulations.
The DEA Compliance Division presently has three branches.* The
primary functions of each are outlined below:
* The International Trade Administration has announced its
intention to reorganize the Compliance Division and to raise the
function to a higher level under,a new Deputy Assistant Secretary
for Export Enforcement. The exact realignment plan and schedule
are not yet available.
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1. Intelligence Branch -- develops intelligence
Information regarding areas of possible export
administration violations; collects intelligence
data on overseas firms and individuals in order
to identify and evaluate their suitability and
reliability as recipients of U.S. exports;
2. Investigations Branch -- investigates suspected
export administration violations; in consultation
with the Department's Office of General Counsel,
prepares cases on violations for referral to the
Hearing Commissioner or for other legal action;
3. Facilitation Branch -- conducts on-site physical
Inspections of cargo for evidence of export
control violations; prom6tes compliance with
export clearance regulations; maintains liaison
with the U.S. Customs Service, Census Bureau and
Postal authorities.
Until recently, the U.S. Customs Service provided limited
investigative and inspection support on a reimbursable basis to
0EA/CD. The U.S. Customs Service, with its initiation of Project
EXODUS, has greatly expanded its own role in export compliance
enforcement over the past 18 months.
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II. SUMMARY OF FINDINGS
The inspection team found the Office of Export Administration's
Compliance Division (0EA/CD) impaired by numerous internal and
external problems which severely hamper its ability to enforce
controls on U.S. exports. These problems include:
No comprehensive appraisal of or effective overall
strategy to address the Nation's technology leakage
problem;
Insufficient trained personnel;
Inadequate management direction and oversight;
Failure to use modern, state-of-the-art intelligence,
investigative and enforcement techniques and systems;
Lack of strong leadership and clear lines of
organizational responsibility within 0EA/CD;
Unwarranted interference in the detailed conduct of 0EA/CD
investigative operations by the Deputy Assistant Secretary
for Trade Administration;
Inadequate cooperation and coordination with the U.S.
Customs Service and vital information sources in the U.S.
intelligence community;
Inadequate travel funds, law enforcement equipment and
other support resources; and
Use of antiquated or inefficient internal administrative
and management systems and procedures.
Many of the problems highlighted in this report have been
identified in earlier reviews provided to ITA management. The
Department of Commerce has failed to correct these problems
despite strong public statements by the present and past
Administrations in support of tight controls over the export of
high and dual-use technologies. This failure raises serious
questions about the Department's commitment to, and ability to
enforce, the Export Administration Act of 1979.
The inspection team repeatedly was advised that the problems it
noted reflect the Department's dual and possibly conflicting
missions of trade promotion and export control. The team was not
able to reach this conclusion unequivocally. It is clear,
however, that the Department's failure to provide adequate
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resources, policy guidance and management direction has impeded
the compliance effort and produced at very least the perception
of a de facto supremacy of the trade promotion mission over the
Departments exportcontrol function.
What is also clear, from the findings in this report, is that the
Department of Commerce has not taken a bold lead in forging an
aggressive multi-agency effo-rt to halt the illicit export of
controlled products.
ITA Response
The International Trade Administration has reviewed the draft
inspection report and concurs with most of the findings and
recommendations. ITA's comments, which are provided in their
entirety as an addendum to this report, emphasize that corrective
action has already been initiated to address many of the problems
cited in this inspection report. Other improvements are planned
for the near future.
The Inspector General has asked the Under Secretary for International
Trade to submit, within 60 days, a detailed implementation plan
for each of the inspection report recommendations. The Office
of Inspector General will followup on IA's planned corrective
action and will, within the coming year, conduct a review to
assess the Department's progress in improving enforcement of
export controls.
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III. DETAILED FINDINGS
A. UUAL MISSIONS: TRADE PROMOTION AND EXPORT CONTROL
Finding # I
There is a widespread perception that a oasic conflict exists
between the trade promotion goals of ITA (on the export
development side) and the agency's trade restraint goals (on the
export administration side). This conflict is interpreted by
many observers as a major reason for inadequate commitment of
Commerce resources to the enforcement function in 0EA/CD.
Discussion
Virtually without exception, each of the staff interviewed in
DEA, 0EA/CD, the Office of General Counsel and the U.S. Customs
Service referred to this conflict and acknowledged its impact --
real or perceived.
The primary mission of ITA is to foster exports, as part of
the Department's overall goal to promote U.S. domestic and
international business. Tnere appears to be an inherent internal
conflict when the same agency harbors within its structure
organizations charged with pushing export trade and other
organizations charged with restraining it, through a regulatory
licensing function and the interdiction of illicit exports. Some
critics have accused the Department of consciously maintaining a
weaK enforcement effort, of being less than enthusiastic in
blocking the sale and export of controlled products, even those
in the high-tech area.
The Assistant Secretary for Trade Administration recently
testified that such criticism was wholly unwarranted. He
emphasized that the Department's trade policy must be delicately
balanced against national security considerations. We found no
evidence of any ITA policy pointed toward weakening export
controls in favor of export promotion. On the other hand, we
found no evidence that the "delicate balance" referred to, or the
Department's dual commitment to trade promotion and export
control, have yet been translated into adequate staffing
resources and management priorities for enforcement of the Export
Administration Act. We did find ample evidence that those
involved in implementing the Act, both inside and outside the
Commerce Department, perceive the long history of inadequate
enforcement as a manifestation of a lower priority vis-a-vis
export promotion.
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Recommendation
A stronger policy commitment, backed up by significantly
increased manpower resources and more aggressive management,
should be assigned to the control of illicit exports. The
projected realignment of the compliance function in ITA must
include enhanced organizational stature as well as sharply
increased resource commitments. The problems arising from past
inadequacies cannot be corrected by rhetoric; only effective
enforcement of the Export Administration Act can erase the
conflict -- real or perceived -- between the Department's trade
promotion and enforcement missions.
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B. INADEQUATE RESOURCES AND OPERATIONS
Finding #2
The lack of operational travel adversely affects the quality and
scope of criminal investigations conducted by the Compliance
Division, compounding the problems created by a shortage of staff
resources.
Discussion
The Investigations Branch has less tnan 12 special agents to
cover the entire United States. Most of 0EA/CD's investigations
are conducted by telephone and correspondence, handled out of the
Washington, D.C. Headquarters office. A restrictive travel
practice has developed in 0EA/CD through the years and is a
serious impediment to an effective investigative program.
Investigators have been limited in their travel and must wait for
inspectors from the Facilitation Branch to travel to an area to
work investigative cases as a side-track from their normal
inspection duties.
Operational travel is essential to an adequate pursuit of
investigative leads. This requirement for travel is universally
recognized by law enforcement agencies. In most 0EA/CD cases
examined by the inspection team, investigator travel was
necessary. In many instances, however, the 0EA/CD travel
requests were not approved. This has resulted in delays or
termination of investigations, and has allowed continued criminal
activity and nonenforcement of the export laws.
Examples of lost opportunities for enforcement and prosecution of
export control violations are not diffiicult to find. One recent
denial of an 0EA/CD agent's travel request has permitted a
consortium of companies to continue their illegal export of hign
technology products to the U.S.S.R. and Communist Block countries
via several European intermediaries; the Assistant U.S. Attorney
willing to prosecute this case remains without the necessary
investigator to work his case. Another agent's request for
travel to the West Coast was denied despite substantial evidence
of unlicensed shipment of micrb chips and other restricted items.
This travel denial was made by 0EA/CD management with the
suggestion that the case be followed through the mail.
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Recommendation
More agents are needed to investigate export violation cases.
The Assistant Secretary for Trade Administration should conduct a
review to determine an adequate level of staff for this function,
as well as other functions of the Compliance Division. Such
adequate staffing should be provided as soon as possible, if
necessary by shifting other ITA resources, obtaining personnel
detailed from other agencies, and/or requesting an emergency
budget supplement.
0EA/CD operational travel should be approved and taken as
necessary in pursuit of criminal cases. Adequate management
systems and controls should be established to insure that
domestic travel can be taken in a timely manner. International
travel should be similarly approved where justified, particularly
when U.S. Customs Service or other appropriate U.S. overseas
investigative personnel are not available.
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Finding # 3
The Assistant Secretary for Trade Administration has been
unreasonably slow in establishing Export Compliance Field Offices
on the West Coast.
Discussion
Approximately 86 percent of the total value of U.S. controlled
exports leave from West Coast ports and airports. Despite the
bulk of these known export violations and the concentration of
high technology manufacturers in the "Silicon Valley" and other
West Coast areas, 0EA/CD investigations and inspections are now
performed there only a few weeks a year.
About one year ago, the Assistant Secretary for Trade
Administration announced plans to establish 0EA/CD field offices
in Los Angeles and San Francisco, each staffed with a trained
team of compliance investigators and inspectors. ITA records of
July 1981 show that the Under Secretary for International Trade
had discussed this plan with the Secretary who gave full support
for the idea and stressed the need to accelerate tne proposed
operation.
On August 3, 1981, a Newsweek article mentioned the establishment
of West Coast field ol?fIZT--Ey Commerce as a means to help combat
hign-technology smugglers. ITA records show that the Assistant
Secretary for Trade Administration advised the Secretary two days
later that the San Francisco and Los Angeles field offices were
scheduled to open October 1, 1981, and both offices would be
fully operational within three to six months. However, these
field offices had not been opened and staffed as of April 30,
1982.
The Assistant Secretary for Trade Administration cites internal
0EA/CD management problems as the reason he did not push ahead
with the West Coast offices last fall. He did not wish to put
new staff and resources out in the field, when DEA/CD was already
engulfed in severe management problems which made it difficult to
manage its existing structure and resources. Within the last
month, the Assistant Secretary has announced a plan to reorganize
the Compliance Division, raise it to office status headed by a
new Deputy Assistant Secretary with a strong law enforcement
background. Plans to open the West Coast offices apparently are
now back on track.
Despite the above explanation for the delays in opening the West
Coast offices, there is no doubt that the Compliance Division's
enforcement of the export law suffered because of the repeated
delays. We believe that the mere presence of additional 0EA/CD
manpower on the West Coast during the past year would have
provided worthwhile deterrence and detection coverage.
Recommendation
ITA management should expedite the establishment and staffing of
Export Compliance Field Offices on the West Coast. These offices
should be staffed with adequate numbers of trained and
experienced investigators and inspectors.
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Finding #4
The Compliance Division frequently hires inexperienced
investigators and provides no training for its investigative
staff.
Discussion
The Compliance Division has hired entry-level investigators with
no experience or specialized training, instead of badly needed
journeymen. In one case, an untrained and inexperienced new nire
was allowed to investigate for six months without investigator's
credentials.
Compounding the problems created by inexperienced manpower,
0EA/CD requires or offers no investigative, intelligence or
enforcement training to its investigative staff. There is no
program or materials to provide training to new hires or
journeyman investigators. On-the-job training is also very
limited and only available from individual OEA/CD investigators
who were trained oy other agencies before coming to the
Compliance Division. Some of the investigators had no
investigative training or experience at all when they assumed
their 0EA/CD duties; this is a violation of OPM standard X-118.
Investigators have requested formal training, but it has been
refused because they could not be spared from their normal
duties.
The training program in effect in FY 1980 appears to have been
limited to a report writing course for all special agents, a
short version of a white collar crime course, and a case
management course for the supervisor of the Investigations
Branch. Such training, inadequate then, has Peen further
reduced: financial records show a total expenditure of $24.98
for training of Compliance Division personnel in FY 1981, and no
expenditure at all thus far in FY 1982.
Recommendation
The Compliance Division should develop and implement a formal
training program for all newly hired and present undertrained
personnel. This should include utilization of the Federal Law
Enforcement Training Center and other established law enforcement
training facilities, as well as structured on-the-job training.
A training profile should be developed for each 0EA/CD
investigator to determine his individual training needs. DEA/CD
personnel should be adequately trained in all aspects of law
enforcement, including intelligence, surveillance, investigations
and inspections, judicial proceedings and case handling. The
Department should provide adequate funding for 0EA/CD's training
needs.
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Finding #5
The Compliance Division lacks virtually any law enforcement
technical equipment, although such equipment is needed to conduct
investigations effectively.
Discussion
The Compliance Division does not have technical equipment for the
collection of criminal evidence, such as cameras, surveillance
team communications equipment, consensual monitoring and other
law enforcement devices. In the past, when investigative
technical aids were needed, they were either borrowed from other
agencies or were personal equipment loaned by individual
investigators. Past efforts tb procure these essential items
have been unsuccessful.
0EA/CD's failure to obtain required investigative equipment is
particularly difficult to understand inasmuch as 0EA/CD funds for
this purpose have been used to purchase equipment for other 0EA
offices and to furnish 0EA/CD's unoccupied new field office in
Los Angeles. Examination of ITA accounting records maintained by
the Office of Financial Operations, Office of the Secretary,
revealed that $37,445 of approximately $52,000 in office
furniture and equipment charged to the Compliance Division for
the period October 1980 to March 1982 was used for a record
processor microcopier system installed and used in the Operations
Division's licensing activity. Also, office furniture valued at
approximately $1,800 was delivered to the Los Angeles Export
Compliance Field Office, although this office is still neither
open nor staffed.
Recommendation
The Department should purchase the essential investigative
equipment required by the Compliance Division.
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Finding #6
The Compliance Division's current intelligence operations are
almost exclusively reactive rather than proactive in nature. An
efficient and effective intelligence operation cannot be
conducted in such a manner.
Discussion
Due to manpower shortages and/or policy and management direction,
OEA/CD has never aggressively developed its own intelligence
leads on potential export violators, or actively solicited such
leads from the intelligence community. The Department should be
directing and/or soliciting a steady flow of information and .
close working cooperation between the Department and the U.S.
intelligence community and COCOM intelligence agencies to
identify targets, patterns and sources of controlled technology
leakage.
In actuality, however, 0EA/CD's Intelligence Branch even fails to
regularly use the information currently available through 0EA's
License Accounting Retrievel System (LARS). The Compliance
Division has taken little or no initiative to work with DEA to
expand and improve its ability to develop "intelligence"
information through the export licensing and other review
processes. The LARS data base could provide a valuable source of
intelligence information. The data base information is
particularly useful for trend and cross-pattern analyses in
detecting illegal transshipments and diversions of goods through
otner countries. In some cases, tne ?EA Operations Division used
LARS data to strengthen ongoing investigative cases. However, to
date LARS or other intelligence data is not systematically being
used by 0EA/CD personnel in a similar manner. One major reason
for this is that the Intelligence Branch currently lacks
sufficient staffing and expertise, including computer
specialists, to undertake this type of intelligence operation.
Recommendation
The Commerce Department and its Compliance Division must increase
its cooperation with and the flow of relevant information from
the U.S. and COCOM intelligence communities, including specific
information on the Soviet Bloc's Western technology import
strategy and targets, exporters of controlled technologies, their
diversionary routes and schemes, and third country participants
in such schemes.
The Intelligence Branch should be given sufficient computer
specialist and analytical staff, and full access to LARS, to
enhance their in-house intelligence operations. The LARS data
base should be expanded to include distribution license
information and other available data which may be useful to the
intelligence operation.
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Finding #7
OEA/CD intelligence operations are severely hampered by
o Inadequate and delayed iotelligence analyses of
information or leads on possible export violations.
o A failure to adequately control, protect and centrally
maintain source documentation establishing possible
investigative leads.
Discussion
The Intelligence Branch is responsible for processing, analyzing,
and augmenting information on potential violations of export laws
and regulations for possible referral for investigative action.
Sources of information include ,Application Screen leads referred
from 0EA's Operations Division, voluntary and informant
disclosures, referrals from other agencies, violations discovered
oy the Facilitation Branch, information from the intelligence
community and others.
For the period October 1, 1981 to April 21, 1982, the
Intelligence Branch logged in 598 cases or referrals of potential
violations; only 74 cases were reviewed during that period. In
addition, there are several hundred backlogged cases from prior
years; the Intelligence Branch is currently able to do no more
than store these cases. While the inspection team was unable to
assess the quality of the intelligence reviews conducted on the
74 cases processed, it is not unreasonable to conclude that the
Intelligence Branch is ineffective in providing timely and
accurate assessments of suspected violations. Less than 15
percent of the leads received by the Intelligence Branch were
processed during this one six-month period, and hundreds of leads
from prior years have gone untoucned.
me effectiveness of an intelligence arm of a law enforcement
agency is only as good as its ability to respond in a timely
manner with a careful and informed analysis of the intelligence
information. Failure to do so only thwarts the necessary
followup investigation, possible prevention of the actual export
violation and successful criminal prosecution of or
administrative action against violators. A large backlog in the
Intelligence Branch slows the investigative process since most
investigations are not started without the intelligence referral.
Furthermore, the backlog puts undue pressure on the small staff
in the Intelligence Branch to cut short their intelligence
analyses, close cases prematurely, or forego further information
gathering from the intelligence community or other sources. A
staff of five persons is totally inadequate to provide necessary
intelligence data and analyses on suspected export violations.
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The Intelligence Branch's manpower problems are further
compounded by the absence of any systematic review of incoming
cases or information leaks and an internal filing and accounting
system to keep track of the Branch's backlog to ensure that the
cases are handled in order of priority and are not lost or
misplaced. The current system places almost total reliance upon
the memory and judgment of the Chief of the Intelligence Branch
to determine the significance and disposition of the backlog of
potential violations. Little or no effort is made within the
Intelligence Branch to process or prioritize the received
intelligence. It functions as little more than a depository and
ineffective conduit to the investigative section.
Recommendation
Additional manpower should be assigned to the intelligence
function, whether it remains as presently structured or is
relocated to another unit in 0EA, combined with 0EA/C0
investigations or given greater resource assistance from other
intelligence agencies. A review should be made of the entire 0EA
intelligence processes to determine whether intelligence
information is adequate and effectively collected, whether
maximum and timely cooperation is available from all appropriate
segments of the intelligence community, and how the analysis of
intelligence information and leads could be better handled and
expedited to prevent, or at least detect and detain, illegal
export shipments.
Automation of the intelligence gathering and internal filing and
control systems is needed, but more drastic improvements also
must be made to increase the effectiveness and efficiency of the
intelligence operation.
Finally, a special effort must be made to eliminate the current
backlog of Intelligence Branch cases. A special team of
intelligence and investigative agents, perhaps including details
from other agencies, should be assigned this task with clear,
written instructions on how to review these cases and recommend
appropriate action. We suspect that most of these leads are lost
opportunities, Out they contain crucial information on possible
violators, illegal export items, importers and foreign government
or company practices, which should be fed into the current
intelligence data base.
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Finding #8
0EA's license application screening, which is vital to the
compliance function, is an antiquated manual process which, in
practice, does little to help detect violations of export laws
and regulations.
Discussion
One of the principal sources of leads for 0EA/C0 investigative
followup is the Application Screen. The Application Screen is a
file containing an alphabetical listing of the names of persons
and/or firms (exporters, consignees, distributors, etc.) which
were previously denied export privileges or are suspected of
illegal exporting activities. Those of national security concern
are also on the list. Additions and deletions of names from the
screen are made by the Operations Division at the direction of
the Compliance Division.
The Application Screen process involves four full-time processing
clerks (three GS-5's and one GS-61 who manually check all the
information on the face of a license application against the
large rotary card screen file. If any of the individual or
business names on the license application match those in the
screen file, the application is referred to 0EA/CD's Intelligence
Brancn.
There are several shortcomings in this vital screening process:
1. Manual operation of the review process provides too many
opportunities for human oversight or error. Names can be
overlooked, or not recognized because of misspelling or
purposeful omission by the applicant without detection by
DEA clerks. Given the volume of applications and the
screen file listings, it is not surprising that human
oversights have resulted in suspect licenses going through
the screen undetected.
2. The present screen name listings are, in large part,
historical. They represent companies or persons involved
in past export violations or suspect cases. A manual
system is not updated with the speed necessary to provide
vital, current intelligence data and information on
today's violators. The current process also does not
screen out the repeat violators who change the name of
their company, use a new intermediary company, change
their own names, or recruit new "principals" for tneir
illegal export operations.
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Recommendation
We understand that DEA is now planning an overall review of
computer applications for various DEA functions. Priority should
be given to automation of the screen process and the Compliance
Division's intelligence gathering and internal control needs.
Such automated systems, which can be accessed by all appropriate
agencies, are needed for immediate entry of data on all current
investigations, new violations, and new suspects from the
Intelligence community and other sources. The new automated
screen process should also be aole to go far beyond a simple
match of names; it should help detect deceptive submissions,
omissions or substitutions by applicants, or at least flag tne
more obvious ones for further review.
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C. COOPERATION WITH THE U.S. CUSTOMS SERVICE
Finding # 9
Cooperation and coordination between the Compliance Division and
the U.S. Customs Service are inadequate and adversely affect
enforcement of export laws.
Discussion
Strong cooperation between 0EA/CD and the U.S. Customs Service is
essential to effective enforcement of export controls and to
supplement the Compliance Division's insufficient investigative
and inspection manpower in the U.S. and overseas. The 0EA/CD
inspectors must use Customs officials for search and seizure of
suspected cargo, since 0EA/CD inspectors do not have such
authority. Despite the obvious need for cooperation, between the
two agencies, the Compliance Division does not maintain effective
liaison with the U.S. Customs Service. There have even been
efforts by some Compliance Division personnel to avoid
coordination with Customs. ?There have also been incidents of
interagency hostility and investigative case interference by both
the Compliance Division and Customs.
One major source of the hostility has been Commerce's narrow
interpretation of Paragraph 12(c) of the Export Administration
Act and 0EA's unwillingness to disclose confidential licensing
information to Customs and other law enforcement agencies. (See
Finding #11.) Customs-Compliance Division competition and turf
battles have intensified during recent months with Congressional
hearings focused on the enforcement of export laws and
interagency rivalry. The absence of a signed ITA-Customs
interagency agreement for FY 1982 has further hampered their
cooperation. (See Finding # 10.)
Current 0EA liaison with U.S. Customs Service on Project EXODUS
is being handled chiefly by an individual-- an
expert/consultant-- whose efforts are divorced from the
operations of the Compliance Division. Even though the liaison
effort is assisted by the presence of U.S. Customs Service agents
assigned to 0EA, this arrangement is inadequate. (See Finding
#13).
Recommendation
The Assistant Secretary for Trade Administration should make a
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policy commitment to and negotiate strong Customs-OE/CD
cooperation. This commitment must be communicated down through
the ranks of both agencies as operating policy. Written
guidelines and procedures should be developed to support improved
cooperation; they should clearly spell out the jurisdiction of
each agency, how and what constitutes liaison, what arrangements
and resources exist for domestic and overseas support, and what
are the responsibilities and obligations of each agency to a
unified export enforcement effort. (Also see Finding #10.)
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Finding #10
0EA and Compliance Division officials are not aware of the actual
level of support furnished by the U.S. Customs Service for ITA's
export control compliance matters. The transfer of appropriated
funds from the Compliance Division accounts could be excessive.
Discussion
Until January of this year, the U.S. Customs Service provided
investigative, inspection, and administrative support to OEA
under a cost reimbursable interagency agreement with ITA. For FY
1981, at a total cost of $200,000, the U.S. Customs Service
agreed to provide:
- 2 manyears of at-large investigative support
- 2 inspector positions at J.F.K. International Airport
in New York
3 manyears of at-large inspector services at various
posts throughout the U.S.
There is no record of tee actual support provided by the U.S.
Customs Service under this interagency agreement. Lacking this
record, ITA cannot certify that payment to the U.S. Customs
Service is correct and proper, as stated on the Voucher and
Schedules of Withdrawals and Credits (SF 1081). A 1980
management study, conducted by the Deputy Assistant Secretary for
Export Administration, concluded that the U.S. Customs Service
was paid for services it did not provide.
There is no written agreement for U.S. Customs Services to
provide export control compliance support in FY 1982. (HA
cancelled Customs services effective January 15, 1982, and
requested information on the actual services rendered during the
fiscal year to that date. No response had been received from
Customs as of April 30, 1982.
Recommendation
A follow-up request should be sent to the U.S. Customs Service by
the Assistant Secretary for Trade Administration to obtain a
record of actual services rendered by Customs in FY 1982 and
under the FY 1981 interagency agreement. Such documentation is
necessary to support ITA certification that the SF 1081s are
correct and proper for payment.
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For all future cost reimbursable interagency agreements with
Customs, or any other agency, OEA and the Compliance Division
should clearly specify in the agreement what services or products
are to be provided at what cost. In addition, DEA or the
Compliance Division should maintain its own cost accounting
records and require monthly charge reports from the provider
agency.
95-929 0 - 82 - 41
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Finding #11
A strict construction or a narrow interpretation of Paragraph
12(c) of the Export Administration Act of 1979, by the Office of
Export Administration and the General Counsel's Office, has
impeded the progress of criminal investigations and prosecutions.
Discussion
Commerce interprets Paragraph 12(c) of the Act to require that
written permission of the Secretary of Commerce must be obtained
in each incident where ITA licensing information is released for
disclosure during a criminal procedure. This policy includes
disclosures to grand juries and U.S. magistrates. It also
includes information placed in statements made in requesting
legal powers; e.g., search warrants. This requirement has
delayed 0EA/CD's release of vital investigative case information
and has been used to justify minimal or delayed cooperation with
the U.S. Customs Service when it requests information in
connection with criminal investigations.
Numerous questions have been raised about the wisdom and legality
of Commerce's interpretation of Paragraph 12(c). We note that the
same restriction applies as well to disclosures of information
regarding munitions and weapons exports under the control of the
State Department. However, the State Department has issued
blanket authority to allow sucn disclosures in law enforcement
efforts involving its export cases. No such authority has been
issued by Commerce.
Recommendation
The Secretary of Commerce should issue olanket authority for
release of Paragraph 12(c) type information in law enforcement
efforts.
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D. MANAGEMENT DIRECTION AND OVERSIGHT BY ITA
Finding #12
The Deputy Assistant Secretary for Export Administration and the
Director of DEA have circumvented 0EA/CD management and become
personally and directly involved in the conduct and disposition
of investigations. This has tended to:
denigrate the established chain of command and management;
create multiple sources of concurrent supervisory instruction
to the operating staff; and
- detract from the efficient and effective operation of the
Compliance Division.
Discussion
The DAS and Director of OEA justify their direct personal
involvement in individual investigations on the basis of their
perception that the Compliance Division's investigators and
managers are largely unqualified, and are naive regarding the
political ramifications of their actions. While there may be
some validity to these charges, there is an alternative and more
effective approach which should have been taken by the DAS to
handle the situation. The DAS could have worked to improve the
qualifications, resources and effectiveness of the Compliance
Division, rather than circumventing 0EA/CD and pursuing
investigations without the direct involvement of Compliance
Division managers. The DAS apparently prefers to use "favorite
son" investigators and a paid consultant to manage and conduct
important investigations.
In addition to using investigative teams outside of the formal
0EA/CD structure, the DAS personally intervenes and conducts
crucial aspects of sensitive investigations. For example, he
personally intervened in the Piher/Suin investigation (Case No.
81-359) by traveling in lieu of an experienced investigator, as
was requested by the Foreign Commercial Service, and failed to
file a written report of his activities, as requested by the
Director of the Compliance Division. The DAS subsequently
directed that this case be reassigned from the original case
agent to an agent of his choosing. Similar actions were detected
in inspection team's review of Case Nos. 82-76, 82-68, 81-271,
82-55, 81-377, and 80-12.
It is obviously both the perogative and responsibility of the DAS
to set overall policy for and oversee 0EA operations, including
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those of the Compliance Division. In special cases, this may
even warrant some degree of personal DAS involvement in case
investigations. However, it is counter-productive for the DAS to
conduct day-to-day operations or call the shots routinely in an
investigative case. It is a waste of available trained
investigators and can have a devastating impact on the morale of
the Compliance Division employees, particularly inasmuch as the
DAS himself is neither a trained investigator nor has any
background in criminal investigation.
Recommendation
Investigations of potentially criminal violations and national
security matters should be conducted by trained 0EA/CD
investigators, without interference in their day-to-day
fact-finding operations.
The Department should obtain qualified individuals to manage the
0EA/CD, if they are not now available. This would include the
pending employment of Theodore Wu as a new DAS for Export
Enforcement to oversee intelligence and enforcement operations.
However, it should also extend down to the management of all
0EA/CD operating units. Efforts should be made to upgrade the
quality of the existing staff and resources. These efforts
snould include the development and implementation of a training
program, inasmuch as newly hired personnel learn on the job from
investigators whose own qualifications are limited. (See
Finding #4).
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Finding #13
The Deputy Assistant Secretary for Export Administration has
weakened the Compliance Division by shifting part of its
functions and responsibilities to a consultant and task force
which operate outside of the Division. The DAS has misused this
expert/consultant whom he nired ostensibly to evaluate and
upgrade the compliance function. Personnel regulations have been
violated, as well as sound management practices, by interjecting
this consultant in an operating role for which he has little
expertise.
Discussion
The OAS originally authorized the hiring of the expert/consultant
for a 30-day term and has since extended his appointment five
times. According to his position description, the consultant is
to enhance the efficiency and effectiveness of the Compliance
Division. Specifically, he is to
Make recommendations to improve intelligence capabilities
and operations;
Evaluate the need, if any, for additional law enforcement
powers;
- Oesign and establish programs in support of future and
ongoing investigations;
- Perform other special projects as agreed upon between him
and the Director of the Compliance Division.
In fact, however, the consultant has not improved the operations
of the Compliance Division, nor has he worked with the management
or staff of that Division. The consultant's activities bear
little, if any, resemblance to his position description. Rather,
there is considerable evidence that the consultant and DAS have
further reduced the effectiveness of 0EA/C0 by stripping it of
many of its assigned functions and resources. The inspection
team found numerous problems and inconsistencies between planned
(as outlined in his position description) and actual activities
of the consultant whicn have disrupted or weakened OEA/CD
operations. These include:
- A task force has been assembled to work with the
consultant. It includes two U.S. Customs agents and 0EA's
principal computer expert, but does not include anyone from
the Compliance Division. This group independently carries
out many of the investigative and interagency liaison and
intelligence coordination functions assigned to the
Compliance Division.
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The consultant's task force operates without any specified
scope of work, time frame, or performance and reporting
requirements.
- The consultant's task force, rather than the Compliance
Division, acts as the central liaison between the
Department of Commerce and the U.S. Customs Service on
Project EXODUS.
me consultant works closely with 0EA's computer and
licensing people to develop new and improved intelligence
information. However, this again is done without
consultation or cooperation with OEA/CO.
The consultant has had very little interaction with the
Director and employees of the Compliance Division. He
reports directly to the DAS and not to the Director of the
Compliance Division, as stated in his position description.
- The consultant's position designation as critical
nonsensitive is in conflict with the direct investigative
duties he has performed and the provisions of DAD 207-4.
The DAS has turned over several classified investigative
cases, initiated Dy the Compliance Division, to the
consultant.
- The consultant has performed no significant analysis or
evaluation of the operations of the Compliance Division as
is stated in his position description. No identifiable
product was located.
Altnough tnere are some benefits to oe derived from the
consultant's efforts, his independent operation further fragments
Commerce's already limited effort to enforce export controls and
provide strong, unified leadership to an interagency program to
prevent or detect illegal export of controlled technologies.
The inspection team also questions the legality and propriety of
the hiring of this consultant. Instructions covering the
employment of experts and consultants are contained in Chapter
304 of the Federal Personnel Manual. Manual subchapters 1-3
state that improper employment of experts and consultants is not
only illegal, but also wasteful and destroys the morale of career
specialists. One of the manual examples of improper employment
of an expert is assignment to a noncritical, nonsensitive
position which could be handled as well by a regular Federal
employee. Such a violation seems to have been made in this Case.
Financial compensation ($93 per day) for this full-time position
may also nave been made to avoid competitive employment
'procedures and General Schedule pay limits.
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Recommendation
The consultant's task force should oe disbanded; the work
initiated by the task force should be continued by the Compliance
Division as follows:
- The liaison function with the U.S. Customs Service should
be continued and enhanced by the Intelligence Branch;
- The expanded use of tne LARS data base for intelligence
gathering operations should continue to be pursued by the
Intelligence Branch with UEA's computer experts.
To the extent that the Compliance Division and the DAS believe
that there is a need to continue the services of this or another
expert/consultant, the latter should report to the Director of
tne Compliance Division. Certain aspects of the consultant's
efforts have significant merit; but appear far outside the scope
of his position description as currently written. A written
agreement should be prepared to specify his mission and work
products.
Both tne DAS and 0EA/CD should adhere to all appropriate
personnel regulations concerning the niring and use of
experts/consultants. Special care must be taken to avoid
assigning consultants to operational duties which would normally
be nandled by civil servants. Rules regarding extension of term
appointments and financial compensation should be followed.
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E. INTERNAL ADMINISTRATION AND MANAGEMENT SYSTEMS
Finding #14
The Compliance Division does not have an effective management
information system or automated administrative processes,
including case control and time reporting systems and information
storage. The current manual processes waste staff time, lend
themselves to human errors, and do not provide management with
sufficient information to effectively and efficiently carry out
the compliance function.
Discussion
The Chief of the Intelligence Branch has the primary
responsibility for compiling and maintaining statistics for the
Compliance Division. Branch Chiefs and staff memoers of the
Compliance Division also devote a substantial portion of their
time generating statistical and administrative reports for
various sources in DEA, ITA, and the Congress. This information
is usually necessary for management's use, but could be more
quickly and efficiently produced if the manual information
storage and retrieval systems now in existence were automated.
The current systems place excessive reliance on the memories of
individual managers and agents as to the significance and status
of hundreds of investigative cases and leads. Furthermore, the
time devoted to compiling and reporting this information detracts
from the time devoted to intelligence, inspections, and
investigative operations. Given limited staff resources, the
need to automate is that much more urgent.
Recommendation
An analysis of computer applications within the Compliance
Division should be performed. This can be done in conjunction
with the requirements analysis being arranged by the DEA
Operations Division. Wherever the benefits outweigh the costs,
management information and administrative processes should oe
automated. Strong consideration should also be given to the
creation of a dedicated, secured system for the licensing and
compliance operations, due to the national security issues
involved and the use of sensitive and classified
information.
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Finding #15
Operational policies and procedures of the Compliance Division
were found to be nonexistent or outdated and not widely
disseminated to staff members.
Discussion
The inspection team found few operational policies and procedures
for the Compliance Division. The most significant procedural
guidelines applicable to the operations of the Compliance
Division are the DEA manual and the agent's manual. The
Compliance Division did not have a copy of the DEA manual and
some employees did not even know of its existence. The team
reviewed a copy of the DEA manual maintained by the Operations
Division; it is fairly comprehensive and informative on the
interaction and relationship between tne licensing and compliance
functions. However, the DEA manual's section on "Intelligence
Information, Investigation, and Enforcement" was last updated in
1973, with many sections written as early as 1956.
The agent's manual was similarly outdated. Most of the
investigators do not have a copy of that manual; there are few
copies available. Furthermore, the manual is classified at a
level above that of most 0EA/CD agents. Such classification
seemed unwarranted.
Recommendation
0EA/CD operating procedures and manuals should be updated and
readily available to staff. If classified information must be
included in the agent's manual, it should be restricted to a
separate appendix to permit free and ready access by agents to
the manual's oasic operating procedures and information.
Considering the present lack of training provided new
investigators, an agent's manual is an absolute necessity.
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Finding #16
The Compliance Division has maintained inaccurate accounting
records of its travel costs. Its reports to the Office of Export
Administration in Fiscal Year 1982 significantly understated
actual monthly travel costs.
Discussion
Since November 1981, units of the Office of Export Administration
have been directed to provide monthly cost data on certain
categories of expenses for internal management purposes. One of
these cost categories is for travel.
Comparison between travel costs reported by the Compliance
Division ($13,032) and actual costs shown in Commerce accounting
records ($26,778) snow a difference of more than 100 percent as
of February 1982. The inspection team found no evidence that
this discrepancy was due to diversion of 0EA/C0 travel funds to
non-OEA/CD uses. Rather, the team attributed the difference, at
least in part, to a failure to include all 0EA/CD travel claims
for,each month in the reports prepared for the Director of the
ColWpliance Division.
Recommendation
The Compliance Division should reconstruct its travel costs for
FY 1982 and provide the Office of Export Administration with
corrected financial reports. An accurate internal financial
accounting system should be established and maintained by 0EA/CD
to ensure proper and effective use of all available 0EA/CD funds.
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Finding #17
The assigned working space of the Compliance Division is
inadequate and has an adverse effect on the ability of the
Division to perform its mission.
Discussion
The Compliance Division's working space is crowded, poorly
equipped, ill-maintained, and noisy. This contributes to low
staff morale and impedes investigative effectiveness. While this
condition, of itself, would not usually disrupt normal activity,
its impact is grossly magnified by the myriad of other problems
and shortages facing DEA/CO.
The currently assigned space provides no opportunity for staff to
conduct private meetings with sources of information, other
enforcement agency personnel, co-workers or other persons wishing
to discuss confidential matters or cases. Furthermore, it is not
good security practice to hold staff discussions of sensitive
and, on occasion, classified information in the current open work
areas.
Recommendation
The Department should provide adequate and secure working and
file space for the Compliance Division.
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v-N
July 2, 1982
MEMORANDUM FOR SHERMAN FUNK
FROM: Lionel H. Olmer
ADDEN
UEU-'5"r'ES DEPARTMENT OF COMMERCE
The Under Secretary tor International Trade
Washmpt.on. D.C. 20230
SUBJECT: Comments on Draft 'Report on Export Enforcement
I have reviewed your draft Report and its findings and
recommendations concerning operations of the export enforcement
group in Trade Administration. ITA's comments are attached.
I hope that you recognize that many of the problems your investi-
gators reported upon are soon to be things of the past or already
are. ITA has agreed to report back to the Senate Permanent
Investigations Subcommittee later this year on the progress we
have made in addressing these problems; we will have a very
positive story to tell on that occasion.
I hope you will incorporate as much as possible of our response
into your final Report. I would especially urge you to ensure
that your final Report takes notice of several important ITA
initiatives taken well before the date of the draft Report to
correct the situation. These include, for example, the planning
and implementation of a major reorganization designed to improve
export enforcement, including the appointment of a new Deputy
Assistant Secretary for Export Enforcement.
By failing to make adequate mention of this key reorganization, as
well as other ITA initiatives on enforcement, the draft Report
gives the incorrect impression that ITA has taken no effective
remedial action whatsoever during the past year.
In any event, please include our entire response as an addendum to
your Report.
Attachment
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SUMMARY OF FINDINGS
(Report page 4)
FINDING: No comprehensive appraisal of or effective overall strategy to
address the Nation's technology leakage problems
RESPONSE: The Department has undertaken several initiatives to rectify
this problem. As explained by Assistant Secretary Brady in his
May 12, 1982 testimony before the U;S. Senate Permanent Sub-
committee on Investigations, the Administration directed the
intelligence agencies to prepare a comprehensive appraisal of
Soviet technology acquisition efforts. On the basis of the
initial results of that appraisal the Department has taken the
following steps:
(1) Creation of a Foreign Technical Assessment Center within
the Office of Export Administration, tasked with maintain-
ing a data base enabling the Department to assess foreign
availability of technology.
(2) _Pursuit of stronger ties with the intelligence community
and other enforcement agencies, both with respect to '
intelligence collection and intelligence utilization.
(3) Elevation to office status of the Compliance Division, to
be headed by a new Deputy Assistant Secretary for Export
Enforcement (DAS/EE). The Office of Export Enforcement
(OEE) will be an aggressive enforcement organization, with
field offices in Los Angeles, San Francisco and New York.
The establishment of additional field offices will be
considered as needs arise.
(4) Tasking of the DAS/EE with the responsibility for
developing strategy for addressing the Nation's illegal
technology transfer problems. Such a strategy is now in
the formulation stage.
Insufficent trained personnel
RESPONSE: We concur in this finding. However, it should be recognized
that the Department has already taken important steps to correct
the situation, including initiation of a vigorous program to
recruit professional law enforcement personnel with extensive
criminal investigation experience. In this connection, the
Department is in the process of eliminating current obstacles to
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the recruiting of experienced law enforcement personnel, such as
the unavailability of premium pay for administratively uncon-
trollable work by export enforcement special agents. We are
also actively pursuing the matter of obtaining firearms, and
search, seizure and arrest powers for our export enforcement
special agents. Finally, we plan to deliver an effective,
professional training program which will include instruction not
only in conventional law enforcement, such as surveillance and
search and seizure techniques as well as Federal criminal
procedures, but also will include training in problems unique to
export enforcement. The in-house portion of the training
program will concentrate on specialized export control
enforcement techniques, trade intelligence and technology
acquisition trend analysis.
FINDINGS: (a) Inadequate management direction and oversight
(b) Lack of strong leadership and clear lines of organizational
responsibility within 0EA/CD
RESPONSE: Recognizing that the management structure inherited from the
prior Administration was inadequate to the task of stemming an
accelerating tide of illegal technology transfer, we have taken
steps to rationalize that structure. As a result, the Depart-
ment has established the post of Deputy Assistant Secretary for
Export Enforcement, whose only responsibility will be directing
the Department's export control enforcement and antiboycott
compliance efforts. The new DAS/EE brings solid law enforcement
management skills to his position. One of his highest
priorities is to establish management objectives and milestones
in order to concentrate resources and talents on the timely
fulfillment of the Department's export enforcement mission.
FINDING: Failure to use modern state-of-the-art intelligence,
investigative techniques and systems
RESPONSE; We agree that much remains to be done in the area of developing
a sophisticated, comprehensive response to illegal technology
transfer. However, the Department has made a good start in
recent months toward attaining this objective. For example, we
have created a specialized analytical unit which correlates
licensing and other intelligence data in order to identify
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possible diversions and diversion routes. This unit will soon
be fully integrated with the Department's operational export
licensing and enforcement arms. Further, the Office of Export
Administration (CEA) has established a technology transfer unit
which is tasked with providing data to the Office of Export
Enforcement. Moreover, the Office of Export Enforcement's own
intelligence unit will be staffed by personnel having both
intelligence and criminal investigation expertise.
.FINDING: Unwarranted interference in the detailed conduct of CEA/CD
investigative operations by the Deputy Assistant Secretary for
Trade (sic) Administration
RESPONSE: (See our response to Finding #12 below.)
FINDING: Inadequate cooperation and coordination with the U.S. Customs
Service and vital information sources in the U.S. intelligence
111-E_IatC01111
RESPONSE: Concurrent with the restructuring and enhancement of our export
enforcement effort, the Department is continuing to move
vigorously to improve cooperation and coordination with the
intelligence agencies. For example, the Department is sharing
and will continue to share with the intelligence agencies
certain threat appraisal and technology transfer intelligence
collection and analysis responsibilities. In addition, the
Department's licensing and export control arms will make every
effort to improve the frequency and effectiveness of their
liaison with the intelligence agencies.
The Department has increasingly sought to improve cooperation
with the Customs Service at all levels. For example, the
Department made a special effort in recent months to share
licensing and intelligence data with Customs personnel in order
to facilitate the development of profiles for use in 'Operation
Exodus. In addition, the Department is presently exploring
with Customs ways of more efficiently allocating the export
control responsibilities of the two agencies, such as assigning
primary responsibility for inspections at points of exit to
Customs.
We fully expect these efforts at improved cooperation to be
successful and to result in a more effective united front
against the illegal technology transfer threat.
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FINDING:
RESPONSE:
FINDING:
RESPONSE:
642
Inadequate travel funds, law enforcement equipment and other
support resources
We agree with this finding to the extent that it reflects the
priorities accorded in past years to the budget and manpower
needs of export control enforcement. The Department is now
fully committed to funding the travel, logistical, space and
equipment needs which are associated with the development of an
investigative force which will be greatly improved both in terms
of quality and quantity.
Use of antiquated or inefficient internal administrative and
management systems and procedures
We agree with this finding of the Report. The need for
application of advanced data processing techniques to the
licensing and intelligence analysis functions, as well as to the
enforcement mission, is critical. To achieve this goal, there
must be both complete commitment and a vigorous follow-through
on the part of all management levels of the Department.
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FINDING:
RESPONSE:
FINDING:
RESPONSE:
642
Inadequate travel funds, law enforcement equipment and other
support resources
We agree with this finding to the extent that it reflects the
priorities accorded in past years to the budget and manpower
needs of export control enforcement. The Department is now
fully committed to funding the travel, logistical, space and
equipment needs which are associated with the development of an
investigative force which will be greatly improved both in terms
of quality and quantity.
Use of antiquated or inefficient internal administrative and
management systems and procedures
We agree with this finding of the Report. The need for
application of advanced data processing techniques to the
licensing and intelligence analysis functions, as well as to the
enforcement mission, is critical. To achieve this goal, there
must be both complete commitment and a vigorous follow-through
on the part of all management levels of the Department.
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FINDING 12: The lack of operational travel adversely affects the quality and
scope of criminal investigations conducted by the Compliance
Division, compounding the problems created by a shortage of
staff resources.
RECOMENDATION: More agents are needed to investigate export violation
cases. The Assistant Secretary for Trade Administration
should conduct a review to determine an adequate level of
staff for this function, as well as other functions of the
Compliance Division. Such adequate staffing should be
provided as soon as possible, if necessary by shifting
other ITA resources, obtaining personnel detailed from
other agencies, and/or requesting an emergency budget
supplement.
0EA/GD operational travel should be approved and taken as
necessary in pursuit of criminal cases. Adequate management
systems and controls should be established to insure that
domestic travel can be taken in a timely manner. Inter?
national travel should be similarly approved where
justified, particularly when U.S. CUstoms Service or other
appropriate U.S. overseas investigative personnel are not
available.
RESPONSE: We concur in this finding. An effective law enforcement
operation tasked with stemming illegal exports necessarily
involves extensive mobility and must therefore be predicated
upon an adequate travel budget, as well as the appropriate
delegation to line managers of the authority to approve
operationally critical travel requests.
The lack of investigative travel is not attributable solely to
resources as the following data show:
Travel Expenses ($000)
Export Other
Enforcement OEA
FY 1980
46
52
FY 1981
43
44
FY 1982 (est.)
60
60
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LTA program managers are allocated resources for official travel
based both on past experience and on the presentation of
evidence of future expansion. Until the arrival of the new
DAS/EE, however, compliance management had not voiced to senior
ITA management any need for additional travel resources.
Also, we found in an April 1980 study that most of the former
Compliance Divisions investigators were reluctant to travel,
principally for personal reasons. In expectation of a vigorous
pursuit of his duties by the new DAS/EE, ITA senior management
is planning to increase the level of travel resources available
to export enforcement.
We are also working to determine the appropriate level and
sources for additional staffing of the export enforcement effort.
FINDING 13: The Assistant Secretary for Trade Administration has been
unreasonably slow in establishing Export Compliance Field
Offices on the West Coast.
FECCHMENDATION: ITA management should expedite the establishment and
staffing of Export Compliance Field Offices on the West
Coast. These offices should be staffed with adequate
numbers of trained and experienced investigators and
inspectors.
RESPONSE: A notification of proposed reprogramming was sent on May 28,
1981 to Senate Appropriations Committee Chairman Hatfield and to
House Appropriations Subcommittee Chairman Smith. The request
included shifting 15 positions from other program areas of ITA
for the export compliance function.
Establishing offices on the West Coast was not explicitly
mentioned in that reprogramming notification. The special
reprogramming notification to create field offices was held up
pending departmental resolution with CMH of In.'s FY 83 budget
request?agreed to in December, 1961. Promptly upon Congress'
return, the Department sent a second reprogramming notification
requesting specific approval for the establishment of export
enforcement offices in San Francisco and Los Angeles, Approval
of this request by Congress came on February 23, 1982. In view
of the imminent reorganization of ITA's export enforcement
organization, implementation of the staffing of the West Coast
offices was deferred to give the new DAS/EE the opportunity to
direct that staffing.
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646
As the Report's discussion of this finding recognizes, plans to
open the West Coast field offices are now back on track. The
Department is now pressing GSA to provide appropriate quarters
as soon as possible to handle the enhanced staffing for these
offices.
The-Compliance Division frequently hires inexperienced
investigators and provides no training for its investigative
staff.
RECOMMENDATION: The Compliance Division should develop and implement a
formal training program for all newly hired and present
undertrained personnel. This should include utilization of
the Federal Law Enforcement Training Center and other
established law enforcement training facilities, as well as
structured on-the-job training. A training profile should
be developed for each OE/CD investigator to determine his
individual training needs. 0EA/CD personnel should be
adequately trained in all aspects of law enforcement,
including intelligence, surveillance, investigations and
inspections, judicial proceedings and case handling. The
Department should provide adequate funding for 0EA/CD's
training needs.
RESPONSE: This problem is now being dealt with on two levels. First, we
are now recruiting only experienced investigative and intelli-
gence personnel of the highest professional quality. In order
to ensure that this is done, all selections for these positions
must be approved by the new DAS/EE, who has in-depth experience
in the investigation and prosecution of technology transfer
crimes. Second, we are providing a systematic and continuing
training program for all ITA special agents, covering not only
conventional law enforcement skills but also the specialized
investigative and intelligence skills which are vital to
development of technology transfer cases. Further, recognizing
that voluntary compliance and cooperation by the private sector
remains the first line of defense against the loss of critical
technology, Commerce special agents will be trained to work with
the business community.
The question of basic (X-118) qualifications held by two
specific employees in DEA was discussed between a representative
of the IG's office and ITA's Office of personnel. The back-
grounds of the two employees were reviewed and it was agreed
that both were qualified for the grades at which they were hired.
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FINDING 15: The Compliance Division lacks virtually any law enforcement
equipment although such equipment is needed to conduct
investigations effectively.
RECCMMENDATION: The Department should purchase the essential investigative
equipment required by the Compliance Division.
RESPONSE: The Office of Export Administration had $30,000 in its FY 1981
and 1982 budget allocations for the purchase of equipment and
has spent only $10,000 through April 30, 1982. Thus, it is not
clear that this is a resource problem, so much as Export
Administration's lack of positive action to secure needed
equipment.
Nevertheless, we agree with the conclusion that the export
enforcement investigative staff is inadequately equipped. It is
essential that this situation be remedied without delay.
Accordingly, the procurement of such equipment will be given
increased priority, both in terms of funding and acquisition.
FINDING 46: The Compliance Division's current intelligence operations are
almost exclusively reactive rather than proactive in nature. An
efficient and effective intelligence operation cannot be
conducted in such a manner.
BECCMMENMATION: The Commerce Department and its compliance Division must
increase its cooperation with and the flow of relevant
information from the U.S. and =OM intelligence
communities, including specific information on the Soviet
Bloc's Western technology import strategy and targets,
exporters of controlled technologies, their diversionary
routes and schemes, and third country participants in such
schemes. ?
The Intelligence Branch should be given sufficient computer
specialist and analytical staff, and full access to LARS,
to enhance their in-house intelligence operations. The
LRS data base should be expanded to include distribution
license information and other available data which may be
useful to the intelligence operation.
RESPONSE: The new Office of Export Enforcement will move aggressively to
develop intelligence leads on two fronts. First, through
improved staffing and training of its intelligence division, it
will develop the capacity to generate intelligence information
on its own initiative, as well as to use intelligence informa-
tion received from other sources. Second, it will encourage its
intelligence and investigative personnel to work more closely
with other intelligence and law enforcement
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FINDING 15: The Compliance Division lacks virtually any law enforcement
equipment although such equipment is needed to conduct
investigations effectively.
RECCMMENDATION: The Department should purchase the essential investigative
equipment required by the Compliance Division.
RESPONSE: The Office of Export Administration had $30,000 in its FY 1981
and 1982 budget allocations for the purchase of equipment and
has spent only $10,000 through April 30, 1982. Thus, it is not
clear that this is a resource problem, so much as Export
Administration's lack of positive action to secure needed
equipment.
Nevertheless, we agree with the conclusion that the export
enforcement investigative staff is inadequately equipped. It is
essential that this situation be remedied without delay.
Accordingly, the procurement of such equipment will be given
increased priority, both in terms of funding and acquisition.
FINDING 46: The Compliance Division's current intelligence operations are
almost exclusively reactive rather than proactive in nature. An
efficient and effective intelligence operation cannot be
conducted in such a manner.
BECCMMENMATION: The Commerce Department and its compliance Division must
increase its cooperation with and the flow of relevant
information from the U.S. and =OM intelligence
communities, including specific information on the Soviet
Bloc's Western technology import strategy and targets,
exporters of controlled technologies, their diversionary
routes and schemes, and third country participants in such
schemes. ?
The Intelligence Branch should be given sufficient computer
specialist and analytical staff, and full access to LARS,
to enhance their in-house intelligence operations. The
LRS data base should be expanded to include distribution
license information and other available data which may be
useful to the intelligence operation.
RESPONSE: The new Office of Export Enforcement will move aggressively to
develop intelligence leads on two fronts. First, through
improved staffing and training of its intelligence division, it
will develop the capacity to generate intelligence information
on its own initiative, as well as to use intelligence informa-
tion received from other sources. Second, it will encourage its
intelligence and investigative personnel to work more closely
with other intelligence and law enforcement
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/ORME: We agree with the conclusions of the Report concerning the case
backlog. The DAS/EE has directed that the backlog be
inventoried, analyzed and assigned priorities without delay, add
this is being done. Once this phase is completed, he will
decide what further resources must be applied to disposition of
the backlog, and what case processing priorities must be
followed.
Finally, we are committed to the complete and deliberate review
of the entire intelligence collection, analysis and distribution
process relating to export enforcement. Moreover, we intend to
draw upon appropriate resources in the intelligence community to
assist us in this endeavor. In the short time he has held his
new post, the DAS/EE has already begun to establish smooth
working relations with representatives of the intelligence
community.
FINDING 18: 0EA's license application screening, which is vital to the
compliance function, is an antiquated manual process which, in
practice, does little to help detect violations of export laws.
and regulations.
RECCHSENDATION: We understand that OE A is now planning an overall review of
computer applications for various 0EA functions. Priority
should be given to automation of the screen process and the
Compliance Division's intelligence gathering and internal
control needs. Such automated systems, which can be
accessed by all appropriate agencies, are needed for
immediate entry of data on all current investigations, new
violations, and new suspects from the intelligence
community and other sources. The new automated screen
process should also be able to go far beyond a simple match
of names; it should help detect deceptive submissions,
ommissions or substitutions by applicants, or at least flag
the more obvious ones for further review.
RESP0mM% We agree that the current manual screening process leaves much
to be desired. 0EA is now planning an overall review of
computer applications for various CEA functions. Priority will
be given to automation of the "screens process, intelligence
gathering, and internal control needs. Such automated aystems,
Which can be accessed by all appropriate agencies, are needed
for immediate entry of data on all current investigations, new
violations, and new suspects from the intelligence comunity and
other sources. The new automated screen process Should also be
able to go far beyond a simple match of names; it should help
detect deceptive submissions, omissions or substitutions by
applicants, or at least flag the more obvious ones for further
review.
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FINDING 19: Cooperation and coordination between the Cbmpliance Division and
the U.S. Customs Service are inadequate and adversely affect
enforcement of export laws.
RECOIMENDATION: The Assistant Secretary for Trade Administration should
make a policy commitment to and negotiate strong CUstoms-
0EA/CD cooperation. This: commitment must be communicated
down through the ranks of both agencies as operating policy.
Written guidelines and procedures should be developed to
support improved cooperation; they should clearly spell out
the jurisdiction of each agency, how and what constitutes
liaison, what arrangements and resources exist for domestic
and overseas support, and what are the responsibilities and
obligations of each agency to a unified export enforcement
effort. (Also see Finding #10.)
RESPONSE: Progress in dealing with perceived difficulties involving
Section 12(c) of the Export Administration Act of 1979 has been
made by the signing on June 18, 1982 by Secretary Baldrige of a
blanket determination under that section permitting the
Department of Justice to use certain protected information in
connection with prosecution of export control violation arising
from 'Operation Exodus'.
Both Assistant Secretary Brady and Deputy Assistant Secretary Wu
are totally supportive of improved cooperation and coordination
between the Office of Export Enforcement and the Customs
Service. They have each met with their counterparts at Treasury
as a first step in producing a comprehensive written
understanding allocating responsibilities between the two
agencies. We believe that this will result in a more efficient
utilization of existing resources, such as the assignment of
primary
responsibility for inspections at points of exit to Customs,
which is already staffed, equipped and trained to take the lead
in performing this function. Moreover, we anticipate these
discussions will help to eliminate jurisdictional overlaps and
conflicts between the two agencies and to foster a spirit of
reciprocal cooperation. We expect that Customs and Commerce
will, through better communication and teamwork, present a
united front in this Nation's fight against illegal diversion of
technology.
We concur in the conclusion of the Report that the liaison
function between IDEA and Customs, now performed by an outside
consultant, should be fully integrated into the Office of Export
Enforcement organization. It will be.
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FINDING 110: CEA and Compliance Division officials are not aware of the
actual level of support furnished by the U.S. Customs Service
for ITA 's export control compliance matters. The transfer of
appropriated funds from the Compliance Division accounts could
be excessive.
RECCMMENDATTON: A follow-up request should be sent to the U.S. Customs
Service by the Assistant Secretary for Trade Administration
to obtain a record of actual services rendered by Customs
in FY 1982 and under the FY 1981 interagency agreement.
Such documentation is necessary to support ITA certifi-
cation that the SF 10Ells are correct and proper for payment.
RESPONSE: The U.S. Customs Service indicated in an April 30, 1981 letter
that to track actual costs incurred against an agreement would
require additional staff-hours which Customs did not have. They
maintained that the reimbursable agreement was insufficient to
cover the additional expense which would be incurred by
Customs. However, pursuant to the recommendation of the Report,
a follow-up request will be sent by ITA to Customs in order to
obtain a record of actual services rendered by Customs in FY 82
and under the FY 81 interagency agreement.
The Report also recommends that the Office of Export Enforcement
maintain its own cost accounting records. We do not agree.
This would unnecessarily duplicate the accounting support
provided ITA by the Office of the Secretary.
FINDING Ill: A strict construction on a narrow interpretation of paragraph
12(c) of the Export Administration Act of 1979, by the Office of
Export Administration and the General Counsel's Office has
impeded the progress of criminal investigations and prosecutions.
RECcEmENDATION: The Secretary of Commerce should issue blanket authority
for release of Paragraph 12(c) type information in law
enforcement efforts. -
RESPONSE: This finding reveals a serious misunderstanding regarding the
Department's position with respect to Section 12(c) of the
Export Administration Act. The Department has always shared
information subject to Section 12(c) with other agencies for
their use in assisting the Department in administering and
enforcing the Act. However, these agencies, and the Department,
are precluded from making the information public unless the
Secretary of COmmercedetermines that the withholding of the
information is contrary to the national interest. Contrary to
the statement made in the Report, Section 12(c) has never
delayed any criminal enforcement proceeding. Indeed, the
Department is unaware of any instance in which intelligence or
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law enforcement agency access to information needed for a
criminal investigation and subject to Section 12(c) has been
blocked by denial of such a determination Although Cbmmerce has
historically dealt with such requests on a case by case basis,
Secretary Baldrige recently issued a "blanket national interest
determination authorizing the use by the Justice Department of
Section 12(c) information (as well as Shipper's Export Declara-
tions which are subject to the confidentiality provisions of the
Census Act), for the purpose of criminal prosecution of Export
Administration Act violations discovered through *Operation
Exodus', subject to certain conditions.
It is important to note that the information subject to Section
12(c)'s confidentiality provisions includes confidential
business information which is submitted to the United States
Government only in order to receive an export license.
Accordingly, great care must be taken by the Department to
ensure that the confidentiality of such information not be
compromised.
FINDING 112: The Deputy Assistant Secretary for Export Administration and the
Director of OSA have circumvented 0EA/CD management and become
personally and directly involved in the conduct and disposition
of investigations. This has tended to:
- denigrate the established chain of command and management;
- create multiple sources of concurrent supervisory
instruction to the operating staff; and
- detract from the efficent and effective operation of the
Compliance Division.
RECCMENDATION: Investigations of potentially criminal violations and
national security matters should be conducted by trained
CEA/CD investigators, without interference in their
day-to-day fact-finding operations.
The Department should obtain qualified individuals to
manage the 0EA/CD, if they are not now available. This
would include the employment of Theodore Wu as a new DAS
for Export Enforcement to oversee intelligence and
enforcement operations. }however, it should also extend
down to the management of all 0E1/CD operating units.
Efforts should be made to upgrade the quality of the
existing staff and resources. These efforts should include
the development and implementation of a training program,
inasmuch as newly hired personnel learn on the job from
investigators whose own qualifications are limited. (See
Finding #4).
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RESPONSE: We concur in the recommendation, but the record should show that
the DAS for Export Administration and the Acting Director of CEA
state they never got personally involved in the day-to-day fact
finding process of the Compliance Division or in the details of
investigations. As a prerogative of management, however, they
did inquire as to what compliance Division personnel were doing
with their time, to get an idea of the Division's effectiveness.
It should be noted that in those cases in which they were
involved, the Deputy Assistant Secretary for Export Administra-
tion and Acting Director of CEA (who was involved in only one
case) did so solely for the purpose of enlisting the cooperation
of concerned foreign governments in paving the way for
Compliance Division and investigators. Their respective conduct
in these cases was entirely proper and consistent with the
practice of other law enforcement agencies, whose senior
officials often take initiatives to enlist the cooperation of
their senior foreign government counterparts in paving the way
for U.S. agency investigators.
FINDING 113: The Deputy Assistant Secretary for Export Administration has
weakened the Compliance Division by shifting part of its
functions and responsibilities to a consultant and task force
which operate outside of the Division. The DAB has misused this
expert consultant whom he hired ostensibly to evaluate and
upgrade the compliance function. Personnel regulations have
been violated, as well as sound management practices, by
interjecting this consultant in an operative role for which he
has little expertise.
RBCCMENDATICO: The consultant's task force should be disbanded; the work
initiated by the task force should be continued by the
Compliance Division as follows:
The liaison function with the U.S. Customs Service
should be continued and enhanced by the Intelligence
Branch;
-- The expanded use of the LARS data base for
intelligence gathering operations sould continue to be
pursued by the Intelligence Branch with CEA's computer
experts.
To the extent that the Compliance Division and the DAB
believe that there is a need to continue the services of
this or another expert/consultant, the latter Should report
to the Director Of the Compliance Division. Certain aspects
of the consultant's efforts have significant merit, but
appear far outside the scope of his position description as
currently written. A written agreement should be prepared
to specify his mission and work products.
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Both the DAS and 0EA/CD should adhere to all appropriate
personnel regulations concerning the hiring and use of
experts/consultants. Special care must be taken to avoid
assigning consultants to, operational duties which would
normally be handled by civil servants. Rules regarding
extension of term appointments and financial compensation
should be followed.
RESPONSE: The comments regarding the consultant doing work not
comprehended in his position description are correct. His
position was accurately designated as non-critical sensitive.
Although he later requested a TOp Secret and Special Access
clearance, it has not been granted. Accordingly, as the Report
says, he should not have access to such information. ITA has
taken steps to have the consultant conform to the terms of his
employment and appropriate security regulations.
FINDING 114: The Compliance Division does not have an effective management
information system or automated administrative process,
including case control and time reporting systems and
storage. The current manual processes waste staff
time, lend themselves to human errors, and do not provide
management with sufficient information to effectively and
efficiently carry out the compliance function.
RECCMMENDATION: An analysis of computer applications within the Compliance
Division should be performed. This can be done in
conjunction with the requirements analysis being arranged
by the OSA Operations Division. Wherever the benefits
outweigh the costs, management information and administra-
tive processes should be automated. Strong consideration
should also be given to the creation of a dedicated, secured
system for the licensing and compliance operations, due to
the national security issues involved and the use of
sensitive and classified information.
RESPONSE: The Report accurately describes the need for improved management
information systems and automated administrative processes.
(See responsb to Finding #8.)
FINDING #15: Operational policies and procedures of the Compliance Division
were found to be nonexistent or outdated and not widely
disseminated to staff members.
RECOMENDATION: OEVCID operating procedures and manuals hould be updated
and readily available to staff. If classified information
must be included in the agent's manual, it should be
restricted to a separate appendix to permit free and ready
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access by agents to the manual's basic operating procedures and
information. Considering the present lack of training provided
new investigators, an agent's manual is an absolute necessity.
RESPONSE: One of the highest priorities of the new DAS/EE will be the
development of standardized and rationalized operating
procedures. These will be incorporated by the staff of the
DAS/EE into a new CEE manual, as well as into a comprehensive,
up-to-date manual for special agents.
FINDIM 116: The Compliance Division has maintained inaccurate accounting
records of its travel costs. Its reports to the Office of
Export Administration in Fiscal Year 1982 significantly
understated actual monthly travel costs.
RECOMENDATICN: The Compliance Division should reconstruct its travel costs
for FY 1982 and provide the Office of Export Administration
with corrected financial reports. An accurate internal
financial accounting system should be established and
maintained by 0EA/CD to ensure proper and effective use of
all available 0EA/CD funds.'
RESPONSE: While it is not clear in this finding exactly what categories of
-travel the Compliance Division was asked to report on, the
problem could have been one of interpretation, timing, or part
of the overall problem ITA is having in obtaining accurate
accounting data from the Department's accounting system. It is
not the Department's, policy to have the program units keep
their own accounting systems.
FINDING 117: The assigned working space;of the compliance Division is
inadequate and has an adverse effect on the ability of the
Division to perform its mission.
Racialmalmoti: The Department should provide adequate and secure working
and file space for the Compliance Division.
RESPONSE: We concur in this finding and expect that the Department will
move expeditiously to adopt the recommendations of the Report on
this matter. -
Approved For Release 2007/12/11 : CIA-RDP85M00364R001001520004-2