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Hearing of the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee - Commercial Sales of Military Technologies

Hearing of the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee - Commercial Sales of Military Technologies

Chaired By: Rep. Bart Stupak

Witnesses: Gregory Kutz, Managing Director, Forensic Audits and Special Investigations, Government Accountability Office; Anne-Marie Lasowski, Director, Acquisition and Sourcing Management, Government Accountability Office; Matthew Borman, Deputy Assistant Secretary, Bureau of Industry and Security, Department of Commerce; Thomas Madigan, Acting Deputy Assistant Secretary for Export Enforcement, Bureau of Industry and Security, U.S. Department of Commerce; John Roush, Senior Vice President and President, Environmental Health, Perkinelmer; Michael Alvis, Vice President for Business Development, ITT Industries; Nicholas Fitton, Chief Executive Officer, Section 8

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REP. STUPAK: This meeting will come to order. Today we have a hearing entitled, "Commercial Sales of Military Technologies."

The chairman, ranking member and chairman emeritus will be recognized for five-minute opening statements. Other members of the subcommittee will be recognized for three-minute opening statements. I will begin.

Less than two weeks ago North Korea detonated a nuclear weapon during an underground test. North Korea is now threatening to test fire an intercontinental ballistic missile capable of striking Alaska.

At the same time, our nation remains at war in Iraq and Afghanistan. And here at home we are faced with the threat of attack from al Qaeda and other terrorist groups. In 2009 the world is a very dangerous place.

Today we'll examine two specific ways we may be allowing our national security to be compromised: domestic sales and illegal export of military and scientific technology overseas.

In 2008 our committee began investigating controls on the export of military and dual-use technology, technology that has both military and commercial uses. As part of our investigation we asked the Government Accountability Office to conduct undercover testing to determine how vulnerable we are to covert acquisition and export of our sensitive technology. The results are troubling.

We will hear today how GAO established a fictitious company led by a fictitious individual to acquire 12 different military or dual- use items that are subject to export control laws. The GAO was able to obtain several devices used in the nuclear weapons program, including a triggered spark gap, which is a high-voltage switch that can be used as nuclear weapon detonator; an accelerometer, an instrument used to measure motions generated by nuclear and chemical explosives; and a gyrochip, a device that can be used to stabilize and steer guided missiles.

The GAO also successfully acquired several pieces of military equipment that give our troops technological superiority in battle, including a night vision scope used by our troops to see and track enemy in the dark, body armor of the type used by U.S. military in battle, and an F16 engine monitoring system computer.

GAO will explain how 12 out of 12 of the companies approached -- 100 percent  agreed to sell these sensitive items to the fictitious company. None of these companies discovered that the company was fake. None of the companies determined that the buyer was a fake person. In fact, none of the companies ever met the buyer and most conducted the transactions entirely by email. The company that manufacturers the night vision scope even signed up GAO's fake company as an authorized distributor of its product.

The only thing more surprising than the ease at which GAO acquired this sensitive equipment is the fact that it was apparently entirely legal. When questioned afterwards the companies involved explained that they were not required by current law to apply for an export license when selling specific military or dual-use products directly to domestic purchasers. There is no requirement for them to conduct any background check or due diligence on the buyers, much less submit the proposed sale to the government for a license to purchase. The Commerce Department, which will testify today, agrees that no violations occurred.

This is obviously not a satisfactory result. GAO illustrated the weaknesses of this legal regime when it turned around and successfully exported some of these items simply by sending them to FedEx and sending them overseas. GAO sent them to a country known as a transshipment point for military and nuclear technology, so there is an enormous loophole in our law.

We will hear today from GAO, the Department of Commerce and three of the companies that sold these products to GAO either as a manufacturer or a seller. We will ask them the following questions:

Are some military items so sensitive that they should be banned from commercial sales to the public entirely?

Are some military or dual-use items sensitive enough to require licenses for domestic sales?

Can additional controls be put in place to make it more difficult for our enemies to gain access to our sensitive military and dual-use technologies?

The stakes cannot be higher. A 2008 report by the Strategic Studies Institute reveals that in the past North Korea has sought to procure from foreign sources at least one of the products GAO acquired, the accelerometer, to enhance its guided missile program.

I look forward to the testimony today and hope we can discuss ways in which the government and business can work together to ensure our technological advantage is not used to jeopardize the safety of our troops, our allies and our communities here at home.

I'll next turn to Mr. Walden for his opening statement.

I should just mention members are going to be coming in and out; we have another hearing down on the first floor. In fact, I may have to have Diana DeGette or someone take the chair for me as I'm going to have to go down to that hearing also.

But, Mr. Walden, your opening statement, please, sir.

REP. GREG WALDEN (R-OR): Thank you very much, Chairman Stupak, for convening this hearing.

Since this country was attacked almost eight years ago on September 11th we've become all too aware of the fact that terrorist groups are constantly seeking to exploit any weakness in our national security and to gain any access to America's advanced technology. Any information they might gain about United States intelligence or military operations could potentially be used to attack our men and women in uniform abroad and here at home. This threatens our national security.

In Iraq we've heard on the news too many times the cases where terrorists posed as Iraqi soldiers or police in order to get close to military checkpoints or barracks only to detonate improvised explosive devices and suicide bombs, sometimes killing U.S. soldiers as well as civilians in the process.

We cannot ignore the link between illegal exports of military items and such attacks. For example, in 2008 various individuals and companies were indicted for purchasing items capable of being used to make IEDs, with Iran being the final destination. For fiscal year 2008 the Department of Justice reported that 145 defendants were charged for criminal violations of export control laws. About 43 percent of the defendants charged were attempting to illegally transport or transfer items to Iran and China. Since 2007 GAO has included ensuring effective protection of technologies critical to the U.S. national security interest as high-risk areas.

As troubling as those weaknesses may be, what's more disturbing is there appears to be a gigantic loophole in our laws that make it easier for our enemies to get a hold of our sensitive military technology and one day use it against us. The loophole the GAO uncovered in this investigation reveals that military and sensitive dual-use technology can be easily and legally bought within the United States, then those items can be illegally exported with almost zero chance of detection.

Here's how easy it is to make these buys: GAO bought a number of sensitive dual-use items from United States companies, including night vision goggles, body armor, an F16 engine computer, and technology used in nuclear weapons and IEDs. Dual-use means these items have both a military and commercial use. You can see some of these items displayed right up here on this table in the front of the room. GAO did so by setting up a bogus company, a company website, a mail drop box; they also used fake military ID to facilitate the purchase. And the fake military ID, from what I'm told, was even not very well constructed.

When GAO purchased these items in many cases they weren't asked a single question by the seller about what they were doing with the items. There was no facetoface contact and sometimes not even contact over the phone. The companies in most cases did not make an attempt to verify the minimal information that GAO provided.

But here's the rub: The companies did absolutely nothing illegal. They did not violate the law because no law or regulation places any meaningful restriction on the domestic sale of these military items. That's right. You, Joe Q. Public, can buy body armor, night vision goggles, an F16 engine computer and our laws do not require any kind of verification for your identity or background. However, if you then tried to export the items, you'd need to go get a license to do so.

Now, how many of you really think that an al Qaeda operative or some other terrorist is going to be the first in line at the Department of Commerce or State to get a license to ship these items to, say, oh, China, Syria or Iran? I don't think so either.

This may be one of those rare oversight hearings where we show not how the law has been broken or evaded by a bad actor but how the law is simply inadequate. In other words, the scandal here may be what is legal, not what is illegal.

Now that we've identified this gap in our laws, it's our responsibility to figure out how to close it and to do it in a way that does not place an undue burden on commerce. As I mentioned before, these are dual-use sensitive items. These items have legitimate, critical uses, sometimes in medical and aircraft equipment.

My understanding is the companies here today and the other companies who sold dual-use items to the GAO are very concerned these items might fall into enemy hands and want to help solve this problem. I look forward to hearing their thoughts about what we can do about it.

Mr. Chairman, our men and women in uniform deserve the best technology that our country's industry has to offer. They deserve to know that when they are on the battlefield they have every advantage over the enemy, and that includes the best technology our industry can produce. So I look forward to working with you to figure out how we can make sure that these dual-use items don't fall into the wrong hands and put our men and women and civilians in peril.

I yield back the balance of my time.

REP. STUPAK: Thank you, Mr. Walden.

Mr. Markey for an opening statement, please?

REP. EDWARD J. MARKEY (D-MA): Thank you, Mr. Chairman. And thank you so much for having this important hearing.

Every day the United States' superiority in high technology is on display in our military, our universities, our computer and software manufacturers and our health care industry. And every day the United States is under assault by foreign countries and groups that seek to acquire U.S. technologies and products that threaten U.S. national security. Our export control system is woefully inadequate to ensure that high technology U.S. goods are not misused either for conventional military or WMD purposes.

As we will hear today, undercover GAO investigators used fake information to purchase dangerous dual-use technologies, including some which could be useful for a nuclear weapons program. Clearly, our export control program must be strengthened.

The particular loophole which GAO exploited in their investigation is frighteningly simple. While exports of dual-use technologies require a government license, domestic sales of the exact same sensitive items are not regulated in any way whatever. GAO was able to provide false information, mask its identity and pretend to be a qualified domestic purchaser. Clearly, foreign countries or terrorist groups could do the same thing. And as GAO proved, a cardboard box and the U.S. Postal Service is all it takes to move dualuse items out of the country.

We must strengthen our export control system, but private industry must also play a cooperative and constructive role. Private companies can and must assist the government by identifying questionable orders and reporting them to law enforcement for action.

In this context I would like to say a word about PerkinElmer, one of the companies which will testify today and is headquartered in my district. GAO was able to purchase a sensitive item, potentially of use to a nuclear weapons program, from PerkinElmer. But given the domestic sales loophole the GAO exploited, PerkinElmer seems to have followed the law.

An event in 2003 demonstrates how PerkinElmer has helped prevent dangerous export control violations. When the company received an order for 200 triggered spark caps alarm bells sounded at the large quantity requested. PerkinElmer reported the order to law enforcement, and at the request of federal authorities, the company played along with the order, eventually shipping sabotaged products which were then traced. At the end of the day a plot to acquire a key technology for the Pakistani nuclear weapons program was thwarted in large part because of PerkinElmer. That is the kind of cooperation that we need to be successful.

To keep the American people safe we now have to make sure that we close this domestic loophole so that we ensure that we have a uniform policy to protect against this kind of proliferation of dangerous technology.

Thank you, Mr. Chairman, for having this hearing.

REP. STUPAK: Thank you, Mr. Markey.

Next we'll hear from Ms. DeGette for an opening statement. Three minutes, please.

REP. DIANA DEGETTE (D-CO): Thank you very much, Mr. Chairman.

To say what we're going to hear today from the GAO is troubling is an understatement. We live in a world where pirates are seizing U.S. flagged cargo ships off the Somali coast, a world where North Korea is desperate to get its hands on any components or weapons that allow its regime to maintain its position as a long-term legitimate threat to international security. Additionally, the United States and its allies have serious concerns about Iran's nuclear program. Yet here we are, after decades of problems being identified related to America's export control process, once again learning about the yawning gaps in our system.

It's difficult enough to make sure our military men and women are equipped and able to defend themselves against the IEDs made by our adversaries with the materials they've obtained. The president's budget demonstrates the magnitude of the issues being raised by this hearing and includes increased funding, and I quote, "to expand operations targeting the illicit procurement in the U.S. of U.S. origin items for the use in improvised explosive devices, IEDs, being employed against U.S. troops."

Okay, so a system that allows material which can be used to build an IED or detonate a nuclear device to be available on the open market and over the Internet is just simply not a functioning system at all. Voluntary industry compliance and government-issued guidance for businesses is great when it works. It hasn't worked entirely in the area of food safety, and in this case, it doesn't seem to be working at all.

I have no doubt that our witnesses from the Department of Commerce share our concerns and that the Bureau of Industry and Security is making efforts to improve its system. And I want to emphasize that I'm sympathetic to work force challenges that might be discussed during this debate. However, this committee is interested in seeing the Bureau of Industry and Security address all of the concerns identified by the GAO and Congress in a systemic and coordinated fashion and fast. Unfortunately, I'm afraid that anything less than 100 percent compliance in this area represents too serious a threat at a time when we are using vast resources to confront terrorists and other adversaries overseas.

And with that, Mr. Chairman, I yield back.

REP. STUPAK: Thank you, Ms. DeGette.

Mr. Braley for an opening statement, please, sir. Three minutes.

REP. BRUCE L. BRALEY (D-IA): Thank you, Mr. Chairman and Ranking Member Walden, for holding this hearing today to examine commercial sales of technology with military applications and U.S. export control programs.

I have serious concerns about the GAO's findings through their undercover investigation that sensitive dual-use and military technology can easily and legally be purchased from dealers and manufacturers in the United States and exported without detection. I believe that these disturbing findings have serious implications for our national security and for American troops working to keep us safe overseas.

I think most Americans would be alarmed to learn that by using a fake company and fictitious identities GAO investigators were able to purchase items that could potentially be used for the development of nuclear and chemical weapons, guided missiles and improvised explosive devices, which have been frequently used to attack our troops in Iraq and Afghanistan. They were also able to purchase military grade radios, night vision goggles and infrared flags which could potentially be used against U.S. troops in combat. GAO investigators were also able to export dummy versions of some of these items without detection to a country which is a known transshipment point to terrorist organizations and foreign governments attempting to acquire sensitive military technology.

These findings are even more disturbing when you consider the frequency with which terrorists and criminal organizations and foreign governments attempt to obtain these types of sensitive technologies from manufacturers and distributors in the United States. The Department of Justice recently reported that foreign states and criminal and terrorist organizations seek arms, technology and other materials to advance their technological capacity on a daily basis.

Given this information and the ease with which the GAO was able to purchase and export sensitive items, you can't help but worry about how many times these attempts have been successful and about what that could mean for our national security.

The GAO's findings demonstrate a clear lack of regulation over the domestic sales of military and dual-use technologies and serious loopholes in our export control system. That's why I look forward to hearing the testimony of our witnesses today and hearing the witnesses' recommendations on how we in Congress can improve safeguards for domestic sales and improve our export control programs to make sure that these potentially dangerous items don't end up in the wrong hands.

As the GAO's investigation clearly demonstrates, improving these safeguards is essential to protecting our troops serving overseas and to protecting every American.

And with that, I yield back.

REP. STUPAK: Thank you, Mr. Braley.

Mr. Gingrey, opening statement, please? Three minutes.

REP. PHIL GINGREY (R-GA): Mr. Chairman, thank you.

Today the subcommittee will have an opportunity to shine a spotlight on a very, very critical but less visible aspect of our national defense: preventing the export of sensitive military technology, particularly to individuals and countries that wish us harm.

Mr. Chairman, we expend a lot of time, effort and resources trying to stop dangerous materials from being brought into this country; however, the failure to properly oversee what is being taken out of this country may pose an equal if not greater threat to our national security.

Mr. Chairman, American-manufactured components and products should never be allowed to be used against this nation or its citizens, yet it seems that this could be a very real possibility and a threat that must be addressed. As we move forward I hope that we can reach a consensus on the best course of action needed to ensure this threat never becomes a reality.

While national defense should remain our first and foremost concern, we must also approach this question with a keen eye and some common sense. While we need to ensure sufficient safeguards, we should also provide for a streamlined and a safe process to expedite legitimate sales for commercial and strategic purposes, particularly when trading with our allies.

American businesses and manufacturers are hurting and the simple and stark reality is that over 95 percent of the world's consumers live, as we know, outside of the United States. Accordingly, Mr. Chairman, we must commit ourselves to adopting a sound security policy that also strengthens the ability of American manufacturers to be successful in the global marketplace.

Mr. Chairman, I look forward to carefully listening to the testimony from the witnesses today. And with that, I will yield back my time.

REP. STUPAK: Thank you, Mr. Gingrey.

Ms. Sutton, from Ohio -- opening statement, please?

REP. BETTY SUTTON (D-OH): Thank you, Mr. Chairman. And thank you for holding this important hearing on the commercial sale of military technologies.

Comprehensive oversight and complete control of the sale of sensitive defense and dual-use military technologies is absolutely essential to our national security. It's imperative that the responsible federal agencies exert every available resource to prevent our sensitive technologies from ending up in the hands of terrorists and it is more than disturbing to learn what investigators have brought to light. The dangerous implications are extraordinarily serious.

The Department of State and Department of Commerce have primary jurisdiction over export controls. It's apparent that the two agencies do not, however, have clear lines drawn when it comes down to jurisdiction on an individual product.

For instance, a development company in Ohio tested an undersea robot in U.S. and international waters with no immediate intention of foreign sales. To cover all bases they reached out to the agencies to see whose jurisdiction their product would fall into in the event that they decided to apply for an export license. Depending on who answered the phone the company received a different answer. In the end they were disappointed that they were not able to secure a concrete answer regarding which agency had jurisdiction over their product.

Now, I'm left to believe that this problem exists with countless products and I support Ms. Lasowski's call for a fundamental reexamination of the current programs and processes within the agencies that have jurisdiction over export controls. And once that examination is completed, I look forward to working with my colleagues to ensure agency procedures are fluid, effective and that the safety of our nation is guaranteed.

Today I look forward to hearing from our panel and I'm especially interested in hearing from GAO on their investigative report on domestic sales. We will hear that there are no rules or authorities in place to regulate the domestic sale of sensitive military technologies. Companies are able to make domestic sales of sensitive items with little or no restrictions unless self-imposed, and that is disturbing. The idea that a U.S. citizen can legally purchase and then rather easily mail a sensitive item that would otherwise have to be granted a license for export is shocking.

Mr. Chairman, while our men and women in uniform are bravely serving overseas, the federal government has no tool in place to regulate domestic purchases of sensitive military technologies that could be used by terrorists and others against our service members. I look forward to working with my colleagues to ensure that the proper oversight and regulations are in place for all commercial sales of sensitive military technologies.

Thank you again, Mr. Chairman, and I yield back.

REP. STUPAK: Thank you.

Ms. Blackburn, opening statement?

REP. MARSHA BLACKBURN (R-TN): Thank you, Mr. Chairman. And I will be brief.

I want to welcome our witnesses. Some of you are returning and we welcome you back. I'm certain you all have already heard we have a telecom hearing that is taking place downstairs so some of us are going to be up and down and back and forth. So we ask that you please be patient with us.

And I do thank you, Mr. Chairman, for the hearing today, and I think it's appropriate that our committee today examine the process that we go through for selling our military's sensitive technologies to U.S. residents. These buyers could potentially export them to a country that is adverse to U.S. national security and we're aware of that, and of course we're concerned about that.

The apparent gap is the tracking of the item by the seller and the security background of the buyer. Proper collection of information on these sales should be placed as a high priority for this administration, but it must not violate privacy rights of U.S. citizens. Even though domestic sales pose a problem, the regulations of foreign sales should also be re-examined. And I think that's an imperative for us.

Over the past two decades, we do know that some military technologies and equipment were exported to China and that it could pose national security risk. That is on our radar as we go through this hearing today. A few examples are anti-jamming and encryption for military satellite systems and advanced U.S. computers.

The U.S. military, we know, is the strongest in the world. And a significant part of that strength is due to innovation and to superior military technology. So we must not allow gaps in our system that will allow this technology to fall into the wrong hands.

We appreciate the information that you are bringing to us today.

Mr. Chairman, I thank you for the time and I yield back.

REP. STUPAK: Thank you.

Mr. Doyle is going to be up here shortly. He's down in the Health Committee, but he wanted to make an opening statement for a particular issue that affects his district directly with the sales of some items. And when he comes up, without objection, we'll allow him to make that opening statement.

Hearing no objection, we'll allow him to do so. We'll move forward with our hearing.

So of the members present, that concludes our opening statements.

Our first panel of witnesses, we're going to have one panel today, they're all before us; let me introduce them before we swear them in: Mr. Gregory Kutz, who's the manager and director of the forensic audits and special investigations at the Government Accountability Office; Ms. Anne-Marie Lasowski, who is the director of acquisition and sourcing management of the Government Accounting (sic) Office; Mr. Matthew Borman, who is the acting assistant secretary for Export Administration in the Bureau of Industry and Security at the U.S. Department of Commerce; Mr. Thomas Madigan, who is the acting deputy assistant secretary for export enforcement in the Bureau of Industry and Security of the U.S. Department of Commerce; Mr. Michael Alvis, who is the vice president of business development at ITT Industries; Mr. John Roush, who is the senior vice president and president for environmental health at PerkinElmer; and Mr. Nicholas Fitton, who is the chief executive officer of the Section 8 Corporation.

Gentlemen, ladies, it's a policy of the subcommittee to take all testimony under oath. Please be advised that you have the right, under the rules of the House, to be advised by counsel during your testimony.

Before I go much further, Mr. Burgess, did you want to do an opening? We were holding open for Mr. Doyle and I knew you had mentioned you wanted -- did you want to do an opening?


REP. STUPAK: It's not out of order. I'll swear the witnesses in in a minute. I just introduced the panel. I'll swear them in after your opening, then maybe Mr. Doyle will be here. So if you want to go ahead.

REP. BURGESS: Well, thank you, Mr. Chairman.

You know, the advancements this country has made with regards to military technology surpasses those of any other nation. Investment in military ingenuity has led to cutting edge commercial advancements in avionics and health care. Contrary to popular belief, the United States military actually created the technology that led to the advent of the Internet, as opposed to that other guy who said he invented it.

Most importantly, these technological advancements have contributed to the safety of our citizens, but it has also placed a high burden on our various federal agencies to ensure the safe production and sale of these sensitive technologies. While there are laws that expressly prohibit the direct sales of our most sensitive military technologies to foreign countries or entities, the laws which govern the domestic sales of these items are far weaker than they could be. In fact, some component parts to manufacture weapons of mass destruction may be sold domestically and then potentially re-sold internationally with little or no accountability under the law.

Currently, most of these companies undergo voluntary due diligence to ensure the sales of items on the commerce control list are then not resold to foreigners, but in this global world in which we live today, controls must be in place throughout the transaction process to ensure that the counterparty corporations are legitimate. We cannot ignore the fact that there are groups trying to reverse- engineer our technology and use them directly against our men and women in uniform.

For instance, the Navy's Grumman F-4 Tomcat, immortalized in the movie "Top Gun": This technology was considered to be of such strategic importance that only one foreign purchaser was ever allowed to procure the F-14, the Imperial Iranian Air Force that existed during the reign of the shah. We all know that in 1979, the monarchy fell. Since then, the United States has essentially severed all relations with Iran, including imposing an embargo on the sale of any spare parts for the F-14s. Yet shadow companies have ordered parts for the Iranian Tomcats and no one seems to have been paying attention to what parts were being sold and to whom.

We must make certain that our standards for export are as rigorous as our standards for import. We must make certain that the Department of Commerce Bureau of Industry and Security implement true post-market verifications of sales. We must make certain that the Department of State, working in conjunction with the Department of Homeland Security, ensures that no exports are being made of our sensitive military technology. We must also work with the Federal Trade Commission to ensure that commerce is unimpeded.

And for those who would violate our existing laws, those who would compromise the security of our nation but, more importantly, compromise the courageous lives of our men and women in uniform, they should be prosecuted by the Department of Justice to the fullest extent under the law.

Thank you, Mr. Chairman. I'll yield back my time.

REP. STUPAK: Thanks, Mr. Burgess.

As I was saying to our panel, under the rules of the House you have the right to be represented by counsel. Do any of you wish to be represented by counsel? Anyone? Okay, you're all shaking your head no, so we'll take it as a no.

So, therefore, I'm going to ask you to please rise, raise your right hand and take the oath. (Witnesses are sworn in.)

Let the record reflect the witnesses replied in the affirmative. Each of you are now under oath. We will now hear a five-minute opening statement from you. And thank you for being here. We're going to try to do this on one panel.

And let's start with you, Mr. Kutz. You're a veteran. If you want to hit your mike and start with your opening statement, we'd appreciate it.

MR. KUTZ: Mr. Chairman and members of the subcommittee, thank you for the opportunity to discuss the sale of military and dual-use technology. There are widespread reports of the illegal transfer of U.S. technology to Iran, China and terrorist organizations. Today's testimony highlights the results of our investigation into the credibility of the security threat.

My testimony has two parts. First, I will briefly discuss what we did and provide some background, and, second, I will discuss the results of our investigation.

First, Justice has reported numerous cases of foreign governments and terrorist organizations seeking to acquire U.S. technology. Items identified in criminal cases are suitable for military, nuclear, guided missile and improvised explosive device applications. As you've all mentioned, these items can legally be sold within the United States.

The objective of our investigation was to make undercover purchases of technology here in the U.S. If successful, we planned to ship several of these items overseas. To set up this operation, we established a bogus front company called Monacosee (ph) Tech Consultants. We also used bogus identities, an undercover credit card and a mailbox as our business address. Most of the items that we targeted for purchase are identical to items cited in recent criminal cases. Although we had a limited budget and relatively simple backstops, our operation could have easily been financed by foreign governments or terrorist organizations seeking to acquire U.S. technology.

Moving on to the results of our investigation, we were able to purchase a number of sensitive U.S. military and dual-use items. We then successfully shipped several of these items by mail, undetected, to southeastern Asia.

The items that we purchased are displayed on the table before you and I have a few with me I'm going to show you by hand. It's important to note that for many of these items, our bogus individuals signed a certificate promising not to export them. Let me discuss several of the more troubling dual-use items that we purchased. And they'll also be shown on the monitors.

First, in my hand, I have a triggered spark gap. We purchased this item for $700 from the manufacturer. We also received a price quote for an additional 100 of these items. In addition to medical applications, these items can be used to detonate nuclear weapons. In 2005, this item was cited as part of a criminal case involving illegal export to Pakistan.

Second, I have in my hand an accelerometer. We purchased this item for $2,800 from the manufacturer. In addition to having commercial applications, this item can be used in smart bombs and nuclear and chemical explosive applications. In 2007, this item was cited as part of a criminal case involving illegal export to China.

And third, I have in my hand this gyro chip. We purchased this item for $3,100 from the manufacturer. We also obtained a price quote for an additional 10 of these items. In addition to commercial use, these items can be used to help steer guided missiles. A large corporation was recently found to have illegally exported 85 of these items to China.

Examples of the sensitive military items purchased include, first, the Modular Tactical Vest body armor you see on my right in front of me and also shown on the monitors. We purchased this item for $2,400 from a distributor. We also received a price quote for an additional 20 of these vests. Also displayed in front of me are ESAPI plates that we purchased on eBay as part of a prior investigation and could have also purchased from this same distributor. These vests are currently used by the U.S. Marines in Iraq and Afghanistan.

And, second, the night vision monocular I have in my hand. We purchased this item for $3,600 from a distributor. As was mentioned, we also became an authorized distributor of this item. These items are currently used by the military in nighttime operations. Recent criminal cases show that these items are in demand, not only by China and Iran but by the terrorist organization Hezbollah in Lebanon.

In conclusion, our work clearly shows that anybody with a credit card, computer and a mailbox that is willing to lie can acquire U.S. military and dual-use technology. For the dual-use items, they are more difficult to address but additional controls at the point of sale for high-risk items should be considered. For military items, we continue to believe that the technology used by our soldiers today should not be available to anybody with a credit card. Our soldiers deserve better than to have our own technology used against them on the battlefield.

Mr. Chairman, this ends my statement. I look forward to your questions.

REP. STUPAK: Thank you, Mr. Kutz. And your investigation is found in the GAO report which is now released publicly based on your testimony?

MR. KUTZ: (Off mike.)

REP. STUPAK: Okay, very good. So it's available.

Ms. Lasowski, did you have an opening statement, please?

MS. LASOWSKI: Yes. Mr. Chairman and members --

REP. STUPAK: Just pull that up a little bit and make sure that green light's on. Thank you.

MS. LASOWSKI: Mr. Chairman and members of the subcommittee, I am pleased to be here today to speak about our work on the U.S. export control system, one part of a complex web of programs intended to protect technologies critical to U.S. national security, both military and economic.

In the decades since these programs were established, the world has changed significantly.

As you are aware, new security threats, increased globalization and evolving technology create significant challenges in maintaining a balance between our military and economic interests. Yet our work has shown that, for the most part, these programs have been neglected or may not be well equipped to deal with these challenges, prompting GAO to add this area onto our high-risk report in 2007 and calling for a strategic re-examination of existing programs.

My statement today focuses on three key areas that should be part of this re-examination: first, interagency coordination and jurisdictional control; second, export licensing efficiency; and, third, system assessments.

With regard to the first area, we found that poor interagency coordination and jurisdictional debates between State and Commerce have weakened export controls over certain sensitive items. For example, Commerce claimed jurisdiction over specialized explosive detection equipment when jurisdiction for this item belonged to State. Consequently, the items were subject to Commerce's less restrictive export control requirements. Until such disputes are resolved, it is ultimately the exporter, not the government, who determines the level of government review and control that will follow. This weakness also creates considerable challenges for other players, namely, the enforcement community. Without information as fundamental as what items are controlled by which agency and which need a license, enforcement officials are limited in their ability to carry out inspection, investigation and prosecution responsibilities.

The second area concerns the need for efficiency in the export licensing process. At State, median processing times doubled in four years and license application reached an all-time high of over 10,000 open cases. Clearly, reviews of export license applications require careful deliberation. However, licensing decisions should not be delayed due to process inefficiencies. Recently, State took steps to restructure its work force and establish standards to reduce processing times and cases in the pipeline. We are encouraged by this action and hope that it will yield needed improvements. The overall efficiency of Commerce's licensing process is unknown, in part due to its limited assessments. While most Commerce-controlled exports can occur without a license, it is no less important for Commerce to seek efficiencies where needed. Most recently, Commerce has established new performance measures in its fiscal year 2010 budget, which we have not yet evaluated.

The third and final area of concern is a more fundamental issue: management due diligence in performing assessments. State and Commerce have argued that no fundamental changes are needed due to their export control systems. We have been somewhat perplexed by this stance, since neither department has conducted a thorough assessment to support this conclusion and our work has repeatedly demonstrated that the U.S. export control system is in need of repair. Redefined security threats, evolving technology and increasing globalization, coupled with the numerous weaknesses we have identified, demand that the U.S. government step back, assess and rethink the current system's ability to protect multiple U.S. interests.

Mr. Chairman, this concludes my prepared statement. I'd be pleased to respond to any questions that you or members of the subcommittee may have.

REP. STUPAK: Thanks, Ms. Lasowski.

Mr. Borman, your opening statement, please.

MR. BORMAN: Thank you, Mr. --

REP. STUPAK: I need you to turn on the mike and pull it up there a little bit.

MR. BORMAN: Thank you, Mr. Chairman and members of the committee.

REP. STUPAK: Thank you.

MR. BORMAN: We do appreciate, Tom Madigan and myself, the opportunity to come up here and talk to you about this. This is a very important topic and we really appreciate your interest, the work of GAO and industry interest. From our perspective, this is an issue that really needs significant coordination between the legislative branch, the executive branch and the U.S. private sector.

Just to give you a quick overview of our role in the system, of course, in the U.S. export control system there's several different components. The dual-use system governs the export of items that have civilian and military applications and we administer at BIS the dual- use system in conjunction with a number of other agencies, including the departments of Defense, Energy, Homeland Security, Justice, State and Treasury, as well as the intelligence community.

In administering the dual-use export control system, BIS and other agencies developed control policies based on technologies, countries and uses and end users. While most items in the U.S. economy are subject to controls, that is, they're subject to the regulations, only a small percentage of U.S. exports by dollar value actually need a specific license from Commerce that goes through an interagency process.

And, in administering the system, we are very aware of the challenges of the 21st century. And the way we look at them is you have diffuse challenges. Diffuse security threats -- there are a range of nation states all the way down to nonstate actors to individuals. But you also have a real diffusion of markets. When the export control system was first crafted, many of the major markets were not markets then, China and India being two obvious examples, and you had a much greater diffusion of technology. The U.S. is no longer the world leader in a range of technologies as it was, say, 20 years ago.

And our authorizing statue, which is the Export Administration Act of 1979, is a Cold War statute. And if anyone looks at it, you'll see -- replete with references to the Coordinating Committee for Multilateral Export Controls. That was the trade equivalent of NATO that has ceased to exist in 1994.

Not only is it the EAA of 1979, it's in lapse. It's not permanent legislation. And in the years I've been in Commerce -- I've been in both this position and our legal office for more than 15 years -- it's only been in effect for about a year and a half, total. So clearly there's a statute on the dual use side that seriously needs revisions.

Pursuant to an executive order, we continue to apply the provisions of the act, to the extent permitted by law, and implement our regulations under another statute called the International Emergency Economic Powers Act, or IEEPA. This authority provides for a limited control over domestic transfers of items subject to the EAR that are deemed to be exports. That's in the technology area -- the release of technology to foreign nationals in the United States.

Consistent with our existing authority, we have outreach compliance and enforcement actions that address exports, re-exports and foreign transfers. And these include certain domestic and third- country transfers of technology deemed to be exports or re-exports based on the involvement of foreign nationals.

Given the volume of trade from the United States -- for example, it was about $1.3 trillion worth of exports from the United States last year -- informing U.S. and foreign businesses of the requirements of our regulations is a critical component to our dual-use export control system.

We have a robust outreach program which includes seminars, Web information, training, phone counseling and direct preventive enforcement visits to companies.

In addition to this outreach program we also have a broad compliance and enforcement program to help ensure that exports are in accord with the regulatory requirements.

Regarding compliance, we do things like following up with license reporting requirements, carefully reviewing data from the automated export system, which is the systems exporters put their data in before trade leaves the country, and inform U.S. manufacturers, exporters and shippers avoid becoming involved in potential export violations with various publications, including red flag indicators, one of which specifically speaks to domestic transfers.

With that, I'll turn it over to my colleague who will address the enforcement aspects of our program.

Thank you, Mr. Chairman.

REP. STUPAK: Thank you, Mr. Borman.

Mr. Madigan.

MR. MADIGAN: Thank you, Mr. Chairman.

REP. STUPAK: You want to share that mike, there? There we go.

MR. MADIGAN: Excuse me.

Thank you, Mr. Chairman, Ranking Member Walden and distinguished members of the subcommittee.

As a follow-up to Mr. Borman's comments on BIS outreach efforts, I would only add that BIS's export enforcement arm conducts additional targeted, specialized outreach visits. These preventive enforcement efforts involve direct outreach to members of the exporting community to educate them on export control requirements, to encourage voluntary compliance, and to detect potential violations. Over the past year we've conducted over 3,400 such targeted outreach visits.

BIS's mission of keeping U.S. dual-use goods and technology from being diverted to proscribed end-users and end-uses is an important one. Our enforcement priorities include weapons of mass destruction proliferation, terrorism and state sponsors of terror and the unauthorized military end-use of items.

To further this mission we have special agents assigned to eight regional field offices across the U.S. and in five foreign locations supported by administrative staff of analysts and other employees.

With respect to AES, which Matt mentioned, BIS special agents use the Automated Targeting System of AES to identify violators in the United States and overseas. AES queries can be conducted to identify unwitting suppliers to foreign diverters. Violations can be then prevented by advising these exporters, through this targeted outreach, that their products may ultimately be diverted in violation of the EAR.

In addressing the threat of dual-use diversion by foreign procurement networks, BIS sometimes encounters circumstances in which foreign parties have attempted to secure what appears to be a domestic order, but which in fact is intended for export. During its targeted outreach, BIS has identified such attempts in the past and has investigated and prosecuted the suspects with its partner agencies.

A recent example of this included the disruption of a network attempting to control -- to acquire controlled thermal imaging cameras for export to the PRC. After receiving an industry tip and conducting a thorough investigation, the suspects were arrested while boarding a flight to Beijing with 10 of the controlled cameras concealed in their luggage. Due to the successful outreach in this case, agents were able to interdict the goods, disrupt the domestic procurement attempt and prosecute the individuals involved.

We greatly appreciate the opportunity to testify in front of the committee toady --subcommittee today regarding BIS's important national security mission.

Our dedicated staff, with support from many other agencies, is committed to protecting our national security, foreign policy and economic interests by ensuring secure trade in high technology items. So we welcome this discussion.

We would be pleased to answer any questions you may have.

REP. STUPAK: Thank you, Mr. Madigan.

Mr. Alvis, your opening statement, please, sir.

And pull that mike up and hit the button there. It should turn on a green light and we'd be all set there. And pull that up there -- and pull that up there a little bit. That's -- thanks.

MR. ALVIS: Good morning, Chairman Stupak, Ranking Member Walden, members of the committee. My name is Mike Alvis, and I'm the vice president at ITT Night Vision, a $500 million business with the ITT Corporation, a Fortune 500 corporation with over 40,000 employees worldwide.

Our products serve a broad range of applications in both military and commercial markets. They include products like pumps for residential and commercial water, imagers on weather satellites and the ground station network for the next-generation U.S. air traffic control system.

I am joined at the hearing today by Mr. Greg Nivella (ph), ITT's general counsel and the head of our Trade Compliance Organization. His organization monitors all -- the sale of all products, military and commercial.

Also in attendance today is Ms. Ann Davidson, corporate vice president at our world headquarters. And she serves as ITT's vice president for Corporate Responsibility.

Also in attendance is Mr. Doc Seyers (ph) our vice president for congressional relations.

ITT has been in the night vision business for 50 years. We are pleased to make ourselves available to this committee as it investigates the sale of sensitive military technology into the commercial marketplace.

In the interest of full disclosure, in early 2007 ITT settled a criminal matter with the U.S. Department of Justice by pleading guilty to violations of the International Traffic in Arms Control (sic) Regulations, or ITAR. The individuals joining me here today hold key positions created as a result of that settlement. And they serve at the corporate and business unit level that is designed to ensure that all ITT employees know and understand the law and operate their business activities legally and ethically.

Ms. Davidson is the first-ever vice president for corporate responsibility and presides over a worldwide network of compliance officials that monitor the business units to ensure that ITT moves forward with a premier ethics and compliance program.

ITT Night Vision, where I work, is the world's largest developer and manufacturer of night vision goggles and image-intense fire tubes for other systems.

We are only one of two manufacturers of the Generation 3 image tubes. Both companies happen to be U.S.

This is the tart (sic) of the technology of the goggle.

We began making these tubes in 1982 and have manufactured over a million Gen 3 tubes. And we've ceased manufacturing the Generation 2 tubes, which many of you see in the commercial marketplace and in catalogs.

Our key domestic business areas are night vision goggles and spare tube sales to U.S. and federal government agencies and state and local first responders.

ITT also sells its Generation 3 aviation goggles to the civil helicopter community, primarily emergency medical services.

Although, not a governmental entity, private medical evacuation helicopters perform a key first responder role. And the use of night vision goggles in their operations in recommended by the Federal Aviation Administration. ITT is currently in the process of doubling the number of goggles available to the civil aviation community for medevac.

Less than 1.5 percent of our sales are to commercial end-users. And 85 percent of those sales are to the civil helicopter community I just referred to.

The other .04 percent of our business -- the remaining 15 percent -- go to the -- into the commercial market. But it should be noted that ITT does not provide military specification tubes for those sales.

They go to people like ranchers, nature lovers and other recreational users. We call these fallout tubes. These are the scrap that come out of our process and they have some value commercially.

ITT is also the developer and sole provider of the Enhanced Night Vision Goggle, the most versatile and multifaceted night vision device ever fielded. The ENVG and its special 16 millimeter tube is only sold to the United States Army. And it's used also in Special Operations. It will continue to insure that U.S. forces always have the critical technological edge or overmatch over potential adversaries.

In closing, ITT is pleased to answer your questions today concerning our technology and our experience in developing a first- class trade compliance organization. Consistence (sic) with the requirements set forth in the ITAR, we will limit our responses to questions concerning night vision technology that are in the public domain.

We look forward to your questions.

REP. STUPAK: Thank you.

Mr. Roush, your opening statement, please.

MR. ROUSH: Good morning, Chairman Stupak, Ranking Member Walden --

REP. STUPAK: You got that mike on?

MR. ROUSH: -- other members of the committee.

REP. STUPAK: There you go.

MR. ROUSH: Thank you for the opportunity to participate in today's hearing.

My name is John Roush, and I am a senior vice president of PerkinElmer and president of the company's Environmental Health business segment.

PerkinElmer has a 60-year history of innovation in life sciences, analytical instrumentation and optoelectronics products. We are a global leader focused on improving the health and safety of people and the environment. We're headquartered in Massachusetts and have about 8,500 employees serving customers in more than 150 countries. We have significant U.S. operations in six different states.

In 2008 we reported revenue of approximately $2 billion, and we are proud to be a component of the S&P 500 Index.

As discussed today's hearing will review U.S. government safeguards in place to prevent the unauthorized diversion of sensitive products via domestic purchase.

Let me say that PerkinElmer is committed to help solve this problem in various ways as discussed by Representatives Walden, Markey and other members of the committee.

As you know, the Department of Commerce and the Department of State are responsible for export control regulations within their respective jurisdictions. Let me tell you that PerkinElmer takes these requirements very seriously.

As part of our commitment we have implemented an export management system to ensure that we are complying with all applicable U.S. export control laws. Our system establishes a robust internal compliance capability to prevent the transfer of sensitive or controlled products for improper end-uses or to unauthorized destinations or purchasers.

Additionally, our compliance processes incorporate the "Know Your Customer" and red flag indicators guidelines issued by the U.S. government. We have a staff of dedicated export control compliance personnel who are regularly trained on U.S. export control requirements and who play an integral role in the sale of these controlled products.

Let me tell you that PerkinElmer's export compliance program is very effective. In fact, we've been viewed as a model within our industry by various compliance agencies that we've dealt with in the past, as mentioned by Representative Markey.

Of particular interest to this Committee, PerkinElmer has also shown a track record of cooperating with government agencies in export compliance matters.

In 2003 PerkinElmer alerted representatives of BIS's Office of Export Enforcement of a request we had received to purchase 200 triggered spark gaps for shipment abroad. PerkinElmer followed its established internal screening procedures and identified several red flags. In this transaction, the number of items in the order quantity was inconsistent with its stated medical purpose in that region of the world. And the proposed sale lacked appropriate export documentation.

In this case, PerkinElmer worked closely with OEE and other federal agencies in a sting operation involving a New Jersey customer to track the ultimate destination for those goods, which was Pakistan. The individual who had attempted to arrange this transaction was convicted of violating U.S. export control laws and received a three- year prison sentence. We are proud that the U.S. authorities publicly acknowledged PerkinElmer for its role in this investigation.

I want to say that PerkinElmer is fully committed to compliance with all applicable U.S. laws. We commend the committee and other interested stakeholders for your interest in considering possible ways to enhance U.S. government safeguards for domestic sales of certain sensitive products. We stand ready to support the committee's efforts.

We do hope that such reforms will not disrupt the ability of domestic buyers to purchase these products for critical and legitimate medical needs. We look forward to working with you to ensure that any such proposals are effective and can be implemented in a reasonable manner.

We thank you for the opportunity to make this statement. And I will be happy to take your questions at the appropriate time.

REP. STUPAK: Thank you.

Mr. Fitton, your opening statement, please, sir.

MR. FITTON: Honorable Chairman and members of the committee, I'm Nicholas Fitton, sole owner and operator of a small store and located in Georgia's Section 8. I'm here today because of the sale of an F110-GE-129 engine computer. This is an item which is restricted from export. Other than that, there are no restrictions placed on the sale of this item.

When I purchased it in 2006 from Government Liquidations, the entity which controls the sale of auction surplus government and military items, I filed paperwork stating it was for resale. The customer was unknown at that time and that it would not be exported or altered in any way.

In December of 2008 I was contacted by a person identifying himself as Joseph Fitzpatrick. He wished to have more information on this item. After several contacts, the individual placed an order on January 20th, 2009. You have in your possession copies of all correspondence between the purchaser and myself, along with my interoffice file on the transaction.

After the order was placed, I had the individual fill out an end- use certificate and send a copy of identification along with the application to my office. Unfortunately, as a seller, I do not actually have access to background checks and certificates that I can submit to a government agency such as Government Liquidations does. The end-use certificate I had the customer fill out is one that I copied and edited from their website.

After I received the customer's information, I obtained satellite imagery of the street address the buyer's home address was listed as, did the same for his place of business. The imagery verified they were residential and business districts.

I also pulled public information on the company the buyer had listed. All information, including IP addresses of the computer the transactions were placed from, is maintained both in digital and hardcopy formats.

I also called in a favor from a local law enforcement officer who just simply ran the buyer's name through the computer system to see if there were any wants or warrants. Pretty much, this is all that I can do as a seller.

During the process, I had the buyer believe that a more complex investigation was taking place than there actually really was. I also drew the process out over a long period of time. My experience in law enforcement and military operations has shown that the longer transactions take and more security measures that are presented to an individual, if they are committing nefarious criminal activities, they tend to become nervous and back out of transactions or tend begin to give "tells" as to something's going wrong.

The entire process from initial contact until the package was shipped on April 23rd was over four months. A short time after the package was delivered, I was contacted by your investigators in regards to the matter, and here we are today.

What we're really looking at here has several issues which need to be addressed.

One, formal guidelines need to be set forth as to what is expected from resellers and end users. This needs to be something other than "no exports," as we've already talked about here.

Two, resources need to be opened up to resellers through which they can validate an end user. There are currently no services available to venders who sell materials deemed sensitive. Other industries, such as firearms dealers, have services available to them such as those offered by the Bureau of Alcohol, Tobacco, and Firearms, which will allow sellers to perform checks and investigations into those wishing to purchase these items. Government Liquidations has such services available and any vendor or person wishing to purchase these items has to be checked prior to them being able to pick up these items.

Once it falls into the hands of the vendor or end user, the only requirement is to not export the item unless prior approval is granted.

The demilitarization codes is my third issue which needs to be addressed.

Right now the demilitarization codes are fairly broad. For example, a piece of cloth is considered a restricted item because it is used as a covering for a piece of armor or a helmet and thus is classified in the same manner as body armor.

A shirt or jacket which is 40 years old and hasn't been issued in years is classified the same way current issue items are.

And on that note, we need to look at why certain items are classified as sensitive and no longer offered for sale. Many of these items, while being available directly from manufacturers without restrictions, and are sold new across the country. Why is that same item, if being used by the military and in many cases no longer serviceable, classified as sensitive?

Also, many items which do have restrictions, such as armor, more specifically, helmets, now are no longer available for sale. These items were once available, with approval, by an end-use certificate. While many people don't understand why someone would want or need one of these, they fail to realize that the primary consumer for such items tends to be law enforcement agencies.

Many departments only have the budget to purchase tactical equipment including ballistic shields and helmets for their SWAT or quick reaction teams. They cannot afford ($)400 or $500 for a helmet for every patrol officer, even after realizing the first responder to a hostile situation such as an active shooter is not a tactical unit but actually patrol officers. These surplus military helmets can be normally sold for under $50.

By restricting items for sale and commercial trade, not only are you taking away items from average citizen, but in many cases you are also affecting law enforcement as well.

Even with policies such as ammunition and weapons restrictions to civilians, law enforcement, even our military are adversely affected. This can be seen in the 1994 assault weapons ban and its subsequent sunset. After the ban was lifted more companies were able to afford research and development to quickly improve long-standing stagnant technologies and simultaneously improve quality and lower the price of items used by military and law enforcement agencies. With continued heavy taxation and upcoming restrictions I'm afraid it'll not take much to make us rely on foreign powers for our military and law enforcement needs.

In conclusion, what we are dealing here with, it's not an inability to enforce security measures but a lack of policy and procedures to enforce and a lack of using common sense to understand what the actual items are that are being sold.

I currently have a bag and several types of simple cloth items which our current regulations consider more sensitive than many of the items up there on display. I have no restrictions as to what I can do with those items; however, a piece of cloth is required for me to be returned to the government for destruction.

At this time I open myself up for any questions in regards to these matters. Thank you.

REP. STUPAK: Well, thank you and thank you to all of our witnesses for your testimony.

And I think it's fair to emphasize again that the that industries are here, the companies that are here and represented here, Mr. Fitton by himself -- basically a one-man operation to ITT, which is a $500 million operation -- did not violate any laws. And they did cooperate with GAO after we made the purchases. But we're going to try to expose some of the problems with the laws or the polices that we have and see if we can't correct them is the purpose of this hearing as we do an oversight investigation.

Let's start with questions. I'll begin.

Mr. Fitton, just out of curiosity: So you bought the F-16 engine monitoring system computer from the government, right? And you're cleared by the government to buy this stuff as surplus military?

MR. FITTON: That is correct. And might I add that many of the items which I purchased over the last several years they've recalled such as clothing, such as helmet covers and things of that nature. However, sensitive items such as the F-16 engine computer, they've never asked for me to return those items.

REP. STUPAK: Okay, so you buy it and you're licensed by the government and you're checked out, you're okay. But once you sell it in the United States, as long as you sell it in the United States, there's no restriction on that, right?

MR. FITTON: That is correct.

REP. STUPAK: What on God's green earth would anyone want with an F16 engine monitoring system computer? Why would that have resale value?

MR. FITTON: Well, typically a lot of items, which a lot of people wouldn't understand why someone would want to, actually go to museums, collectors. I've sold a great deal of items to movie production companies and things of that nature out in Hollywood.

And things such as the infrared flags there which are a restricted item, honestly, a lot of these things I purchase from overseas countries such as China, so export restrictions are kind of curious to me simply because a lot of the things we're restricting from export we actually import into this country from the countries we're trying not to export to.


Mr. Kutz, let me ask you a couple questions. Your undercover investigation showed how easy it is to obtain military and dual-use items on the State Department's munitions list and the Commerce Department's commerce control list. Your investigation also illustrated that our laws impose few if any controls on domestic sales of these items.

In the post-9/11 world I don't think it makes any sense to assume that all attacks the United States will occur from overseas, so in your undercover operation your investigators bought seven items -- or several items that could be used to make IEDs, improvised explosive devices. Is that right?

MR. KUTZ: Yes, several of these have IED applications.

REP. STUPAK: Which are those? Which items are they?

I know you've got some of them up here.

MR. KUTZ: For example, the quadruple differential line receiver -- if we could put that on the monitor, too; it's over there --

REP. STUPAK: Is your mike on?

MR. KUTZ: Yes, it is.

It's a little chip and I think they can show it on the monitor for you. That is one of them.

The inclinometer, which I believe those are both over my left on the table there.


MR. KUTZ: Those are two primaries and I believe some of the other ones have other applications.

But we actually looked for ones that appeared to have been going to Iran as part of prior criminal cases that were being built into IEDs then used in Iraq. That's the type of thing we're talking about.


MR. KUTZ: This is low-end technology, unlike some of this other. This is very low end. It's potentially available other places. Why they come to the United States looking for it I don't know exactly.

REP. STUPAK: Well, we have many reports that these IEDs, when they go off they find U.S.made parts in them.

MR. KUTZ: Correct.

REP. STUPAK: So it is a serious problem that we're facing in Iraq, Afghanistan and elsewhere right now.

MR. KUTZ: Yes.

REP. STUPAK: All right, let's take a look at some of the other items you purchased: body armor, night vision scopes and secure radios. Are you concerned these could be used by not just terrorists but criminals and terrorist organizations operating within the United States?

MR. KUTZ: Yeah, I do think there's a -- especially like the body armor seems to be more of a domestic there. We didn't see any criminal cases of export of the body armor, but there's many criminal cases of -- the Binghamton case recently, the shooter there was wearing body armor.

REP. STUPAK: That's the one up in Pittsburgh.

MR. KUTZ: No, Binghamton, New York, the one where there were about -- 12 or 13 people were murdered by someone; they had body armor. We don't know what type of body armor, but body armor was used in some of the bank robberies from the 1990s. You're probably familiar --

REP. STUPAK: Oh, yeah. That was the James Guelff legislation introduce some time trying to restrict those sales? We never could anywhere with it.

MR. KUTZ: Yes.

REP. STUPAK: I know Mr. Doyle wanted to come and testify because the recent shooting of three police officers in Pittsburgh; that individual was clothed in the body armor that we see here today.

MR. KUTZ: Right. And we actually have -- I have a quote of actually a Craigslist ad that we had as a prior investigation and it actually said, and I quote, "a must-have for any gangster." So that's another use of the body armor that we understand.


Ms. Lasowski, let me ask you this: You testified that GAO placed the lack of control over sensitive military targets on your high-risk list, correct?

MS. LASOWSKI: Yes, that's correct.

REP. STUPAK: Okay, so let me ask you about this: The Arms Export Control Act and the Export Administration Act date back several decades. Were any of these laws amended or updated at any point since 9/11?

MS. LASOWSKI: There has not been a fundamental change in the laws, as Mr. Borman has mentioned. The Export Administration Act has lapsed and has been kept alive through executive order.

REP. STUPAK: Through an emergency executive order.

MS. LASOWSKI: Exactly. And so there has not been a major overhaul of either law.


And for committee members, remember we had our hearing during April about the chemical plant in West Virginia that blew up and we mentioned a lot about what if a terrorist would view this as a target. Everything they wanted to do to hit that chemical plant that we had the hearing on -- the night vision, body armor, IEDs -- it's all there. So it goes farther than that.

We're going to try to keep to five minutes. We'll keep going back and forth. We have votes soon, so let me go to Mr. Walden for his set of questions.

REP. GREG WALDEN: Thank you very much, Mr. Chairman.

Mr. Kutz, what kind of checks did some of the companies run on your GAO undercover company called Monacosee (ph) Tech Consultants. What kind of background checks and what did the companies those checks would show?

MR. KUTZ: There were a variety of controls that were used and I want to start with the end-use certificate that was mentioned here. If we could put that up on the monitor, too, I actually would like to read to you.

It's essentially a self-certification that you won't export, et cetera, so it says: "I confirm that the products listed above" -- and this was the Ka-band amplifier -- "will be solely used for the end use stated above and will not be used in or for nuclear, biological, chemical weapons or missiles capable of delivering these weapons. I further confirm that the products will not be exported."

So that was considered part of the control system, to get a self- certification from us in several of these key products.

REP. WALDEN: So if I wanted to do something bad with what I got, I'd just sign this and say "I promise not to use this to create a nuclear, biological or chemical weapon, honest --

MR. KUTZ: That's what we --

REP. WALDEN: -- "signed, Osama bin Laden." It'd be believable and enforceable.

MR. KUTZ: Well, we signed it in all cases and I don't believe there were any other checks done.

Some of the other things just real quickly: They had copies of our identifications. They checked to see if our credit card worked. Some of them actually checked to see that we had a website.

And so there were some things -- I mean, one actually claimed they did a background check but I don't know how they do a background check of a person that doesn't exist. I'm not sure what kind of record you would get on that.

So that's the type of things we understood were happening.

REP. WALDEN: Is there any information that companies could do or require of buyers when making a domestic purchase of dual-use items that would identify a possible export situation or deter a bad actor who wanted to buy the item in order to ship it abroad?

I mean, is there -- how can you stop that?

MR. KUTZ: I think it's very difficult. I think some of the points that were made by the witnesses to my left here are valid points.

Mr. Fitton, I guess, mentioned some of the things that he had said he did and he maybe exhausted all options. It still wasn't good enough to get us and he appears to have a lot more training than a lot of the other people we were probably dealing with here in recognizing kind of a situation like we were.

REP. WALDEN: You've met with all the manufacturers and distributors who were the subject of your investigation, correct?

MR. KUTZ: We either met with or talked by phone after this. There were no contacts with them before the transactions.

REP. WALDEN: While any restrictions they place on domestic sales are voluntary, do you think they were sufficient to prevent foreign nationals or terrorists from obtaining these sensitive items?

MR. KUTZ: No. And as I think we had found based on discussion with law enforcement, the kind of front company we used and the kind of scheme we used is one that is being used by real foreign governments and terrorist organizations today. This is not a hypothetical; this is real.

REP. WALDEN: That's pretty disturbing.

MR. KUTZ: Yes, it is. Again, we -- again, these items we were successful with and I think it raises questions.

I mean, I think that the military and the dual-use items are different. The military, some of the discussions here about what should be done, what possible use does anybody have for whatever the U.S. military -- according to the U.S. military this is being used today by our soldiers. Why would anyone else need exactly what our soldiers need? That's something that has a more easy solution than the dual use.

REP. WALDEN: Do you have your domestic buyers sign -- I want to go to the companies now.

Do you have your domestic buyers sign end use agreements? Could you answer verbally into the microphone each of you?

MR. ALVIS: Yes, sir. We have instituted -- as much out of our own experience as we've learned and instituted a compliance -- a rigorous compliance system.

We have required our distributors, dealers, the people that we sell to, which is a very, very small part of our business, to sign end-use agreements.

REP. WALDEN: Mr. Roush?

MR. ROUSH: No, we don't ask for -- on domestic sales of these items we don't ask for an end-use statement.

REP. WALDEN: Really? Okay.

Mr. Fitton?

MR. FITTON: Yes, I do. And contrary to something that was said earlier in the proceedings, I do require the customer to actually say what the end use is going to be. Granted, it's just what they're stating it's going to be. In this case it was for display, but that is essentially all I as a buyer from the government am required to give as well.

REP. WALDEN: So do any of you that are selling this equipment -- I realize you're following the absence of the law -- (laughs) -- it doesn't exist -- do you get comfort from these end-use agreements? Do you share our concern that just because somebody signs it and says "I promise I won't use this for nuclear, biological or chemical weapons or missiles; signed, Kim Jong Il," what do we do here? It doesn't --

MR. FITTON: Personally, if -- this is what I'm required to give to the government. If it's good enough for the government to use, shouldn't it be good enough for me to use as a reseller?


MR. FITTON: And on that note, a lot of the things that are considered dual-use technology and no longer authorized for the government to release, these are common offtheshelf items that could be purchased at Radio Shack, including an oscilloscope, which the government no longer releases. But I as a buyer sometimes get confused as to what I should be concerned with and what I shouldn't be concerned with considering some of the items up here the government doesn't seem to be very worried about where a lot of items they should be worried about they don't care.

REP. WALDEN: I appreciate that. That's the struggle I think we're having here is we're all under risk -- (laughs) -- at risk here.

Thank you, Mr. Chairman, my time's expired.

REP. STUPAK: This end-use agreement, there's no penalty if you lie on it or anything like that. I mean, it's just something to give you some comfort, right?

MR. ALVIS: In our case, sir, what we would do is we would probably sever our relationship with --

REP. STUPAK: With that buyer?

MR. ALVIS: -- the distributor or dealer.

REP. STUPAK: But there's no criminal penalty or anything like that?

MR. ALVIS: Not that I know of.


MR. KUTZ: Could I comment on that real quickly?


MR. KUTZ: The one value we've seen of the end use -- it doesn't really prevent anything  law enforcement has used it in making criminal cases to show knowledge and intent, so it does have value after the fact.

REP. STUPAK: But if I don't do one there's no penalty involved in it?


REP. STUPAK: I just wanted to clear that. Go ahead.

REP. WALDEN: Mr. Alvis, you said you'd sever your relationship with the distributor.

Do you go back -- do any of your companies go back and do random checks to see if the person who signed the agreement's actually following the agreement?

MR. ALVIS: Our dealer agreements do require -- have a proviso that allows us to come and audit --

REP. WALDEN: So you do audits?

MR. ALVIS: -- and check to see if they do that.

REP. WALDEN: And you do audits then?

MR. ALVIS: We have resources constraints, as any other organization does, and we have not because -- we have not done that to date. We've set up --

REP. WALDEN: Do any of you do audits? Back on this. I realize you're not required to but 

MR. FITTON: Unfortunately, there's not a whole lot I as a seller can do. I'm at a little bit of a different situation than Mr. Alvis in that I would actually purchase -- I'd be a type of customer he would sell to selling to military and law enforcement agencies, who are my primary buyer.

But while he would essentially come to me and see who I sold it to, I really don't have somebody I can report to such as the ATF to get information on my buyers from. And this is one thing that I would like to have access to. As a firearms dealer I've got it, so why wouldn't I have it as a sensitive materials dealer?

REP. WALDEN: Got it. Thank you.

Thank you, Mr. Chairman.

REP. STUPAK: And Ms. Sutton, thanks for letting us step on your time. We'll give you your five minutes back.

Ms. Sutton for questions.

REP. SUTTON: Thank you very much.

Mr. Kutz, I'm sitting here in a bit of astonishment at what your undercover investigation was able to buy right here in the United States. And you just look at these tables -- a detonator for a nuclear bomb, an accelerometer used in a nuclear weapons program, a steering instrument for a guided missile, components for an IED, bulletproof vests, secure radios and night vision equipment. It's as if our own country has become a terrorist bazaar.

Mr. Kutz, I know you do this for a living but you were surprised at your -- were you surprised at your success in obtaining these items?

MR. KUTZ: In some cases probably, in other cases, no. We've done work on eBay and Craigslist. We bought these same types of items there.

We have actually bought from the surplus property system from the Department of Defense before where they were selling F14 parts. And that was one of the reasons I believe Congress passed a law prohibiting the Department of Defense from selling F-14 parts which had only one customer, Iran.

And so not really would be my answer.

REP. SUTTON: Well, your investigation is just so important because it shows the whole picture. You know? You found that all of these items can be easily and legally purchased inside the United States.

And I want to thank the companies who are represented here today for your cooperation with the committee and for your willingness to look at making changes to the law.

But you, too, are looking at this issue through your more narrow viewpoints and with respect to your products, and I think the lesson here is that we need to look at this issue holistically. And I think, Ms. Lasowski, you would agree. We need to see the bigger picture. Each year billions of dollars in military and dual-use items are exported from the U.S., as has been made clear here today, and for too long we've viewed the problem through isolated stovepipes.

And Ms. Lasowski, you're also from GAO. You've analyzed this problem from the perspective of a federal agency coordination. And I think you're finding support that Mr. Kutz's undercover investigators, all that they found. You know, every two years GAO issued what's called its high-risk report. It's been referenced. And in this report you list some of the biggest problems in government. You've placed the security of our sensitive military technologies on this list and I want to just read very quickly a portion of your testimony that explains why.

You say this: "Poor interagency coordination, inefficiencies in processing licensing applications and a lack of systematic assessments have created significant vulnerabilities in the export control system."

Now, Ms. Lasowski, the departments of Defense, State, Commerce, Homeland Security, Treasury, Energy and Justice all have a role in regulating exports of defense-related technology, yet their coordination is poor. Can you tell us why?

MS. LASOWSKI: Thank you for the opportunity to respond to that.

What we have found over the years is that for various aspects of the export control system there has not been good coordination for agreeing upon, for example, the jurisdiction of certain items or for enforcement actions.

Some of the individual agencies have taken some actions toward making some improvements and we certainly applaud any individual agencies' attempts to improve inefficiencies or an ineffective part of the system.

However, for something as important as this, it really is important to get all the stakeholders to look together at this particular topic, and what we are calling for is a re-examination of the system. And this would entail bringing each of those agencies together to represent their particular viewpoints and bring their knowledge and expertise to the topic, but then in addition, what we have done, too, is we've addressed this issue with the Office of Management and Budget. They in turn have informed us that, given that there are -- this is a cross-cutting type of issue, the National Security Council may have an important role to play in this re- examination. And we welcome that opportunity for bringing all the players together to come up with solutions to the vulnerabilities and weaknesses that we have identified over the years.

REP. SUTTON: Okay. And you mentioned that there have been failures to conduct systematic assessments and that that failure has called -- caused significant vulnerabilities. And if you could just expand upon your answer a little bit, can you tell us what assessments they should be doing?

MS. LASOWSKI: What we are calling for in terms of those assessments is to determine how effective their system is.

The system has a particular mission and goals and objectives and it would be important to identify the appropriate measures for figuring out are they meeting their mission and their objectives.

And so what we would be asking for is to take a look at the current environment, to develop measures that would determine whether they're being efficient and effective in the current environment, and then periodically measure those to see if they are making improvements.

REP. SUTTON: I thank you. My time is up.

REP. STUPAK: Thank you, Ms. Sutton.

Mr. Gingrey for questions please -- five minutes.

REP. GINGREY: Mr. Chairman, thank you.

Mr. Borman, do you have any sense about the number of legitimate transactions that these products go through for legitimate purposes as part of their normal production or the supply chain? I'd just like to get a sense of how often these products may need to change hands before they reach their end use.

MR. BORMAN: In general terms, of course, we've just received a copy of the report and heard the report today, so we'll have to look at this in detail. And again, I'm talking about on the dual-use side really the items on this table, not the items on this table. But a lot of these are components, so it's very likely that they will go through several iterations, either from the manufacturer to a distributor or to a sub-vendor who then puts it into a subsystem and so on.

But one of the things we did look at, in thinking about the scale of domestic commerce, just to give you two examples: Last year it was estimated that the domestic market for semiconductor goods was almost $40 billion. That's just the domestic market. The domestic market for aerospace goods, about $35 billion.

So you know, when you're talking about dealing with domestic -- potential domestic controls on at least the dual-use items like this, that's a significant challenge. Now, others of these are more specialized and maybe some of the products, like the triggered spark gap, are more specialized and they really just go from the manufacturer to an original manufacturer equipment at OEM and there's only one transaction there. So it really varies. But these kinds of things -- I think the inclinometer, certainly the QRS-11 chip, which goes into a component that then goes into civil aircraft -- you're talking about several stages usually.

REP. GINGREY: Let me do a follow-up on that same question, particularly for these items that we're talking about that have the domestic commercial use. Is there any kind of a protocol or oversight of their ultimate disposal process? Because at some point, the technology is going to either malfunction or exhaust its primary purpose and it would likely need to be discarded. Should this -- is this an area that we should be concerned about?

MR. BORMAN: Well, again, I think there's a distinction to be made at least currently between those things that are exported and those that are used commercially. So, for example, the QRS-11 chip, that is probably in thousands of commercial airliners around the world, Boeings, Airbuses, Embraers, also Bombardiers, to the extent that they're operating domestically and the companies need to replace them; again, that's one set of circumstances. If they're going to be replaced abroad, then again, they're subject to the export control system and so there are certain requirements that if companies want to export them to replace them in China or some other country, they have to go through that process.

REP. GINGREY: I was referring to those that were primarily for domestic use.

Let me go to -- and thank you, Mr. Borman -- Mr. Fitton. Thank you for being here today. As the sole employee of your business, I know you certainly had to make a sacrifice to get up here and we know that this committee appreciates your presence and your testimony.

In light of what you said, it seems to me that you took most every possible precaution that you could to evaluate your buyer, the end user. Take a moment and further expand on the current limitations that a reseller faces in validating the information and the background of a potential buyer. You touched on that just a little bit a minute ago. Could you elaborate in the remaining time that I've got?

MR. FITTON: Correct. Say if you're dealing with a firearms transaction, an individual has to fill out what's essentially an end- use certificate, stating that there's nothing preventing them from purchasing the weapon or any of this type of business -- got their social security number, their names, their addresses, everything's listed on that application. That application is then submitted to the ATF for approval. This may be instantaneous approval and in many cases take a week or two weeks for that approval process to take place.

There is no reason that we can't go through a similar process to at least validate the person purchasing that item. Now, what happens beyond that point, let's face it, if somebody wants to do some nefarious activities to the U.S., they can do it. There's no way to prevent this in its entirety. All we can do is try and do as many measures as possible.

And one of the things that we have to look at is the fact that there are terrorists that are trying to destroy America. There are individuals throughout the world who want to see our downfall. But our current political correctness and the fact that we do have so many privacy rights protecting American citizens, these privacy rights are also protecting the terrorists and we're not able to actually hunt down the real cause of what's causing damage to the country. It's not the items, it's the end user, simply because I can do more damage with a truck full of fertilizer and gasoline than I can with any of the items that have been brought up on display today.

REP. GINGREY: Thank you, Mr. Fitton.

Now I yield back, Mr. Chairman.

REP. STUPAK: Thanks, Mr. Gingrey.

Mr. Braley, for questions please.

REP. BRALEY: Thank you, Mr. Chairman.

Mr. Alvis, I appreciated your comments about some of the changes that have been made at ITT, but you may want to count me as someone who's still skeptical about the progress that's being made and I want to talk to you about that.

In 2007 your company was convicted of one of the biggest criminal violations in the history of the Arms Export Control Act for illegally exporting to China and other countries technology relating to your highly sought-after night vision goggles and the company was fined $100 million.

And I want to show you what Daniel Wilkins at the Defense Criminal Investigative Services said about your company. He said this: "The illegal export of U.S. military technology and equipment threatens our national security in the most direct way. American security and its critical military technology are simply not up for sale."

And Julie Myers, who is the assistant secretary for U.S. Immigration and Customs Enforcement at the Department of Homeland Security, said that your company placed profits ahead of the security of our nation.

So my question for you is, are you here today to vouch on behalf of ITT that those concerns are no longer valid about your company?

MR. ALVIS: Yes, we are. The people that were involved are no longer with the company. I talked earlier in my opening statement about the structure we put in place. I was not there. I've only been there two and a half years. I was redeployed there along with -- our entire senior staff has come onboard within the last three years to include our president.

REP. BRALEY: Okay, well --

MR. ALVIS: We are totally -- yes, sir, that --

REP. BRALEY: Let's talk about that. Here's another quote from Kenneth Wainstein, who is the assistant attorney general at the Department of Justice, and he said, "ITT's exportation of this sensitive technology to China and other nations jeopardized our national security and the safety of our military men and women on the battlefield," which is an extremely strong statement coming from the Department of Justice.

And what I don't understand and what the committee doesn't understand is your company is still doing business with the federal government, correct?

MR. ALVIS: That's correct.

REP. BRALEY: And the Justice Department allowed your company to defer $50 million of that $100 million criminal fine by allowing you to invest it toward a new, more advanced line of night vision goggles.

Isn't that true?

MR. ALVIS: That's true.

REP. BRALEY: Now, normally when a company is convicted of illegal activities of this magnitude, they are automatically debarred from future government contracts. Why hasn't ITT been debarred, according to your understanding?

MR. ALVIS: As I mentioned in my opening statement and in my written statement, we are the world leader and we have made drastic changes. One of the things that I think the government believes, and this is my opinion, is that the heart of the night vision technology was not compromised. The goggle is nothing but a wrapper for the tube. The tube is the essence of the goggle. The tube cannot be reverse engineered. The tube is -- and the government is convinced of this. I've talked to the former customer, general officer level, that the security of the United States was not compromised via any of the activity.

REP. BRALEY: Well, that would seem to belie a $100 million fine, which apparently was levied in connection with the activity. Wouldn't you agree with that, that if there's no compromise of the national security, why in the world would $100 million fine be imposed? (No audible reply.)

Anyway, let me move on. This isn't the only time that ITT has been engaged in illegal export activities. The committee requested from the Department of Commerce copies of documents relating to other ITT export violations. And one of the documents shows that in 2007, which would have been within the time frame you're talking about after this changeover in management at the company, one of your subsidiaries, Engineered Values Group, was fined for illegally shipping valves used in chemical and biological weapons to China, Israel, Saudi Arabia and Taiwan. Isn't that right?

MR. ALVIS: As I mentioned earlier, I'm in the night vision business area. I have no knowledge of that.

REP. BRALEY: But that certainly would have been within the period of time that you've indicated the company has had a change in management, if it happened in 2007.

MR. ALVIS: We can respond to that question and get back to you for the record. I really don't feel comfortable, particularly under oath, responding to something I have no knowledge about.

REP. BRALEY: All right.

Then, Mr. Chairman, I would specifically request that we get an official response from the company in regard to that question.

Mr. Kutz, let me close with you. After ITT's conviction and $100 million fine, the company officials issued a statement saying they had conducted a comprehensive review of their policies and procedures and were initiating new monitoring to prevent illegal exports. But in November 2008, which is even later than this 2007 incident, you were able to purchase their night vision technology from one of its distributors using fake company and fake individuals' identification. Isn't that true?

MR. KUTZ: Yes. And in fact, we became a distributor.

REP. BRALEY: So, Mr. Chairman, that illustrates why I continue to have serious concerns about ITT's actions. The company's history of illegal exports is troubling and raises serious questions about whether it continues to put profits over the security of our nation.

And in closing, Mr. Chairman, I'd just like to point out that while this hearing has been going on, in response to the memo we received from the committee, I drafted a very simple certification that I think could address many of the issues that have been raised here at the hearing today. It would require the name, address, phone number, e-mail, business address, employer identification number of anyone purchasing these items. And it simply states, in a very short form: "I understand that the item I am purchasing is, a, a defense item under the Arms Export Control Act or, b, a dual-use item under the Export Administration Act. I also understand that this item is subject to export control laws that may prevent or restrict the sale or delivery of this item to anyone outside the United States. I am aware that I may face criminal prosecution and/or civil fines and penalties if I attempt to sell or distribute this item in violation of these export control laws. And I certify that neither I nor anyone on my behalf will attempt to export this item at any time."

Now, there's a paper trail that would certainly add some teeth to prosecution and enforcement of anyone attempting to violate our laws.

And with that, I yield back the balance of my time.

REP. STUPAK: Thank you, Mr. Braley.

Mr. Burgess for questions, five minutes please.


Mr. Alvis, now we've heard, I think it was Ms. Lasowski testify that the exporter determines the level of government review. Is that -- do you generally agree with that?

MR. ALVIS: The company?

REP. BURGESS: Yeah, that the exporter -- the person that's doing the export of -- exporting the item in question is, because of the ambiguity of our laws and the problems with jurisdiction, that many -- much of that is left up to your discretion. Is that a fair statement?

MR. ALVIS: On the exports it's pretty specific. On our international business we sell to the U.S. government, which sells to other governments as a government-to-government sale through the Foreign Military Sales Program. But we also do direct sales to other militaries. ITT's in the business of selling to militaries overseas.

We can sell to them directly, but the ITAR that I mentioned earlier does have provisos. Every time you ship an item -- every time you get an order from an international customer, you apply to the State Department to receive an export license. Each export license is handled on a case-by-case basis and can have specific provisos in it that regulate the technology. So we just respond to whatever our government determines.

REP. BURGESS: And do you think that's an adequate safeguard the way that's set up or would you structure something different, having come through the experience that you've endured?

MR. ALVIS: From my personal experience, having used these goggles as a military officer and also -- and having been down in the night vision business for the past two and a half years, my personal opinion is that the ITAR is rigorous enough with its figure of merit calculations.

A lot of people don't know that the stuff we export, even to our closest allies, is not the same night vision that the U.S. military gets. The goggle may look the same, but the tube inside -- we make 200 different types of tubes of varying degrees, all the way down to the ones which I would not consider to be cutting edge that we sell commercially to the best tube that the U.S. military gets.

So my personal opinion is that the ITAR is rigorous enough to control the export of night vision.

REP. BURGESS: Let me ask a question. I guess, Ms. Lasowski, I need to direct this to you. You talked about the turf battles that go on between Commerce and State.

I guess, Mr. Chairman, I don't really understand why we don't have the State Department here today. Perhaps that would be helpful.

But is this a frequent occurrence that these turf battles occur between Commerce and State?

MS. LASOWSKI: We have noted various instances where there have been jurisdictional disputes that have occurred. Sometimes it has occurred due to some confusion about where space technology, for example, is controlled.

But the instances that I was referring to had to do with actually an exporter who became aware that his competitor of the very same item was going through the Department of Commerce and utilizing that system to export his item while this other company was going through the State Department.

REP. BURGESS: So they were at a competitive disadvantage?

MS. LASOWSKI: They were at a competitive disadvantage and therefore --

REP. BURGESS: Do you get --

MS. LASOWSKI: -- in that kind of situation you have an unlevel playing field and that's why I referred to the exporter as being really the first step in terms of deciding which process to use.

REP. BURGESS: Because they can venue shop -- or I'm sorry, agency shop as to the most expeditious way to get their product out.

MS. LASOWSKI: It is a complex system and it is up to them to be -- to understand the export control laws and regulations.

REP. BURGESS: Why is it like that? Why is there a dual jurisdiction?

MS. LASOWSKI: That has been --

REP. BURGESS: I'm just a simple country doctor and so tell me, why did we set it up like that? When did it happen? Why did it happen? Was there something we were trying to accomplish by setting up this dual jurisdiction?

MS. LASOWSKI: The system is bifurcated because they are to accomplish different activities. The State Department is to control the most sensitive defense items while the Commerce Department is to control those items that are commercial and military applications.

REP. BURGESS: But has it always been that way?

MS. LASOWSKI: The system has been established, yes, as that long ago.

MR. BORMAN: Sir, if I could just add a little bit to that.


MR. BORMAN: The Export Administration Act originally was passed in 1949. It's a Cold War statute, as I mentioned. The Arms Export Control Act actually predates World War II. And, as Ms. Lasowski said, they originally had different purposes.

One of the challenges now is, of course, you have so much commercial-off-the-shelves technology going into military systems, and conversely, you have some military systems moving back into the commercial area. That's a big difference over the last 20 years.

REP. BURGESS: Now, when I was just a regular person and not in Congress, I mean, I seem to recall a lot of controversy back in the '90s about selling satellite technology to China. Did we not get into some of this same difficulty between Commerce and State with selling the satellite technology to PRC back in the '90s?

MS. LASOWSKI: That is correct. In the late '90s there were export violations that occurred and then the Congress passed legislation to change the jurisdiction of satellites and related components from the Commerce Department to the State Department.

REP. BURGESS: Well, was that fix then just inadequate, that it should have been a broader fix that has led us now to these additional problems that we're discussing today?

MS. LASOWSKI: I think the best response that I would have for that is that we are calling for a re-examination of the system and the whole safety net of programs. And as part of that, one of the first key steps is determining what is it we want to control and how do we want to control it, particularly given the challenges of the 21st century?

So it would be a good set of questions for the agencies that are responsible to come together and discuss to see if they are -- if the current structure best supports the current challenges.

REP. BURGESS: That's an excellent piece of advice.

Mr. Chairman, I'm just concerned that 10 years ago Congress took it upon itself to fix this problem and here we are 10 years later, the problem is not fixed and people are put at risk and fines are being levied. It seems like an inconsistent way for us to be doing business. So I hope we take this problem seriously.

And I just thank the witnesses for being here today. I think this is a terribly important issue that we need to get resolved.

I yield back.

REP. STUPAK: That's why we're having the hearings and we hope to have some resolutions.

Mr. Markey, for questions.

And Mr. Welch, I want to try to get you in too before votes.

REP. MARKEY: Thank you, Mr. Chairman.

Mr. Borman, as you know, I've been a long time critic of your bureau's Validated End-User Program, which allows certain foreign companies to import certain controlled U.S. goods without individual export licenses. Of the five Chinese companies originally certified as validated end-users, two were found to be closely affiliated with China's military industrial complex and to companies that had been under U.S. government sanctions for proliferating WMD-related technologies.

Apparently, these bad background checks by your bureau are continuing. On April 24th, you signed an order which added a new Chinese company, Aviza Technology, to the program. That is this Validated End-User Program, which basically says: "We trust you. We're not going to put you through the full process."

The order named five import destinations that Aviza was authorized to receive certain sensitive U.S. goods without export licenses. Here, we're talking about a pressure transducer, which is used in uranium enrichment.

Are you aware that one of the import locations that you authorized to receive a pressure transducer is also listed as the address of a company that the United States sanctioned by the State Department in December of 2006?

MR. BORMAN: Mr. Markey, the validated end users go through an extensive review with many agencies, including the intelligence community and --

REP. MARKEY: Are you aware that one of them was sanctioned in December of 2006?

MR. BORMAN: I don't believe that's correct, sir, that any of those validated end users, the ones that we approved, were sanctioned by the U.S. government, because if they were, they wouldn't have been approved.

REP. MARKEY: Okay. Then I have here pages and pages of documents that show this Chinese company called CEIEC International Electronics, which has been sanctioned by the State Department, is headquartered at the exact address that you have now authorized to receive certain sensitive dual-use, high-technology U.S. products.

The location that you have authorized to import sensitive U.S. goods, including pressure transducers, which are extremely important to uranium enrichment, is Building A23 Foxing (ph) Road, Beijing. And these documents show the exact same address is the headquarters of a company that has been sanctioned by our government for WMD-related proliferation, Building A23 Foxing (ph) Road, Beijing.

These documents were provided to me by the Wisconsin Project on Nuclear Arms Control, which was the organization that originally blew the whistle on your VEU program.

How is it that this small NGO can consistently do a better background check on these Chinese companies than you can do?

MR. BORMAN: Well, I have to say respectfully I disagree that they can do a better job. We'd be happy to take a look at whatever information they've provided you that they have not provided to us. But what I can tell you is all of those validated end users go through a thorough interagency review, including the intelligence community.

So right now today I can't discuss this with you. I'd be happy to look at it. But I can tell you that, again, it goes through a thorough review, and as you recall from the response our bureau gave to you earlier on the original five, there is a significant distinction between the specific entities that are approved and other entities that the Wisconsin Project is referencing.

REP. MARKEY: Well, you have just certified a sixth Chinese company to ignore our export controls system and that's essentially what this program does. It ignores the export controls system, sets up a special fast lane that doesn't have the same level of scrutiny. And it's the third one where you did not know it was associated with a company that had been sanctioned by the United States government.

MR. BORMAN: Well --

REP. MARKEY: And I think that when three out of the six are, in fact, not properly scrutinized, then the program is essentially unacceptable. It is not something that should be in place. And we'll share these documents with you, but it just seems to me that it shouldn't be an NGO that identifies that this new transfer is going to the exact same address as a company which was sanctioned just two years ago for violations of the very same type that we are talking about here today.

MR. BORMAN: Well, again, all I can tell you is that the thorough interagency review, including the intelligence community -- we'd be happy to look at that information, but I'd be very surprised if this is information that really correlates as the Wisconsin Project apparently is alleging.

The other point I would like to make with the Validated End-User Program is very extensive review, all of these companies have extensive individual licensing history. Many of them have been visited by U.S. government officials in an official capacity and there's a check once things are shipped there on the back end. So the requirement is that it eliminates individual license requirements. They don't get a free ride.

REP. MARKEY: Well, I just think that this whole concept of validated end-user that allows for a circumvention of a full inspection is a very questionable process. It would be like being at the airport and them being able to say: "Well, you don't have to go through the full screening. You don't have to go through the full screening. But all the rest of you do." Well, if you're going to have a program like that, then you cannot have mistakes. You cannot have there to be a trusting relationship which has developed where the same address two years later is receiving materials that can be used in uranium enrichment in a country about which we still have questions in terms of their nuclear nonproliferation record.

So I thank you, Mr. Chairman, very much.

I just have very serious questions about this Validated End-User Program. I think it ultimately turns into a validated end abuser program if, in fact, you can have violations like this. And I will share the material with you and I look forward to getting a response.

Thank you, Mr. Chairman.

REP. STUPAK: Very good. Yes?

REP. BURGESS: Mr. Chairman, can I ask unanimous consent that Mr. Markey's documents be shared with members of the minority as well as the witness?

REP. MARKEY: It will be done so, yes.

REP. STUPAK: Made part of the record, shared with both.

Mr. Welch for questions, please. We've got votes on the floor, but let's get your five minutes in.

REP. PETER WELCH (D-VT): I'll try to be quick.

REP. STUPAK: No, take your time.

REP. WELCH: I wanted to ask Mr. Kutz a few questions, if I could, and it's about the nuclear weapons issue. Two weeks ago, as you know, North Korea detonated a nuclear weapon during an underground test and is threatening to test fire an intercontinental ballistic missile.

And what concerns me is this: Last year the Strategic Studies Institute, a component of the Army War College, issued a report about the North Korean ballistic missile program. And I don't know if we want to make this part of the record, but that report is here. And it concluded -- and this is what's relevant to us -- that North Korea almost certainly depends upon outside sources for advanced electronic components and other sophisticated hardware for missile guidance systems. And incidentally, North Korea then sells what it makes, including possibly to Iran.

And the report warned that as early as 1999, North Korea was trying to procure gyros and accelerometers and other components for its ballistic inertial guidance. And what I want to ask you is about those two items, the accelerometers and the gyro chips. Those are two of the categories of items that you were able to purchase using a fake company and a fake buyer. That's right, correct?

MR. KUTZ: Yes.

REP. WELCH: And I don't know if you want to put the photos of those two items -- I guess you've done that --

MR. KUTZ: Yeah, I've got the accelerometer here too.

REP. WELCH: All right. How easy was it for you to purchase those?

MR. KUTZ: The accelerometer was an end-user certificate and it was done by credit card, fictitious name, bogus company and mailbox. So that was --


MR. KUTZ: -- relatively simple, I would say. And then the gyro chip, the same thing, and we got a quote for additional ones of those. So I would say that they were similar in how difficult they were to obtain.

REP. WELCH: And is it correct that those items can be sold within the U.S. without any license?

MR. KUTZ: Legally, yes.

REP. WELCH: And let me ask you, after you bought these items, you were then able to send them to Federal Express to a country in Southeast Asia?

MR. KUTZ: Correct.

REP. WELCH: And I won't ask you what the country is. I know that's sensitive information. But can you tell us why you chose that specific country?

MR. KUTZ: Because it is a known transshipment point to terrorist organizations.

REP. WELCH: All right. So we send it there or someone sends it there and that's a location from which it goes to people who are trying to do Americans harm?

MR. KUTZ: Correct.

REP. WELCH: These items are very small and lightweight. Just out of curiosity, how much did it cost to mail these halfway around the globe?

MR. KUTZ: Fifty dollars. And what we labeled them as was "documents.

" That was the word we used on them.

REP. WELCH: To me, your undercover investigation -- thank you for doing that, even though it's quite alarming -- it shows that our current system does not adequately prevent the export of items that are actually used in nuclear weapons programs. Do you agree with that conclusion?

MR. KUTZ: Yes. I mean, that's why we chose these items. We took the exact same part number out of indictments and criminal cases, and these two things you just mentioned are the exact same part that was cited in cases going to China, Iran, terrorist organizations, et cetera. So that was why we chose them, so this is real examples of what's going on.

REP. WELCH: Well, I really thank you.

It's incredibly alarming, Mr. Chairman. It's troubling because North Korea manufactures nuclear things and then exports their technology. So I do hope -- and I appreciate your efforts to have a thorough review of export controls. And I'll yield back my -- the balance of my time.

REP. STUPAK: Thanks, Mr. Welch.

Mr. Doyle still plans on coming. I'm sure there will be questions after. We've got votes here. Why don't we just recess until -- about 25 minutes here? How about 12:20, give you a chance to stretch your legs? We'll come right back and I'm sure we can finish up then probably within an hour after that.

So I'll ask you all to be back at about 12:20. Thank you. We're in recess. (Sounds gavel.)

REP. STUPAK: Hearing will come back to order. Thanks for your patience. I know Mr. Doyle is coming and I think one or two other members.

I had a couple questions. Mr. Kutz, let me ask you this if I -- because one that sort of caught my eye was GAO's purchase of the infrared American flag patches. I think you have one up here. Can you put one of those on screen what they look like? These infrared flags can appear as the United States flag or just a black material when you look at it, right, a black --

MR. KUTZ: Right. They can appear as black or if you use the infrared and you turn on the specialized item that is made.

REP. STUPAK: So it's -- show that -- so it's black up there. And then when you look with the infrared it comes out the American flag.

MR. KUTZ: It looks like a U.S. flag with the goggles, yes, with the goggles.

REP. STUPAK: That's with the night vision technology. And these flag patches are currently worn by our troops during combat to help identify friendly forces at night. What is the danger to our troops if these flags are available to our adversaries?

MR. KUTZ: Well, certainly on the battlefield -- and I guess there have been public statements made by Defense Criminal Investigative Service and the Department of Defense that the enemy does have these in Iraq and Afghanistan. And so there is a concern that these are the kinds of things that could -- they're supposed to be able to identify friendly versus foe, and if the foe has them then they're going to look like a friendly. That's the risk.

REP. STUPAK: Okay. Now, you purchased these flags. Did you buy them in person or over the Internet?

MR. KUTZ: Internet.

REP. STUPAK: How many did you purchase?

MR. KUTZ: We purchased several, but we got a quote for 400. They were going to ship us 400 if we wanted 400.

REP. STUPAK: Okay. So you got 400 and then you put an offer for -- I mean, you had four --

MR. KUTZ: Bought, like, four, eight but we --

REP. STUPAK: Okay. And then you offered to buy 400 and that --

MR. KUTZ: Yes.

REP. STUPAK: -- that was approved.

MR. KUTZ: Yes, they would have shipped us 400.

REP. STUPAK: It seems that there aren't really any legitimate reasons for anyone other than our servicemen and women to have these flags, is there?

MR. KUTZ: No, although I think this is probably considered lower-end technology now. It is apparently exactly what's being used by our soldiers according to the Department of Defense officials we spoke to.

REP. STUPAK: Were you required to show that you were a member of the armed forces in order to buy them?

MR. KUTZ: The agreement that this distributor had with the manufacturer was that they required a military ID but this distributor did not request a military ID from us. And so we were not -- we did do a counterfeit military ID in another case. But in this one they were supposed to and they didn't. According to the manufacturer this will no longer be a distributor of theirs.

REP. STUPAK: Like I said, this one sort of caught my eye because no one really needs this except maybe our military people. So I asked our staff to do some research on this and this -- here's what they tell me. First, anyone can buy these legally in the United States, correct?

MR. KUTZ: Correct.

REP. STUPAK: And you cannot export these items to certain countries like North Korea, China or Afghanistan, correct?

MR. KUTZ: These are on the commerce control list I believe.

REP. STUPAK: Okay. But you can export these flags to countries like Saudi Arabia, Yemen and Cambodia; is that correct?

MR. KUTZ: I don't know the difference in who you can ship them to and who you can't.

REP. STUPAK: Well, let me ask you this then: Does it make any sense that you can -- you can't export to North Korea, China or Afghanistan but you can to Saudi Arabia, Yemen, Cambodia. They're readily available here in the United States even though there really is no use for it I guess. It's for our military and for identification.

If we believe our adversaries shouldn't have these, I think it's a pretty bizarre way to implement that goal. And I really think it highlights why we think we should re-examine the entire system for controlling items that only have military uses.

MR. KUTZ: Yeah, I concur with that. I think that many in the military and especially the soldiers concur. I don't think that they're excited about the items that they use on the battlefield today being so readily available. That is something that's a concern.

REP. STUPAK: Mr. Fitton, would your customer base be interested in these?

MR. FITTON: Actually, the largest percentage of my customer base is military and law enforcement. And in the past I've had difficulty getting these from U.S. suppliers. I have purchased them directly from China. So no matter what exports --

REP. STUPAK: It's one of those export back you're saying.

MR. FITTON: -- what exports you restrict here in the U.S. it doesn't make a difference if a Chinese person can buy it directly from their own country. So our export regulations won't affect this market whatsoever.

REP. STUPAK: Buy it from their own country.

Do you know if they're manufactured in China?

MR. FITTON: Yes, they are manufactured in China.

REP. STUPAK: So you just export them back here and you can --

MR. FITTON: Right. This is not high-tech technology that only the U.S. has access to. Countries around the world produce IFF flags and patches for their --

REP. STUPAK: But then in order to view it or to see it you've got to have night vision, don't you?

MR. FITTON: Correct.

REP. STUPAK: And I take it not very high-tech night vision goggles, just probably any night vision --

MR. FITTON: Right, any Gen 1, Gen 2 or above will reflect it.

MR. BORMAN: Mr. Stupak, if I could just add an observation.


MR. BORMAN: Based on what I've just seen and heard I think it would be more likely that those items would be on the U.S. munitions list and not on the commerce list, because the definition for a military item is specifically designed for a military application. And off the top of my head it would seem to me that's exactly what those things are. Just a little correction or observation.

REP. STUPAK: But either way they're on a list. They're restricted but readily available or we can bring them in from China if we wanted to. (Laughs.) So there's plenty of opportunities for our adversaries or terrorist groups or whatever domestic or foreign to get them or to use them to harm Americans.

Mr. Doyle has arrived. I know the Penguins aren't going to show up for the game tonight but I'm glad to see you did. So if you'd like to ask some questions now would be a good time.

REP. MIKE DOYLE (D-PA): Say to my friend have your fun now because tonight you're going to be crying in your beer. (Laughter.)

REP. STUPAK: Are those Penguin colors you're wearing?

REP. DOYLE: Black and gold, yeah.


REP. DOYLE: Thank you, Mr. Chairman.

Mr. Chairman, on April 4th in my district three Pittsburgh police officers were killed and two others were injured by a heavily armed man who fired on them as they responded to a domestic disturbance call. The three officers who were murdered in the line of duty left five children without their fathers.

The standoff between the armed man and the police units lasted for hours that morning. SWAT officers were pinned down by a hail of bullets. And the wounded policemen lay where they fell. It was complete chaos.

But the gunman, armed with an AK-47 and a number of handguns, was protected. Although the gunman had been shot in the chest and the leg, he wore a bulletproof vest to shield him. The gunman was able to continue to fire on the police as a result of this protection he was wearing.

Now, Mr. Kutz, you were able to purchase a bulletproof vest over the Internet. And you could have acquired the protective inserts from the same company, enabling it to withstand even heavy ammunition. Could you tell me how did you purchase these bulletproof vests?

MR. KUTZ: We actually in this case represented that we were part of an active reserve unit and provided counterfeit military documentation. And we were shipped this item along with a commitment to ship 20 more.

REP. DOYLE: Did they do any background check on you?

MR. KUTZ: I don't know. Well, the military ID seemed to be what they were looking for.

REP. DOYLE: What threats do you think these bulletproof vests pose to our emergency first responders and military?

MR. KUTZ: I think this really is a domestic threat. Again, I mentioned earlier when you weren't here that there -- we didn't see any export cases for these items. We see these more as a domestic threat, something that, you know, the military's best body armor here -- the ESAPIs -- are the newer plates that have additional protection from the regular SAPIs. And this is what the Marine Corps uses today. It's hard to understand why anybody but military and potentially law enforcement would have a use for those.

REP. DOYLE: Thank you. Three officers from my district were killed and two were wounded by a man who was able to continue this onslaught because he had the same product you were able to buy off the Internet.

I see no reason, Mr. Chairman, why criminals should be able to buy bulletproof vests for use on our streets just as terrorists overseas should not be able to acquire them for use on the battlefield. Mr. Chairman, for the sake of brave Americans who make our country and community safe, including the three brave officers from Pittsburgh who died in the line of duty, we have to do more to keep this equipment out of the hands of criminals and terrorists.

And I yield back.

REP. STUPAK: Well, thank you, Mr. Doyle. And Mr. Kutz mentioned earlier the gunman up in Brighton who killed about 12, 13 people, same thing -- body armor. I mentioned James Guelff legislation, the San Francisco police officer armed bank robbery where there was almost like a robocop just head to toe. And they got them through the mail.

And we tried to restrict that with the James Guelff legislation I had a few years ago. We could never really put any severe -- or curtail it. And I agree with you, and that's one purpose of looking at it. And I know a number of members have mentioned both not just terrorists but also criminal activities with being able to purchase these items.

So we'll continue working on it. And thanks for your input.

MR. FITTON: Mr. Chairman --


MR. FITTON: -- might I? As a dealer for these items I do have serious reservations when you start restricting strictly to law enforcement and military. The reason for this, one of the primary consumers I have interested in body armor right now is not civilian, it's not military and law enforcement because they're typically supplied with these items. It's first responders such as EMT and firemen.

Typically in active shooter situations and things of this nature they're some of the first people that are on-site. The gunman will typically fire at anyone in uniform or of a government capacity. Once you restrict them to military and law enforcement, all of a sudden these individuals are no longer authorized to use as well as contractors serving overseas in security details, as well as VIP protection details here in the United States.

So we have to really address a fine line when we start doing restrictions to make sure individuals who do have a need for these items can still obtain these items, and that's something we tend to forget about when we think just tactical situations involving military and law enforcement.

REP. STUPAK: We're cognizant of that fact, but there's no reason why this stuff should be purchased without some kind of identification, verification of who they are, just going on the Internet. I think what we've seen is if you have a credit card that's valid that'll accept a purchase, we don't care who you are. And this committee has shown time and time again, everything from Viagra for our cat -- as long as that cat has a credit card, he got his Viagra.

And that's the problem we see. It's not just in this area. We see it in drugs, we see it in pornography, we see it in gaming, we see it in e-commerce, and there's some legislation we're working on to really put some kind of restrictions on this credit card, or verify the individual using that credit card before you can even use it.

So there's other areas we're looking at, so while we have this hearing -- the purpose of this hearing was military and dual-use technology -- we still go back. It filters in many of the areas of jurisdiction this committee has, and so we're trying to look at the whole thing. But you're right, you're right.

Mr. Roush?

MR. ROUSH: Yes, if it's possible I'd like to just clarify one point. I think a lot of excellent points have been raised by the committee today but there's one factual point I did want to clarify. The triggered spark gaps were mentioned in the GAO's report. We didn't get the chance to see the report ahead of time. There's a few things we want to clarify.

Triggered spark gaps are not used as detonators for nuclear weapons. In fact, PerkinElmer has an entirely separate product line that is completely ITAR-controlled and not available for commercial sale that is used in conjunction with nuclear weapons. Triggered spark gaps are primarily used in medical equipment -- lithotripters, which are treatment devices for kidney stones -- and there's a second use of the product on conventional munitions which accounts for the minority of its sales.

I just wanted to make that clarification.

REP. STUPAK: Well, the --

MR. KUTZ: Mr. Chairman, could I just comment quickly?

REP. STUPAK: Sure, and I want to get in there a little bit, because there's that central contractor registration database which sort of looks like -- it's like a government-approved site and we're buying this stuff.

Go ahead --

MR. KUTZ: I know the manufacturer knows why these were purchased, but the source of information we use was the Department of Commerce and Justice saying that these items could be used. And I will just read it for you for the record. If you want me to submit it for the record I would too.

But according to the indictment, the triggered spark gap in the exact model number we bought could be used as a detonating device for nuclear weapons as well as other applications, and the testimony of Christopher Padilla in 2007 stated the same thing to the Department of Commerce.

So again, whether it was designed for that and could be used, again, I'm not an expert at that and I would certainly defer to the manufacturer of what it was designed for.

REP. STUPAK: Well, whether it was the triggered spark gap or a couple of these other items we've purchased which are sort of technical, a lot of them fall on this federal central contractor registration database, which is an approved government supplier via the General Services Administration schedule.

It seems to me like if you're on this central contractor registration that somehow you have -- it's government approval, but yet you're able to purchase it like there's no -- it's like the government's approving what you're doing but yet you can purchase anything you want off this CCR registration.

Shouldn't there be some safeguards in there that if a company's on a CCR, this database that's government-approved, that there's some restrictions on how they do sales or something? Or even licensing?

MR. KUTZ: The central contract registry is something -- actually, a lot of our undercover companies are in the central contract registry. I mean, no one validates anything in there. There's approved GSA vendors that go through a little bit more stringent process, so there is a distinction between the CCR and an approved government vendor, I believe. But to do business with the government you have to be registered in the central contract registry.

REP. STUPAK: So if you're registered, doesn't it give it some form of legitimacy to the outsider?

MR. KUTZ: Absolutely, it does. And we use that all the time, we say we're registered in the central contract registry, and it's similar to your IRB hearing several months ago where we were registered with HHS and assured it did mean something to people who looked at it.

REP. STUPAK: Well, let me ask you a little bit about this, a little bit about "know your customer."

Mr. Borman, and I think it's Tab number 5 -- do we have a book up there? On the far end.

Mr. Fitton, could you pass that book down?

Look at Tab number 5, because it's some helpful hints that you get from Commerce and all that on to know your customer, and we just have parts of your form there. It's about a 40-page form; we have certain parts of it in there. And I think it was Page 38 -- I want to highlight a few portions of this guidance.

First it says, "Absent red flags, there's no affirmative duty upon exporters to enquire, verify, or otherwise go behind the customers' representations." It also says, "You can rely upon representations from your customers and repeat them in the documents you file, unless red flags oblige you to take verification steps."

So Mr. Borman, do you think this guidance is adequate, given the GAO was able to, you know, basically subvert that "know your customer"?

MR. BORMAN: Well, I think it goes back, Mr. Chairman, to what I mentioned earlier. I think the first issue would be with us does existing legal authority -- that is, the statutory authority we have -- give us the authority to do anything differently, and in this case extend regulations in a significant way to domestic transfers? And that's something that we'd have to look at very carefully to see whether the existing authority goes that far.

REP. STUPAK: Okay. Well, GAO was able to convince these companies to sell sensitive military technologies every time it tried in all 12 cases. The Commerce Department guidance also lists a -- also includes a list of red-flag for companies that would -- for companies to look for, and I think it's Page 40 -- maybe the last one there.

For example, companies should be on the lookout if, and quote, "the customer is willing to pay cash," or, quote, "the customer is reluctant to offer information about the end use of the item." By posting this guidance on the Internet, aren't you really informing terrorists and criminals how to beat the system?

MR. BORMAN: Well, I think the issue is, though, we do want legitimate companies to have some specific guidance from the government, and it's very difficult, I think, for us to identify the thousands, if not hundreds of thousands, of U.S. companies that do business and sort of repeat individually (each of ?) them.

And it seems to me the PerkinElmer example we talked about earlier exactly shows the benefit of these kind of -- because it's that kind of information that they've incorporated into their product and to their corporate compliance program that said hmm, there's some red flags on that particular transaction. They contacted our field office in Boston, and that's exactly what we want to have happen.

So I mean, I suppose you could take the position that sure, bad guys could read this and figure out oh, I know how to get around this, but I think it's more important to have all the vast majority of companies in the United States that want to do legitimate business to have this information available to them so that they do come to us.

And that's a lot of our cases, as Mr. Madigan can tell you, come from tips from U.S. companies.

REP. STUPAK: But it just shows you how much the Internet has changed. I mean, if you take the way we do business, most of these purchases were on the Internet or over the Internet, right, Mr. Kutz?

MR. KUTZ: Yeah, for all the purchases we made we never spoke on the phone or met face to face with anyone. It was all fax and e-mail transactions.

REP. STUPAK: So it almost made the red flag almost -- you can get around it so easy.

Let me ask this, Mr. Roush, if I will. You represent PerkinElmer, the company that sold the triggered spark plug (sic) gap to GAO, a fake company. Your company adopted the Department of Commerce guides right there on Tab 5 and created your own customer screening procedure, right?

MR. ROUSH: Yes, correct.

REP. STUPAK: Okay. Do you agree that both your guidance and the Commerce Department guidance was inadequate? Would you agree with that?

MR. ROUSH: Well, I would say it doesn't protect against the kinds of examples that you're talking about. If somebody were to try to buy a product under a legal transaction and then subsequently illegally, you know, use it for an unintended use or export it --

REP. STUPAK: Sure, but --

MR. ROUSH: -- the screening might not uncover that.

REP. STUPAK: Is there a screening in even this guide here, just for honest people, keeping honest people honest?

MR. ROUSH: I believe --

REP. STUPAK: I mean, the people want to do us harm are terrorists. They don't care what -- they're not going to give you the honest answer, right?

MR. ROUSH: I think it's a valid question. What I would say is if you make the red flags in those processes robust enough they start to triangulate in a way that unless somebody is extremely informed and diligent they're going to become fearful, as Mr. Fitton said, and back away from the transaction, or you will start to detect that in their behavior.

REP. STUPAK: Well, you know, here GAO made up a fictitious company, it had a fictitious reason for wanting these triggered spark gap, and its promise was not to export. And then your company sort of relied upon those statements, or misstatements, but we didn't go any further to try to verify that, right? Your company?

MR. ROUSH: That's correct.


Mr. Kutz, did PerkinElmer conduct any verification on the representations you made, do you know? Did you know if anyone tried to verify what you had said or put down? In your own -- anything come back to you?

MR. KUTZ: I don't know exactly what they did. There was no end- use certificate on that one as I understand, but we did meet with their folks and they do have a compliance group. And so again, there was no violation of the law and their processes seemed to be consistent with some other companies we dealt with, the bigger companies.


Mr. Roush, if I can go back to you there on this spark plug and the -- I'm sorry, spark gap. You submitted with your testimony an article from The Boston Globe describing a real case in which your company cooperated with law enforcement officials to thwart an illegal shipment of triggered spark gaps to Pakistan, 2003.

MR. ROUSH: Correct.

REP. STUPAK: According to this article, it was the size of the order. It was 200 spark gaps, which is enough to detonate three to 10 nuclear bombs, that caused your company to alert law enforcement. And one of your spokesmen said it was such a huge quality (sic), a hospital buys one or two. Is that correct?

MR. ROUSH: Those statements are correct. And I would say that particularly the geographic region of the world affects whether you would view a quantity as valid or not for medical purposes because in the United States the health care infrastructure is much larger. So it is normal that customers in the United States might order, you know, as many as a few hundred of these, particularly if they were a distributor serving multiple hospitals.

REP. STUPAK: But you would know those customers, wouldn't you, pretty much?

MR. ROUSH: Typically, that's correct, yes.

REP. STUPAK: So then, Mr. Kutz, before you made your purchase from Mr. Roush's company, PerkinElmer, you asked them for a quote on a larger order of triggered spark gaps, right?

MR. KUTZ: One hundred, yes.

REP. STUPAK: Okay. And so you had a totally new customer then asking for 100, Mr. Roush, that you never dealt with before, and they were seeking 100 spark gaps. Why didn't that alert -- or why didn't you have law enforcement check these guys out?

MR. ROUSH: This is actually a completely normal practice for our new customers in all of our product lines, including triggered spark gaps, that normally a customer will buy one sample of something and test that under an R&D or development process, and if it does then meet their specifications they're going to want to purchase production quantities of that.

So we'll typically provide the pricing for the sample and the pricing for the production quantity up front. That's a normal competitive practice and it was followed in this case, and in fact, this, you know, fictitious company indicated they wanted one piece for development purposes, and if that worked in the application, then further quantities would be ordered at that time and, you know, there would be a separate transaction that would be screened in its own right at that time. So this was a normal commercial practice.

REP. STUPAK: Any comment on --

MR. KUTZ: That could very well be true. I mean, we didn't want to spend $70,000 instead of $700.

MR. ROUSH: Right.

MR. KUTZ: That was really the reason we did it that way.

REP. STUPAK: Okay. What would you use -- what would a company buy 100 -- what would you use 100 for? I mean, I guess I'm still trying to figure this one out.

MR. ROUSH: Well, because this part is used in lithotripter treatment devices in hospitals around the United States. There's an awful lot of hospitals -- there are spare parts demands as well as new system demands that we sell 2,000 of these devices in a year, in excess of 2,000, and 70 percent of those are for medical uses, so a quantity of one now and potentially 100 later is not at all unusual.

REP. STUPAK: I see. So it wasn't the fact that 100, it was that they had one for research and might possibly want 100 more.

MR. ROUSH: Correct, and so we provided standard quantity pricing for various quantities that would be ordered. That's a normal practice.

Nobody will design your component into a system if they have no idea what they're going to be paying once they go into production because they have to work towards -- typically towards some kind of cost for that system and they want to know for planning purposes what your price would be. Typically there's a volume discount, you know?

REP. STUPAK: Right. But wouldn't you then sort of ask, like, okay, I've got my one for research or for testing purposes, but then when they ask for 100 -- wouldn't you usually ask what the product is? In this case you never even asked what they were going to use the 100 for, did you?

MR. ROUSH: Well, in this case we did not, but I will tell you that, you know, triggered spark gaps are not one thing. It's a product group, okay? We offer a lot of different models. Most of them are specifically designed for a range of performance of a medical device, so some of them operate at 20 kilovolts, some at 10 kilovolts, 12. The military versions we sell typically operate at 2 kilovolt. There's no overlap in the operating range. So there was nothing about this that would have indicated that it was for use in some sort of munitions application. It was entirely consistent with our medical versions.

REP. STUPAK: Sure, and there's no requirement under law since it was domestic to make sure they're licensed and there's no requirement to follow up the end user or anything like that, right?

MR. ROUSH: Correct.


Mr. Gingrey, questions?

REP. GINGREY: Mr. Chairman, thank you. Let me go to Mr. Borman.

Mr. Borman, some items can be exported to some countries without a license but require a license if going to certain other countries. Some items can be exported to some countries as long as they are intended for commercial purposes but not for military purposes. Some items can't be exported to some countries for any reason. I think you get my drift here.

With all of the variables and exceptions, is it not -- and I think it is, but I want your answer -- is it not confusing for government agencies and businesses involved in export and export controls to make sure everyone is doing the right thing? How in the world do you know?

MR. BORMAN: Well, that's a very good question, sir, and it is a complex system, and I think it's evolved that way because of what I mentioned earlier. Last year, for example, there were $1.3 trillion worth of exports from the United States. Probably the vast majority of those are subject to our regulations but have gradated requirements, depending on what the item is and where and who it's going to.

And so off the top of my head, certainly the system could be made simpler, but to make it simpler I think it has to go one of two ways: either you drastically reduce requirements for items and places or you drastically increase the level of control. And when you're talking about, you know, $1.3 trillion worth of exports, that would have a significant impact.

And so that's why the system has evolved, to try to give exporters more and more information about the types of transactions and the technologies that they need to be most concerned about.

REP. GINGREY: Well, earlier, before we went to vote, there was, I think, Mr. Burgess from Texas was questioning why the dual system of responsibility, when you of course have the Department of State and the Department of Commerce, the Department of Commerce controlling these products that are dual use and the Department of State controlling those that are just for military purposes and military sales, and you got into some discussion, actually any one of the three of you, Mr. Kutz, Ms. Lasowski, Mr. Borman.

Let's elaborate that on a little bit more, if you will, because I think what Burgess was getting at was to simplify, to make it so that the right hand will know what the left hand's doing and the left hand will know what the right hand is doing. It'd be a more efficient way and less chances for sales that would be inappropriate.

Let's talk about that a little bit in my remaining time, and I'll throw it open to the GAO.

MS. LASOWSKI: I think you raise some excellent questions, because the system that was created decades ago was --

REP. GINGREY: How long ago did you say the system was created?

MS. LASOWSKI: Well, the current laws were established in their most recent form in the 1970s, but they do date back earlier in different forms --

REP. GINGREY: I think you said back into the 1940s earlier, didn't you?

MS. LASOWSKI: That's where there was an origination, yes, but the current laws that are in existence really were in the 1970s and there hasn't been a major overhaul of these particular laws, and has been previously mentioned, the Export Administration Act has currently lapsed.

So it is fair that in terms of a re-examination, which is what we have been calling for, that it would be appropriate to take a look at the current challenges that have been involving for the 21st century and re-examine the system to look at the very basic questions -- what is it that needs to be controlled and how do we want to control it? -- and then establish clear lines of responsibility and accountability for how best to do that. And so those would be, I think, the fundamental aspects of such a re-examination.

REP. GINGREY: Mr. Kutz, any comment?

Mr. Borman?

MR. BORMAN: I think that I generally agree with that. To add a little bit of, I guess, fuel to the fire to your concern about the complexity, we're talking about dual-use and munitions items, but there are actually several other agencies that have direct authority to regulate the control of other exports.

For example, the Nuclear Regulatory Commission under the Atomic Energy Act controls the export of nuclear materials and equipment. The Department of Energy has specific authority. So it's even more complicated, although these are the two main systems. But clearly, the current threat challenges -- technologies and markets are really challenging the system as it currently exists.

REP. GINGREY: Yeah, and you know, and just continue along that same line and all these variables and exceptions, is it not confusing for government agencies and businesses involved in export and export controls to make sure everyone is doing the right thing? I mean, that is my main point.

MR. BORMAN: It's certainly a challenge. That's why we do so much on outreach, for example. We do 30, 40, 50 outreach events every year throughout the country, just BIS, and there's a whole cottage industry of private entities that do export control compliance seminars, I think in part as a market reaction to that.

REP. GINGREY: Are some dual-use items more sensitive than others?

MR. BORMAN: Oh, certainly, certainly. I mean, there's a whole strata of -- most of what we control on our control list are based on multilateral agreements by most of the supplier countries. There's one specific -- the nuclear missile technology, chem-bio, and sort of conventional arms, and then there's another strata that are controlled really just to the terrorist countries, or to specific bad end-users in different countries. So there's certainly a large gradation.

REP. GINGREY: You touched on the fact that a number of different laws and regulations, agencies, multilateral agreements play a role in how we control our exports. Can you describe some of the challenges that this presents?

MR. BORMAN: Well, absolutely.

I mean, on the multilateral side there's agreement, again, among most but not all suppliers as to items to be listed, but then certainly each country has individual discretion as to how they actually implement those controls. And what we hear a lot from U.S. industry is that our system is much more rigorous than other countries and therefore they're at a competitive disadvantage when they're selling into markets like China and India, for example. So that's a real challenge.

Another real challenge, of course, is what we call foreign availability. It was alluded to earlier. Many of the things we control are available from many countries, including the countries that are the target of those controls, so.

REP. GINGREY: Mr. Borman, thank you.

And Mr. Chairman, I yield back to you at this point.

REP. STUPAK: Thanks.

Just a couple questions, if I may.

Mr. Kutz, if I'd ask you -- you got the book there, the document binder there. I want to look at Tab number 3, because one of the things that caught my attention, you mentioned in your testimony that one seller actually signed up your fake company as a reseller or dealer? That was on the night vision, was that right?

MR. KUTZ: It was a distributor, it wasn't the manufacturer.

REP. STUPAK: Okay. No, no it was the distributor, right, not the manufacturer.

So if you look at Tab 3, which is the reseller-dealer agreement between GAO's fictitious company and a company called Kerif Night Vision --

MR. KUTZ: Correct.

REP. STUPAK: Whose idea was it to make your company -- your false company a dealer of night vision equipment?

MR. KUTZ: It was the only way we could get the item. They wouldn't sell it to us otherwise. So we agreed to fill out this agreement and that was the way we got the item. So it was their --

REP. STUPAK: Okay, so in order to obtain the item you had to fill out this reseller-dealer --

MR. KUTZ: A reseller-dealer agreement was necessary to get our target item, yes.

REP. STUPAK: What information were you required to provide to become a dealer?

MR. KUTZ: Well, it was interesting. We didn't have to provide a Social Security number or an EIN, and that would be something that, you know -- or identification number. It was other information -- you know, name, address and I believe other information. But it wasn't any personally identifiable information.

REP. STUPAK: Well, did you have face-to-face meeting with this company?

MR. KUTZ: Yes, we did -- no, we did not. Not until afterwards, no.


MR. KUTZ: Afterwards. We actually met with this individual afterwards.

REP. STUPAK: After. So before you became a dealer, you never even had face-to-face meetings with this company that was going to make you a dealer of their night vision.

MR. KUTZ: That's correct.

REP. STUPAK: Okay. What's your understanding of what access to night vision equipment would you have as a dealer?

MR. KUTZ: Well, I guess ITT could probably better answer that because it was ultimately their product. But we were at several levels below the distributor level so our understanding was we could have actually purchased more of these from this individual. That was one of the discussions I believe we had. We don't know how many or under what circumstances.


And Mr. Alvis, I realize that your company -- you're the manufacturer and there's probably multiple layers between you and this Kerif Night Vision. Do you know how many layers that'd be between you and probably Kerif, two or three?

MR. ALVIS: My guess is the company that sold to themes probably one of our three dealers, because they do have 25 distributors, now 26.

REP. STUPAK: But before you ever would deal with them, would there be a couple layers?

MR. ALVIS: We wouldn't deal with --


MR. ALVIS: We wouldn't deal with anybody. We deal with three companies --

REP. STUPAK: And then they --

MR. ALVIS: -- that we are allowed to audit.


MR. ALVIS: As I mentioned earlier, we haven't audited them. However, we do cooperate with law enforcement, FBI, whenever -- obviously, as the biggest manufacturer, whenever there's an investigation. We cooperated with GAO on this thing.

We're a resource and every time we've gone to one of our dealers, all their paperwork's been right on the money. So the end-use statements that we put out there, whenever we've had to follow up they've always had all the paperwork and all the documentation.

REP. STUPAK: Well, I take it from your answer then Kerif had no requirement of contacting you and saying, hey, I signed up a new company to sell night vision.



MR. KUTZ: Mr. Chairman, I would just say, too, ITT was able to trace this item down within a couple of hours, very quickly.

REP. STUPAK: By going through the --

MR. ALVIS: We make 175,000 night vision tubes a year. Every tube we make is serial numbered, whether it's going to the U.S. military. Everything we do is ITAR, so we don't have the dual-use distinction. Everything is ITAR.

The downgraded tubes or the nonmilitary spec tubes that we sell into the commercial market are also serial numbered. So whenever GAO -- and that's a very -- there's two generations behind -- that goggle up there on the front is two generations behind what the U.S. Army currently has. We could still take that serial number.

We can also autopsy any tubes and see what's been done to it.

REP. STUPAK: Sure, but let me ask you this: In Tab 3 -- and you may want to pass that down to him -- (inaudible) -- says, "Kerif should exercise no control over the activities and operations of reseller-dealer," in other words, Mr. Kutz's company there with the GAO.

Have you ever seen these agreements like that? Is that something your distributors do, where they shall exercise no control over the activities and operations of a reseller-dealer?

MR. ALVIS: I have actually never looked at a dealer agreement that came from one of our distributors to a lower-level distributor.


MR. ALVIS: However, I'll see if our team -- Greg (sp), have you ever looked at a --

REP. STUPAK: He can't answer; he'd have to answer through you, sir. He can advise you but he can't --

MR. ALVIS: Oh, okay, fine.

REP. STUPAK: It's also on the board up there, too.

MR. ALVIS: (Off mike consultation.) Kerif, even though they are the distributor --

REP. STUPAK: Kerif, okay.

MR. ALVIS: Yeah, Kerif, that gave the agreement to the fictitious company --


MR. ALVIS: -- they are not the ones -- they're not our dealer.


MR. ALVIS: So there's a layer in there --

REP. STUPAK: There's a layer in there.

MR. ALVIS: And that layer in there is required to have the end- use statements and all the documentation that we're likely to audit and occasionally call on them to give back to us in cooperation with law enforcement.

REP. STUPAK: Okay. I guess the part that gets me a little bit is the law prohibits exports of your product outside the United States, but when you hire a distributor you don't control who that distributor signs up as dealers of your product. So the distributor signs up a dealer and doesn't control the activities of the dealer. (Laughs.)

So it sounds like we've got a crazy system here. You can't export; you hire a distributor. He hires dealers and everyone says we exercise no control over the activities of the next person.

Go ahead.

MR. ALVIS: This distributor -- this real-world distributor, not the fictitious company -- would be -- the distributor that hired him -- would be in violation of our agreement.

REP. STUPAK: Of your agreement?

MR. ALVIS: Of our agreement.


MR. FITTON: And Mr. Chairman?


MR. FITTON: As a dealer myself in night vision goggles and equipment, the certificates that I sign as a dealer setting up myself as a distributor or dealer with a company, I have to agree not to export the items through any distributor I purchase it through. So even down to my level, giving it to the end user, I have to agree not to export the items through any distributor I purchase it through. So even down to my level, giving it to the end user, I have to abide by the same laws and regulations.

REP. STUPAK: Sure, because you're in the United States. But then after you sell it to someone they can do anything they want with it, in a way.

MR. FITTON: Correct. Once it falls into civilian hands, then it's out of our control.

REP. STUPAK: Okay, thanks.

Mr. Gingrey, any more questions? Wrap her up here?

REP. GINGREY: Mr. Chairman, thank you. I did have a couple more that I wanted to address to the GAO, Mr. Kutz or Ms. Lasowski -- excuse me.

In my state of Georgia, in fact in my congressional district even, we have a large number of defense contractors and businesses, both large and small, who work every day in good faith towards the defense of our nation as well as the defense of our international allies, which is also in our own national defense.

While there are clearly areas upon which we need additional oversight, it also seems that many of these small businesses that I represent who play by the rules experience sometimes massive delays when trying to secure the necessary licensing through the State Department and its Directorate of Defense Trade Controls.

So my first question is this: As a result of your investigation, do you have any insight with respect to the existing process at the directorate and its efficiency in approving clearly -- clearly -- aboveboard export activities? How timely do you believe the directorate is in the approval process, how long should American businesses be expected to wait in this process?

Because time is money, obviously; they lose these opportunities if it drags on too long, and I have had one of these companies come to me with this concern.

MR. KUTZ: Yeah, nothing we did in the investigation was aboveboard, so I will pass the microphone. (Laughter.)

MS. LASOWSKI: Over the years we have looked at the State Department --

REP. GINGREY: Is your mike on, Ms. Lasowski?

MS. LASOWSKI: Over the years --

REP. GINGREY: You have a sweet, low voice.

MS. LASOWSKI: (Laughter.) Let me see if I can speak up a little bit here.

REP. GINGREY: Ah, that's better.

MS. LASOWSKI: Over the years we have looked at the State Department's licensing process and we have noted a number of inefficiencies associated with the process. We recognize that it's important for the process to take the time necessary to deliberate and to do various verifications and come up with the appropriate restrictions that will be placed on the license conditions for the export.

However, we have noted that a number of inefficiencies have delayed the process, and a couple of years ago when we looked at the process we noted that there were not particular standard operating procedures, there was not a lot of attention in terms of taking a triage approach in terms of referring the licenses to the appropriate parties.

So when we completed our review we made a number of recommendations to improve the efficiency of the licensing process.

We have not been back in to examine the current state of play. However, we have been briefed by State Department officials that they have taken a number of steps to restructure their work force and to establish procedures and training in an attempt to reduce the number of licenses that are in the pipeline and also to ensure that they are consistent in terms of their processing of license applications.

REP. GINGREY: Well, I appreciate that answer. I would suggest to you that the problem is still there, and my information is very, very recent and I sincerely do believe the problem is still there.

Is this applicable as well to the Department of Commerce? You mentioned the Department of State, but.

MS. LASOWSKI: In terms of the Department of Commerce, most of the exports can occur without an actual license application, so very few in terms of what is ultimately under the control is licensed compared to a much larger volume of license applications that occur at the State Department.

REP. GINGREY: I see. Sure, of course, that makes sense.

Well, thank you all very much. I appreciate the opportunity to hear from you and ask you some questions, and I thank you.

Mr. Chairman, I yield back to you.

REP. STUPAK: Well, thank you. Thank you, Mr. Gingrey.

As I said, we started this investigation in 2008; we're going to continue our investigation. I want to emphasize again that the witnesses that have appeared here today, they created no violation of law.

ITT, PerkinElmer and Mr. Fitton, you guys followed the law, you did not violate the law, and you probably followed the absence of law, as I think Mr. Walden said earlier. So that's work for this committee to do some more work, and I want to thank you for your cooperation in providing the requested documents as well as the other companies that were part of the sting operation that did provide documents to us.

And I have to for the record note there's one exception -- Systron Donner of Walnut Creek, California, a company which sold the gyro chips to the GAO undercover company, that company, Systron Donner, stands out for their defiant failure to comply with the document requests from our committee. While everybody else complied with it, they refused to, and we're going to continue to press to receive the information from this company.

So I want to thank you for your being here, thank you for your cooperation, thank you for your testimony and thank all of our witnesses. And that concludes our testimony for today.

The rules provide that members have 10 days to submit additional questions for the record. I ask unanimous consent that the content of our document binder be entered into record provided that the committee staff may redact any information that is of business proprietary nature or relates to privacy concerns or is law enforcement-sensitive in nature.

Without objection, the documents will be entered in the record.

That concludes our hearing. The meeting of the subcommittee is adjourned. (Sounds gavel.)


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