Validated End-User Program in China

Validated End-User Program is well known among export control expert.
But according to GAO ("Government Accountability Office") report, they recognize this program doesn't work as intended and advise to suspend.

What is Validated End-User (VEU) Program?
The program allows U.S. companies to ship eligible products to VEU companies without an individual validated license. This program was first made available to China as part of a larger “China rule” that included expanded controls related to military end-use. The U.S. government has since extended the VEU program to India and may consider other countries in the future. Five companies have been approved for VEU status so far. This program is still in an early phase and the U.S. and Chinese governments are discussing issues and implementation.

Now, what companies are approved as VEU?
The five approved VEU companies are: Applied Materials China; Boeing Hexcel AVIC I Joint Venture; National Semiconductor Corp; Semiconductor Manufacturing International Corp; and Shanghai Hua Hong NEC Corp. They are authorized to import certain controlled items without individual export licenses.

What is the problem in the program GAO point out?
The Government Accountability Office has called on the Department of Commerce to suspend a program designed to facilitate high technology exports to China. The GAO expressed concern that the DOC is unable to ensure that goods shipped under the validated end-user program, especially semiconductor equipment and materials, are being used as intended.

The VEU program allows select “trusted” Chinese companies to receive controlled items without a DOC export license. Instead of requiring a post-shipment verification check to ensure that the equipment is being used in accordance with the terms of the authorization, VEUs must agree to periodic records reviews and discretionary on-site reviews by U.S. government personnel. This program covers a wide range of items, may be used by foreign re-exporters and does not have an expiration date.

The GAO states that the introduction of the VEU program has yet to produce the anticipated advantages and that challenges with program implementation may hinder the DOC’s ability to ensure that items exported to VEUs are being used as intended. For example, although negotiations are ongoing, the department has not reached a VEU specific agreement with the Chinese government for conducting on-site reviews of VEUs, a mechanism cited by Commerce as critical for ensuring program compliance. Instead, as a stopgap measure, the DOC is attempting to conduct on-site reviews under a 2004 end-use visit understanding with China. The department also continues to lack specific procedures for selecting and conducting on-site reviews more than a year after the program was introduced.

The GAO therefore recommends that the DOC suspend the VEU program with respect to China until it (a) negotiates a VEU-specific agreement with China or the EUVU is amended to include the VEU program and (b) develops operating procedures for selecting and conducting on-site reviews that are applicable to all VEUs. The DOC disagreed with this recommendation, stating that the EUVU provides a framework for all inspections related to export controls in China and that procedures for conducting end-use checks exist and will be used for on-site reviews as applicable. The GAO noted, however, that the EUVU requirement to obtain end-user statements for shipments imposes an additional burden on VEUs and runs counter to the trade facilitating objectives of the program. The GAO also pointed out that end-use checks focus on ensuring that an item is being used for the purposes stated on the license, whereas on-site reviews are more comprehensive.

(Source: World Trade/Interactive - 10/28/08)