OIG-04-A-19, Audit of NRCs Management Import/Export Authorizations

OIG-04-A-19, Audit of NRCs Management Import/Export Authorizations

ML042670108
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Issue date:	09/13/2004
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OFFICE OF THE INSPECTOR GENERAL U.S. NUCLEAR REGULATORY COMMISSION Audit of NRCs Management of Import/Export Authorizations OIG-04-A-19 September 13, 2004 AUDIT REPORT All publicly available OIG reports (including this report) are accessible through NRCs website at:

http://www.nrc.gov/reading-rm/doc-collections/insp-gen/

September 13, 2004 MEMORANDUM TO:

Luis A. Reyes Executive Director for Operations Janice Dunn Lee Director, Office of International Programs FROM:

Stephen D. Dingbaum/RA/

Assistant Inspector General for Audits

SUBJECT:

AUDIT OF NRCS MANAGEMENT OF IMPORT/EXPORT AUTHORIZATIONS (OIG-04-A-19)

Attached is the Office of the Inspector Generals audit report titled Audit of NRCs Management of Import/Export Authorizations.

The report reflects the results of our audit to determine whether the Office of International Programs was (1) properly reviewing and approving import/export authorizations in a timely manner, (2) effectively coordinating this activity with other Federal agencies, and (3) efficiently and effectively coordinating import/export authorizations internally. The audit found that the Office of International Programs approved license applications in a timely manner in compliance with Title 10 of the Code of Federal Regulations, Part 110 and effectively coordinated with other Federal agencies. However, license processing costs are under-recovered and the internal coordination relating to the proper review and approval of import/export license applications requires improvement to correct documentation weaknesses.

This report makes recommendations to address the issues identified by enhancing management controls.

Comments provided at the August 10, 2004, exit conference, and via subsequent e-mails, have been incorporated, as appropriate, in our final report.

If you have any questions or wish to discuss this report, please call me at 415-5915 or Steven Zane at 415-5912.

Attachment:

As stated cc: W. Dean, OEDO

Distribution List B. John Garrick, Chairman, Advisory Committee on Nuclear Waste Mario V. Bonaca, Chairman, Advisory Committee on Reactor Safeguards John T. Larkins, Executive Director, Advisory Committee on Reactor Safeguards/Advisory Committee on Nuclear Waste G. Paul Bollwerk, III, Chief Administrative Judge, Atomic Safety and Licensing Board Panel Karen D. Cyr, General Counsel John F. Cordes, Jr., Director, Office of Commission Appellate Adjudication Jesse L. Funches, Chief Financial Officer William N. Outlaw, Director of Communications Dennis K. Rathbun, Director, Office of Congressional Affairs Eliot B. Brenner, Director, Office of Public Affairs Annette Vietti-Cook, Secretary of the Commission Patricia G. Norry, Deputy Executive Director for Management Services, OEDO William F. Kane, Deputy Executive Director for Homeland Protection and Preparedness, OEDO Martin J. Virgilio, Deputy Executive Director for Materials, Research and State Programs, OEDO Ellis W. Merschoff, Deputy Executive Director for Reactor Programs, OEDO Jacqueline E. Silber, Chief Information Officer Michael L. Springer, Director, Office of Administration Frank J. Congel, Director, Office of Enforcement Guy P. Caputo, Director, Office of Investigations Paul E. Bird, Director, Office of Human Resources Corenthis B. Kelley, Director, Office of Small Business and Civil Rights Jack R. Strosnider, Director, Office of Nuclear Material Safety and Safeguards James E. Dyer, Director, Office of Nuclear Reactor Regulation Carl J. Paperiello, Director, Office of Nuclear Regulatory Research Paul H. Lohaus, Director, Office of State and Tribal Programs Roy P. Zimmerman, Director, Office of Nuclear Security and Incident Response Samuel J. Collins, Regional Administrator, Region I William D. Travers, Regional Administrator, Region II James L. Caldwell, Regional Administrator, Region III Bruce S. Mallett, Regional Administrator, Region IV Office of Public Affairs, Region I Office of Public Affairs, Region II Office of Public Affairs, Region III Office of Public Affairs, Region IV

Audit of NRCs Management of Import/Export Authorizations i

EXECUTIVE

SUMMARY

BACKGROUND The Atomic Energy Act of 1954, as amended, assigns responsibility for licensing imports and/or exports of specified nuclear materials and equipment to the U.S. Nuclear Regulatory Commission (NRC).

Title 10 of the Code of Federal Regulations, Part 110 (10 CFR 110) contains the regulations that prescribe licensing, enforcement, and rulemaking procedures. NRCs Office of International Programs (OIP) administers the agencys import/export licensing program. In carrying out this responsibility, NRC coordinates with other Executive Branch agencies such as the Departments of State and Energy, which review license applications forwarded by OIP. NRC has historically processed approximately 100 import/export license applications per year, but this is expected to increase to about 280 in FY 2005.

PURPOSE The objectives of this audit were to determine whether OIP was (1) properly reviewing and approving import/export authorizations in a timely manner, (2) effectively coordinating this activity with other Federal agencies, and (3) efficiently and effectively coordinating import/export authorizations internally.

RESULTS IN BRIEF The audit found that OIP approved license applications in a timely manner in compliance with 10 CFR 110 and effectively coordinated with other Federal agencies. However, license processing costs are under-recovered and the internal coordination relating to the proper review and approval of import/export license applications requires improvement to correct documentation weaknesses.

License Processing Costs are Under-Recovered Although Federal laws and regulations require recovery of the full cost of processing import/export license applications via fees (hereafter referred to as flat fees), NRC under-recovered the full cost of processing these applications. The agencys calculation of flat fees, fails to accurately estimate the hours used, resulting in under-recovered costs of approximately $800,000 in FY 2002 and

Audit of NRCs Management of Import/Export Authorizations ii approximately $600,000 in FY 2003. In the instance of under-recovered costs, NRC recoups the under-recovery via the General Fund and/or the annual fees charged to the agencys other licensees.

Quality Control Process Needs Improvement NRC properly reviewed and approved 96 percent of the FY 2003 import/export license applications. However, four of the ninety-eight applications reviewed during this audit were not fully documented in NRCs files. These exceptions were caused in part by the lack of written quality control procedures and checklists and in part by the lack of a provision allowing issuance of licenses based on verbal approvals.

RECOMMENDATIONS The report makes recommendations to the Director, OIP to enhance management controls.

AGENCY COMMENTS During an exit conference on August 10, 2004, NRC staff generally agreed with the findings and recommendations in this report (except as explained below) and provided comments to clarify certain sections. We modified the report, as we determined appropriate, in response to those comments. Management chose not to provide written comments for inclusion in this report.

Management expressed concerns about the accuracy of the estimated under-recovered costs of processing import/export license applications for FYs 2002 and 2003. The calculations are estimates based on the best information available in NRCs books and records.

Audit of NRCs Management of Import/Export Authorizations iii ABBREVIATIONS AND ACRONYMS ADAMS Agency-wide Documents Access and Management System 10 CFR 110 Title 10 of the Code of Federal Regulations Part 110 10 CFR 170 Title 10 of the Code of Federal Regulations Part 170 IAEA International Atomic Energy Agency IOAA The Independent Offices Appropriations Act of 1952 NMSS Office of Nuclear Material Safety and Safeguards NRC U.S Nuclear Regulatory Commission NSIR Office of Nuclear Security and Incident Response OBRA 90 The Omnibus Budget Reconciliation Act of 1990 OCFO Office of the Chief Financial Officer OGC Office of the General Counsel OIG Office of the Inspector General OIP Office of International Programs

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Audit of NRCs Management of Import/Export Authorizations v

TABLE OF CONTENTS EXECUTIVE

SUMMARY

.......................................................................... i ABBREVIATIONS AND ACRONYMS.....................................................iii I. BACKGROUND.......................................................................1 II. PURPOSE..............................................................................2 III. FINDINGS...............................................................................2 A. LICENSE PROCESSING COSTS ARE UNDER-RECOVERED....3 B. QUALITY CONTROL PROCESS NEEDS IMPROVEMENT..........6 IV. CONSOLIDATED LIST OF RECOMMENDATIONS..............10 APPENDICES A. Scope and Methodology.............................................................11 B. Import/Export License Fee Categories and Associated Fees.....13 C. Office of International Programs Time and Labor Codes...........15

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Audit of NRCs Management of Import/Export Authorizations 1

I. BACKGROUND The Atomic Energy Act of 1954, as amended, assigns responsibility for licensing imports and/or exports of specified nuclear materials (including, but not limited to byproduct material,1 source material,2 and special nuclear material3) and equipment, such as coolant pumps, and spare and replacement parts, to the NRC. 10 CFR 110 contains the regulations that prescribe licensing, enforcement, and rulemaking procedures. NRCs OIP administers the agencys import/export licensing program. In carrying out this responsibility, NRC coordinates with other Executive Branch agencies such as the Departments of State and Energy, which review license applications forwarded by OIP.

NRCs licensing authority includes: nuclear reactors, source and special nuclear materials, heavy water, nuclear grade graphite, and radioactive waste. In addition to OIP, other NRC offices process license applications. The Office of Nuclear Security and Incident Response (NSIR) provides assurance that international safeguards and physical security at recipient sites meet International Atomic Energy Agency (IAEA) criteria. The Office of Nuclear Material Safety and Safeguards (NMSS) provides advice concerning imports of radioactive waste and the Office of the General Counsel (OGC) assists with legal matters pertaining to significant license applications.

OIP has five employees that process import/export license applications. In addition, NSIR, NMSS and OGC each devote less than one person per year to license processing. The Commission expects to issue a proposed regulation change that would increase control of specified nuclear byproduct materials by requiring import/export license applications for certain nuclear materials not previously requiring a license application (such as Cesium-137 and 1 Byproduct material - (1) Any radioactive material (except special nuclear material) yielded in or made radioactive by exposure to the radiation incident to the process of producing or utilizing special nuclear material and (2) the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content. [Source: Atomic Energy Act of 1954, Section 11 (e)]

2 Source material - Uranium or thorium or any combination thereof, in any physical or chemical form; or ores that contain by weight 0.05 percent or more of (1) uranium, (2) thorium, or (3) any combination thereof.

Source material includes depleted uranium and natural uranium, but not special nuclear material. [Source:

Title 10 CFR Part 40.4]

3 Special nuclear material - Plutonium, uranium-233, uranium enriched in the isotopes uranium-233 or uranium-235, and any other material which the Commission, pursuant to the provisions of Section 51 of the Atomic Energy Act of 1954, as amended, determines to be special nuclear material, but does not include source material; or any material artificially enriched by any of the foregoing, but does not include source material. [Source: Title 10 CFR Part 74.4]

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Iridium-192). OIP expects that the regulation change, if approved, would dramatically increase the current level of import/export applications by two or three times in FY 2005.

The chart below shows the number of import/export license applications processed during FYs 2001 through 2003. The FY 2004 information is a projection based on nine months data and the FY 2005 figure is an estimate obtained from an OIP official.

Import/Export License Applications Processed Per Fiscal Year 121 82 83 280 98 0

100 200 300 2001 2002 2003 2004 2005 Number of Applications II. PURPOSE The objectives of this audit were to determine whether OIP was (1) properly reviewing and approving import/export authorizations in a timely manner, (2) effectively coordinating this activity with other Federal agencies, and (3) efficiently and effectively coordinating import/export authorizations internally.

III. FINDINGS The audit found that OIP approved license applications in a timely manner in compliance with 10 CFR 110 and effectively coordinated with other Federal agencies. However, license processing costs are under-recovered and the internal coordination relating to the proper review and approval of import/export license applications requires improvement to correct documentation weaknesses.

Audit of NRCs Management of Import/Export Authorizations 3

A. LICENSE PROCESSING COSTS ARE UNDER-RECOVERED Although Federal laws and regulations require recovery of the full cost of processing import/export license applications via fees, NRC under-recovered the full cost of processing these applications.

Applicants for import/export licenses pay flat fees that fall into one of five categories. 4 To develop these flat fees, OIP provides the Office of the Chief Financial Officer (OCFO) with the estimated average hours spent processing each category of license. The estimated hours for each fee category, multiplied by the materials rate5 (developed in accordance with Title 10 of the Code of Federal Regulations, Part 170 (10 CFR 170)), determine the fees charged.

The agencys calculation of flat fees, while properly using the materials rate, fails to accurately estimate the hours used, resulting in under-recovered costs of approximately $800,000 in FY 2002 and approximately $600,000 in FY 20036. In the instance of under-recovered costs, NRC recoups the under-recovery via the General Fund and/or the annual fees charged to the agencys other licensees.

Applicable Laws and Regulations NRCs authority to charge fees derives from the Independent Offices Appropriations Act of 1952 (IOAA) and the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), both of which provide a statutory basis for the flat fees charged to obtain an import/export license. Excerpts from these laws, as well as from 10 CFR 170, which deals with the flat fees for import/export licenses, follow.

The Independent Offices Appropriations Act of 1952 The IOAA states: "The head of each agencymay prescribe regulations establishing the charge for a service or thing of value provided by the agencyEach charge shall be(1) fair; and (2) based on (A) the costs to the Government.

The Omnibus Budget Reconciliation Act of 1990 The OBRA 90 Conference Report states NRC User Fees, "must reasonably be related to the regulatory service provided by the NRC and fairly reflect the cost to the NRC of providing the service."

4 Appendix B lists the five import/export license fee categories along with the associated fees.

5 OCFO develops the materials rate.

6 See the subsection titled Under-Recovery of Costs for further discussion of these estimated shortfalls.

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Title 10 of the Code of Federal Regulations, Part 170 10 CFR 170.12(b)(1) states: "Licensing fees will be assessed to recover full costs for - (i) The review of applications for new licenses and approvals; (ii) The review of applications for amendments to and renewal of existing licenses or approvals 10 CFR 170.12(b)(2) further states: Full cost fees will be determined based on the professional staff timeexpended. The full cost fees for professional staff time will be determined at the professional hourly rates in effect at the time the service was provided.

Calculation of Flat Fees Is Deficient Currently, NRC does not fully adhere to the requirements of IOAA, OBRA 90, and 10 CFR 170, because the calculation of flat fees is deficient. Specifically, NRC needs to:

• Improve procedures for estimating total hours per license,

• Provide clear guidance on time charging, and

• Perform monitoring.

Procedures for Estimating Total Hours per License The agencys calculation of flat fees, while properly using the materials rate, fails to accurately estimate the hours used to process import/export license applications. OIPs estimates of hours date back to 1991 and continue to be used today. OIP and OCFO representatives could not explain the sketchy documentation supporting the 1991 estimates. To develop accurate estimates based on current processing times, OIP needs to properly record and use actual hours expended by agency staff in processing import/export license applications.

Guidance on Time Charging Until recently, OIP staff charged their time processing import/export license applications, regardless of fee category, to a single time code titled Import/Export Licensing Reviews. As a result, OIP did not distinguish between times spent on each of the five fee categories. Furthermore, OIP did not provide clear guidance to

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NRC staff on time charging. Specifically, the time charged to the one time code reflects only the time charged by OIP staff and excludes direct time processing applications expended by representatives of other NRC offices (OGC, NSIR, and NMSS7).

Beginning in May 2004, OIP staff discontinued the use of the single time code and began charging their time spent processing import/export license applications to eleven time codes.8 These added time codes represent an attempt by OIP to accumulate hourly data for further analysis in refining the calculation of flat fees.

The new time codes, however, fail to accumulate hours in a manner that corresponds with the five existing fee categories. The lack of correlation between time codes and fee categories prevents OIP from using the hours expended in developing accurate license application fees.

Monitoring To ensure that import/export license fee computations reflect current, accurate, and complete information, OIP needs to perform monitoring in the course of normal operations. Specifically, OIP should periodically compare flat fees collected with the full cost of processing import/export license applications and make adjustments to the flat fees as warranted. Office of Management and Budget Circular A-123, revised, Management Accountability and Control, requires management controls, which reasonably ensure that reliable and timely information is obtained, maintained, reported and used for decision making.

Under-Recovery of Costs The agencys calculation of flat fees resulted in shortfalls of approximately $800,000 in FY 2002 and approximately $600,000 in FY 2003. Stated differently, the fees collected for import/export license applications are less than the costs of processing them.

During FYs 2002 and 2003, the import/export license application fees collected by NRC represented only 15 percent and 28 percent of the processing costs, respectively. As a result, NRC had to recover the shortfalls via the General Fund and/or the annual fees charged to the agencys other licensees.

7 However, as part of the Biennial Review of Fees, OCFO works with NMSS and NSIR to identify their direct time spent on import-export licenses and includes estimates of these hours in the flat fees for these licenses.

8 Appendix C lists the eleven time codes currently used by OIP.

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The aforementioned shortfalls are estimates based on the best information available in NRCs books and records. Due to limitations in NRCs data, characteristics of the estimates may, in some instances, be under or overstated.9 RECOMMENDATION The Office of the Inspector General (OIG) recommends that the Director of the Office of International Programs:

1. Develop and implement a written methodology for the annual calculation of import/export license application fees that provides for correlation between time codes and fee categories and results in the development of fair and equitable license application fees that recover the agencys full cost of processing the applications.

B. QUALITY CONTROL PROCESS NEEDS IMPROVEMENT NRC properly reviewed and approved 96 percent of the FY 2003 import/export license applications. However, four of the ninety-eight applications reviewed during this audit were not fully documented in NRCs files. Current licensing procedures require that the OIP licensing staff receive a memo from NSIR indicating that the international safeguards and physical security review had been performed and the criteria for approval had been met.

Reportedly, in two cases, the OIP licensing staff issued the license based on verbal approval, contrary to the licensing procedure. In one case, there was no memo providing formal approval. In the second case, the memo was dated four days after the license was issued. These exceptions were caused in part by the lack of written quality control procedures and checklists and in part by the lack of a provision allowing issuance of licenses based on verbal approvals.

9 The shortfalls may be overstated because the OIP staff charged their time spent on all licensing related matters to a single time code, the hours collected include time spent on rulemaking, general correspondence, answering requests for information, and interagency and international meetings, which cannot be billed to licensees. However, because the only hours available are the aggregate hours, those were used to calculate the recovery of costs. The shortfalls may be understated, as the effort of other NRC offices (OGC, NSIR, NMSS) isnt included in the single time code that was used by OIP personnel. The shortfalls may be further understated, as our analysis did not include the OIP effort for October 2001, which was not available.

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The failure to use a checklist can result in quality control weaknesses, which, in turn, could lead to the granting of an import/export license without proper review and approval. Such circumstances could increase the vulnerability to the agency if there is a loss of control over specified nuclear material.

Applicable Regulations and Agency Policy The review of import/export license applications is required by 10 CFR 110. To comply with international safeguards and physical security requirements, OIP relies on evaluations from NSIR, which provides assurance that international safeguards and physical security at recipient sites meet International Atomic Energy Agency standards. OIP Policies and Procedures No.15 (effective August 1993) specifies that prior to being issued, license applications must be maintained in the Public Document Room for a 15-day period for public comment. The Agency-wide Documents Access and Management System (ADAMS) has become the forum through which the public can access import/export license applications.

This policy gives the public an opportunity to express their views on the granting of a particular import/export license.

Compliance Exceptions Compliance testing of NRCs processing of the ninety-eight FY 2003 import/export license applications disclosed four exceptions.

• Two exceptions occurred because of inadequate documentation of the review required under the international safeguards and physical security requirements of 10 CFR 110.

• A third exception resulted from an inconsistency in the license regarding the amount of source material approved for export.

The differing quantities within the license could cause confusion regarding the correct amount of source material to be exported.

• The fourth exception relates to NRCs failure to include a license application in ADAMS for public comment. Such action precluded the public from expressing any objections to the proposed export.

A more detailed description of the first two exceptions follows.

In one case, a license was granted, but the file did not include the required notification from NSIR regarding international safeguards and physical security requirements. Although an NSIR log

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indicated that a response was sent prior to the issuance of the license, documentation could not be provided. In another case, the required notification from NSIR concerning international safeguards and physical security requirements was dated four days after the license was issued. In this circumstance, there was a note on an e-mail saying, Verbal OK from NSIR. Memo is to come. The note is not dated and fails to indicate who provided the approval.

Security Vulnerabilities Import/export licensing helps to combat the inappropriate spread of specified nuclear materials. Exceptions in the processing of import/export license applications could expose the public to potentially harmful consequences. The four exceptions noted above include:

• Two license applications for the export of uranium hexafluoride, which if released into the atmosphere, can form a highly toxic chemical compound; and

• Two license applications for the export of Uranium-235, which, with extensive enrichment, can be used to produce nuclear weapons.

Improper processing of import/export license applications could lead to security vulnerabilities regarding control of nuclear materials.

Quality Control Weaknesses The lack of written quality control procedures results in compliance exceptions. Written procedures, including the proper use of a checklist, would help ensure compliance with all applicable requirements. The license application files contain a tracking list that could easily be modified into a quality control checklist. The checklist should contain steps to achieve compliance with all applicable requirements for the processing of import/export license applications and provide evidence of supervisory review and approval.

The significant increase anticipated in the number of license applications heightens the importance of quality controls.

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RECOMMENDATION The OIG recommends that the Director of the Office of International Programs:

2.

Develop and implement written quality control procedures to include the use of a checklist.

Audit of NRCs Management of Import/Export Authorizations 10 IV. CONSOLIDATED LIST OF RECOMMENDATIONS The OIG recommends that the Director of the Office of International Programs:

1. Develop and implement a written methodology for the annual calculation of import/export license application fees that provides for correlation between time codes and fee categories and results in the development of fair and equitable license application fees that recover the agencys full cost of processing the applications.

2. Develop and implement written quality control procedures to include the use of a checklist.

Audit of NRCs Management of Import/Export Authorizations 11 Appendix A SCOPE AND METHODOLOGY This audit reviewed NRCs import/export licensing application process to determine whether OIP was (1) properly reviewing and approving import/export authorizations in a timely manner, (2) effectively coordinating this activity with other Federal agencies, and (3) efficiently and effectively coordinating import/export authorizations internally.

To accomplish the audit objectives, the OIG reviewed and analyzed pertinent laws and regulations. In addition, OIG identified and analyzed OIP guidance. OIG conducted interviews with selected NRC officials to gain an understanding of the agencys processing of import/export license applications as well as practices employed in license fee development. Interviews were conducted to determine current issues, problems, known deficiencies and to assess management controls. OIG interviewed personnel in the Offices of International Programs, Chief Financial Officer, General Counsel, Nuclear Material Safety and Safeguards, and Nuclear Security and Incident Response. OIG also met with representatives from the Department of State and Department of Energy.

OIG conducted compliance tests of NRCs processing of FY 2003 import/export license applications. OIG also analyzed the license fee development process. OIG reviewed and analyzed management controls related to the audit objectives.

This work was conducted from February through May 2004, in accordance with Generally Accepted Auditing Standards.

Steven Zane, Team Leader, Steven Shea and Susan Jones, Senior Auditors and Amanda Hollander, Intern conducted the work.

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Audit of NRCs Management of Import/Export Authorizations 13 Appendix B IMPORT/EXPORT LICENSE FEE CATEGORIES AND ASSOCIATED FEES

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Audit of NRCs Management of Import/Export Authorizations 15 Appendix C OFFICE OF INTERNATIONAL PROGRAMS TIME AND LABOR CODES I00015 Import/Export Licensing & Consultations -

General I00016 Import/Export Licensing & Consultations -

Import Waste (IW)

I00017 Import/Export Licensing & Consultations -

Byproduct Material (XB)

I00018 Import/Export Licensing & Consultations -

Components (XCOM)

I00019 Import/Export Licensing & Consultations -

Heavy Water (Deuterium), or Nuclear Grade Graphite I00020 Import/Export Licensing & Consultations -

Reactor (XR)

I00021 Import/Export Licensing & Consultations -

Special Nuclear Material (XSNM)

I00022 Import/Export Licensing & Consultations -

Source (XSOU)

I00023 Import/Export Licensing & Consultations -

Export Waste (XW)

I00024 Import/Export Licensing & Consultations - Part 810 Technology Retransfers I00025 Import/Export Licensing & Consultations -

Rulemaking