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Nuclear Black Markets:
Can we win the game of catch-up with determined proliferators?

Prepared testimony by Mark Fitzpatrick, Senior Fellow for Non-Proliferation
International Institute for Strategic Studies

Before a Joint hearing of the House Committee on Foreign Affairs'
Subcommittee on the Middle East and South Asia, and
the Subcommittee on Terrorism, Nonproliferation and Trade
27 June 2007

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Testimony

It is an honor to testify before this joint hearing of the two subcommittees on a matter of vital security interest for the United States and the entire world. I am particularly honored to be asked to present the findings of the strategic dossier published last month by the London-based International Institute for Strategic Studies, for which I was the editor: Nuclear Black Markets: Pakistan, A.Q. Khan and the rise of proliferation networks - A net assessment.

This report retains the proliferation focus, analytical rigor and methodology of three previous IISS strategic dossiers assessing the strategic weapons programmes of Iraq, North Korea and most recently Iran. As the subject of our latest dossier, we addressed the nation and the network that offered nuclear weapons technology to these three countries, plus Libya and possibly other countries. We also assessed more broadly the problem of nuclear black market networks.

In our study, the term "nuclear black market" denotes the trade in nuclear-related expertise, technologies, components or material that is being pursued for non-peaceful purposes and most often by covert or secretive means. Often the trade is not explicitly illegal, but exploits loopholes in national export regulations. "Black," in this case, often means shades of grey.

At least a dozen countries have secretly sought to procure technology in their efforts to develop nuclear weapons. In addition to Pakistan's programme, we examined some of the black market procurement attempts made over the course of several decades by Iraq, Iran, North Korea, Libya, Israel, India, South Africa, Brazil, Argentina and Egypt.

The A.Q. Khan network was not a nuclear weapons "Wal-Mart," since - so far as is known today - its contributions to proliferation were limited to uranium-enrichment technologies and associated weapon designs. This is not to minimize the deleterious impact of Khan's nuclear sales. His transfer of enrichment technology to North Korea precipitated the break­down of the US-North Korea Agreed Framework and Pyongyang's resumption of its plutonium programme and last October's nuclear test explosion, with as-yet unknown ripple effects. Khan's covert nuclear assistance to Iran allowed it to skip many steps in the development of uranium enrichment technologies that appear to be intended for nuclear weapons purposes, causing severe strain on the global non-proliferation regime and an international crisis that potentially could escalate to armed conflict. If Col. Gadhafi had not decided to give up his nuclear weapons program in 2003, Khan's assistance to Libya possibly could have resulted in it possessing an atomic bomb today, a development that likely would have set one or more of its neighbours on a similar path. More generally, by freely selling enrichment equipment and by putting the designs on computer disks, Khan significantly lowered the technical barriers to nuclear weapons development.

Are concerned countries and international organizations doing all they can to stop such clandestine acquisition of nuclear technologies and materials for weapons purposes? The answer, unfortunately, is "no." The nuclear black market has been constrained but not eradicated.

The continuing strong demand for nuclear tech­nology for weapons purposes reinforces the need for vigilance. Tehran, in particular, has built a procurement structure that is equivalent to, if not larger than A. Q. Khan's global network, and Iran's quest for a nuclear weapons capability may prompt other states to acquire their own nuclear deterrent in turn. Little is known in open sources about any actual efforts by terrorist organizations to acquire nuclear weapons, although Al Qaeda statements of intent are reason enough for concern.

Today's black market suppliers are far less integrated than Khan's "one-stop shopping." His enterprise was unique in its ability to provide nearly the entire array of materials and services required to produce highly enriched uranium. The supply side of the post-Khan market is largely comprised of individuals selling selected dual-use goods. In seeking to pre-empt prolif­eration trends of the future, however, concerned governments should anticipate new ways in which black market suppliers may integrate their services. Future proliferation efforts may take on various forms of quasi-state involvement, expanding in new ways the manner in which Khan's actions blurred the lines distinguishing private criminality from state-authorized activity. Future nuclear black market sources could conceivably emerge, for example, from Russia's criminal networks, North Korea's corrupt state apparatus, Pakistan's jihadi sympathizers and/or Iran's Revolutionary Guards.

Many governments have taken additional steps to stop proliferation involving non-state actors. Much credit is due to the British and American intelligence agencies that put the A.Q. Khan network out of business. Indeed, although only a handful of the some 40 individuals publicly iden­tified as having worked with Khan are in prison, investigators express confidence that none remain involved in the proliferation business. Investigators are less certain, however, about the more shadowy recesses of the network. At least some of Khan's associates appear to have escaped law-enforcement attention and could, after a period of lying low, resume their black market business.

In addition, the international framework of export controls still contains serious gaps that could be exploited by a network similar to that of A.Q. Khan. Firstly, many countries still lack laws and regulations governing trade in nuclear-related goods and technologies. Secondly, an even larger number of countries have yet to implement controls. Thirdly, only a handful of countries are actually enforcing controls with thorough investigations and strict penalties. As a result, exporters of dual-use items may calculate that the risk of being caught for exporting controlled goods without a license is minimal.

Up to now, the history of the non-proliferation regime has been a game of catch-up: regulators belatedly tighten controls after learning the lessons from previous rounds of proliferation, but states intent on acquiring strategic weapons capabilities find new ways to keep one step ahead. Concerned governments, acting individually and collectively, have undertaken further important steps to close the loopholes. The Proliferation Security Initiative (PSI), enhanced NSG guidelines, UN Security Council Resolution 1540, an IAEA industry outreach programme and other multilateral efforts all serve to create a transnational enforcement network that should, in theory, be able to outmatch the transnational black market networks. However, many of these tools have yet to fulfill their promise. Unless further reforms are made, and then rigorously enforced, it seems likely that this pattern will repeat itself.

To stop nuclear black markets, the United States and other concerned governments may wish to consider further action in four areas:

I. Tighten export controls

The ideal export control regime would be treaty-based, harmonized and binding on all governments. The current system relies on national discretion, discordant standards and a gentlemen's agreement that is non-binding, non-universal and viewed as discriminatory by less developed countries. Non-proliferation values are not universally shared, and export controls often collide with natural incentives to gain competitive trade advantage. The Khan network established its work­shops and transshipment centers in countries with weak export control laws. On the assumption that export controls are only as good as their weakest link, they should be applied universally in states that have supply capabilities or serve as transit points.

Vigorously implement UNSCR 1540

The UN Security Council made a good start in addressing the nuclear black market problem in April 2004 by adopting Resolution 1540, which required all countries to enact and implement export controls. The resolution for the first time made states responsible for what leaves their borders. In the three years since the resolution, however, follow-through has been feeble, to the point of negligence. All states should be held to the mandate of the resolution to establish a legal framework to govern trade in nuclear-related goods and technolo­gies. The United States and Russia provided leadership in bringing the new norm into being, and the United States for the past ten years has been helping states develop export control systems, but neither state has made implementation a high priority. Energetic diplomacy at senior levels is needed to persuade the UN member states that are insufficiently motivated to establish effective controls, combined with real penalties that would constitute a deterrent.

States that were implicated in the Khan network bear a particular respon­sibility to implement the resolution. It is to their commercial benefit to do so. Primary suppliers have reason not to allow unfettered trade with secondary suppliers and transshipment hubs that do not have effective export control systems.

A major defect of UNSCR 1540 is the lack of verification measures in the resolution. In the nuclear field, it would be logical to assign the verification task to the IAEA, which has both the personnel and the knowl­edge base about the nuclear infrastructure and local conditions. Because the IAEA has no mandate to verify export controls, the Security Council would have to explicitly designate it for this responsibility

Standardize controls

The drafters of UNSCR 1540 decided it was politi­cally impossible to try to establish universal standards for export controls, including what should be on the control lists and under what circumstances the controls should apply. Short of amending the resolution, states could seek to harmonize stand­ards by promoting best practices. This could be helped by the exposition of a model law. Controls on transit and transshipment are lacking even in most developed countries, including Japan and the European Union. Too many countries specifically exempt items in transit or in free trade zones from catch-all controls. Similarly, too few countries control the so-called "intangible trade" in these sensitive items, or related financial or trans­portation services. These vulnerabilities should be addressed.

Impose penalties that deter

States should also consider harmonizing penal clauses in a manner that can serve as an effective deterrent. The relative lightness of the criminal sentences imposed so far on Khan's associates and the absence of any prosecutions in Pakistan mean that there is an insufficient deterrent to future black market activity. The difficulty of applying intelligence-derived infor­mation to the evidentiary standards of the courtroom and other legal complications are one explanation for this failure. Overall, however, violations of export controls are not seen as serious crimes in most countries. In some of the countries Khan exploited, no laws were even broken by the network's activities.

Make the Additional Protocol a condition of supply

The Additional Protocol is one of the most impor­tant non-proliferation tools but is not yet a standard requirement for the signatory states of the Non-Proliferation Treaty. The best-known feature of the Additional Protocol is the greater access it gives IAEA inspectors to nuclear-related facilities. Another key feature is the additional reporting requirements of the protocol. Supplier states must report exports of trigger-list items to the IAEA, and recipient states must confirm this information upon IAEA request. Short of making such reporting mandatory under UNSCR 1540, the best way to universalize export controls and to compel transparency in recip­ient states may be to make the Additional Protocol a universal norm. The NSG can promote universality by making the Additional Protocol a condition of supply of nuclear technology for civilian use. Momentum has been growing within the NSG to adopt such a rule, to the point that today only Brazil stands opposed, due to its own reluctance to accept the Additional Protocol.

II. Dry up the supply of nuclear materials

Illicit trafficking in nuclear materials appears to be largely a supply-side problem, the solutions to which are clear, but not simple or inexpen­sive. Sensible recommendations include:

• Completing work to secure all weapons-usable nuclear material;
• Ceasing production of highly enriched uranium and reprocessed plutonium;
• Guaranteeing fuel-cycle services to states that forgo uranium enrichment and plutonium reprocessing;
• Converting all nuclear reactors to run on fuel that is not weapons usable; and
• Eliminating excess stocks of fissile material.

III. Enhance information collection and sharing

Effective intelli­gence is critical to government efforts to ascertain intended end users and expose procurement front companies and brokers. Law enforcement is then critical to stopping proliferation. Closing down networks will also require intelligence sharing among concerned states regarding the countries, groups and front companies seeking sensitive dual-use equipment and the strategies and tactics they are employing. Given the ease with which prolif­erators can cross borders, intelligence coordination should be similarly unconstrained by national fron­tiers. Although concerns about revealing sources and methods makes the United States and other states cautious about sharing intelligence-derived information, smaller countries on the front lines of proliferation-prone regions generally lack the resources to collect timely intelligence on their own.

Expand IAEA industry-outreach programme

Government intelligence collection is not the only source of tip-offs of clandestine nuclear procurement attempts. The IAEA's outreach programme to selected industries involved in sensitive dual-use products is a promising way of acquiring information provided volun­tarily by those most likely to come across it first. IAEA analysis of seemingly unrelated and innocent-looking faxes from well-disguised front companies in various countries can connect the dots in order to enable detection of clandestine nuclear activity. If the initial results fulfill that promise, the IAEA should consider expanding the industry outreach programme to all countries with firms likely to be approached by front companies acting on behalf of proliferators. Some governments are reluctant to allow the IAEA to establish such relationships with their industries because the IAEA, on grounds of confidentiality, does not in turn share information that would aid the governments' export license decisions. The IAEA should consider ways of coordinating with government agencies that have their own industry outreach programmes, to help each other better assess potential proliferation prob­lems.

Share export approvals and denials with IAEA

When NSG members deny nuclear-related license applications on non-proliferation grounds, they routinely notify other NSG members, who are obliged, under the NSG no-undercut rule, not to export the item to the same buyer themselves. Sharing these denial notifications with the IAEA as well would impose no additional burden and would significantly assist the agency's mission to analyze procurement patterns and state capabilities as a means of early detection of undeclared nuclear activities. Sharing such information is a national decision, but few states will agree to provide it on a regular basis unless the NSG collectively makes this a guideline for all members.

NSG members should also consider exchanging information with each other and with the IAEA on "informal denials" and export approvals for key dual-use items. Sharing such information could be based on the same principles of no-undercut and commercial confidentiality that govern the denial notice system - i.e. information exchanged about denials will not be used for commercial purposes against firms in the country supplying the informa­tion. For such a system to be sufficiently worthwhile to overcome concerns about economic espionage, the volume of data generated would have to be effectively managed. NSG members could establish a centralized database for information sharing or the IAEA could be empow­ered with the responsibility and resources to analyze the data flow.

IV. Reinforce interdiction networks

If all other non-proliferation controls fail, the ability of concerned states to take coordinated interdiction action provides a final opportunity to stop illicit transfers. The Proliferation Security Initiative has helped participating states improve and coordinate their interdiction capabilities and holds promise both in its operational effectiveness and in its deterrent impact. However, the ad hoc nature of the initiative and its limited applicability could erode its promise over time.

Formalizing the PSI's organizational status would preserve this valuable non-proliferation tool and reduce its political vulnerability. The initiative could be formalized without creating an unwieldy bureaucratic superstructure, such as by creating an official point of contact to facilitate regular communication among participants and coordination with other non-proliferation bodies.

Ratify SUA amendment

The most effective means to strengthen the PSI is to extend its legal reach beyond territorial waters to the high seas. An amendment in October 2005 to the international Convention on the Suppression of Unlawful Acts Against the Safety of Maritime Navigation (SUA) allows interdiction on the high seas if the ships are registered to countries that are parties to the SUA. Effecting this change to inter­national law, however, still requires ratification by a certain number of states. Most states are waiting for the United States to ratify the SUA amendment before they too attempt the difficult changes to national legislation that this would entail. By taking this step, the United States would continue to set an example and improve the effectiveness of the PSI.

Conclusion

The steps I have outlined will not quell the demand for nuclear weapons. Accomplishing that would require fundamental changes to the international system and to the role accorded nuclear deterrence. As with most markets, when there is a determined demand and the price is high enough, there is likely to be a supply. Supply-side controls can minimize illicit exports, however, by raising the costs and risks to would-be suppliers to the point where most will not find it worthwhile. Although supply-side measures cannot be one hundred percent effective while these weapons remain in demand, strict constraints on the black market are essential to prevent the break-down of the non-proliferation regime.