Archive for the ‘China’ Category



Wide World of (North Korean) Sports: Piste Off Edition

Posted by George Murphy at 7:23 pm on January 21, 2014
Category: ChinaEconomic SanctionsEUForeign Export ControlsNorth Korea Sanctions

By Mark Scott Johnson from Sydney, Australia (IMG_7688) [CC-BY-2.0] (], via Wikimedia Commons Rodman and his coterie of NBA All-Stars recently returned to the United States from North Korea after Rodman’s birthday basketball bash for his “friend for life” Kim Jong Un.  While Rodman’s zealous zaniness has grabbed global media headlines, another sports-related development in North Korea, is more significant to sanctions and export control issues: the grand opening this month of the Masik Pass luxury ski and hotel resort.

Pictures taken of the resort show the 120-room hotel, indoor swimming pool and 11 ski runs.  Other pictures also show, however, Italian snow plows, Canadian snowmobiles and Swedish snow cannons.  Recent news reports began to shed light on the obvious sanctions issue: how did North Korea build a ski resort without someone violating sanctions.  U.N. Security Council Resolution 2094 and others prohibit members from selling “luxury goods” to North Korea and even though “luxury goods” are not defined and are not limited to the specific luxury items delineated in Annex IV of Resolution 2094, it seems hard to deny that snowmobiles, snow cannons and the other accoutrements of a “luxury” resort are not “luxury goods.”

According to SkyNews, the Italian snow plow manufacturer has predictably said, “Snow groomers are sold directly to ski resorts and distributors and it is possible that a used snow groomer is than sold to another final user by ski resorts or distributors themselves. On this kind of business we as a producer do not have any influence, no company can avoid that this happens.”

Western goods flowing into North Korea is not new.  In fact, we reported last year on the curious infiltration of an Apple iMac on Kim Jong Un’s desk and suggested it, like many Western goods in North Korea, came from China.  Plausible deniability about to whom a manufacturer’s customers sell its products becomes, of course, more attenuated when your business is selling “state-of-the-art snow cannons” that retail for 14,000 Euros each.

U.N., U.S., E.U. and Canadian sanctions policies fail if a repressive regime like North Korea’s so-called supreme leadership continues to violate human rights but opens a ski resort to sustain its control.  Like sanctions against Iran, Cuba and other countries, a principal goal is to curtail infrastructure projects that support the sanctioned governments.  While a ski resort is not the largest national infrastructure project, sanctions were designed to prohibit it being built and supported by Western goods and technology.

Even if the sales of the items found at Masik Pass were beyond detection of reasonable know-your-customer requirements, Italian, Canadian and Swedish enforcement authorities would at least have grounds to inquire further, especially company records and communications involving sales to Chinese resellers that may have been possible routes to North Korea.  While any manufacturer or retailer can’t know everything about its customers, knowing more gives a company greater support to conclude that its business does not involve impermissible activities or give law enforcement a reason to examine its business further.

Clif adds: Blame me, not George, for the terrible pun in the post title.

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Do As I Say Not As I . . . etc. etc.

Posted by Clif Burns at 2:15 pm on May 3, 2013
Category: ChinaDDTCDeemed Exports

Credit: China Great Wall Industry Corporation [Fair Use]
ABOVE: Apstar-7 launch in China

Picture this scenario: a U.S. defense contractor leases time on a Chinese satellite and uses the transponders of that satellite to beam ITAR-controlled technical data between and among its facilities in the United States. The Directorate of Defense Trade Controls (“DDTC”) which licenses exports of ITAR-controlled technical data by U.S. exporters and which has imposed an absolute ban on transferring such data to China would, pardon the metaphor, go ballistic. The defense contractor would be investigated, fined millions of dollars, forced to conduct public self-shaming sessions (i.e. compulsory self audits) and either debarred or threatened with debarment. The zombie apocalypse would seem a Sunday afternoon outing in the park compared to the terror that the agency would rain down on the guilty exporter.

Now, suppose that the U.S. defense contractor in this story is not a private contractor but instead . . . (are you sitting down?) . . . is the Pentagon. What has DDTC to say about this catastrophic breach of national security? Let’s listen: (Crickets chirping . . . crickets chirping . . .) Speak up, over there, Foggy Bottom. I can’t hear you. What? Nothing? Not a peep?

And, no, this is not merely a hypothetical. It is a fact.

Doug Loverro, deputy assistant secretary of defense for space policy, testified at an April 25 hearing of the House Armed Services strategic forces subcommittee that when he assumed his duties a month ago, he learned of DOD leases with a Chinese satellite service provider that were issued early last year following a joint urgent operational needs statement in support of “warfighter needs.”

“The warfighter needed [satellite communication] support in his area of operations. He went to the Defense Information Systems Agency to request that support,” Loverro said.

Loverro said DISA responded to the request by reaching out to its pool of providers. Only one of those providers, a company based in China, had the bandwidth available to meet the communications needs. …

“From that perspective, I’m very pleased with what we did,” Loverro said. …

According to Wired, the satellite in question is the Apstar-7, launched in China and operated by APT Satellite Holdings Ltd., which is owned by the PRC.

The point of raising this is not just to show the double standard the government exercises with respect to defense-related information but also to find some support for a potential problem that has been bedeviling exporters and (to a lesser extent) the export licensing agencies themselves — namely, the issue of the interaction between export law, controlled technology, the “cloud” and the use of the Internet and email for information transfer. Everyone pretty much agrees that if controlled technical data so much as traverses a foreign internet server for a nanosecond — even if the information originated in the United States and is being sent to another user in the United States  – there has been an unlicensed export of that data. And yet, no one who puts information in the cloud, or sends it by email, or otherwise transfers the data using the Internet can be certain of the path the information will take and that it won’t pay an infinitesimally brief visit to a server outside the United States. Does this mean that everyone with controlled data has foresworn the Internet, keeps all controlled data on paper locked in file cabinets and uses the good offices of the United States Snail Mail service to send it about? Of course not.

Instead, it appears that those who have thought about the vagaries of Internet routing and cloud storage have adopted, at least as a best practice and perhaps as a mitigating factor, the use of encryption on controlled technical data being sent by email or stored in the cloud even where this is intended to be a solely domestic transaction. Of course, there is nothing in the ITAR or the EAR that endorses this and, technically speaking, the export of encrypted technical data is still the export of technical data.

Now in that light, consider this nugget from Lovero’s testimony:

Based on his review of the leases, Loverro said, the agency followed all of the current procedures and operational commanders were aware of the safety and business concerns connected with such an agreement. Those commanders, he said, are equipped with the necessary encryption to protect the information being relayed.

File that testimony away, folks, because you may need it. In short, the DoD is endorsing the notion that encryption effectively prevents the transfer of controlled technical data to the Chinese even when it passes through their hands. I’m certainly not guaranteeing that this is a “Get Out Of Jail Free” card, but it might some day be all you have.

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PRC Citizen Arrested For Manometer Exports

Posted by Clif Burns at 7:12 pm on May 30, 2012
Category: BISChinaCriminal Penalties

MKS ManometerQiang Hu, a Chinese national who was sales manager at MKS Instruments Shanghai Ltd. was arrested while he visited the Shanghai company’s U.S. parent, MKS Instruments, Inc. in Andover, Massachusetts. He was arrested on charges that he illegally exported manometers, classified as ECCN 2B230, without the required licenses from the Bureau of Industry and Security (“BIS”).

What is interesting about this case is that the items were exported to the PRC pursuant to licenses, but the licenses were allegedly for persons who were not the ultimate end-users of the exported items. According to the affidavit supporting the criminal complaint, Hu used licenses for existing customers of MKS where those licenses had remaining quantities available for exports. Additionally, Hu is alleged to have applied for new licenses for front companies and then used those to export manometers that were then diverted to a number of other end-users in the PRC. One of the alleged front companies was Shanghai Racy System Integration Co., Ltd., surely one of the best front company names ever. The affidavit alleges that “thousands” of items were exported improperly by Hu, with items worth $4.5 million going to Shanghai Racy alone.

The affidavit does not allege, with one rather odd exception, that Hu would have been unable to obtain licenses for the ultimate end users. Instead, the affidavit cites emails from Hu to his customers and co-conspirators in the PRC which suggested that he used existing licenses to service end-users in the PRC who only needed small quantities of the items on the grounds that the export process was too cumbersome and expensive for the small quantities involved.

As I noted above, there is one instance in which the affidavit tries to suggest that the end-user was problematic. This involved an export to “Parr Lab Technical Solutions” in Hong Kong which the affidavit noted was on BIS’s Unverified List. That is presumably a reference to Parrlab Technical Solutions, Ltd., which is on that list. However, licenses are not necessarily denied to parties on the unverified list. When an end-user is on that list, the exporter is simply required to engage in heightened due diligence to assure that the exported item will not be diverted to a prohibited end-use or end-user.

The DOJ press release on this case indicates that the parent company, MKS Instruments, Inc., is not a target of any investigation in this matter.

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Export Reform on a Slow Boat to China

Posted by Clif Burns at 6:52 pm on March 14, 2012
Category: Arms ExportChinaDDTCExport Reform

Gregory Schulte
ABOVE: Gregory Schulte

The House Armed Services Committee last week held a hearing on whether the Thales sale of an ITAR-free satellite to the Chinese had, in fact, leaked U.S. space technology to the Chinese. During that hearing, Gregory L. Schulte, deputy assistant defense secretary for space policy, tried to allay concerns by the Committee that export reform would be a boon to the Chinese.

And we are not proposing removing the Tiananmen Square sanctions that would remain in place even with export-control reform, meaning that items still on the Munitions List could not be exported to China. And, also meaning, that we would not allow the launch of satellites from Chinese launch vehicles.

He went on to say that although some space items would, as part of export reform, be moved to the less restrictive Commerce Control List, those would only be “space items that are already widely available.” Even then, according to Schulte, such space items that were moved to the CCL would still be subject to strict controls with respect to licensing exports to China.

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U.S. Threatens Thales Alenia Space over “ITAR-Free” Satellite

Posted by Clif Burns at 7:27 pm on February 13, 2012
Category: ChinaDDTC

China W3C LaunchReuters has obtained a copy of a State Department letter to Congressional staff on the simmering feud between the State Department and Thales Alenia Space over the W3C satellite that Thales sold to the Chinese and which the Chinese have launched. Thales has claimed, but the State Department refuses to believe, that the W3C satellite was “ITAR-free” and could be shipped to China without violating the U.S. embargo on exports to China of satellites and other space vehicles.

The State Department’s efforts to investigate whether U.S. components or technology were incorporated into the W3C satellite, in contravention of the claim that it is “ITAR free,” have been stymied by Thales’s invocation of a French blocking statute which forbids French companies from supplying documents or information to be used in foreign governmental investigations. According to the Reuters report, the State Department letter to Congress acknowledged that the blocking statute would make Thales unable to comply with its investigative requests but nevertheless suggested that the result might be a blanket ban on exports by U.S. companies to Thales.

Needless to say such an action barring exports to Thales would deal a heavy blow to Thales and to the bottom lines and jobs at U.S. suppliers to Thales. Such a ban could force Thales to revamp many of its product lines and would certainly strain French-American relations, not to mention the possibility that the Congressional cafeterias would revert to serving freedom fries and freedom vanilla ice cream again. Worse yet, ordinary Americans might have to start referring to some of their dogs as freedom poodles and certain hairstyles as freedom twists.

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