Archive for the ‘China’ Category


Jun

16

It’s A Small World After All, Even For Economic Sanctions


Posted by and at 8:02 pm on June 16, 2014
Category: ChinaEconomic SanctionsEURussia SanctionsSanctionsSudan

It's A Small World by Darren Wittko https://www.flickr.com/photos/disneyworldsecets/2767829714/ CC BY 2.0 [https://creativecommons.org/licenses/by/2.0/] (cropped)G-7 countries recent meeting in Brussels understandably grabbed global headlines for their unified message that they “stand ready to intensify targeted sanctions and to implement significant additional restrictive measures to impose further costs on Russia should events so require.”

While sanctions imposed by G-7 countries, as well as the EU, drive the engine of global sanctions enforcement, there are almost 200 other countries in the world and many of them want to have their position on sanctions known.  Last week, for example, Serbian President Tomislav Nikolić surprised no one on Earth (or anywhere else for that matter) when he told Serbian media, “It’s impossible to imagine Serbia imposing sanctions on Russia.”  Of course, Nikolić’s pronouncement is hardly going to cause the E.U. to rethink, even for a fraction of a nanosecond, its position on Russian sanctions.  On the other hand, the E.U. sanctions may cause Serbia, given that Russia is one of it’s largest trading partners, to rethink the wisdom of its application to become a member of the E.U.

Besting Serbia’s population by over a billion, China is emerging as a critical Russian ally and the most important country that is not imposing sanctions against it.  As with Serbia, economic self-interest and the volume of China’s trade with Russia may be at the heart of this.  In fact, reports on the recent $400 billion, 30-year deal for Gazprom to supply natural gas to China suggest the deal would be based on a ruble-yuan exchange and bypass Western financial systems altogether.

With developed countries like China and Serbia using economic self-interest to justify trading with Russia despite its shenanigans in Ukraine, some developing countries may be acting against their own economic self-interest in imposing sanctions to deal with regional conflicts.  Reuters reported this week, for example, that members of the Intergovernmental Agency for Development, an East African trade group made up of Djibouti, Eritrea, Ethiopia, Kenya, Somalia, South Sudan, Sudan and Uganda, have threatened sanctions against South Sudan if warring factions do not cooperate to end conflict in that country.  The United States imposed sanctions in early May against military leaders involved in the conflict, but they likely will provide no meaningful impact.  However, when everyday trade with your neighboring countries starts to become restricted, sanctions are far more likely to achieve the goal of ending conflict.  If East African sanctions succeed against South Sudan while E.U and U.S. sanctions have no impact on Ukraine,  then we will certainly have a situation where it’s the mice that roar while the elephants squeak.

Sanctions news runs on the front page when it involves the United States and Europe but also on the back pages as it involves the rest of the world.  You have to read the whole paper to make sure you have the full story.

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Apr

30

U.S. Long Arm Stretches But Likely Won’t Reach Its Chinese Target


Posted by at 6:12 pm on April 30, 2014
Category: ChinaDoJEconomic SanctionsExtraditionIran SanctionsSDN List

FBI Wanted Poster [Public Domain]

The U.S. Department of Justice announced yesterday that it charged Li Fangwei, a Chinese national, with violating U.S. sanctions against Iran as well as with federal fraud violations.  Li, also known by a panoply of aliases including Karl Lee, Sunny Bai and Patric, is accused by the Justice Department of using a number of Chinese companies he controls to sell “metallurgical goods” and other items to Iran that are prohibited from sale to Iran under U.S., UN and other sanctions around the world because of their potential use in nuclear weapons or ballistic missiles. Li himself was added to the SDN List in 2009 and his Chinese companies have been added to the SDN since 2006.  In fact, OFAC added eight Li companies to the SDN List yesterday.

With respect to U.S. sanctions, Li is alleged to have used front companies to engage in funds transfers through U.S. banks in order to conduct his business with Iran.  In a related matter, the Justice Department announced yesterday that the U.S. Government has already seized almost $7 million in funds attributable to Li’s companies that were held in U.S. correspondent accounts of foreign banks used by the Chinese companies.

The seizures are, of course, a success for U.S. sanctions enforcement.  It raises, however, the question of whether a criminal prosecution of Li is fruitful or may be even necessary in an effort to curtail his dealings with Iran.  In announcing the indictment, Assistant Attorney General John Carlin described the criminal prosecution as “part of the ‘all tools’ approach our government is taking against Li Fangwei.”  Indeed, other tools like those used by OFAC, in cooperation with the FBI and the Marshals Service, have so far seized millions attributable to Li front companies on the SDN List.  If OFAC can designate entities to the SDN List and funds in the United States attributable to them can be seized, what more can U.S. sanctions be expected to accomplish under the circumstances.

On that score, Li was part of a post here over five years ago when Robert Morgenthau, as then New York County District Attorney, announced a 118-count indictment against Li and one of his companies, LIMMT, alleging Li and LIMMT falsified business records in violation of New York law in transferring funds through New York banks in connection with transactions with Iran.  Back then, we questioned the legitimacy and efficacy of New York trying, in effect, to enforce U.S. sanctions and wondered whether OFAC wanted any assistance (or ultimately the distraction) from New York in its attempt to enforce U.S. sanctions policy.

History has a funny way of repeating itself.   Although the Justice Department actually has the authority to prosecute a U.S. sanctions violation, the same question of efficacy lingers.  Under a fair assumption that Li is in China now and the Chinese government knows Li’s exact whereabouts, there is almost no reason to think China will extradite him or even possibly curtail his activities with Iran.  Perhaps the Department is hoping that the $5 million bounty the FBI placed on Li’s head might prompt someone in China to nab Li, tie him up, put a bag over his head, put him in a container and ship him to the U.S. in order to claim the reward.

The case of Li Fangwei, therefore, should not be sidetracked to the U.S. justice system.  This is in OFAC’s bailiwick and OFAC should lead the charge, in cooperation with other U.S. agencies, to seize blocked property in the United States and liaise with Canadian, EU, Swiss and other foreign sanctions enforcement authorities to convince them that similar seizures should take place around the world and intelligence should be shared with each other on what new companies Li, and possibly others, are using to do impermissible business with Iran.

In the words of the Justice Department, Li Fangwei is a “fugitive.”  That could not be more of a misnomer.  The case of Li Fangwei simply does not fit the parlance used by U.S. prosecutors.  The Justice Department is right, however, that the United States is afforded a lot of tools in sanctions enforcement.  Sometimes, there are tools best left in the toolbox.

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Jan

21

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


Posted by 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] (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3AMount_Paektu7.jpgDennis 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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May

3

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


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

Credit: China Great Wall Industry Corporation http://cn.cgwic.com/APSTAR-7/photo.html [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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May

30

PRC Citizen Arrested For Manometer Exports


Posted by 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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