Tuesday, March 8, 2016

A China Sanctions Warning

After a four-year investigation, the U.S. has decided to sanction Chinese telecom giant ZTE for trade violations with Iran. This provides reason to hope that at last the Obama Administration may also crack down on Chinese firms benefiting from other illicit conduct such as cybertheft.
The U.S. Commerce Department said Monday that it will block American and foreign companies from shipping U.S.-made equipment to ZTE without applying for a special export license that will face a “presumption of denial.” This will effectively bar ZTE from buying from suppliers such as Qualcomm, Broadcom and Intel. The Shenzhen-based firm buys technology and components from U.S. suppliers for its phones and other communications equipment.
An internal ZTE document seen by Reuters describes how ZTE schemed to buy export-controlled U.S. technologies via shell companies and re-export them to Iran in ways that make it “harder for the U.S. government to trace it or investigate the real flow of the controlled commodities.” Another internal memo, addressed to “company leaders” and marked “no spreading abroad without permission of ZTE,” describes “projects in all five major embargoed countries—Iran, Sudan, North Korea, Syria and Cuba.” It notes that “all of these projects depend on U.S.-procured items to some extent, so export control obstacles have arisen.”
The memo, dated August 2011, further reveals that “employees at the U.S. Research Centers often travel between China and the U.S. carrying R&D data,” which “severely violates the law.” ZTE “needs to take preventative measures immediately,” it says, or “face the risk of being investigated anytime.” Trade with Iran, the memo admitted, “can potentially put us at risk of being put on the Blacklist by the U.S.” and “losing the supply chain of U.S. products.”
The memo didn’t detail the Iran trade in question, but in 2012 Reuters reported that a $130 million ZTE contract to help Iran’s leading telecom carrier monitor Internet, text and voice communications included a “Packing List” with hardware and software from the likes of Microsoft, Oracle and Dell. ZTE responded at the time by promising to “curtail” its Iran business, but U.S. officials opened investigations. ZTE said this week that it fully complies “with the laws and regulations in the jurisdictions in which it operates” and “will continue to cooperate and communicate with all U.S. agencies as required.”
One issue is whether ZTE’s behavior reflects Chinese state policy. The company doesn’t have the typical profile of a state-owned enterprise, but a 2012 investigation by the U.S. House Intelligence Committee was unable to “allay concerns that ZTE is aligned with Chinese military and intelligence activities or research institutes.” Its Iranian-export shell game fits China’s extensive record of undermining sanctions on rogue regimes with sales of everything from mobile missile launchers to uranium-enrichment tools.
Last April President Obama issued an executive order declaring a “national emergency” over “malicious cyber-enabled activities.” That order threatened measures harsher than the export ban now faced by ZTE, including financial freezes on those involved in hacking and third parties doing business with them, from banks to suppliers—effectively a financial embargo. So far the threat has proved empty.
The move against ZTE is nonetheless welcome, not least as a signal that the U.S. will enforce what are left of the sanctions against Iran in the wake of the nuclear deal. Let’s hope this isn’t a one-time action.