Chinese Aviation Execs Violate US Arms Embargo

Last September, two Chinese nationals were arrested in Hungary and transferred to US custody in April. They were charged with conspiring to violate the Arms Export Control Act and to smuggle goods from the U.S., and the attempted export of munitions in violation of the act.

Hong Wei Xian, 32, and Li Li, 33, both from the PRC, were charged in a two-count indictment accusing them of conspiring to violate the Arms Export Control Act and to smuggle goods from the United States and the attempted export of U.S. Munitions List items in violation of the Arms Export Control Act.

According to the indictment, Xian is the president of Beijing Starcreates Space Science and Technology Development Company Limited, and Li is the company’s vice president. Among other things, Beijing Starcreates engages in the business of importing and selling programmable read-only memory microchips to China Aerospace Science and Technology Corporation, which is controlled by the PRC government and plays a substantial role in the research, design, development and production of strategic and tactical missile systems and launch vehicles for the PRC.

Since 1990, the U.S. government has maintained an arms embargo against the PRC that prohibits the export, re-export, or re-transfer of any defense article to the PRC. Prohibited defense articles are placed on the U.S. Munitions List, which includes spacecraft systems and associated equipment. A programmable read-only memory microchip (PROM) serves to store the initial start-up program for a computer system and is built to withstand the conditions present in outer space.

According to the indictment, neither Xian nor Li applied for nor received a license from the United States to export defense articles of any description; however, from April 2009 to Sept. 1, 2010, the two are charged with contacting a company in the Eastern District of Virginia and seeking to export thousands of radiation-hardened PROMs from that company.

The indictment states that Xian and Li knew a license was required, but did not seek to obtain one because it was difficult, time-consuming, and would require them to identify the end user and describe the end use. They are accused of conspiring to break up orders into multiple shipments and designate countries outside of the PRC for delivery to avoid drawing attention to the orders.

On Sept. 1, 2010, the defendants were arrested in Hungary pursuant to a U.S. provisional arrest warrant and were transferred into the custody of U.S. Marshals on April 1, 2011, after they waived extradition. They arrived in the Eastern District of Virginia late April 1, 2011.

http://www.justice.gov/opa/pr/2011/April/11-nsd-422.html

Analysis and Source Documents after the Break.

Xian and Li plead not guilty to the charges on April 7. However, on June 1, they appeared before U.S. District Judge Gerald Bruce Lee to change their plea to guilty. The source documents provide a bit more information about the case and what it took to catch these guys.

In 2009, they contacted the US exporter company of the prohibited microchip. Since the chips were prohibited, the company transferred communications over to an undercover agent. The undercover agent was to purchase the microchips then ship them to a third country for pick up. The Chinese suggested a country like New Zealand or Indonesia. The chips were ultimately bound for the Chinese Aerospace Science Technology Corporation.

When I first ran across this story, I thought it was an example of the US government trapping a couple of naive Chinese businessmen in a bad deal. I wouldn't expect Chinese microchip importers to have much of a conception abou]t US military technology embargoes. However, after I took a look at the indictment, guilty plea, and attached statement of facts, it looks like these guys knew exactly what they were doing.
When asked if they would like to get a permit to export the material they stated they had had difficulty in the past and did not want to reveal the destination of the chips. Additionally, when the agent told them that exporting the technology was illegal, the Chinese stated that they knew and suggested using several purchasing companies to keep the supplier from finding out the chips actual use.

This was either a coordinated CCP plan to try to get restricted military technology or it was a case of overreaching Chinese businessmen, who were unfamiliar with the repercussions of violating the export treaties. I am tempted to say that it was the latter. From my experience in China, it is much easier to avoid government permits and rather grease the palms, or find a workaround when the government gets in the way. I expect that these guys were just following their usual course of doing business. The export permit is too difficult to get, then we'll just hire a middleman, pay him a bit extra, and that will solve the problem.

Unfortunately for them, the US government has its hands all over the world, and even meeting in a foreign country to finish the deal could not protect them from our extradition abilities. That said it is a good warning to those who are doing business in China. Some day the Chinese government will play a larger roll in enforcing the corrupt business practices of its country, foreigners (laowai) are always the first wave of people to round up in those crackdowns.

additional source:

http://www.washingtonpost.com/business/chinese-aerospace-execs-plead-to-attempting-to-violate-us-arms-embargo-against-beijing/2011/06/01/AGVkodGH_story.html

PDF file with the indictment, plea agreement, and statement of facts from the case. I had to buy these from the court, so take advantage of them. -- ChineseExecs --