China

Johnson Trading & Engineering Company, Ltd. of Taiwan has agreed to pay BIS $90,000 to settle charges that it knowingly caused the unlicensed export of computer chips to the People’s Republic of China, and for evading the EAR. The computer chips are subject to the EAR and controlled for national security and anti-terrorism reasons.

Between February 2003 and December 2003, on seven different occasions, Johnson Trading ordered computer chips from a US exporter and provided the exporter with false documentation that the country of ultimate destination was Taiwan. When the chips reached Taiwan, Johnson Trading arranged for them to be shipped to the PRC via Hong Kong.

Johnson Trading has agreed to the fine and will be suspended for a five-year period encompassing the denial of export privileges and an audit of the company’s export compliance program. If Johnson Trading fully complies with all terms of the agreement (which has yet to be published), $30,000 of the $90,000 penalty will be suspended.

“BIS is taking a hard-line with license exceptions being used to evade licensing requirements,” explained Kevin Delli-Colli, Deputy Assistant Secretary for Export Enforcement at BIS.

More information:

• BIS News Release

J. Reece Roth, a 70 year old retired University of Tennessee professor faces up to 160 years in prison and more than $1.5 million in fines for 18 counts of conspiracy, fraud and violating the Arms Export Control Act. Roth, an expert in plasma research, agreed to serve as a subcontractor on a US Air Force project which was awarded to Knoxville technology firm Atmospheric Glow Technologies Inc.(AGT) The project involved the development of advanced plasma actuators for use on the wings of Air Force drones, a defense munitions item.

Roth assigned two of his graduate students, Truman Bond an American and Xin Dai a Chinese foreign national, to work on the project with him. At first, Xin Dai was not allowed to view Truman Bond’s work to ensure that export laws were not broken. Soon after, Roth and Atmospheric Glow Technologies representative Daniel Max Sherman agreed that this was slowing the process and allowed the graduate students to work together and share all information. Read More

The president has issued a letter to the House permitting temporary exports to the People’s Republic of China for the Beijing Olympic Games. The restrictions will pertain only to firearms and related items for use by US and non-US athletes competing in shooting events, and military gyroscopes that are embedded in mobile high definition television camera systems for use by US filming crews.

Licensing requirements will remain in place for these exports and will require review and approval on a case-by-case basis. All equipment will be returned to the US following the end of the games.

More information:

• Letter from the President to House of Representatives and the Senate

WaveLab, Inc. of Virginia was sentenced to one year supervised probation and fined $15,000 along with a forfeiture of $85,000 in profits that the company had made on the illegal exports. The company willfully admitted that it exported more than 2,400 power amplifiers to the People’s Republic of China without obtaining licenses.

The power amplifiers are used for satellite communication of data, voice, and video signals, as well as in wireless data communications. The amplifiers contained military applications and were controlled for national security reasons under the CCL.

More information:

• DOJ News Release: Virginia Corporation Sentenced for Unlawful Export of Sensitive Electronic Components to China

After having its assets frozen by the US for over 2 years, China Great Wall Industry Corp. (CGWIC) has been removed from the Specially Designated Nationals list. The company and its US subsidiary, G.W. Aerospace were added to the list on June 13, 2006 after the Treasury Department sanctioned the company for providing missile guidance technology to Iranian programs. Read More

Daniel Max Sherman a former physicist from Atmospheric Glow Technologies, Incorporated plead guilty to conspiracy with J. Reece Roth a professor at The University of Tennessee to transmit export controlled technical data to the People’s Republic of China. Between January 2004 and May 2006 the two worked with a Chinese graduate research assistant at the university where the professor and student researched military drone aircraft to develop plasma actuators.

In the court documents, prosecutors claim that Sherman and Roth both agreed amongst themselves to assign the Chinese student, Xin Dai, to the military development project. They never advised the Air Force or sought any special export licenses or consul.

At this time Sherman faces up to 5 years imprisonment and a $250,000 fine, the charges for the professor and student have yet to be released.

Patrick Rowan, Assistant Attorney General for National Security made a point, “Knowingly disclosing restricted US military data to foreign nationals represents a very real threat to our national security, particularly when we know that foreign governments are actively seeking this information for their military development.”

More information:

• DOJ News Release

Even though our booming seminar business seems to confirm that the ITAR is vague on many points, it seems for now that a court has decided the ITAR is not unconstitutionally vague as it relates to the case of Qing Li.

Last year Qing Li was charged with conspiracy to export defense articles without a license and to smuggle goods from the US. Li attempted to export Endevco 7270A-200K accelerometers without a license to China and was caught by undercover agents.

Her case is now scheduled to go to trial. Qing Li’s legal defense ordered motions to dismiss the indictment and to suppress evidence but were shot down indefinitely. Li argued that the indictment should be dismissed on the grounds that the AECA and its implementing regulations are unconstitutionally vague as they are applied to her case. Her defense disputes that a person of ordinary intelligence could not have been able to determine if the Endevco accelerometer was a “military accelerometer” that required an export license. They supported this argument by showing a two page manufacturer-provided “public information” sheet regarding the accelerometers. The defense argued that, “[a] person of ordinary intelligence would likely deem that data sheet incomprehensible, and that the sheet does not indicate whether the device is for military or weapons use.”

The court denied her motion to dismiss claiming that the defendant failed to cite a single case in where the court found the AECA unconstitutionally vague, and whether or not she knew that the accelerometers were on the munitions list will be for the jury to decide. Her motion to suppress evidence was also denied as the subpoenas were all authorized, she had no reasonable expectation of privacy, and she lacked standing to assert any fourth amendment violations.

More information:

• Qing Li Indictment Update (ExportLawBlog)

Chi Mak, a former engineer for defense contractor Power Paragon, was sentenced to 293 months in federal prison and fined $50,000. Mak conspired with his wife, brother, sister-in-law and nephew to obtain naval technology and then export the material to the People’s Republic of China.

Co-conspirators from the PRC provided a task list for Chi Mak that requested specific defense information, including research regarding nuclear-powered submarines. The list contained instructions for Mak to take part in seminars and then compile information he obtained from the seminars onto computer disks. Nearly all of the information he obtained from the seminars was sensitive and subject to restrictions regarding its distribution, storage and handling.

Chi Mak and his wife would copy the information onto CD-ROM disks and then forward the disk to Mak’s brother, Tai Mak who would have his son take the data and encrypt it onto the CD-ROM disk. Tai Mak and his wife then took the disk and hid it in their luggage as they traveled to the PRC to deliver it, when they attempted to board the plane in Los Angeles they were arrested along with Chi Mak and his wife at their home and their son was apprehended and charged seven months later.

All conspirators have pleaded guilty and all face deportation back to the PRC.

More information:

• DOJ News Release

The Center for Strategic and International Studies, a Washington research group has released a 63 page report on the Health of the US Space Industrial Base and the Impact of Export Controls. The main concern from the report was that the US export controls that were tightening almost 10 years ago are hindering the US share of the global space markets.

The US tightened space technology-transfer rules in 1999 after investigators found China has acquired sensitive technology from US built commercial satellites. When the new rules were implemented they put commercial communications satellites, subsystems, and components on a munitions list that became subject to State Department licensing even if the product could be easily purchases worldwide.

The overall health of the top-tier manufactures in the industry such as Lockheed Martin Corp., Boeing Co. and Northrop Grumman Corp. all had “good financial health” despite the US industry’s loss of shares overseas. The report shows that Russia, China and others are gaining space market share aided by the US policy. Jeffery Foust, a space and telecommunications expert at Futron Corp explained that the US policy backfired in space. “The US is actually hurting national security by making it more difficult for the space companies it depends on to compete in the global market,” he said.

The study concluded that the ability for the government and industry to meet program execution commitments is inadequate and that there was a unanimous agreement that the export control process can be improved without adversely affecting national security.

More information:

• CSIS Briefing
• International Trade Law News article

Lucent Technologies Inc., a global communications solutions provider has entered into an agreement with the Department of Justice to resolve allegations that it violated the Foreign Corrupt Practices Act (FCPA). The company provided travel and other items of value to Chinese government officials and included it as expenses in company books and records. Read More

In June of 2004 Philip Cheng was indicted by a federal grand jury on charges of conspiracy to violate the federal Arms Export Control Act and the International Traffic in Arms regulations, brokering the illegal export of defense articles and services, and three counts of money laundering. Cheng illegally exported a night vision camera and its accompanying technology to China.

A trial in February and March of 2006 ended in a hung jury. After this, Mr. Cheng agreed to resolve the case through a guilty plea to willful illegal brokering of the night vision cameras to China.

On December 3, 2007 Philip Cheng was sentenced to two years in prison and ordered to pay a $50,000 fine for his role in the illegal export of night vision goggles to China without obtaining the required authorization from the United States Department of State.

More information:

California Export Broker Sentenced to Two Years for Illegally Exporting National Security-Sensitive Technology to China (examiner.com)

It has been a few months since the US slapped new export/reexport controls on China to attempt to slow the growth of the Chinese defense industry, and thus hamper the growth of Chinese military capability. On October 17, 2007, BIS announced the names of the five new Validated End Users (VEUs) in China. (OK, I admit my prediction that the VEUs would be a long time coming was wrong.)

So, it after hearing a wide range of people talk about the new China military end use license requirement and the VEU program, maybe now is time for me to issue the last word analysis of the new China rules.

For the most part, what does exist today, and what companies must comply with today, is a new approach to restricting certain export/reexport to China that are imposed by the new set of export/reexport restrictions on China.

Let’s look at the details of the new requirements. Read More

In the October 19, 2007 Federal Register the Bureau of Industry and Security published the names of the five entities in China who are the first BIS has designated to be Validated End-Users (VEU) eligible to receive certain items without export/reexport licenses. The five VEUs are:

• Applied Material China: supplier
• Boeing Hexcel AVIC I Joint Venture National Semiconductor Corporation
• Semiconductor Manufacturing International Corporation
• Shanghai Hua Hong NEC Corporation
• National Semiconductor Corporation

Each VEU has a list of specific Export Control Classification Numbers (ECCNs) that they may receive license-free under the VEU program. The eligible ECCNs vary from one VEU to the next. The new rule also identifies which facilities for each VEU are eligible to receive license-free exports/reexports.

More information and the complete final rule are available at:

Federal Register Notice

BIS Announcement

On October 18, 2007, Qing Li was indicted on charges of conspiracy to procure the illegal export of military-grade accelerometers from the United States to the Republic of China. The accelerometer measures massive shocks up to and beyond 200,000g and has numerous military applications. The accelerometer is a designated defense article of the United States Munitions List and requires written permission from the United States Department of State to be exported.

Li lived in Connecticut and was conspiring with an individual in China to locate and procure accelerometers for scientific agencies in China. Li and her co-conspirator used email messages and telephone calls to make negotiations referring to the accelerometers. Both also had contact with an undercover ICE agent in San Diego, who posed as a seller of accelerometers. He was promised that if the accelerometers he sold tested properly, large orders would follow.

Li faces a potential of 5 years in prison and a $250,000 fine, the indictment itself is not evidence that Li committed the crimes she is charged with, she is innocent until proven guilty beyond a reasonable doubt.

More information:

DOJ Announcement

Well, even though accusations are flying all around, it is not yet clear as to whether Pratt & Whitney Canada have violated U.S. restrictions by exporting military items to China. The company sold their PT6C-67C engines to China for the use in civilian helicopters; however a new brochure for the Chinese Z-10 Zhisheng, an attack helicopter, has the same engine listed. If these engines contain parts or technology controlled by the ITAR, the company could face an enormous fine and negative implications for future ITAR-controlled exports.

The Z-10 helicopter is an anti-armor and battlefield interdiction, with the capability of air-to-air combat. The air craft holds air-to-air missiles and unguided rocket launcher pods. Observers expect that the helicopter will be mass produced, and will acquire numerous sales. Richard Fisher, the vice president of International Assessment and Strategy Center, warns that, “The chances are very good that the Z-10’s will be hurting Americans, either killing them on some future battlefield or attacking their jobs”. (Obviously, the former is a bit more painful than the latter-jb.)

According to published reports, Pratt & Whitney claims it had no idea that the engine was used for anything besides the civilian aircraft it was intended for. Some however, believe that the company knew, “Claims that P&WC had no idea they were supporting a military program truly beg credulity, China’s efforts to support the Z-10 through massive foreign technology acquisitions have been an open secret for over a decade,” Fisher alleges.

At this time, the company has not violated any Canadian export regulations and the U.S. Government is currently taking steps to gather more information to ensure that the company is not violating any U.S. exporting restrictions pertaining to the engine.

We all know that accusations flow eagerly from the mouth of headline seeking fear mongers like the proclamations of a carnival barker. Accusations make news, but it normally will be the facts that will determine whether the US Government will take or threaten enforcement actions against Pratt Canada.

Information available at:

SinoDefense.com

DefenseNews.com