The Bureau of Industry and Security (“BIS”) is placing Chinese telecom giant ZTE (and three related companies) on the Entity List tomorrow according to this pre-release version of the Federal Register notice announcing the action. As a result, all items subject to the EAR will require an export license prior to any export to ZTE. Under this action, all applications for such licenses will be subject to a policy of denial.
The action is taken as a result of the diversion by ZTE of certain U.S. origin products to Iran. More important, perhaps, than the diversion itself is that BIS caught ZTE playing a shell game and ZTE lost. Somehow or other, BIS got its hands on a ZTE internal document, labelled “Top Secret Highly Confidential” and titled, innocently enough, “Proposal for Import and Export Control Risk Avoidance.” In fact, this incriminating document might be better titled “Everything You Wanted to Know about Shells but Were Afraid to Ask.” It sets out, in excruciating detail, a plan for setting up a chain of shell companies through which the U.S. goods would pass with the hope that it would throw the U.S. government off the scent of what was really going on. Under this plan, a Chinese company owned by an allegedly independent Chinese investor would buy U.S. parts, sell them to another Chinese company, owned by another allegedly independent Chinese investor, which would sell those to another single “independent” Chinese investor company in Dubai, which would then sell the goods to Iran.
Two juicy quotes from the report will give you the idea of what ZTE had in mind:
However, the detached [shell] companies … are invested by natives of [the People’s Republic of China] and not only does our company need to make [the detached shell companies] operate independently, [our company] also needs to effectively control them.
Yea, sure, that works … if you believe in oxymorons and unicorns.
The biggest advantage of [this] Model is that it is more effective, [because it’s] harder for the U.S. Government to trace it or investigate the real flow of the controlled commodities; and in formality, our company is not participating in doing business with [Iran].
Right, “in formality” it’s not doing business with Iran because its being done by those companies that look like they operate independently but which ZTE “effectively control[s].” Game over.