Procurement: The Unbreakable China Connection

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July 27, 2018: In late June Shuren Qin, a Chinese citizen and permanent resident of the United States was arrested in the United States and indicted for purchasing 78 high-end hydrophones and illegally shipping them to NPU (Northwestern Polytechnical University), a Chinese research institute identified by in 2001 by the U.S. government as undertaking research in marine technologies for both commercial and military uses. That meant certain American technology, like the high tech hydrophones, could not be sold to NPU. Starting in 2015 Shuren Qin used a company he owns in China to import the hydrophones in a manner that avoided the American prohibitions and then transferred them to NPU. By 2017 Shuren Qin had delivered 78 of the hydrophones. Because of the illegal methods he used to do this, he is being prosecuted for conspiracy to violate U.S. export laws as well as visa fraud. This case is of particular interest to the U.S. Navy which has noted that Chinese submarine detection technology was advancing particularly fast, especially in areas that use underwater systems of underwater hydrophones to monitor large areas, like the South China Sea. In light of that since early 2017, the U.S. government ordered a more vigorous investigation of these continuing technology thefts by Chinese living in the United States. This caught several smuggling operations that were illegally obtaining American tech for Russia and Iran, as well as China. In fact, some of those caught were obtaining tech wanted by all three of those nations.

For example, in January 2018 a Texas businessman (Peter Zuccarelli) was sentenced to 46 months in prison for conspiring to smuggle radiation hardened integrated circuits (microchips that can operate despite the increased radiation found outside the atmosphere) to China and Russia. These microchips were falsely labeled as “touch screen components” as the activities went on from June 2015 to March 2016. There were others involved, including a Pakistani man who is a naturalized U.S. citizen and was described as the middleman for this deal and similar schemes with others. The Pakistani agent apparently sought out Americans in a position to legitimately buy equipment that require an export license that the foreign customer knew they could not get. Zuccarelli owned an eyeglass lens coating company that was having financial problems and the Pakistani middleman got in touch and arranged the deal, which included paying Zuccarelli $1.5 million to cover the cost of the chips and profit for undertaking the illegal transaction.

These radiation hardened microchips were apparently needed for Chinese and Russian space probes that spend long periods in deep space. Similar Chinese microchips proved unable to handle the radiation for long periods. Russia had much less ability to design and manufacture these items and has to smuggle them in or do without. These microchips are also needed in ICBM guidance and control systems. Some of the mislabeled microchips shipped to China were also being sought by Russia and any other country needing such export restricted components for space systems or other types of advanced military technology. In the case of China, the hardening technology could be developed and manufactured in China but that would be very expensive and time consuming and it was simply cheaper to use the existing network of smugglers to obtain the components faster and at much less cost. The Chinese government is shielded from involvement via the use of Chinese companies that have contracts to deliver certain components for larger projects and as part of China’s new (since the 1980s) market economy these firms are free to get it done any way they can. At the same time, the Chinese government is not particularly cooperative in assisting foreign governments investigating these smuggling schemes.

There continues to be a lot of this smuggling via China in part due to the role China has played as a smuggling conduit for all sorts of illegal tech going to a large number of countries. Heavy users of the “China Connection” included North Korea, Iran, Pakistan and Russia. Citizens of all those countries were often found (and frequently arrested) by Western nations that were being plundered for export restricted tech.

Until 2015, when most economic sanctions were lifted, Iran was a heavy user of the Chinese Connection. Even as Iran was negotiating the mid-2015 treaty they were still actively smuggling tech and that is one of the reasons the U.S. decided in early 2018, to withdraw from the 2015 agreement. For example, at the end of 2014 a Chinese citizen (Sihai Cheng) flew into Boston from Britain, under guard, and was arrested for organizing a smuggling operation to obtain thousands of components (mostly American pressure transducers) Iran needed for enriching uranium (for nuclear power plants and nuclear weapons). Sihai Cheng was caught attempting to buy these items for a Chinese company and then smuggle them into Iran. Sihai Cheng was arrested in Britain in early 2014 and indicted for espionage in the U.S. two months later. Cheng fought the American extradition effort but lost and was sent to America for trial. Cheng was accused of working with an Iranian citizen and two Iranian companies to carry out the plan. The Iranians told Cheng that the transducers (made in China by an American company) were to be smuggled into Iran for a “secret project.” Cheng was caught, in part, because of help from the U.S. firm that makes the transducers. By 2014 the U.S. and Western nations had become well aware of the Chinese Connection and cooperated with each other to spot and shut down these smuggling operations.

Because of decades of economic sanctions Iran came to depend on China to help smuggle forbidden items into Iran. China opposed the sanctions but went through the motions of observing them. Despite official sanction support, China has always been the ultimate source of forbidden military and nuclear research items for Iran. This included Western gear, especially stuff from the United States that the rapidly growing Chinese economy had legitimate buyers for. These American items are usually obtained by Chinese trading companies, who served as a one-stop-shopping source for many countries. The trading companies break American laws when they ship some types of restricted (by American regulations) gear to embargoed nations. This is done using forged documents and bribes that can mask these operations for years.

These Chinese exporters have little fear of punishment at home because the Chinese government refuses to discipline its wayward firms. But these trading/smuggling companies can be hurt in other ways. That’s because U.S. regulators can reach just about every other country (even China) using the enormous U.S. presence in the international banking system. But the Chinese traders consider occasional fines and business interruption a cost-of-doing-business and pass these extra costs onto customers like Iran. Thus as the sanctions on Iran grow more formidable, prices Iran must pay go up and the Chinese profits increase even more.

This kind of smuggling employs techniques that Iran has used successfully for a long time and apparently shared with some allies. Many Western suppliers will simply charge a much higher price to cover the risk of being found out and prosecuted. There are, as the Iranians know well, a lot of Western suppliers who are willing to take the risk. But as the risk of getting caught, and the penalties, increase a growing number Westerners abandon this lucrative business to the Chinese.

The war on Iranian arms smuggling had been intensifying in the decade before the 2015 treaty. Most countries cooperated, but not all. While Turkey has been getting cozy with Iran, the Turks still enforced international trade sanctions against Iran. But as Turkey encourages its companies to do more business with Iran, there are more opportunities to smuggle forbidden goods to assist Iranian nuclear weapons and ballistic missile projects. Iran takes advantage of this whenever possible.

Ever since the U.S. embargo was imposed in 1979 (after Iran broke diplomatic protocol by seizing the American embassy), Iran had sought, with some success, to offer big money to smugglers who can beat the embargo and get needed industrial and military equipment. This soon became a risky business, and American and European prisons are still full of Iranians, and other nationals, who tried, and often failed, to procure forbidden goods. The smuggling operations are currently under more scrutiny, and attack, because of Iran’s growing involvement in wars throughout the region and Islamic terror operations worldwide. The Iranians have found they can still profit from this smuggling network they have nurtured over the decades and continued access to an international smuggling network is useful to keep the goodies (tech or information) coming. With the Americans withdrawing from the 2015 treaty, many major suppliers in the West (not just the United States) will no longer deal with Iran because these firms fear losing their American connections, which are more important than a little extra business from Iran.

 


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