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Daniel Salisbury

Daniel Salisbury

Over the past two decades, significant positive advances have been seen in China’s non-proliferation policies. Since the early 2000s, China has worked to establish an export control system and made ongoing efforts to align the country’s system with international supplier regimes. However, despite these positive developments, there is evidence that the non-proliferation practices of the Chinese authorities have often fallen short of government policies. Several risk areas remain; this article will consider China’s export controls and the risks posed by Chinese entities.


China’s Export Control System

Since 2002, China has worked to develop a system of export controls which is broadly aligned with international standards. In 2004 China joined the Nuclear Suppliers Group; the country has also pledged to adhere to the MTCR, and as a UN member state it must comply with UN sanctions resolutions. China’s export control system is in place to ensure that the country meets its obligations in this regard. It is administered by the Ministry of Commerce (MOFCOM) and draws on the expertise across government.

However, China’s relatively weak capacity to administer and enforce its controls presents a significant challenge.[1] In some specific cases there has also been a lack of will to enforce or follow up on breaches of legislation.[2] The growth of the Chinese industrial sectors capable of producing or exporting sensitive goods also poses a significant regulatory challenge. China is clearly expanding its capacity to administer and to enforce export control legislation. However, good intentions alone will not suffice if adequate resources are not invested in enforcement, outreach and engagement.

To facilitate industry’s compliance with the controls, China has made some attempts to engage its private sector on non-proliferation and export compliance issues. However, these efforts have been relatively limited in scope to date. The implementation of a comprehensive private sector engagement strategy is required in order to minimise proliferation risks. The development of a stronger and more pervasive compliance culture would help China overcome some of the challenges posed by a rapidly growing private sector.

Proliferation Risks posed by China

When considering the nature of proliferation risks in China, a number of key dimensions of the problem can be highlighted. These risks are both posed by the Chinese government, but perhaps more significantly by private sector entities operating to divert goods onto programmes of concern.

While China has put in place a system of export controls, there are still shortcomings in how the system is operationalised. In some cases, this has allowed for the transfer of sensitive goods to WMD programmes. In short, there is a risk of continued proliferation posed by the interpretation of the licensing criteria by the Chinese authorities in licensing transfers that abide by the letter, but not necessarily the spirit, of national legislation or international commitments. A key example here is the apparent reluctance of the Chinese authorities to invoke catch-all controls, or to prevent the transfer of non-controlled goods to WMD programmes.[3]

However, by far the most significant proliferation risk posed by China relates to Chinese companies. Many Chinese businesses, intentionally or due to lack of awareness, still seek to transfer goods without an appropriate licence or authorisation, and to programmes of concern. The reluctance of the Chinese authorities to follow up on cases of illicit transactions can facilitate this. The types of Chinese entities involved in WMD-related trade have evolved over time. During the 1990s and early 2000s, numerous state-owned entities were sanctioned by the US for their involvement in proliferation.[4] Many of these enterprises have since altered their behaviour and put in place compliance programmes.[5] Now risks are more frequently documented as being posed by entities of the Chinese private sector.[6]

Alongside exporters of sensitive goods, the Chinese financial and transportation sectors continue to be utilised by proliferators, especially with regard to China’s neighbour North Korea.[7]The risks posed by Chinese intermediaries, and the role of transportation hubs, have been found to constitute some of the most significant challenges to the non-proliferation of WMD.

Doing Business in China

Exporters doing business in China should take into account the risks posed by Chinese entities to avoid involvement in illicit trade.Before entering business relationships with Chinese companies, firms should conduct extensive due-diligence. Steps should be taken to ensure the Chinese company has in place a rigorous export compliance system. If in doubt, firms should contact their national authorities.

The following resources are available to firms conducting business in China:

China Country Profile

Red Flags and Due Diligence

The following case studies may be of interest:

Li Fang Wei

UK Civil Nuclear Company


[1] Chin-Hao Huang, “Bridging the gap”: Analysis of China’s export controls against international standards’, Final Project Report to the Foreign and Commonwealth Office Counter-Proliferation Programme (April 2012), 14.

[2] US Embassy, Beijing, ‘China Urged to Investigate And Halt Shipment Destined for Iran’s DIO’, 08BEIJING2674, 9 July 2008, http://wikileaks.org/cable/2008/07/08BEIJING2674.html, accessed 20 December 2012.

[3] Secretary of State, ‘Missile Technology Control Regime (MTCR): China’s Record On Controlling Missile-related Exports’ 1 October 2008, Cable no. 08STATE105132, http://wikileaks.org/cable/2008/10/08STATE105132, accessed 8 February 2013; ‘PRC Urged to Investigate A Chinese Firm’s Missile-related Transfers to Iran; Update Sought on PRC Investigation of a Second Chinese Firm’, 08BEIJING1463,16 April 2008,  http://wikileaks.org/cable/2008/04/08BEIJING1463.html, accessed 20 December 2012.

[4] See for example the sanctions on NORINCO P. C. Saunders and S. C. Lieggi, ‘What’s behind US Non-proliferation Sanctions against NORINCO’, James Martin Center for Non-proliferation Studies; with Kan, ‘China and Proliferation’, p.73.

[5] See for example the case of China Great Wall Industry Corporation (CGWIC) ‘US Removes Chinese Firm from Sanctions Blacklist Over Iran’, Associated Foreign Press, 19 June 2008, http://afp.google.com/article/ALeqM5h8UAMuXVNkqRYXpTh9iHspgJSz5g, accessed 19 February 2013.

[6] See for example the case of Li Feng Wei: William Maclean and Ben Blanchard ‘Chinese trader accused of busting Iran missile embargo’, Reuters, 1 March 2013, http://www.reuters.com/article/2013/03/01/us-china-iran-trader-idUSBRE9200BI20130301, accessed 1 July 2013.

[7] See for example: Julian Ryall, “Chinese Firms Breaking UN Embargo on North Korea”, The Telegraph, 8 June 2012; Jack Kim & Louis Charbonneau, ‘North Korea uses Cash Couriers, false names to outwit sanctions’, Reuters, 15 February 2013, http://www.reuters.com/article/2013/02/16/us-korea-north-money-idUSBRE91F00K20130216, accessed 18 February 2013.

In late June 2013, the UN panel of experts that was set up to monitor the implementation of sanctions on North Korea released its final report. The report outlines North Korea’s continued efforts to breach UN sanctions in order to supply its WMD programmes, import and export conventional arms, and import luxury goods. The report issued a number of recommendations to the UN Security Council and national authorities to enable more effective implementation of sanctions.


UN sanctions have been in place on North Korea since July 2006 following a series of missile tests on the 4th July. Since then, North Korea has undertaken three nuclear weapons tests, the latest in February this year, and a number of long-range missile tests. The sanctions have targeted  North Korea’s nuclear and ballistic missile programmes and related illicit activities.

These UN sanctions have included measures taken to prevent the DPRK’s acquisition of sensitive goods and materials for its WMD programmes, an arms embargo, and prohibitions on the transfer of luxury goods. The relevant resolutions also include a number of measures that states and their private sectors should take to prevent activities, such as financing, that can assist North Korea’s prohibited programmes.

Most recently, following the latest nuclear weapons test in March 2013, the Security Council passed Resolution 2094 which added a number of sensitive items to the lists of those prohibited from import or export to North Korea and expanded other measures.

The 2013 panel report highlights developments in North Korea’s nuclear and missile programmes over the past year. It also covers the work of the panel over the past 12 months, including incidents of alleged sanctions non-compliance that it investigated.

The Panel’s investigations highlighted a number of incidents of alleged non-compliance in relation to the prohibitions on imports and exports of sensitive technologies to North Korea. These included:

  • A shipment of missile-related items believed to be in transfer from North Korea to Syria via China was seized at the South Korean port of Busan. The goods included ‘fine grain graphite’ cylinders which were falsely declared to be ‘lead pipes’;[1]

  • An attempt to acquire intangibles relating to missile technology by North Korean officials in Ukraine. The information was held in ‘photographs’ of a ‘secret academic thesis’ and related to ‘new forms of technological processes for the design of missile systems, liquid-propellant engines, spacecraft and missile fuel supply systems and associated computer programmes’;[2]

  • More details are provided on the shipment of Transporter Erector Launchers (TELs) to North Korea by a Chinese entity.[3] These TELs were first seen carrying a new missile in an April 2012 parade in Pyongyang and were first reported on by the panel in their 2012 report;[4]

  • Ongoing efforts to acquire CNC machine tools by North Korea were documented. A number of examples are given of efforts to the tools and information relating to them from Taiwan and other locations.[5]

The report also provides details on the attempts by North Korea and other entities to breach other measures put in place by the UN resolutions, such as the arms embargo in UNSCR 1874 (2006). Similarly, there are examples of interdictions of shipments of luxury goods, for which a ban was put in place by UNSCR 1718 in 2006. A major difficulty of this measure thus far has been the ambiguity and resulting differing interpretations of the term ‘luxury goods’. A baseline definition was provided in March 2013’s UNSCR 2094 focusing on jewellery and transportation items.[6]

The panel’s 2013 final report can be accessed here.



[1] United Nations, ‘Report of the Panel of Experts established pursuant to resolution 1874 (2009)’, S/2013/337, 11 June 2013, p.23.

[2] Ibid, p.25.

[3] Ibid, p.26.

[4] United Nations, ‘Report of the Panel of Experts established pursuant to resolution 1874 (2009)’, S/2012/422, 14 June 2012, p.19.

[5] United Nations, ‘Report of the Panel of Experts established pursuant to resolution 1874 (2009)’, S/2013/337, 11 June 2013, p.29.

[6] See Annex IV of United Nations, ‘Resolution 2094 (2013)’, 7 March 2013, http://www.un.org/ga/search/view_doc.asp?symbol=S/RES/2094%20%282013%29.

 

Bank Mellat is one of the largest banks, and the largest privately owned bank, in Iran. It has allegedly been involved in providing financial services that have enabled procurement in some areas of Iran’s nuclear programme. Sanctions were imposed on Bank Mellat by the US and the EU in 2007 and 2010.

More recently, Bank Mellat has been disputing the grounds on which these sanctions were imposed and seeking legal proceedings to bring about their removal. They have recently had some success on this front with a UK Supreme Court ruling that the UK sanctions were unlawful in June 2013, following a similar ruling by the EU General Court in January and lifting of the designation of the bank’s Chairman by the EU in 2012. However, EU sanctions remain in place whilst the EU appeals the ruling at the European Court of Justice. This case study explores the Bank Mellat case and some of the issues surrounding it.  

  • MITEC, an entity involved in the construction of the Arak heavy water reactor in Iran, has been involved in the procurement of a large number of valves in breach of UN sanctions;
  • The new UN panel report provides some more insights into the case;
  • The report recommends the designation of ‘Pentane Industries’ for its involvement in the procurement process;
  • Firms should have in place a compliance system including a screening element to prevent possible involvement in trade with designated entities.
  • This case study also highlights some of the risks posed by Iran’s use of front companies based in Turkey, a country which shares a 499km land border with Iran, to transfer sensitive technologies.

Entities of Concern

Key Points

·        It is only by conducting extensive due diligence that the risks posed by parties to a trade can be understood;

·        However, several authorities maintain lists of entities known to be of concern which must be taken into account. These are produced at United Nations (UN), National (including European Union (EU)), and non-governmental levels;

·        UN sanctions are binding on firms based in all countries, while national (or EU) lists are typically only binding to firms based within the relevant territory;

·        US measures often have an extraterritorial element, meaning that conducting business with US-sanctioned entities can have adverse business impacts for a firm even if based outside the US;

·        Companies should implement screening and due diligence systems to ensure that all entity-specific concerns are identified, understood, and addressed before entering business relationships.

 

What is an entity of concern?

Entities are typically identified as being of concern for one of three main reasons:

1)    They are involved in activities of concern – i.e. they have been designated as a terrorist organisation, they directly support or operate a Weapons of Mass Destruction programme in a country of concern, or they oversee an activity of concern (this can include individuals with responsibility for Iran’s nuclear programme, for example).

2)    They work on behalf of entities of concern, in capacities including procurement agents, brokers and financial service providers.

3)    They potentially supply programmes of concern, often by failing to implement appropriate trade compliance systems.

Note that not all entities of concern can be found on the various lists; firms should conduct due diligence to fully mitigate risk.

Where are entities of concern located?

This depends on the category of entity of concern. Those directly involved in programmes of concern are usually found only in sensitive countries (see country briefs), whereas middle men and suppliers to programmes of concern can be located anywhere around the world. The image below is a map highlighting the entities identified as being of concern by the US government in summer 2012.


What are firms’ responsibilities?

While legal responsibilities vary from country to country, the short answer is that firms must comply with the laws of the territories in which they operate. This means that if your national authority maintains a list of entities of concern you must ensure that you have a system in place to screen customers. In cases where national authorities do not provide national lists, firms should be screening potential business partners against the lists contained in UN resolutions.

How can firms avoid conducting business with entities of concern?

In practice, as US designations name firms worldwide, to ensure that you stay compliant with US extraterritorial measures, firms should maintain a designated entity screening system for trade to all destinations. A screening system or process which screens new and existing customers and other business partners against multiple relevant national and international lists is necessary to mitigate legal and reputational risk.

Nonetheless, while legally it may be permitted to do business with entities identified as being of proliferation concern outside jurisdictions in which the firms operate, there is an obvious need for caution: such trade is can lead to massive reputational risk and damage a firm’s public image.

Therefore, an effective screening system is one which screens against the relevant lists required for legal compliance, as well as takes into account possible reputational risks. An efficient system is one which effectively uses fuzzy logic to pick up matches whilst keeping a ‘false-positive’ figure low.

 

 

The US has charged two men with conspiracy to evade US laws to prevent WMD proliferation. Hsien Tai ‘Alex’ Tsai and his son Yueh-Hsun ‘Gary’ Tsai were arrested on 1 May 2013 in Tallinn, Estonia and Glenville, Illinois respectively. The charges relate to the breach of US legislation, namely economic sanctions imposed on Alex Tsai and his company, Trans Merits, to prevent the proliferation of WMD. According to the US, Alex Tsai and Trans Merits have a history of involvement in the proliferation of sensitive technologies to countries such as North Korea and Myanmar since the 1990s. Exporters need to make sure that they conduct due diligence to mitigate fully the legal, financial, and reputational risks of involvement in proliferation and complicity with designated entities.

A full case study is available in PDF format below.

 

Summary:

 

·         The US has charged two men with conspiracy to evade US laws to prevent WMD proliferation. Hsien Tai ‘Alex’ Tsai and his son Yueh-Hsun ‘Gary’ Tsai were arrested on 1 May 2013 in Tallinn, Estonia and Glenville, Illinois respectively;

 

·         The charges relate to the breach of US legislation, namely economic sanctions imposed on Alex Tsai and his company, Trans Merits, to prevent the proliferation of WMD;

 

·         According to the US, Alex Tsai and Trans Merits have a history of involvement in the proliferation of sensitive technologies to countries such as North Korea and Myanmar since the 1990s;

 

·         Exporters need to make sure that they conduct due diligence to mitigate fully the legal, financial, and reputational risks of involvement in proliferation and complicity with designated entities

 

Charges against the Tsais

 

The US has charged two men with conspiracy to evade US laws to prevent WMD proliferation.[1] Hsien Tsai ‘Alex’ Tsai and his son Yueh-Hsun ‘Gary’ Tsai were arrested on 1 May 2013 in Tallin, Estonia and Glenville, Illinois respectively.

 

They have been charged on three counts:[2]

 

·         Conspiring to defraud the United States in its enforcement of laws and regulations prohibiting the proliferation of Weapons of Mass Destruction;

 

·         Conspiracy to violate the International Emergency Economic Powers Act (IEEPA) by conspiring to evade the restrictions imposed on Alex Tsai and two of his companies by the U.S. Treasury Department;

 

·         Money laundering

 

Alex Tsai is believed to reside in Taiwan, whilst his son Gary lives in the US.

 

Previous Involvement in Proliferation and Resultant Legal Actions

 

Alex Tsai’s Taiwan based businesses, Global Interface Company Ltd. and Trans Merits Co Ltd., and his wife, Lu-chi-Su, were sanctionedby the US Treasury for supplying items to North Korean entities in 2009.[3] They allegedly supplied dual-use goods of potential use in missile manufacture to the North Korean the firm KOMID, which has itself been subject to multiple US sanctions. Taiwanese authorities also indicted Alex Tsai in 2008 for ‘forging invoices and illegally shipping restricted materials to North Korea’.[4] US State Department cables leaked by Wikileaks provide some insights into Tsai’s activities.

 

A cable from 2007 indicates that a number of lathes shipped by Tsai’s firm Trans Merits were seized on US recommendation in Singapore in 2006.[5] A later cable indicates that associated documentation showed ‘Directorate of Yanmar Industrial Planning’ in Myanmar as the end user.[6] Whilst the cable indicates that Taiwanese national controls had not been breached, it does allege that Tsai was aware that goods that Trans Merits had previously shipped to unnamed entities in China had been transferred on to North Korea. The alleged shipment of a lathe was not the first that Trans Merit had transferred to this end user, although previously these shipments were limited to refrigerators and house hold goods. 

The intended final destination for the lathes still remains unclear. There have been some speculations regarding Myanmar’s nuclear intentions in the past.[7] However, more recently concern has lessened as Burma’s relationship with the US and EU improves. Myanmar does possess missile capabilities and may wish to acquire machine tools for this programme or for peaceful uses. Alternatively, precedents suggest that the tools may have been destined for onward shipment via Myanmar to North Korea.[8]

In 2009, a further cable alleges concern that Alex Tsai would be travelling to Singapore airport to collect a significant cash payment. The cable alleges that this could be a $850,000 payment for double-action hydraulic drawing press equipment from a KOMID representative. The author of the cable expresses concern that this could be in breach of Singapore’s anti-money laundering legislation. The cable also alleges that Tsai has been involved in supplying North Korean entities since the late 1990s.[9]

 

 

 

The Tsais’ Recent Alleged Activities

 

 

 

It seems that Gary Tsai became involved  after the aforementioned sanctions were imposed by the US on his father’s companies. It is alleged that the Tsais conspired to circumvent sanctions by conducting business under the Trans Multi Mechanics and Factory Direct Machine Tools names to avoid raising suspicions.

 

Gary Tsai set up Factory Direct Machine Tools in Glenville, Illinois, no later than September 2009. Alex Tsai and Trans Merits are alleged to be ‘active partners’ in this new business. Through access to email correspondence, the prosecutors allege that business conducted by Gary Tsai, Trans Multi Mechanics and Factory Direct Machine Tools was actually being conducted on behalf of Alex Tsai and Trans Merits.

 

A number of transactions, following a similar pattern, were orchestrated by Gary Tsai. Allegedly, he: [10]

 

·         Negotiated the purchase of the machinery, acting on behalf of Trans Merits;

 

·         Copied Trans Merits and/or Trans Multi Mechanics on emails;

 

·         Requested payment for the machinery in emails to Trans Merits;

 

·         Transferred, or caused the transfer of, funds from Trans Multi Mechanics’ bank account in Taiwan to Individual Gary Tsai’s bank in the United States;

 

·         The machines were exported from the United States to Trans Merits in Taiwan

 

Gary Tsai is alleged to have acquired and exported a ‘Bryant Centre Hole Grinder’ in September 2009 to Trans Merits amongst a number of other pieces of equipment. Press reports do not indicate whether the goods that were shipped were controlled or not.

 

The Case Continues

 

Gary Tsai appeared in court in the US on 6 May 2013. He was placed under house arrest after he was bailed, guaranteed by a $500,000 bond. His father Alex is in prison in Estonia currently awaiting extradition to the US.

 

Notes for Exporters

 

According to data collected in the indictment, there were a number of red-flags which should have raised companies’ concerns if they were not witting actors in the conspiracy. These include the following, which are by no means definitive:

 

·         The Tsais frequently used gmail.com and hotmail.com email addresses, rather than company email addresses;

 

·         Gary Tsai gave out the address of ‘Trans Merits’ for use on invoices when he represented Trans Multi Mechanics;

 

·         Gary Tsai gave out business cards with ‘Trans Merits’ and ‘Global Interface Incorporation’ on them when representing Trans Multi Mechanics;

 

·         A US company providing an invoice to Gary Tsai wrote on it that he worked for Trans Merits rather than Trans Multi Mechanics   

 

Exporters should be sure to conduct due diligence checks on their customers. Simple Google searches could reveal the past activities of Trans Merits and could have prevented involvement in trade with entities designated for their past role in proliferation.

 


 


 

[1] See indictments at http://dig.abclocal.go.com/wls/documents/alex-tsai-complaint.pdf and http://dig.abclocal.go.com/wls/documents/gary-tsai-complaint.pdf.

 

[2] FBI, ‘Taiwanese father and Son Arrested for Allegedly Violating Laws to Prevent Proliferation of Weapons of Mass Destruction’, Press Release, 6 May 2013, http://www.fbi.gov/chicago/press-releases/2013/taiwanese-father-and-son-arrested-for-allegedly-violating-u.s.-laws-to-prevent-proliferation-of-weapons-of-mass-destruction, accessed 7 May 2013.

 

[3] Office of the Spokesman, US Treasury, ‘Treasury Designation of Taiwan Entities and Individuals’, 16 January 2009, http://2001-2009.state.gov/r/pa/prs/ps/2009/01/115019.htm, accessed 7 May 2013.

 

[4] William Lowther, ‘US Removes Taiwan from I.P.R. ‘Watch List’’, Taipei Times, 18 January 2009, http://www.taipeitimes.com/News/front/archives/2009/01/18/2003434057/1, accessed 7 May 2013.

 

[5] American Institute Taiwan, ‘MTAG: Boft on Siezed Lathes’, Cable no. 07TAIPEI17, 4 January 2007, http://wikileaks.org/cable/2007/01/07TAIPEI17.html, accessed 7 May 2013.

 

[6] American Institute Taiwan, ‘MTAG: trans Merits Lathes from Taiwan’, Cable no.07TAIPEI72, 11 January 2007, http://wikileaks.org/cable/2007/01/07TAIPEI72.html, accessed 7 May 2013.

 

[7] Robert E Kelley, Ali Fowle, ‘Nuclear Related Activities in Burma’, Democratic Voice of Burma, May 2010, http://www.dvb.no/burmas-nuclear-ambitions/burmas-nuclear-ambitions-nuclear/expert-analysis/9297, accessed 7 May 2013.

 

[8] Catherine Boye, Melissa Hanham & Robert Shaw, ‘North Korea and Myanmar: A Match for Nuclear Proliferation?’, The Bullitin of the Atomic Scientists (online), 27 September 2010,  http://www.thebulletin.org/web-edition/features/north-korea-and-myanmar-match-nuclear-proliferation

 

[9]http://wikileaks.org/cable/2009/04/09STATE36855.html, accessed 7 May 2013.

 

[10] Taken from the indictments.

 

 

 

About Proliferation

What Business Needs to Know:

- Countering the proliferation of weapons of mass destruction is a top objective of most governments...

- Weapons of Mass Destruction (WMD) include nuclear, chemical, biological, and missile systems...

- Exports of dual-use and anciliary equipment with even an indirect utility to the lifecycle of a WMD can be refused an export licence...

- A number of countries work to buy goods illicitly…

- Involvement in proliferation is bad for business, and carries reputational, legal, financial risks…

What is Proliferation?

Proliferation in the context of the project is the spread of Weapons of Mass Destruction (WMD) and military capabilities. Proliferation tends to fall into two main categories:

-          Horizontal proliferation refers to countries acquiring a new capability that they did not previously possess;

-          Vertical proliferation involves the quantitative and/or qualitative improvement of a country’s existing capability.

What are Weapons of Mass Destruction?

Weapons of Mass Destruction’ is a term that has become increasingly popular and politicised in recent years. The term is generally used to cover the following types of unconventional weapons:

-          Nuclear weapons

-          Chemical weapons

-          Biological weapons

Also covered are the means of delivery which include:

-          Primarily ballistic missiles

-          Also other means which are more of use in conventional arsenals: aircraft, cruise missiles, UAVs

In Practical Terms, how do WMD Relate to Business?

In most cases, WMD are not available to purchase off the shelf; they need to be developed in large-scale research, engineering and manufacturing efforts.

Practically then, WMD programmes rely on the dual use equipment, and support services for WMD research and development, manufacture. Without taking the relevant antiproliferation measures, businesses that produce dual use and other relevant goods are vulnerable to being targeted by proliferators and involved in illicit trade.

What is Illicit Trade?

Illicit trade occurs when states or other entities use deceptive and fraudulent methods to circumvent export controls and sanctions to obtain the goods and services that they need to sustain their WMD efforts.

Involvement in Illicit Trade is Bad for Business

-          Reputational risk: Being publically linked to proliferation activities carries huge reputational risk. Being publically named will gain your business a reputation which is difficult to shake off, and people may still be referring to the case many years later.

-          Financial risk: Involvement in proliferation, knowing or unknowingly, carries significant financial risk. Companies can be fined thousands or even millions for being found non-compliant. There are also the financial implications of the related reputational damage. Being publically named in the press may cause customers to seek out new business partners.

-          Personal risk: Involvement in proliferation can carry significant legal risk. Those legally responsible within a company – usually the compliance director or other senior management – can be handed a lengthy jail term.

-          The risk of being blacklisted: Companies and individuals found to be involved in assisting proliferation are frequently blacklisted by other states, most notably the US. If your business with the US is significant or the company has US operations this can significantly impact on profits and the business’s future viability. 

Why do Governments Care about Proliferation?

Most governments hold countering proliferation as an important objective. There are many reasons that governments care about illicit trade and view the proliferation of WMD as an undesirable outcome. A few are listed below:

Negative Strategic Implications

-          The likelihood of use increases: The more states that possess nuclear weapons, the higher the likelihood that they will be used – either purposefully, or by accident.

-          The perceived value of WMD increases: In short, proliferation will lead to further proliferation; the perceived value of the WMD in question will increase as other states see the need to acquire nuclear weapons to balance those of their neighbours.

-          Deterrence is not necessarily stable: Deterrence is often cited as the reason that the cold war stayed peaceful; however, deterrence does not necessarily work in all relationships. In fact, there were many close misses during the cold war, and luck certainly played some role.

-          In fact, WMD are destabilising: Often countries acquiring nuclear weapons for the first time do not have the same structures in place as the existing nuclear weapons states. Their capabilities may not be adequately protected, which may make them more inclined to use them for fear of losing them. There may be safety or security concerns surrounding the facilities and work of states seeking WMD. There may be concerns about accidents or terrorists gaining access to the weapons.

-          Barrier to a world-free-of-nuclear-weapons: The more states that acquire nuclear capabilities or other WMD pushes the vision of a nuclear weapons free world further into the future. This vision has been presented both by US President Barrack Obama and by UK Prime Ministers.

More Broadly, Why Should Business Care?

-          The impact of use on trade: The use of WMD, accidental or intentional by a state, would seriously disrupt trade; especially that occurring across borders.

-          The impact of transfer to terrorists: The transfer of WMD to terrorist groups would have significant implications for trade, even if use did not occur. The resultant actions taken would likely restrict the ability of business to conduct their affairs.

-          The impact of accident: An accident resulting from a state’s WMD activities would also negatively impact on business in the way that nuclear accidents such as Fukushima have done.

Case Studies

A selection of case studies can be found listed below. These have been drawn from research undertaken by the project team both from open sources, and from direct discussions with companies which produce proliferation-sensitive goods.

If your firm has had an experience which involved illicit procurement attempts or has received suspicious enquiries in the past, the project team would be pleased to talk to you. Please click here for more details. 

Please Note...
All case studies taken from discussions with companies have been published with consent and anonomised accordingly. Some of the case studies use letters to refer to companies (e.g. Company A, Firm B). These letters are specific to individual case studies - i.e. Company B in one case study is not the same firm as Firm B referred to in a second case study. 

 

Case Studies
 Sector Case Study Features / Keywords
 Civil Nuclear Illicit Procurement of a Fluid Control Product  China; Distributers; Nuclear
 Electronics Israeli Illicit Procurement of Krytron Tubes from the USA  
Patterns in Suspicious Enquiries seen by a UK based Electronics Company  Suspicious enquiries; Compliance system; Iranian procurement
  Machine Tools
 
Export Control Violation by Japanese Machine Tool manufacturer  Diversion risk; China; Reputational risk
Toshiba-Kongsberg and Illicit Procurement by the USSR  Reputational risk; Soviet illicit procurement; Compliance systems
 Metals and Castings

 
Li Feng Wei and LIMMT  China; Red flags; multiple aliases; Letterheads; Iran; Due-dilligence
Khaki Yi  US; Illicit procurement; Global export; Controlling systems
Carbon Fibre to Iran Hamid Reza Hashemi; Murat Taskiran; illegal export; US; Iran
Carbon Fibre to the People's Republic of China Peter Gromacki; illegal exports; US; China
Helicopter Parts to Iran Amir Abbas Tamimi; illegal exports; US; Iran
 Academia John Reece Roth and Export Control  
Valves Fluval Apin S.L.

Project Alpha Researcher Daniel Salisbury and David Lowrie, Compliance Officer at Rakon UK, recently published an article in the Bulletin of the Atomic Scientists detailing Iran's attempts to acquire military grade oscillators from Rakon UK and the steps the company has taken to mitigate risk.


The article is available here.

On the 8th and 9th April 2013, the Project Alpha team was represented at the Carnegie Nuclear Policy Conference by Professor Wyn Bowen, Ian Stewart and Daniel Salisbury. This biennial conference is held in Washington DC and organised by the Carnegie Endowment for International Peace. The conference is the largest event of its kind in the world and attracts attendees from governments, NGOs and the private sector. Sessions at the conference focused on a wide variety of non-proliferation related topics, including the situation on the Korean peninsula, the IAEA’s role in monitoring proliferation, and the peaceful uses of nuclear technology.

Of particular interest was former Swedish Prime Minister and current Minister for Foreign Affairs, Carl Bildt’s presentation on ‘assessing the efficacy of sanctions for non-proliferation’. During this session, Alpha researcher, Ian Stewart posed questions regarding the challenge of  securing multilateral support for implementation of UN sanctions on Iran while also pursuing unilateral economic measures.  UN sanctions on Iran require all states to prohibit the export of certain proliferation-sensitive technologies, but countries such as Russia and China have stated a reluctance to maintain sanctions sighting the unilateral and extraterritorial steps take by some countries.

Attending the conference was a valuable opportunity for members of the Alpha team to listen to and participate in debates surrounding nuclear policy issues. It also provided an opportunity to discuss Alpha’s work with conference attendees and other researchers working in similar areas from around the world.

In March 2013 Project Alpha researcher Daniel Salisbury presented on private sector engagement at two conferences organised by the Project on Nuclear Issues (PONI). Daniel’s presentations considered the challenges posed by illicit procurement to the private sector and government and ways that these challenges could be overcome and risks mitigated. The presentations drew on work that Project Alpha has been conducting engaging the private sector since mid-2011.

The first conference was held at Offutt Air Force Base in Omaha, Nebraska, the home of US Strategic Command (STRATCOM) on 19 March. It was organised by US PONI, an initiative of the Washington DC-based thinktank Centre for Strategic and International Studies (CSIS). The presenters at the conference were largely drawn from presentations made at three conferences hosted by PONI in 2012. Daniel previously delivered a presentation on similar issues at a PONI conference at Pacific Northwestern National Laboratory (PNNL) in Washington State in April 2012. The STRATCOM conference attracted a large number of attendees from the US government, military and private sector.

The second, ‘Nuclear Futures: Linking Policy and Technology’, was a conference organised by UK PONI, an initiative hosted by the Royal United Services Institute (RUSI), along with the Bristol-Oxford Nuclear Research Centre and the Cabot Institute at the University of Bristol. The conference took place in Bristol on 25and 26 March and sought to bring together those from the policy and technical nuclear sectors to explore the relationship between civil and military nuclear activities. The conference was attended by a variety of participants from academia, industry and government.

The two conferences provided good opportunities to present the activities and research being conducted by Alpha. Daniel will be publishing a paper which covers some of the topics addressed in his presentation in the PONI STRATCOM conference journal. His presentation from the Nuclear Futures conference in Bristol is available to view below and audio is available here.

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In this virtual conference Dave Lowrie of Rakon UK will share his experiences of detecting illicit [...]
Date :  25 07 2013
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