Chinese Companies Avoid Sanctions, Still Deal in U.S.

Jan. 14, 2010
By changing name spellings or addresses, targeted Chinese companies are still trading in the U.S. -- and thriving.

Sometime back in 2006, someone in the marketing department at American Forge & Foundry purchased a sample product for an oil drain from a company in China. The product was shipped, but was quarantined at the dock for reasons unknown. Weeks went by, the transaction was forgotten, written off, and the case was closed.

Fast-forward nearly five years and John Iliff, the general manager at American Forge & Foundry, received a phone call asking about that purchase. The Chinese company with which it had conducted the transaction, China JMM Import & Export Pudong Corp., he found out, shares an address and phone number with a unit of China Precision Machinery Import Export Corporation (CPMIEC).

Why is that significant? Because CPMIEC, a state-owned company, has been banned from shipping to U.S. firms since 2006, when it was discovered to have been selling highly sophisticated missile technology to Iran. But those trade restrictions haven't stopped CPMIEC from conducting brisk trade in the U.S. on any number of products, from anchors and drilling equipments, to automotive parts.

A slew of unsuspecting U.S. companies are transacting illegally because often CPMIEC, and other entities on the sanctioned list, serve as an intermediaries or simply change the American spelling of its names or uses a different address.

"We never imagined we were trading in illegal goods," says American Forge & Foundry's Iliff. "We were blindsided by this."

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The Treasury Department's Office of Foreign Assets Control (OFAC) oversees the enforcement of 20 sanctions programs. It offers a PDF copy of its Specially Designated Nationals (SDN) List on its website. However, the list is voluminous -- Iliff estimates the document at 450 pages long -- and lacks a search engine.

"There are tens of thousands of entities with whom U.S. companies may not engage in transactions," says George Grammas, a partner of law firm Squire, Sanders & Dempsey, and chair of the international transaction regulations exports and customs practice. "It has nothing to do with your intent. It has to do with whether you dealt with them or not. In other words, there's strict liability for dealing with one of these entities."

If, for example, a U.S. company has dealt with one of the companies on the SDN list, even unknowingly, executives and compliance officials could receive exorbitant fines and potential jail-time. To date, unsuspecting U.S. companies have simply received warnings from OFAC.

"But if there is a systemic problem where the company has simply failed to address the issue, that's when there's risk to a C-suite level person," says Grammas. "They have to take steps necessary to bring the company into compliance."

Despite the threat of legal punishment, U.S. companies can exert strict diligence and still wind up, indirectly, dealing with a foreign company under sanction. There are can be problems with translating company names, and many sanctioned companies can simply create aliases or bogus shell companies to mask their ownership.

"In dealing, in particular, with Chinese companies, it's so difficult because they have two-tier providers that feed them," says American Forge & Foundry's Iliff. "It's a real difficult web to navigate. You have to keep your eyes open before you deal with a supplier there."

According to Grammas, some U.S. companies are integrating sophisticated search capabilities into their SAP or other management information systems to automatically check the names of all parties to a transaction and compare it to the SDN list.

Companies are also making a more concerted effort to make its front-line officials more aware of the danger.

American Forge & Foundry, for instance, issued new policies to their purchasing, acquisition and marketing departments that all future business must be checked against the SDN list. Furthermore, the company's trading counterparts have to sign affidavits assuring that there are no transactions taking place with sanctioned entities.

But even that might not be enough, says Grammas.

"Essentially, these companies that deal with entities outside the U.S. have to make an investment in resources," says Grammas. "I don't know of a way of dealing with [this issue] without investing. You have to have the automatic search capability and an appointed person within the organization who will attend conferences and become educated on trade compliance obligations. It's becoming a cost of doing business."

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