US Should Harmonize Entity List, SDN List, Former Official Says

The U.S. should harmonize the sanctions lists kept by the Commerce and Treasury departments to ensure trade and financial restrictions are imposed across the same set of companies, said Keith Krach, a former senior State Department official. Krach said all companies subject to export restrictions on the Entity List also should face strict financial sanctions on Treasury’s Specially Designated Nationals List to cut off any U.S. support for sanctioned companies, particularly those in China.

“We've pretty much shut off a lot of technology [going to China] in terms of export controls,” Krach said during an event this week hosted by the Hudson Institute, “but we're really far behind on these financial sanctions.”

Krach, who served as undersecretary for economic growth, energy and the environment in the Trump administration, said he tried to spur more coordination between the two lists during his time in government. “Out of the 500 or so companies on the Commerce Entity list, 493 were not on the [Office of Foreign Assets Control] list,” Krach said. “So in other words, we're not giving them the technology, but we're financing them.”

He said the U.S. has been “enabling” a range of Chinese companies who may be on one list but not the other. He also said the U.S. should add to its list of Chinese companies subject to U.S. investment restrictions, specifically mentioning Tencent, Alibaba and Baidu. “The average American is unknowingly funding these companies,” Krach said. “These should be companies that are included in capital market sanctions.”

Although he applauded the Biden administration for expanding the Trump-era policy that banned investments in Chinese military companies (see 2106030067), Krach said he’d like to see better “implementation” of the restrictions. He said some companies are finding ways around the restrictions.

“A lot of times there's a big gap in government between policy and execution,” Krach said. “A key area to this, it might be a little technical, is when they put out the FAQs, the questions and answers. Because the devil is in the details, so we’ve got to make sure that it closes all the loopholes.”

Krach also suggested lawyers shouldn’t be allowed to help Chinese companies find “loopholes” to remove themselves from the Entity List. “Can you imagine this: We've got lawyers here in the United States who are getting paid by China to find loopholes in our government,” he said. “Could you imagine us as businessmen going over to China” and doing the same thing? He called it “unthinkable.”

"This is where the issue of reciprocity and everything should be applied,” Krach said. “It was one of the things we talked about. We talked about clean capital markets, clean funds, clean investments, clean technology. How about clean law firms? That'd be a novel concept.”

Another step the U.S. can take, Krach said, is making sure it’s sanctioning each of the various subsidiaries of a parent company that is subject to trade or financial restrictions. He said Chinese companies use an “unnatural amount of subsidiaries” for “the purpose of deception and concealment.”

“We have to make sure not only do we sanction that main mothership,” Krach said, “but the subsidiaries coming off it.”