BIS Fines US Business for Illegal Exports to Chinese Research Groups on Entity List

The Bureau of Industry and Security this week fined a Pennsylvania electronics business and its Hong Kong affiliate $5.8 million after the company voluntarily disclosed and admitted to illegally shipping controlled technology to China, including to military research institutes on the Entity List. The company, TE Connectivity Corporation, had “knowledge or reason to know” that the shipments violated U.S. export controls, BIS said, adding that its employees in China hid the true end-users and bypassed the company’s denied-party screening process.

In total, TE illegally shipped $1.74 million worth of “low-level” technology -- including wires, printed circuit-board connectors, and pressure and temperature scanners -- to missile, military electronics and defense research organizations on the Entity List, including the China Aerodynamics Research and Development Center, two China Electronics Technology Group Corporation research institutes working on military electronics production, and the Northwestern Polytechnical University, BIS said. Some of those parties are specifically helping the Chinese government modernize its military in hypersonics and unmanned drones, the agency said.

Chinese salespeople working for the company’s business unit in Hong Kong, TE Connectivity HK Limited, used “deception and concealment tactics to disguise end users on the Entity List or restricted end uses,” BIS said, including by changing their names and using “misleading” end-use certificates. The company’s screening efforts “also failed to identify an obvious alternative spelling” of an organization on the Entity List, BIS said.

Matthew Axelrod, the top BIS export enforcement official, said the agency has “made clear that all tools, including BIS’s unique administrative enforcement capabilities, would be leveraged to punish those who send even low-level technology to nation-state adversaries if that technology has the potential to further the development of unmanned aerial vehicle and hypersonic weapons programs.” The penalty, which BIS said was a “significant reduction” from the maximum it could have imposed, reflected TE’s cooperation with BIS and the fact that it disclosed the violations, Axelrod said.

It also takes into account “the seriousness with which we will act when a company permits China’s destabilizing military modernization programs to benefit from U.S. technology,” he said.

As part of a settlement with BIS, TE, which is headquartered in Switzerland but has a “significant executive management presence” in Pennsylvania, admitted to 79 violations of the Export Administration Regulations and must pay the $5.8 million penalty within 30 days. If the company doesn’t pay the penalty on time, BIS said it may suspend its export privileges for one year.

A TE spokesperson said "we have fully cooperated with BIS and are pleased" to settle the issue. “Integrity and accountability are among TE Connectivity’s highest values," the spokesperson said in an Aug. 15 email. "We have a strong commitment to compliance with trade laws globally and continue to make significant investments and improvements to our trade compliance program.”

BIS said TE began investigating the issue in 2017 after allegations sent to its legal office and “internal compliance reporting system” revealed that the company’s China-based Aerospace, Defense and Marine (ADM) unit was marketing the company’s products in a way that violated export controls. The Chinese employees of that unit, who have since been fired, “worked to conceal the nature of these sales at the direction” of the company’s now-fired China sales director, BIS said.

TE “uncovered a pattern of active deception and concealment by these ADM China sales employees and certain third-party distributors in China, who used misleading end-use certificates” to “circumvent TE’s denied-party screening process to ensure that sales were approved, regardless of the ultimate end user or end use,” the agency said.

In one instance in 2012, the company’s China sales director told salespeople to refer to state-owned Chinese military companies by numbers instead of their corporate names “to conceal the true end users” from TE’s compliance officials in the U.S., BIS said. The agency also said China-based distributors also used tactics to evade TE’s denied-party screening, including by using the names of other, non-restricted companies or by combining orders for restricted companies with orders for legitimate customers.

The company also used these tactics even for transactions that didn’t involve restricted customers, BIS said. The China sales employees used end-user names and end-use descriptions that TE compliance officials had previously approved, even if they weren’t part of the transaction, so that deals would be “approved and processed quickly.”

TE disclosed to BIS that it illegally sent 36 shipments of “space-grade and general-use wires, as well as standard connectors and clamps,” worth more than $470,000, to the 8th Research Academy of China Aerospace Science and Technology Corporation, which is on the Entity List. It also sent more than $5,000 worth of printed circuit board connectors to the Entity Listed 20th Research Institute of China Electronic Technology Group Corp, and 12 shipments of printed circuit board connectors, worth more than $211,000 to the Entity Listed Southwest Electronics Equipment Research Institute.

TE also discovered other violations in 2019 involving its China-based sensors unit, which the agency referred to as Sensors China. The agency said one of the unit’s Hong Kong distributors sold to China Aerodynamics Research and Development Center (CARDC), which is on the Entity List.

TE found out about the violation after the Hong Kong distributor accidentally included “information” in an email to the Sensors China unit that suggested the distributor had previously provided TE with the wrong end-user name to conceal the true end user, CARDC. After realizing the mistake, the distributor wrote to two sales employees with the Sensors China “and asked them to help conceal the true end user.” Instead, one of the sales employees reported it to TE’s compliance office.

The Hong Kong distributor, which helped ship TE’s scanner products in China, “deliberately concealed that CARDC was the end user,” BIS said, “despite its knowledge that CARDC was a restricted party.” It said the distributor “falsified and obfuscated end-user information in” end-user certificates and hid CARDC’s true identity by referring to it as “Mianyang” for years. During visits to China by TE’s account manager for the China Sensors unit, the distributor “arranged meetings with CARDC in nearby hotels and never took the account manager to CARDC’s business premises.”

BIS noted that before October 2018, the China-based sensors unit’s sales were managed by a sales team based in the U.S., and none of those managers could “speak, read, or otherwise understand Chinese.” That changed after the company reorganized later that year.

Despite the Hong Kong’s distributor’s “deception,” BIS said TE should have known CARDC was the true end user because references to the Entity Listed research group “appeared in reports sent by distributors to Sensors China sales personnel.” But BIS noted that the sensors unit’s customer care team, which was responsible for screening TE customers, did restricted party screening on a transaction-by-transaction basis after receiving end-user certificates from distributors. “As a result, TE relied upon the falsified" end-user certificates provided by the Hong Kong distributor, the agency said.

In total, BIS said TE discovered that its sensors unit was involved in 23 illegal exports, reexports, or transfers of U.S.-origin items designated as EAR99, which are items that aren’t specifically controlled for export to other countries but generally need a license before being sent to an entity on the Entity List. TE’s investigation revealed more than $990,000 worth of EAR99 exports to CARDC between 2016 and 2019, BIS said, including EAR99 pressure scanners used in wind tunnels that can be utilized to “analyze and model a variety of aerodynamic situations, from skyscrapers to aircraft to hypersonic missiles.”

TE also found two illegal exports of EAR99 items worth more than $34,000, including temperature scanners and pressure scanners, for delivery to Entity Listed Northwestern Polytechnical University. Although the Hong Kong distributor listed the end user as “NPU North West Poly Tech University,” and BIS said the Entity List included four aliases for NPU, TE’s “screening processes failed to flag the transactions.”