In late April 2014, the U.S. government announced a $5 million bounty for information leading to the arrest of a Chinese national and resident, Li Fangwei. Known more prominently in the U.S. as Karl Lee, an accompanying indictment described him as a “principal contributor” to the Iranian ballistic missile program. The reward is unprecedented in the U.S. government’s efforts to end the activities of an individual in supplying prohibited WMD programs.
Li and his network of companies have also been sanctioned numerous times by the U.S. – accounting for a large number of non-proliferation sanctions on Chinese entities over the past decade. Using information from U.S. designations, Chinese government and commercial databases, Project Alpha based at King’s College London has mapped out in great detail the extent of Li’s operations. This research suggests that Li is not merely playing the role of middleman, but that he is also expanding his business interests in the manufacture of sensitive technologies.
Li’s Operations
Li has been described in a recent indictment as having done “a great deal of business with Iran,” and being “a long time” and a “principal” supplier to Iran’s ballistic missile program. Since 2004, Li has been connected with somewhere between 12 and 26 firms, most of which are little more than shell companies. Through this network of companies, he is alleged to have transferred large quantities of materials to Iran’s missile program in defiance of UN sanctions. While early allegations focused on alloys and graphite, concerns are growing that Li may also be manufacturing and exporting other technology, including missile guidance components.
Li’s business activities are extensive. His first firm – LIMMT Economic & Trade – was set up in 1998, and sanctioned in 2004. Since then Li has set up a dozen or more other companies in and outside the city of Dalian in Eastern China. Presumably since he was prevented from setting up companies in his name by the Chinese authorities in 2008, he has used details of his mother, family members, or possibly business associates when filing the business licenses. Identifying the exact number and name of each of Li’s firms is difficult: The latest U.S. indictment includes 26 company names. However, by cross-checking these names with Chinese language sources, Alpha’s research revealed that these correspond with just 12 documented companies. These firms – whilst listed as separate in Chinese government databases – all share at least one of two contact addresses, and other unique identifiers such as phone numbers and email addresses.
This highlights a key challenge in enforcing non-proliferation controls: on several occasions the U.S. authorities asked the Chinese government to take action against Li but provided details of firms that had either closed or that did not actually exist. Similarly, difficulties caused by transliterating Chinese language company names, and the lack of a requirement to provide registered companies in China with an English language name has made designations and listings of Li’s companies difficult.
Li’s alleged use of illicit procurement methods may be underpinned by his substantial financial assets and the profit that can be realized through the procurement of technology. The trade between Li’s network and Iran was said to have “earned” him $10 million between 2009 and 2013. The recent U.S. sanctions have confiscated $8.6 million of funds from his front companies from Chinese back accounts associated with his network of companies. Li’s network appears also to have had substantial assets available to invest into a company in 2009, with $4 million being invested into the business that is thought to now own a substantial factory on the outskirts of Dalian.
The creation of so many firms by Li appears to be a direct response to the action of the U.S. government in “designating” his firms. Designations under U.S. law have the effect of cutting an entity off from the U.S. market and the international financial system. On numerous occasions Li created new companies soon after previous companies had been designated and on more than one occasion he allowed the business license of designated companies to lapse. A recent wanted poster released by the FBI lists 16 aliases. He has also used multiple bank accounts registered in multiple names to transfer funds.
The allegations against Li suggest that his network has transferred both goods that it has manufactured and goods that it has procured from other sources. Li appears to be manager and have an interest (perhaps as owner) of a substantial Graphite factory – Sinotech (Dalian) Carbon & Graphite Manufacturing Corporation — in the outskirts of Dalian, which was designated (for the second time following a name change) in the recent action taken against Li in 2014. This factory appears to be able to manufacture at least some of the products that Li is accused of having previously transferred to Iran. Some of these products also fall within the scope of controls on graphite that are listed in the Missile Technology Control Regime (MTCR), to which China, although not a member, claims to adhere.
Research conducted by Project Alpha suggests that Li also may be expanding his capabilities to begin the manufacture of fiber optic gyros – advanced components used in aerospace or missile guidance. A company that is linked to Li but that has not yet been designated by the U.S. has listed this capability online, and consistent job advertisements listed in the name of the factory have also been found.
Responding to Li’s Activities
The sheer scale of the allegations against Li has meant that he is a high-priority target for counter proliferation activities. Western governments have repeatedly asked China to act in keeping with the country’s international commitments by investigating Li and bringing him to justice. However, despite claims by China that a complex, interdepartmental investigation has been undertaken, little or no enforcement action has been taken by the Chinese government in the last 10 years.
This response from China has frustrated the U.S. in particular. Already concerned about a host of other cases involving illicit trade through China, the U.S. government began to take action against Li. The first such action took place in 2004 when the U.S. designated LIMMT. Since then, the U.S. has designated dozens of firms thought to be connected with Li. It is the most recent action by the U.S. that is most significant, however. U.S. authorities in late April confiscated millions of dollars of assets associated with Li’s network and issued a $5 million dollar reward for information leading to his arrest.
This most recent action by the U.S. is unprecedented. Its enactment likely means that the U.S. government think that there is no prospect of the Chinese authorities acting against Li; certainly, Chinese officials have stated that the recent sanctions may harm bilateral cooperation on nonproliferation.
Breakdowns in U.S.-China relations on non-proliferation issues – and especially regarding cases of illicit trade – are not uncommon. After U.S. arms sales to Taiwan, Chinese government officials have previously become unavailable to meet with U.S. officials connected with arms and non-proliferation controls. U.S. designations of Chinese entities have also previously annoyed Beijing. However, the Karl Lee issue has the potential to significantly damage U.S.-China relations on non-proliferation issues at a time when cooperation is vital.
The importance of U.S.-China relations on non-proliferation issues is not limited to tackling the Iranian nuclear and missile crises. Chinese businesses have also been integrally linked to the supply of goods to North Korea’s prohibited programs. The U.S. and China must work together to address both issues.
There are more systemic risks too. China has been investing in its ability to manufacture strategic technology in recent decades, and the country is on the brink of having the capability to manufacture a wide range of strategic commodities to a standard that is as good as that of international rivals. It is vital that China works to improve its export controls and engage key industries on these issues soon if a tidal wave of proliferation is to be prevented.
However, Chinese authorities lack the capacity needed to conduct effective industry outreach without outside assistance – something that Beijing is not likely to request. Such assistance has long been difficult for the U.S. to offer. Despite having a well-funded export control outreach program – the U.S. government is heavily constrained by Congress when it comes to expending resources in China. Until recently there had been signs that progress was being made, but the latest actions may further set back plans for capacity building.
More strategically, the goal of the international community in the medium term should be to have China join the Missile Technology Control Regime (MTCR) – a group of likeminded countries that coordinate policy on the export of missiles and components in order to prevent proliferation. China applied to join the MTCR in 2004, but because of proliferation concerns and other issues the application was refused. Similarly, there would be clear benefits to China’s admission into the Australia Group as a key manufacturer of dual use chemicals.
The Li case and cases like it would likely mean that any such application would not be considered in the near future. The challenge for the U.S. and for China therefore is to identify a way of working together to build capacity in the short term, despite cases such as this one, with a view to having China join the MTCR.
Ian J. Stewart is seconded from the British Ministry of Defence to King’s College London where he heads Project Alpha, which works to understand and prevent illicit proliferation-related trade. Daniel Salisbury is a Researcher working on Project Alpha at the Centre for Science and Security Studies, Department of War Studies, King’s College London. This article builds upon a case study published by Project Alpha of King’s College London. Click here for more information.