On February 1, 2016, Sihai Cheng was sentenced to nine years in prison after pleading guilty to six charges related to the diversion of U.S.-manufactured pressure transducers to Iran. The plea brings to an end a lengthy legal process that started with an indictment in 2013. Cheng is one of two individuals who have faced justice over the diversion of a substantial number of specialist pressure transducers to Iran’s uranium enrichment program. Shortly after Cheng entered his guilty plea, and shortly before his sentencing, charges were dropped against Cheng’s Iranian conspirator as part of a prisoner exchange timed to coincide with the implementation of the Iran nuclear deal. The case thus raises questions about the deterrence messages being sent to would-be middle men and proliferators. It also highlights yet again a critical weakness in the non-proliferation regime related to the procurement of goods from specialist suppliers via non-state actors has not yet been addressed. Addressing this challenge in order to detect and prevent such trade is vital if the Iran deal is to be successfully implemented over the next decade.
The Cheng Case
Cheng had apparently been procuring goods on behalf of Iranian entities for a number of years when his Iranian contact – Seyed Abolfazl Shahab Jamili – asked if he could procure pressure transducers made by MKS, a company in Andover, Massachusetts. Pressure transducers are a specialist item necessary in most uranium enrichment processes – including centrifuge enrichment. The items are manufactured by fewer than 10 firms worldwide and they are thus seen as a “chokepoint technology” whose adequate control can prevent clandestine uranium enrichment from taking place.
It was shown in court that Cheng (and indeed Jamili) knew that they were procuring the items on behalf of Kalaye Electric Company, a subsidiary of the Atomic Energy Organization of Iran with responsibilities for centrifuge enrichment.
In this case, Cheng was the key facilitator in the network, approaching MKS Shanghai Ltd to enquire about procurement of the pressure transducers. Staff of MKS Shanghai Ltd (a Chinese subsidiary of MKS Instruments Ltd in Andover, MA), recognising the sensitive nature of the procurement, informed Cheng that they could not sell the goods to him directly. However, Cheng was also advised that the goods could be procured through another Chinese businessman – Wang Ping. Cheng approached Ping, who then over the course of a number of years allegedly worked with Qiang Hu of MKS Shanghai Ltd and Cheng to have thousands of pressure transducers shipped to Iran.
Cheng, Ping and Hu of MKS Shanghai Ltd are understood to have conspired to have products made by MKS in Andover diverted. Between the two individuals, false end user undertakings were prepared and sent to Andover to have the goods shipped to Wang’s companies, which included Shanghai Racy Systems Integration Co,. Ltd,. In some instances, the names of real MKS customers were utilized for this deception. Cheng is personally alleged to have stripped the labels from the boxes before they were shipped to Iran’s enrichment program.
The collective effect of the actions of the individuals was that more than 1000 US-origin pressure transducers were diverted to Iran. Many, but perhaps not all, of these goods were sent to Iran. Given the importance of pressure transducers to Iran’s nuclear enrichment program, it seems certain that the illegal activity was of substantial benefit to Iran’s program, which has been prohibited by UN sanctions from receiving such goods for much of the last decade.
Cheng was arrested at London’s Heathrow airport in late 2014, purportedly after flying to the U.K. to watch a football game. An extradition process then took place that saw Cheng extradited to the U.S. in December 2014. Interestingly, the extradition nearly did not come to pass after it was suggested (incorrectly) in court that the export of such goods from the U.K. to Iran would not have been an offence prior to the adoption of EU regulation 428/2009. In fact, the extradition hearing highlights the challenges associated with enforcing export control regulations in many countries, with the barrister acting on behalf of the crown describing export controls as a “turgid” area of the law.
Caught in the Middle?
At nine years, the sentence that Cheng received appears severe. Hu, the former sales manager of MKS Shanghai who was lured to Boston in 2012, was sentenced to 34 months in prison. Charges were dropped against Jamili – the Iranian involved in the case as part of the prisoner swap mentioned above and will face no further action. Cheng has already lodged an appeal against his sentence, with his lawyer arguing that Cheng would not have entered into the plea agreement had he known that the charges against Jamili would soon be dropped. Nonetheless, reading the government’s sentencing memorandum, it is clear that Cheng was the central character in the illicit procurement network. In this case, it could be argued – and indeed was argued in court – that the sentencing is proportionate and will act to deter others from repeating Cheng’s activates.
Nonetheless, the dropping of charges against Jamili in particular raises complex questions about the deterrence value of this case and the messaging to other would-be proliferators. It is also notable that the prosecution of these cases has taken place in the United States rather than in China where the individuals were resident and where the crimes are alleged to have taken place.
The decisions of the United States to lure Hu from China to the U.S. and to seek the extradition of Cheng from the U.K. are controversial. At a workshop on export controls for Chinese industry co-organized by the author in early 2015, a Chinese government official rebuked the U.S. for taking enforcement actions against Chinese citizens – to applause from the Chinese industrialists present at the workshop. It is likely that China will seek to shield its citizens from extraterritorial actions.
The decision, however, was likely taken out of frustration: U.S. officials have complained for many years about an apparent lack of action by the Chinese government to enforce export controls in cases where goods could contribute to WMD programs. This has led to a widely held view that Chinese export controls are weak, which in turn has led some states to take a cautious approach to licensing exports of sensitive goods to China. There are signs that China is committed to improving its export control systems. Recently, for example, China created a new bureau in its Ministry of Commerce for this purpose. This unit includes an enforcement team responsible for pursuing violations of export control laws. China has also apparently created a cross-government “emergency reaction mechanism” through which it can respond to intelligence information about possible violations.
Despite this, it is unclear how the export control landscape affects decision-making in Chinese industry. There have been very few enforcement actions undertaken by the Chinese government in relation to export controls. While the risk of U.S. extraterritorial punishment might deter Chinese industry might be deterred from committing export control violations, the apparent willingness of the Chinese government to defend its citizens and the dropping of the charges against Jamili may lessen this effect.
Implications for the JCPOA?
The case also raises questions about future efforts to prevent illicit trade, particularly in the context of the Iranian nuclear agreement of summer 2015, which came into force on January 16 – the same day as the prisoner swap. As part of this agreement, Iran has agreed to procure nuclear-related items through a dedicated channel – the “Procurement Channel,” and has acknowledged that further illicit procurement of such pressure transducers would constitute a breach of the nuclear agreement.
The case highlights the importance of the procurement channel and the limitations of traditional export controls. Under the procurement channel, the Iranian government would be required to sign an end user undertaking for any nuclear-related items that are imported – including the types of pressure transducer acquired by Iran in this case. If Iran imported such items without the required end user undertaking and permission from the Procurement Working Group of the joint commission, it would be in violation of the Joint Comprehensive Plan of Action (JCPOA), as the Iran deal is officially known.
The procurement channel was established because of the limitations of traditional export controls. The U.S. government issued export licenses for the goods to be exported to China. In some cases, the U.S. government appears to have allowed the goods to be held in stock by MKS Shanghai, probably because of the company’s good reputation with regards to export controls.
It is not yet clear how this case came to light, but it seems likely that authorities learned about the Cheng network through information gleaned from intelligence agencies rather than from information obtained in the export control process. This highlights a key challenge in implementing the procurement channel. Much of the enforcement action that takes place in relation to export control violations is initiated based on information from intelligence. Thus a key challenge for implementation of the Iran deal will be in ensuring that such information can be acted upon both in terms of national disruption of procurement networks, but also in terms of holding Iran to account for any non-compliance with the terms of the JCPOA.
Given that intelligence information is by its nature unreliable and usually cannot be shared widely, it is desirable that some investigatory body exists that can independently investigate whether a violation actually occurred. The UN body assigned to this task in relation to the implementation of sanctions – the Iran Panel of Experts – was disbanded on implementation day. It is not yet clear whether an alterative body will take up this mandate. Notably, the MKS case, despite taking place during the Panel of Expert’s mandate, was never reported to the panel. Given that the panel could generally only investigate cases that are reported to it, this has meant that the independent UN body has never investigated whether Iran breached sanctions in this case, even though two individuals have pleaded guilty to related offences. This is an unhelpful precedent for implementation of the JCPOA.
Significant Prosecutions, Strategic Gaps
Prosecutions for export control violations are relatively rare. The fact that two individuals have been brought to justice in this case, which relates to a substantial diversion of particularly sensitive instruments, is to be welcomed. On closer look, however, the case highlights numerous gaps and limitations in the non-proliferation regime. In the context of implementation of the JCPOA, it is vital not only that efforts to enforce export controls and investigate possible violations continue, but that they be ramped up. Fail to do so may derail the JCPOA’s chances of constraining Iran’s nuclear program.
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.