Former US Official: Analyze Historical Data, Corporate Records to Find China Red Flags

Potter, now a senior analyst with risk intelligence firm Sayari, said links between private Chinese companies and Beijing’s military-civil fusion (MCF) efforts “are not promoted or trumpeted like they once were.” He noted that Chinese policy statements “don't make as much mention” of MCF as they used to, and the government’s most recent five-year economic and social development plan “made no mention of it at all.”

“All of this makes things harder on analysts and investigators trying to comply with related export controls,” Potter said during an event hosted by Sayari this week.

U.S. companies at risk of violating sanctions or export controls have devoted more resources in recent years to their due diligence efforts, especially firms that must determine whether a potential Chinese customer has ties to a sanctioned entity or would otherwise be subject to U.S. export controls through its connections to the country’s military.

Although gleaning that information may have grown more difficult, Potter said it’s still possible.

“There is an important distinction to make here: less obvious does not equal non-existent,” he said. “It's our view, and the view, I think, of most observers, that the close integration between the Chinese military and civilian industries that takes place as part of MCF is as prevalent as ever.”

Potter said some Chinese companies have altered their names to remove public-facing references to MCF, including to China’s National Military-Civilian Integration Industry Investment Fund, which would signal an obvious connection to the military. But even though a Chinese company may, for example, change the name on its website, it often can’t change its name in corporate records or other official shareholder information.

“So there's still some space between what's being disclosed in very public settings and what is still being required in Chinese corporate records,” he said.

Potter also said compliance officers can look at a company’s ”historical records” to see if it recently removed references to the military. “Even when a company removes mention of MCF from its name, that phrase, more often than not, was captured in previous official records,” he said. He called it a “relatively simple process” to undertake due diligence “if you have access to those previous versions of a company's disclosures” and those disclosures mention the military.

Other information may only be gleaned from searching through layers of ownership records. Potter used an example of a China-based company that didn’t appear to be owned by any entity on a U.S. restricted party list, but a search of the company’s ownership structure revealed that it’s controlled by the Aviation Industry Corporation of China (AVIC), an entity on the Non-Specially Designated Nationals Chinese Military-Industrial Complex (NS-CMIC) List overseen by the Treasury Department. AVIC is also listed as a Chinese military company on the 1260H List maintained by the Pentagon.

Neither list imposes traditional export restrictions or financial sanctions -- the NS-CMIC List places certain investment restrictions on listed companies, and the 1260H List imposes government contracting restrictions. But Potter noted the Bureau of Industry and Security has flagged entities on both lists “as high-risk," and said “quite a few” AVIC subsidiaries and affiliates are on the more restrictive Entity List and Military End-User list maintained by BIS. The agency has recommended that companies scrutinize the activities of the parents or subsidiaries of those on its MEU List to “determine the specific MEU risk attached,” he said.

He also said companies on both the Treasury and Pentagon list could be added to more restrictive lists in the future.

“It's really important to look at company ownership and control when you're determining the risk of potential Chinese military companies,” Potter said. “For a lot of these companies, corporate relationships are the only place in public records where you would find red flag indicators such as this.”