Can the U.S. Use Its Long Arm to Stop a Technology Hemorrhage?

In 2014, U.S. officials described Chinese national, Karl Lee, as the "principal supplier" to Iran's ballistic missile program. Pursued for nearly two decades by U.S. intelligence and law enforcement, Lee's network was responsible for illicitly shipping high-end materials from his factories in China to Iran. The scale of his activities was second only to famed nuclear proliferator, A.Q. Khan— the "father" of Pakistan's nuclear bomb and responsible for selling nuclear enrichment technology to Iran, North Korea, Libya, and perhaps others. A recent documentary, however, suggests that Karl Lee was imprisoned in China in 2019, likely as part of a secret Sino-American deal. Yet, despite the apparent end of Karl Lee's network, recent information suggests that the network may still be operating, further highlighting the difficulties of implementing and enforcing strategic trade controls.

Export controls—the rules and regulations meant to deny U.S. adversaries access to critical American technologies—are once again becoming a central tool in managing great power competition. Last October, the Biden administration unveiled new rules to cut off China's access to U.S. semiconductors and chip-making technologies, undermining China's own burgeoning indigenous semiconductor industry and hampering its ability to use the chips in its own strategic and military programs. Limiting Russia's access to technology—as it fights Putin's illegal war in Ukraine—has also become a priority.

As Russia's defense industry struggles under sanctions to replenish spent munitions and prepare more systems for use on the battlefield, its ability to illicitly tap into western supply chains becomes ever more important. The Royal United Services Institute, a London-based defense and international security think-tank, released a detailed report last summer showcasing Russia's illicit acquisition of Western-origin microprocessors for use in a wide range of weapons systems including cruise missiles, military communications and electronic warfare systems. The report found that Western microelectronics are far more slippery—and Russia is far more dependent on these goods—than previously thought. Indeed, Iranian drones, procured by Russia as it struggles to resource its war, have also been found to contain similar items.

The sheer difficulty of controlling what can sometimes be ubiquitous technologies in highly globalized markets are laying bare the limits of this toolset—even with renewed efforts to coordinate with allies and partners. Whether these tools will be effective, however, largely depends on how the US tailors its enforcement approach to meet both market forces and nimble illicit procurement networks. This includes the success of extraterritorial approaches—the "long arm" that the U.S. uses to undertake enforcement in overseas jurisdictions.

A recent U.S. indictment suggests that a new individual Xiangjiang Qiao—alias "Joe Hansen"—is continuing Karl Lee's proliferation activities. Assistant Attorney General Matthew G. Olsen of the Justice Department's National Security Division announced new charges against Hansen, alongside four other cases including those involving technology transfer to Russia, China and Iran. These were announced under the auspices of the new "Disruptive Technology Strike Force", a multi-agency task force that was created between the Justice, Homeland Security, and Commerce Departments in February to better coordinate export control enforcement.

However, despite the continued activities of the Lee network through "Joe Hansen," the imprisonment of the 20-year mastermind of the network in China is a key development in this decades old case. During this time, the United States deployed unprecedented extraterritorial tools, including a civil asset forfeiture proceeding, to disrupt Lee's activities. A reappraisal of their utility of these novel tools is timely especially in light of renewed efforts to implement export controls against Russia and China: What, for example, does the Karl Lee case tell us about the limits of U.S. extraterritorial enforcement of trade controls and how can the U.S. and its partners apply these lessons to counter Russian and Chinese technology illicit procurement networks?

Lessons from the "Karl Lee Blitz"

Karl Lee's proliferation activities first came to the attention of the U.S. government in the late 1990s and early 2000s. He first acted as a middleman, exporting goods to the organization running Iran's solid-fuelled missile program, Iran's Shahid Bagheri Industrial Group (SBIG), with his Dalian-based LIMMT Economic and Trade Company. Over the next two decades his operation shipped vast amounts of materials—graphite, gyroscopes, accelerometers, metals and materials—to support Iran's efforts.

It was, however, in 2014 that U.S. law enforcement escalated its efforts against the China-based Lee, in what some DC insiders described as a "Karl Lee blitz." Following waves of designations against his various front companies to this point, in April 2014 the US authorities levied a second criminal indictment against him, seized $6.8 million of his assets, raised a reward of up to $5 million for information leading to his arrest, and issued an FBI Wanted Poster featuring the only known photograph of the proliferator.

The Lee case typifies one of the core challenges of enforcing export controls overseas. Namely, what to do when a proliferator runs an illicit procurement network largely out of U.S. law enforcement's reach? Indeed the same jurisdictional conundrums are being seen in efforts to counter Russian and Chinese procurement networks. Many of these networks either involve procurement agents based in these countries, or in "third-country" jurisdictions where they reside to dupe exporters and export controllers into thinking their goods are destined for less concerning destinations.

But despite their efforts to hide in overseas jurisdictions, participants in these networks are not necessarily completely out of the reach of U.S. law enforcement. In the Karl Lee case, for example, U.S. prosecutors relied on a somewhat obscure section of U.S. anti-money laundering laws, which allow the government to seize a target's assets, even if those assets are not held within U.S. banks. The law relies on US banks’ central role in global finance and correspondent banking— that is, the network of accounts held between banks that help to facilitate transactions and clearing. Thus, even though Karl Lee's assets were held in Chinese banks, those banks all held their own correspondent accounts at American institutions, which U.S. authorities could seize assets from.

Such a legal proceeding is both extraordinarily powerful and rarely used. In fact, the only other cases that have involved civil asset forfeiture from correspondent bank accounts have dealt with China-based front companies involved in laundering funds and acting as procurement agents for North Korea. Such a powerful tool could, however, have some utility against Russian and Chinese procurement networks—seizing their funds and making their work less profitable. The problem, however, is identifying a big enough target so as to demonstrate the seriousness of the infraction and enforcement action, but small enough as to not seriously damage economic ties or prompt a backlash against U.S. business interests.

The $5 million reward for Lee was high relative to similar rewards, and clearly meant to draw out information about a figure shrouded in mystery. As the CIA has reached out publicly to disenchanted Russian officials in recent days, rewards for information leading to Russia's procurement operatives could also yield results.

Some tools used to build Lee's public profile—particularly the FBI Wanted Poster—have been used against other technology procurers. In 2012 a number of individuals surrounding Russian company ARC Electronics were indicted for selling over $30 million of microchips to Russian military and intelligence end users. While several of the network participants have been jailed, three associates are still the subject of FBI wanted posters.

Moreover, the U.S. has also developed a suite of sting and lure operations to bring targets from these networks to friendly countries where local law enforcement can arrest them and they can be extradited to face justice. Karl Lee was careful with his travel plans—if indeed he conducted overseas travel besides that to Iran. Covert operations can also potentially be run where procurement agents are played off each other and trust undermined, or where compromised technology is inserted into supply chains.

However, while the United States has powerful tools at its disposal, acting against these networks at the tactical level is often hostage to broader political and diplomatic conditions. Lee, while based in China and possibly with some local political connections, was supplying Iran and not China. China or Russia would likely not burn one of their own procurement agents operating in the national interest.

The recent developments in the Lee case also highlight the importance of high-level politics, in the sense that it was likely a high-level secret political deal struck between the Trump administration and the Chinese government that saw Lee incarcerated. The long arm of U.S. extraterritorial export enforcement clearly made Lee's life difficult, disrupted some of his activities and made him substantially poorer, but it was not what ultimately put him behind bars.

There are political and diplomatic costs to the use of these tools. With Russia at least, the aggressor in a war with a major U.S. partner, "the gloves are off." With extensive sanctions against the Russian state and industry any use of extraterritorial tools will be less controversial and require less careful consideration. The use of these tools against Chinese networks, as has already been seen, is more complicated given the U.S.'s trading relationship. Use of such tools—considered U.S. jurisdictional overreach by China—have resulted in anger and even retaliation through hostage diplomacy.

What More Can the U.S. and its Partners Do?

At a press conference last month, Assistant Secretary for Export Enforcement at the U.S. Department of Commerce's Bureau of Industry and Security, stated that twenty years ago, the primary threat was Al Qaeda—today, it is keeping advanced technology out of the hands of adversaries like China, Russia, Iran, and North Korea. There is no doubt that export controls will continue to feature heavily in the United State's approach to great power competition. But to be effective, the U.S. and its partners will need more resources, broader engagement with international partners, and deeper relationships with industry leaders.

For one, extraterritorial enforcement requires an extraordinary level of inter-agency and international coordination and cooperation, and it will be imperative for Congress to address resource constraints. The Disruptive Technology Strike Force is an ambitious and necessary effort to address these challenges, but more is necessary. Specifically, Congress will need to allocate additional resources to key agencies involved in export enforcement, including Commerce, the FBI, and DHS Homeland Security Investigations. A recent report by the Center for Strategic and International Studies, for example, found that the Commerce Department's Bureau of Industry and Security's capability and capacity to enforce export controls would significantly benefit from budget enhancements to support technology modernization programs as well as additional analytic and enforcement personnel.

Second, engagement with international partners is a critical component to solving a core jurisdictional conundrum. That is, in a highly globalized market, a robust system of export controls is only as good as allies and partners will, capacity and capability to implement their own national trade controls. This, of course, is much easier said than done. Many jurisdictions that act as key transhipment points or provide services that help procurement networks obfuscate their activities.

Many of the so-called financial "secrecy jurisdictions," for example, are generally low-income countries with little or no advanced technological industries. Dedicating resources to implementing and enforcing what may be viewed as unnecessary or irrelevant policies is a hard sell. However, an understanding of export controls and sensitive technologies is important to allow jurisdictions to avoid being exploited by these proliferation networks. Thus, it is important for U.S. policy makers to facilitate engagement, capacity-building, and outreach activities in ways that are viewed as relevant and mutually beneficial.

Third, partnerships with industry—from exporters to the financial services industry—are crucial. In the past, however, industry partnerships have struggled to amount to little more than one-way relationships. A common complaint, often overhead at private-sector outreach events, is that information needed to effectively monitor for potential violations is often scarce or incomplete. Government will need to help overcome this challenge, providing timely and actionable information to industry. Government can also leverage civil society to help overcome these information gaps. A revolution in the ability of civil society to provide open source intelligence is fundamentally changing the relationship between government and industry. With proper guardrails, this should be viewed as an asset.

Like sanctions, over-enforcement could lead to negative repercussions affecting American businesses and markets. It may be one thing to target Russian procurement networks in concert with partners and allies. It is another, however, to go after Chinese firms, especially larger ones with connections to the Chinese state—risking retaliation against American economic interests or that of its partners. Furthermore, some mechanisms like civil asset forfeitures against correspondent banking and license denials, could be viewed as anti-competitive, ultimately undermining American competitiveness in the long-run.

As the Karl Lee case shows, while a powerful set of tools, the long-arm enforcement of export controls also has its limits. Developments over the past weeks also highlight the ability of networks to adapt. Just days after the documentary revealed Lee was likely in Chinese prison, the U.S. government unsealed the Hansen indictment, showing that Lee's proliferation business empire likely has a new heir, and underscoring the persistence of illicit networks and their ability to operate and find new ways to evade export controls.

With technology transfer risks and export controls again moving to the center of U.S. national security discourse, however, careful and considered use of these "long arm" tools can help to counter the risk of technological hemorrhage and help the U.S. and allies to compete.