U.S. Adds SMIC and other Chinese Entities to List of Military Companies

Written by Alex Bate

December 7, 2020

The U.S. Department of Defense will add four entities to its list of Chinese military companies barred from U.S. investment, according to Reuters.

The announcement comes amidst repeated U.S. actions to highlight the risks posed by Chinese military entities. President Trump issued an executive order (E.O. 13959) last month that cites China’s Military-Civil Fusion strategy as the source of U.S. concern over China’s military industrial complex. Also last month, the U.S. Department of Commerce said it was considering designating 89 Chinese companies as military end users.

The four new companies play major roles in China’s economy and have investment from the Chinese government, according to public records. Understanding military affiliation in China is crucial to identifying risky entities – and public records can help.

 

New Section 1237 Designations

The Department of Defense will add the new entities to its list of “Chinese Communist military companies,” pursuant to Section 1237 of the National Defense Authorization Act of 1999. The additions include Semiconductor Manufacturing International Corp (SMIC), China National Offshore Oil Corp (CNOOC), China Construction Technology Co. Ltd., and China International Engineering Consulting Corp (CIECC).

The companies, which each have a global footprint, play significant roles in the Chinese economy. CNOOC is China’s largest offshore oil producer, and CIECC is China’s largest engineering consulting firm, according to their company websites. Both CNOOC and CIECC are wholly state-owned.

SMIC and China Construction Technology each have significant indirect shareholding from the Chinese government. SMIC, China’s largest chipmaker, has indirect investment from the State Council SASAC, the Shanghai City SASAC, and the Cangzhou City SASAC. The Department of Commerce imposed export restrictions on SMIC in September due to risk of military end use.

The Section 1237 entities’ sprawling downstream holdings may also be at risk of military affiliation. CNOOC is a shareholder of at least 30 active companies operating in China and abroad, according to records from China’s National Enterprise Credit Information Publicity System (NECIPS).

 

Using public data to uncover risk in China

Identifying military entities in China is a complex problem. Due to growing concern over military-civil fusion in China, the U.S. definition of military affiliation goes beyond legal ownership to include any risk of military affiliation or end use.

Public records can shed light on this problem. Chinese companies are required to register with a business purpose, which can contain references to the military or military-civil fusion. Corporate records can also show when a company is owned by the Chinese government, either directly or through multiple layers of ownership.

In addition, public data can uncover the extent of military-affiliated companies’ networks and highlight their highest-risk holdings.

 

More Sayari analysis to come

The Section 1237 entities’ subsidiaries and branches also may be at risk of military affiliation, and it is crucial for compliance teams to understand their scope. Our team is working to identify the highest-risk holdings of the 31 entities named in E.O. 13959.

We will publish our findings soon, and stay tuned for more tips on how to get ahead of regulators and identify other military-affiliated entities. Please register here to access the dataset when it becomes available.

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