Identifying High-Risk Entities Owned By “Chinese Military Companies” on Section 1237 & E.O. 13959 List

Identifying High-Risk Entities Owned By “Chinese Military Companies” on Section 1237 & E.O. 13959 List
Insights 6 minute READ 12/14/2020

Recent U.S. regulations have targeted the risks posed by Chinese military companies, including 31 companies designated by the Department of Defense under Section 1237 of the National Defense Authorization Act of 1999 and later named in Executive Order 13959 (“the Section 1237 list”).

These actions expand the definition of military affiliated entities in China and present new challenges for compliance teams.

We have compiled a dataset covering more than 600 active legal entities that are majority owned by the 31 Chinese  companies from the first three tranches of the Section 1237 list. Note that 4 additional entities (“Tranche 4”) were added to the Section 1237 list on December 3 and will be included in future analyses.

The dataset and this accompanying analysis are designed to help compliance teams quickly triage risk and better understand the Chinese military’s ties to the civilian economy.

Each of the 600+ entities contains, where available, name (CN), name (EN), machine translation of Chinese name, address, identifiers, operating status, ownership path, and a link to the expanded profile and sourcing in Sayari Graph.

Key Findings

  • Many entities in our dataset have no obvious ties to the Section 1237 list. More than a third of these entities have entirely different names than their designated parents. The names of many others reference their parents in ways that would not be obvious to non-native speakers and escape machine translation.
  • Most entities in our dataset have no obvious ties to the military. This holds true across an even broader sample of the Section 1237 entities’ holdings: less than one percent of the 25,000+ total holdings we examined, including those in our dataset, mentioned “military” or “Military-Civil Fusion” (MCF) in their company names or business purposes. While not surprising in light of China’s MCF strategy, this greatly increases the challenge facing compliance teams.
  • “Chinese military companies” own companies domiciled across the world. Many of the Section 1237 entities are major Chinese corporations with a presence overseas. Our dataset includes dozens of foreign-domiciled holdings within three layers of ownership, including in the U.S.
  • This dataset represents a fraction of the high risk holdings of Section 1237 entities. We used Chinese public records to identify majority-owned subsidiaries of the first 31 Chinese entities on the Section 1237 list. There are likely many other entities that meet the majority ownership risk threshold or other high-risk criteria, like separately registered and non-obvious branches, that could be the subject of future analyses.

Methodology

As is common for most U.S. regulatory lists, the Section 1237 and E.O. 13959 lists provide only English names for the designated Chinese entities. We first confirmed the Chinese legal name and unique identification number for each entity, as disclosed in our database of Chinese public records.

We then ran a set of graph queries in our public records database that started from each Section 1237 entity and followed all ownership links downstream. We capped the results at three layers of ownership, which returned over 25,000 legal entities that were majority or minority owned by, subsidiaries of, or separately registered branches of the Section 1237 entities.

We wanted to focus on the highest risk holdings, which for this analysis we defined as entities with direct or indirect majority shareholding by the Section 1237 entities. Share percentages are not consistently disclosed in Chinese corporate records, so we automatically calculated share percentage from nominal values where possible and excluded relationships where both the share percentage and nominal value were unknown.

We also included holdings explicitly disclosed as “subsidiaries” of Section 1237 entities in China’s Ministry of Commerce Overseas Investment Database. This source defines subsidiaries as entities with over 50 percent shareholding by the parent entity.

This resulted in a dataset of over 600 legal entities that are majority owned by Section 1237 entities.

We enriched each entity with identifying information and other relevant attributes (e.g. operating status) disclosed in our database of Chinese public records, which consists of multiple records for each entity pulled from different public records sources. For operating status, we assumed that any entity marked as “closed” in any public record filing was closed.

Note that we generated this dataset automatically using data collected from Chinese public records over the past year, updated as recently as October 2020. In addition to automated quality checks on all records we collect, we have randomly sampled and confirmed the accuracy of the content in this particular dataset as of the date of collection; however, always verify information with the original source, as relationships and attributes can change.

Note also that this dataset does not represent all high-risk entities owned by the Section 1237 entities, and there are likely many other entities that meet the majority ownership risk threshold.

Finally, note that there are occasional conflicts between a company’s primary registration record and information disclosed in its annual reporting, or across other official sources.

Findings

Footprint in China and overseas

Many of the Section 1237 entities are massive Chinese corporations that own and/or control hundreds of other entities through multiple layers. Some of these entities, such as Huawei, have established and well-known footprints overseas.

This geographic reach was evident in our data. Within the 25,000+ total holdings we examined, we identified more than 700 entities domiciled in 34 other countries, including entities that are domiciled in both China and the United States.

Similarly, most of the entities in our dataset are solely registered in China, but 12 percent are domiciled or have been active in both China and another country.

Non-obvious connections to Section 1237 parent entities

Entities without obvious ties to their designated parents can be harder to identify. About one-third of the entities in our dataset do not mention their parent entity in their legal name, and some seem to operate in different industries. For example, Excemon Beijing Nanyueyuan Hotel is 100% owned by China Telecommunications Corps, one of the Section 1237 entities.

While the remaining two-thirds have some indication of affinity with a designated parent in their names, this connection often occurs by way of abbreviated appellations that can escape machine translations or compliance teams unfamiliar with the native language and context.

Overt connections to the military are elusive

Most entities in our dataset have no obvious ties to the military. Notably, this holds true across a broader sample of the Section 1237 entities’ sprawling corporate network. Of the 25,000+ total holdings we examined, less than one percent use the Chinese character for “military” (军) in their names or mention “military” in the business purpose disclosed on their corporate records.

Furthermore, while E.O. 13959 explicitly linked the Section 1237 entities to China’s nation-wide strategy of Military-Civil Fusion (MCF), only ten of the 25,000+ entities include MCF in their names, and only four mention MCF in their business purposes.

This is not surprising. Chinese legal entity names and business purposes generally indicate the industries in which those entities operate, but the MCF strategy specifically leverages entities in a variety of civilian industries. As E.O. 13959 notes,  the companies that were compelled to directly support the Chinese military through MCF “[remain] ostensibly private and civilian.”

Identifying military-affiliated companies in China

This lack of overt ties to the military may not be surprising in light of MCF, but it presents a challenge to compliance teams concerned with exposure to “Chinese military companies,” per the increasingly broad definitions of U.S. regulators. Determining whether a Chinese entity poses high risk of military affiliations requires enhanced due diligence into not only the entity itself, but also its parents, subsidiaries, and other related entities.

The methodology we employed here used automated ownership queries to identify entities that are high risk because their parents have been named on the Section 1237 list. In upcoming analyses, we will delve into additional methods of identifying MCF entities by querying Chinese public records.

This analysis was updated in January 2021 with the 4 latest additions to the Section 1237 list. Click here to read more.

Dataset: Chinese Military Companies on Section 1237 & E.O 13959 List

This dataset covers 600+ active legal entities that are majority owned by the 31 Chinese  companies on the Section 1237 and E.O. 13959 list.