Reforming the Flawed Process of Listing Chinese Entities on A Case-By-Case Basis

By Steve Coonen

In 2019, the Department of Commerce’s Bureau of Industry and Security (BIS) wisely placed Huawei on the Entity List. This action was necessary for making sure the company could not obtain American components it needs to win the 5G race. But Huawei moved fast to protect its interests, quickly spinning off a company called Honor to maintain the flow of U.S. components required to produce 5G mobile devices. A state-owned company, Shenzhen Zhixin New Information Technology, subsequently purchased Honor in 2020, demonstrating the important role that the Chinese government plays in directing strategic technologies such as 5G. During my time serving at the Department of Defense (DOD), I personally pushed for the federal government to add Honor to the Entity List for the same reasons Huawei was. DOD sponsored the review. Yet, despite compelling evidence, the collective members of the federal government’s Export Review Committee, led by BIS, did not see a strong enough case to add Honor. The company is still not on the Entity List today, and is presumably free to acquire American technologies for a Chinese-dominated global 5G buildout.

The case with Honor illustrates how BIS’ practice of limiting additions to the Entity List to one subsidiary or affiliate at a time is ineffective and irresponsible. First and foremost, that practice ignores the ability of Chinese entities to change business names, individuals, and addresses, or even establish new businesses in order to maintain the flow of needed U.S. technologies. Unless the federal government can act extremely quickly to list every one of those entities (and it usually can’t), placing a Chinese company or other organization becomes a futile exercise. Tracking companies spun off from parent structures has become even harder in light of China’s recent expansion of anti-espionage laws. Today, retrieving basic data on financial transactions of Chinese firms has become increasingly difficult, thereby furthering Chinese schemes to skirt Entity List restrictions. As it stands, the Entity List’s only utility is providing U.S. export control officials with the appearance of doing something meaningful.

Second, BIS’ process for adding entities, whether it includes single subsidiaries, affiliates, or the entire parent company structure, is reactive. BIS adds entities only after they are found to be involved in activities that are “contrary to the national security or foreign policy interests of the United States” (per section 744 of the Export Administration Regulations (EAR)). BIS is, in effect, closing the barn door after the horses have already gotten out. And even then, as the case of Honor shows, the government doesn’t always close the barn door.

Ironically, leaders in the export control community point to the increased number of Chinese persons on the Entity List as a success story. In reality, their misplaced faith in their whack-a-mole approach fails to recognize the systemic nature of China’s Military-Civil Fusion (MCF) strategy, by which any technology with potential military application will find its way into the hands of the Chinese military. In this light, BIS’ entity-listing practices are irrelevant—the Chinese military will work with any Chinese entity to acquire any technology it otherwise legally cannot. Consequently, BIS policies invite diversion to the People’s Liberation Army (PLA) and the Ministry of State Security (MSS) domestically and to entities and countries of concern internationally, including  Russia, Iran, and North Korea.

Under such circumstances, the Entity List is of no consequential utility in preventing illegal diversion of American technologies to the Chinese military. The failed, porous export control policies of the United States have allowed technologies China needs to modernize its military to flow to various Chinese end users. I propose two ways forward to improve how BIS treats the Entity List:

1. Tighten presumption of denial standards to China: Because of the ability of Chinese entities to shapeshift and divert technologies under the MCF policy, BIS must, with respect to China, adopt a presumption of denial policy for technologies controlled for national security reasons or critical technologies with limited foreign availability.

2. List all entities linked to the main target: Spin offs and shell companies are just some of the ways that Chinese officials circumvent the Entity List. When discovered, those companies should likewise be added to the Entity List. Even still, implementing this practice does not constitute a completely adequate solution.

Reforming BIS’ practice of handling the Entity List is just one piece of a necessary overhaul of BIS policies, as I argued in my report Willful Blindness. At a minimum, pretending that Entity List additions are a meaningful long-term solution to China’s illegal diversion activities undermines American national security—and BIS’ reason for existence.