Sep 29, 2021 - Politics & Policy

Scoop: Chinese tech firm sidesteps sanctions

Illustration of a pair of legs stepping over a ribbon stylized in colors from the American flag.

Illustration: Aïda Amer/Axios

A tweak to U.S. export restrictions is letting a prominent Chinese tech company sidestep measures designed to punish the firm over its alleged involvement in the repression of Muslims within the country, records show.

Why it matters: The artificial intelligence company SenseTime's strategy to bypass those measures shows how companies deemed national security risks — or accused of complicity in human rights abuses — can bypass U.S. restrictions.

The backstory: In 2019, the Commerce Department added SenseTime to its Entity List, barring it from doing business with large swaths of U.S. companies absent a license.

  • Commerce said SenseTime was "implicated in human rights violations and abuses in China's campaign targeting Uighurs and other predominately Muslim ethnic minorities in the Xinjiang Uighur Autonomous Region."
  • Last year, the Commerce Department's Bureau of Industry and Security made a subtle tweak to the designation. The company on the Entity List was changed from SenseTime generally to Beijing SenseTime, one of its subsidiaries.
  • According to the company, that's left its business largely unencumbered. The designation "has not had any material adverse impact on the [parent company's] business," it recently told potential investors.
  • That statement was buried in a 672-page prospectus filed last month ahead of an IPO in Hong Kong.
  • It was first flagged by the surveillance technology news outlet IPVM, which shared its findings exclusively with Axios.

How it works: Entity List restrictions, designed in part to punish "activities contrary to U.S. national security and/or foreign policy interests," apply only to the specific companies named by BIS — not to their parent or sister firms.

  • SenseTime attorneys at the firm Hughes Hubbard & Reed concluded that only Beijing SenseTime was restricted from doing business with U.S. firms.
  • In its prospectus, SenseTime assured potential investors the designation will not hamper its business. It also said it has put in place "a series of export control compliance measures for the entire Group, in abundance of caution."

What they're saying: "Beijing SenseTime’s placement on the Entity List was the result of information available to the Department of Commerce and the End User Review Committee," a Commerce spokesperson told Axios.

  • "The Department of Commerce, with its interagency partners continually reviews available information, including whether parties are receiving items subject to the [Export Administration Regulations], to assess whether parties should be added to the Entity List," the spokesperson wrote in an email.
  • SenseTime told Axios it has "established an export control compliance program to ensure compliance with the relevant US export control laws."

Between the lines: It's not clear precisely what portions of SenseTime's business are controlled by its Beijing subsidiary versus its sister companies.

  • The prospectus lists its principal business activities as "Sales of software products and provision of related services."
  • It also reveals that of the 100 patents "material to our business," 68 are owned by Beijing SenseTime.
  • As of July, a copyright notice at the bottom of the company's main website listed Beijing SenseTime, according to an archived version of the page flagged by IPVM. By Aug. 20, the day it filed its prospectus, that language had been changed to Shanghai SenseTime.

The big picture: The company's addition to the Entity List came after the New York Times reported it had provided facial recognition software to Chinese authorities who used it to monitor Uyghurs in Xinjiang.

  • The Biden administration has formally dubbed the mass internment of Uyghurs a genocide.
  • SenseTime was one of a handful of companies singled out over their alleged roles in that repression. It told the Times it had no knowledge of its technology being used to profile Uyghurs.
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