On Monday, October 24, 2022, the Department of Justice (DOJ) announced charges against two alleged Chinese intelligence officers for bribing and stealing documents to obstruct the criminal investigation of, reportedly, Huawei (while the complaint does not name Huawei, it is the company according to multiple reports).
In the unsealed criminal complaint, the DOJ describes a two year period where the intelligence officers engaged in multiple attempts to steal files and other information for the benefit of the Chinese company under federal prosecution. The Chinese officers directed an undercover U.S. government law enforcement employee, who they believed was a Chinese asset, to steal confidential information including prosecutorial evidence, witness list and trial strategy in order to obstruct the criminal investigation. In exchange, one of the Chinese officers paid $61,000 in Bitcoin to the double agent.
This DOJ announcement was part of a broader effort in three criminal cases to stop the alleged unlawful influence of Chinese agents within the United States. On the same day, the DOJ announced that seven other individuals were accused of participating in a scheme to forcefully repatriate another Chinese national. Additionally, four other individuals were charged with conspiracy to act as agents of a foreign government by targeting individuals to act on behalf of the Chinese government to further intelligence objectives.
- National Security Focus on China: The national security on focus on China is increasing more than ever before. Just in the past few weeks, we have seen additional controls on semiconductor technology and President Biden’s National Security Strategy being explicit about the threats we face from China. It is clear that the DOJ is focused on threats here and abroad influenced by the Chinese government.
- Bitcoin: The bribe here was paid in bitcoin, which is a poor choice, since bitcoin transactions are trackable on a public ledger. Going forward, the use of bitcoin or digital assets for illicit activity will likely be an even worse choice. As we discuss here, there have been more successful law enforcement actions, such as prosecuting cryptocurrency fraud and tax evasion stemming from cryptocurrency investment schemes. It also highlights how DOJ has coordinated with other regulatory agencies such as the Office of Foreign Assets Control to prosecute those who use digital assets to evade sanctions. The belief that the use of bitcoin is anonymous is misplaced. It is much more traceable than handing someone a bag of cash.
- Importance of Diligence: The alleged use of Chinese intelligence officials on behalf of Huawei highlights how complex it is to understand third parties and truly “know your customer” to ensure compliance with U.S. regulations. Regulators are increasingly focusing on end-use and end-users as evidenced by the Model Certificate described in Supplement No. 1 to Part 734 which was proposed by BIS and referenced in the recent semiconductor export rules. Companies should be thoughtful about their diligence policies and procedures to ensure business relationships are in line with compliance best practices.