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Military vehicles carrying DF-21D ballistic missiles roll to Tiananmen Square during a military parade to mark the 70th anniversary of the end of World War Two, in Beijing
Reuters/Damir Sagolj
Big ballistic missiles need tiny, expensive microchips.
NO SALE

China is trying to steal military space tech. The US is running stings to stop it.

By Justin Rohrlich & Tim Fernholz

On Aug. 21, Pengyi Li walked to his gate at Honolulu International Airport, ready to board a flight to Hong Kong. Before he could get on the plane, federal agents arrested the 33-year-old Chinese national.

Authorities say Li thought the bag of export-controlled electronics he had in his possession had come from rogue US brokers. The transaction was instead part of an elaborate undercover sting operation.

Li’s arrest was the culmination of a two-year investigation into an effort to smuggle sensitive components used in spacecraft and missiles out of the US and into China, according to a sealed criminal complaint obtained by Quartz.

In 2017, Department of Homeland Security investigators offered radiation-hardened microchips and advanced aerospace sensors to an unnamed Hong Kong-based company in exchange for more than $150,000, according to the complaint. The parts in question require export licenses to ship abroad, and many are specifically banned from sale in China because they can be used in missiles and advanced satellites with military applications.

The theft of US technology by Chinese companies, many state-backed, is among the key drivers of the trade war between the two nations that is roiling the global economy. In 2018, the US Department of Justice launched a major effort to prevent China from illicitly obtaining US technology (pdf). In July, FBI director Christopher Wray said his agency had more than 1,000 open investigations into Chinese intellectual-property theft.

Li wasn’t the primary target of the investigation, according to the complaint, but an apparent go-between used to smuggle the parts from the US to their Chinese buyer.

Unnamed in the complaint, “Individual 1” ran the Hong Kong company and was entirely familiar with American export laws, as evidenced by online conversations preserved by the investigators. A federal judge approved electronic surveillance of Individual 1’s chat service. But after an initial shipment of prohibited parts was seized by US postal inspectors, Individual 1 was said to have gotten cold feet and she refused to be lured into US jurisdiction.

Enter Jacky Li

Pengyi Li, or “Jacky,” as he styles himself, was presented as a potential solution for the shipment problem. Li proved brash enough to risk a trip to Hawaii when the agents posing as the brokers promised that a corrupt customs official would protect him, investigators say.

“I need to give him bribe money, also cigars and whiskey, that he likes, then he will make sure that your flight is not searched,” the undercover agents told Li. “I’ll need your flight #s when we get closer. Are you comfortable with that situation? If yes, let’s complete the deal.”

Li allegedly demanded that the undercover agents reimburse his travel expenses and pay him a $10,000 fee for carrying the prohibited parts back to Hong Kong.

“Our boss said that we already paid 70% for the total payment, And half for the shipping, Right now you want us to pay for the fined money, that is ridiculous,” Li said in a text message to the undercover agents, referring to a penalty imposed after the initial shipment was seized. “If not we will sue you.”

“Sue us for what,” the agents replied. “We shipped a highly restricted part and we are lucky we are not in jail.”

Ultimately, the undercover agents paid for Li’s flight from Shenzhen, China, to Honolulu on Aug. 20. Li was in handcuffs the next day. A federal judge ordered him held without bail. The criminal complaint against Li was filed under seal and inadvertently posted publicly before being taken down.

Bureau of Prisons records indicate that Li was released on Sept. 4, the day Quartz contacted the Department of Homeland Security about the investigation. While the prosecutors and investigators leading in the case refused to comment on a sealed matter, another source expects further indictments to be issued.

The Li complaint also discusses an unnamed and possibly complicit US company. “Individual 1” purchased microchips designed to survive in high-radiation environments like outer space from the US company, which refused to ship them abroad. Then she asked the undercover agents to accept the chips and include them in their shipment of controlled parts to China.

The agents agreed, and received a package from the US company, complete with an invoice showing the firm was aware the customers for its export-prohibited parts were based in Hong Kong.

The hunt for smugglers

Quartz reviewed nine prosecutions the Department of Justice has brought against similar aerospace smuggling operations in the last decade.

Most follow the same storyline: A US company reports suspicious customers to the government, and then undercover agents pose as unscrupulous brokers. Months or years of communication about shipping the goods and what to do about those pesky customs labels establishes that all parties know that what they are doing is illegal, which is necessary for prosecutors to bring a case under US export law.

Then, the buyer—often acting as a middleman for the real customer in China—is lured to US jurisdiction and arrested. Bo Cai and Wentong Cai met undercover agents offering sensors in New Mexico in 2013. In 2014, See Kee Chin was arrested in Seattle trying to smuggle accelerometers disguised as children’s toys. In 2016, William Ali, a Fijian national, also attempted to procure restricted accelerometers for a Chinese buyer and was arrested in another Seattle-based sting.

“First and foremost, [our goal is] to prevent the technologies at issue from leaving the United States and getting into the wrong hands,” Todd Greenberg, an assistant US attorney who has prosecuted multiple export violation cases, told Quartz. “And then…to deter future conduct in the same regard, and make sure that potential perpetrators know that law enforcement’s watching very carefully, that industry is making these kinds of referrals, and that we will bring a prosecution whenever we can.”

The challenge of precision

Prosecutors rarely identify the ultimate end user for smuggled goods in public, but the sought-after components offer several clues.

Radiation-hardened circuits are used to build vehicles that leave the Earth’s atmosphere, like satellites that can spot missiles or spy on other countries, but require exotic materials and extensive testing to produce. Accelerometers are used to guide spacecraft and missiles, and require precise engineering to ensure accuracy. Attempts to steal components like these highlight where China has yet to match US production.

“The skill required to manufacture to that level of quality is extremely substantial,” says Andrew Hunter, a senior fellow at the Center for Strategic and International Studies who studies the defense industry. “That’s what distinguishes the high-end US manufacturing capability from their Chinese competitors—to achieve that level of quality control.”

While China has a nascent space industry, it is still has yet to catch up in many areas. For example, it relies on commercial use of a Boeing-built satellite to communicate with military bases in the South China Sea. Much of the country’s space hardware is produced by state-owned enterprises connected to the military. Missile technology in particular is central to Beijing’s plan to deter US armed forces, which may explain the hunt for technology related to space vehicles and the kinds of remote-sensing apparatus required to deploy them most effectively.

Court documents in a 2007 smuggling case said a Chinese state agency was seeking to obtain export-prohibited space sensors. In a different prosecution handled by Greenberg in 2011, US attorneys wrote that these crimes “amounted to a form of espionage on behalf of the People’s Republic of China to acquire the United States’ sensitive military technology….[the defendant] Yang’s contacts were high-level individuals who knew exactly what military technology the PRC wanted to acquire, and how to get it.”

Tim Fernholz
Reporter
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