EXTRANCHECK: POST SHIPMENT VERIFICATION: ARROW ASIA PACIFIC

UNCLAS HONG KONG 002563 SIPDIS USDOC FOR 532/OEA/LHINES/DFARROW USDOC FOR 3132 FOR FCS/OIO REGIONAL DIRECTOR WILLIAM ZARIT BICE FOR OFFICE OF STRATEGIC INVESTIGATIONS SIPDIS E.O. 12958: N/A TAGS: BMGT BEXP HK ETRD ETTC SUBJECT: EXTRANCHECK: POST SHIPMENT VERIFICATION: ARROW ASIA PACIFIC LTD WHSE REF: A) USDOC 06986 B) HK00909 1.Unauthorized disclosure of the information provided below is prohibited by Section 12C of the Export Administration Act. ¶2. As per reftel A request and at the direction of the Office of Enforcement Analysis (OEA) of the USDOC Bureau of Industry and Security (BIS),Export Control Officer Philip Ankel (ECO) conducted a post shipment-verification (PSV) at Arrow Asia Pacific Ltd., 20 Floor, Tower Two, Ever Gain Plaza, 88 Container Port Road, Kwai Chung, Hong Kong (Arrow Asia). The items in question are various electronic integrated circuits exported to Arrow on or about May 6, 2007 and valued at USD 37,849. On the applicable shippers export declaration (SED),these items are classified under export control classification number (ECCN) 3A001 and, if properly classified, would be controlled for national security (NS) reasons. The exporter was Analog Devices of Norwood, Massachusetts. ¶3. A search of the web reveals that Arrow Asia is a business unit of Arrow Electronics, Inc, a New York Stock Exchange listed company with 2006 U.S. sales of USD 13.6 billion (www.arrow.com). Arrow Electronics, Inc. acts as supply channel partner for more than 600 suppliers and 140,000 original equipment manufacturers, contract manufacturers and commercial customers. In Asia, Arrow Asia operates fifty sales offices, four distribution centers and 12 local warehousing facilities in eleven countries/territories. ¶4. On September 11, 2007, ECO met with several representatives from Arrow Asia including Mr. Victor K.C. Cheung, Logistics Director, Mr. Albert W.H. Chan, Operation Controls Manager, Mr. Kam K.F. Leung, Transportation and Export Control Manager, and Ken T.K. Ng, Shipping Supervisor. Representatives of Arrow Asia provided background on the company consistent with the information noted above and on the company's web site. They stated that Arrow Asia has approximately 1,600 employees in the region. ¶5. Mr. Leung also provided a detailed overview of the company's export control compliance system. That system is based, in large part, on commercial software designed to compare customers and orders against established lists of parties of concern as well as reasons for control based on the country of destination and applicable ECCN. Mr. Leung stated that the company's software screens all potential customers prior to opening a customer account and accepting orders. Arrow Asia also obtains from all new customers an end-user certificate, which include a certification that the items will be used only for civil and not military or WMD applications and that they will not be re-exported or sold to third parties except in compliance with applicable export and re-export laws. Only after these initial formalities are completed may a new client account be created. When an order is received, the company's software checks the licensing requirements for the applicable ECCN and determines whether a license will be required for the shipment. A manual review by export control compliance staff must be completed for all transactions where a license requirement is noted by the software. No sale may be completed absent release by export control personnel (typically after a license has been obtained). Mr. Ng stated that Arrow Asia obtains a company registration certificate from all new customers to confirm corporate existence. Mr. Ng further stated that the company screens both the registered address and the "ship to" address on all orders it receives against the applicable licensing requirements. Mr. Leung demonstrated the system to the ECO at the conclusion of the meeting. ¶6. The conversation then turned to the particular transaction in question, namely a shipment apparently destined for Centre Bright (HK) Limited. OEA provided ECO with an invoice from the exporter stating that one of multiple orders placed by Arrow Asia was destined for its customer, Centre Bright. ECO showed the meeting participants the invoice and asked for further background on this transaction. There was some confusion around the room at this point about what actually occurred with this order. Mr. Leung eventually stated that he recalled that this order had originally been accepted but had subsequently been put on hold when it was determined that Centre Bright is on BIS's Unverified List. This list is a compilation of companies where BIS has been unable to satisfactorily complete a PSV or pre-license check (PLC) for reasons outside of the control of the U.S. government. The PSV of Centre Bright that prompted the inclusion of Centre Bright on the Unverified List is detailed in reftel B and occurred in 2005. In that case, the ECO at that time stated that the transaction described by the Centre Bright representative had many suspicious characteristics including a customer without contact details (aside from a mainland China cell phone number) who preferred to pay for controlled commodities in cash. In that case, the ECO recommended that Centre Bright be included on the Unverified List since significant portions of the purported transaction could not be verified. Note: Inclusion on the Unverified List does not, by itself, impose any new licensing requirements. However, such inclusion is considered to be a "red flag". Where such red flags exist, parties have an affirmative obligation to inquire about the end-use, end-user and ultimate country of destination. ¶7. When the ECO inquired what happened next, Mr. Ng stated that Centre Bright cancelled its order. Shortly thereafter, Arrow Asia received an order for an identical number (668) of the same items from another company, namely Victory Wave Holdings. Mr. Ng provided copies of the applicable transaction documents and corporate registration documents for Victory Wave Holdings Limited. The packet includes the Arrow Asia standard End-User Statement signed by Hong Chun Tai on behalf of Victory Wave Holdings. The packet also included an invoice showing sale of the 668 items and listing ECCN 3A001(a)(5)(a)(3). This subcategory of ECCN most likely does not require a license to Hong Kong but would most likely require a license to mainland China. The packet also included the applicable import license issued by Hong Kong TID for the items stating that the goods are for local (Hong Kong) consumption. ¶8. ECO requested more information on how it transpired that the transaction with Victory Wave Holdings was completed when an identical Centre Bright order for 668 Analog Devices AD6645ASW-105 integrated circuits had recently been cancelled. Mr. Cheung stated that he would investigate the matter further and provide more background on how the transaction occurred once he had obtained such information. He suggested that any judgments about the nature of the transaction be deferred until further information could be obtained. ECO will provide OEA additional information when he obtains it from Arrow Asia. ¶9. A subsequent review of the Hong Kong Companies Registry information revealed that Victory Wave Holdings Limited is related to Centre Bright. The review also revealed that several additional Hong Kong companies are also related to both Victory Wave Holdings Limited and/or Centre Bright. These relationships are detailed below. ¶10. Victory Wave Holdings Limited: This company was established in February 2007 and has limited paid-up share capital (the Hong Kong equivalent of USD 1,000). Its Director is listed as Hong Kong resident Wong, Yung Fai. Its registered address is listed as Unit 2401A, 24Fl, Park-In Comm Ctr, 56 Dundas St, Mongkok, Hong Kong. The signatory for Victory Wave Holdings Limited on the Arrow Asia End-User Statement is listed as Hong Chun Tai. Corporate records obtained when the Centre Bright PSV was completed show Wong Wai Chung and Hong Chun Tai as the sole shareholders of Centre Bright. In short, one of the shareholders of Centre Bright (Hong Chun Tai) apparently signed the Victory Wave Holdings Limited End-User Statement. ¶11. Exodus Microelectronics Company Limited: This company was established in March 2003. Its registered address is Unit 6B, Block 1, International Centre, 2-8 Kwei Tei Street, Shatin, Hong Kong. It likewise has nominal share capital (the Hong Kong equivalent of USD 1,000). Its directors are listed as Hong Kong residents Hong, Chun Tai and Wong, Yung Fai. In short, one of this company's directors (Hong, Chun Tai) is also a director in Centre Bright and the signatory for Victory Wave Holdings Limited. Another of its directors (Wong, Yung Fai) is also a director of Victory Wave Holdings Limited. ¶12. Echelon Microsystems Limited: This company was established on April 25, 2007. Its registered address is Unit 2006, 10F Carnarvon Plaza, 20 Carnarvon Rd., Hong Kong. It has the Hong Kong equivalent of USD 1000 authorized share capital but no paid-up share capital. Its director is listed as Wong, Yung Fai. In short, this company shares a director with Victory Wave Holdings Limited, Exodus Microelectronics Company Limited and Omniway Technology Limited (referenced below). ¶13. Omniway Technology Limited: This company was also established on April 25, 2007 (on the same day as Echelon Microsystems Limited). Its registered address is Unit 503, 5/FL Silvercord Tower 2, 30 Canton Rd., Hong Kong. It has the Hong Kong equivalent of USD 1000 authorized share capital but no paid-up share capital. Its director is listed as Wong, Yung Fai. In short, this company shares a director with Victory Wave Holdings Limited, Exodus Microelectronics Company Limited and Echelon Microsystems Limited. ¶14. SBC International (Success Business Center): This company advertises itself as a leading company register agency in Hong Kong and mainland China. It has 18 offices in Hong Kong and mainland China with over 400 professional staff to provide business advice and business registration services. More information is available at www.sbc.com.hk/English. The addresses of Victory Wave Holdings Limited, Echelon Microsystems Limited and Omniway Technology Limited correspond to SBC International branch offices in Hong Kong. ¶15. Other companies: A review of Hong Kong Companies Registry information reveals additional companies that are related to Centre Bright. In particular, Centre Bright director and shareholder Wong, Wai Chung, was also a director in Square Holdings Limited, a company that was dissolved in 2004. Co-directors in that company were also directors in the following additional companies (that are still listed as operational) in Hong Kong: Bescom Development Limited (established in 1993),Beijing Technology Limited, China Urban Transport Engineering and Consulting Limited, Pacific Telecom Development Limited, Radio Frequency Engineering Limited, Boland (H.K.) Limited and Goahead World Limited. ¶16. The ECO suspects that at least some of the companies affiliated with Centre Bright and Victory Wave Holdings Limited have been established as conduits for Centre Bright purchases (Centre Bright is still operational and maintains a web site at www.centrebright.com). ECO further suspects that several of these companies have received exports of items from the United States and recommends that OEA review those exports to determine what further action is warranted in respect of those shipments and companies. ECO also recommends that OEA review exports listing the addresses of these companies as ship-to addresses. The ECO also recommends that BIS conduct a commodity classification to confirm the ECCN and licensing requirements of the items that are the subject of this check. ¶17. The ECO recommends that this check be classified as Unfavorable. That recommendation is based on the apparent circumvention of Arrow's compliance software hold on transactions with Centre Bright and the eventual sale of the items to Victory Wave Holdings, a company affiliated with Centre Bright.