The CCP is enabling Russia, Iran, and North Korea to circumvent sanctions through parallel financial systems.
China is allowing U.S. adversaries to avoid sanctions and export controls on a massive scale, posing a direct challenge to U.S. economic statecraft and the dollar-driven international financial system.
The Chinese Communist Party is enabling Russia, Iran, and North Korea to circumvent sanctions through parallel financial systems, high trade volumes, and transportation networks that limit the effectiveness of U.S. economic tools, according to a new report from the U.S.-China Economic and Security Review Commission, a non-partisan panel authorized by Congress.
As the key enabler of sanctions-evasion, China is allowing U.S. adversaries to conduct geopolitical activities Beijing favors, the report explains. China is a major trading partner of heavily sanctioned countries, limiting the effectiveness of U.S. attempts to economically isolate countries and cripple them in the process.
A key cog in China’s sanctions-avoidance system is Hong Kong because of its historical role as a finance and trading hub. The Chinese Communist Party cracked down on Hong Kong’s “one country, two systems” model of governance with a 2020 national-security law. Shell companies, intermediaries, and payments systems China uses to avoid sanctions often pass through Hong Kong.
“More broadly, China’s commercial relations with these countries provide vital sources of revenue and access to goods that mitigate the impact of U.S. and multilateral economic sanctions,” the report reads.
“Russia’s war of aggression against Ukraine, Iran’s funding of terrorist organizations and proxy groups, and North Korea’s military buildup and state-sponsored cybercrimes are all possible in large part due to assistance from Chinese actors in skirting sanctions and mitigating the impact of export controls.”
China has established a separate network of financial institutions, as well as payments and clearing systems, to conduct transactions that support sanctioned entities. Additionally, China is allowing U.S. adversaries to dodge export controls through dual-use technology sales and its shipping infrastructure. The sanctions-evasion industry China has built is achieving economies of scale for the firms involved, making the entire system greater than the sum of its parts.
Facilitating sanctions avoidance en masse benefits China’s geopolitical aims enormously. It increases China’s energy security by granting it access to cheap oil and draws U.S. attention to other global theaters, namely Europe and the Middle East. Furthermore, the sanctions-evasion network China built is creating support for alternative payment networks and a greater capacity for circumventing the U.S.-led financial system altogether.
The known tactics China deploys to evade sanctions include barter trading, processing payments in Chinese currency, scaling alternative payment networks, cryptocurrency, money laundering, and “shadow” fleets of aging, obscured ships.
China is employing similar tactics in its efforts to evade U.S. export controls against Russia, Iran, and North Korea. Chinese companies are shipping goods directly to sanctioned countries in some cases. In other cases, Chinese and Hong Kong shell companies are posing as final buyers of certain goods. But in reality, those entities are passing goods along through third-party markets or sending them directly to sanctioned countries. Moreover, China is facilitating technology transfers and investments in local ventures launched in adversarial nations.
To mitigate China’s behavior, the U.S. government has expanded secondary sanctions and targeted front groups. Increased coordination of sanctions and export controls is another tool in the American toolbox. More agency coordination and greater use of the FDPR, an export regulation on foreign items made with U.S. technology, are also techniques the U.S. is utilizing to combat China’s malign activities.
But, these tools may not be sufficient to prevent China from operating its sanctions-evasion network. China’s large economy, manufacturing prowess, global financial connectivity, and opaque legal and customs systems make it a unique challenge for the U.S. to overcome. The U.S.-China Economic and Security Review Commission is urging America and its allies to develop a more united and aggressive response to what China is doing.
If not, the Russian war machine in Ukraine and Iran’s network of terrorist proxies will continue to have financial and material support for the foreseeable future.