Alt causes to DoD counterfeiting – Chinese shell companies contract with the DoD to sneak in counterfeit.

The IP Theft Commission further notes that Chinese entities rely on shell companies both to obscure their involvement in IP theft and to shield themselves from potential US sanctions.7 As the China Economic and Security Review Commission has warned, even a strengthened Committee on Foreign Investment in the United States will be unable to detect and properly scrutinize Chinese investments in US technology firms if their ownership is masked by shell companies.8 Chinese entities have also acquired valuable American IP and technology by using shell companies to conceal their participation in US bankruptcy proceedings.9

A Government Accountability Office (GAO) study of 1,406 high-security US federal leases could not identify the owners in about one-third of cases because many of them were shell companies. In cases where the GAO did identify the owners, nine out of fourteen government agencies working on sensitive national security issues were unaware that the buildings in which they were housed were ultimately owned by companies in China and elsewhere.10

A recent NBC investigation found that thousands of Chinese nationals have used US-registered shell companies as phony employers to remain in the United States illegally after their student visas expire. Many go on to work for US firms dealing with sensitive information, and at least one is now being prosecuted for espionage.11

Nearly 90 percent of counterfeit products entering the United States originate in China.12 This poses a unique challenge for defense procurement, where substandard equipment jeopardizes the safety of military personnel and compromised technology provides a window for espionage.

Another recent GAO study found that shell companies are routinely used to facilitate fraud and circumvent restrictions barring foreign contractors, including one whose faulty parts caused the grounding of forty-seven US combat aircraft.13 GAO also noted that “contractors fraudulently misrepresenting themselves to [the Department of Defense] could actually be operated by... adversarial foreign governments [to conduct] sabotage or surveillance.”

Shell company secrecy also incentivizes American importers of counterfeit goods. A New York company currently faces charges of illegally importing Chinese surveillance technology and selling it to US government agencies before laundering the proceeds through shell companies.14