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Exclusive: Chinese trader accused of busting Iran missile embargo

By William Maclean and Ben Blanchard

(Reuters) - A Chinese businessman indicted in the United States over sales of missile parts to Iran is still making millions of dollars from the trade, say security officials who monitor compliance with Western and U.N. sanctions.

These officials, speaking on condition of anonymity, said the businessman, Li Fangwei, has earned at least $10 million from illegal sales to Iran since his indictment by the New York County District Attorney in 2009.

Trade sanctions are at the heart of international efforts to curb Iran's nuclear program for fear it is for military ends - a suspicion Iran rejects. Li's alleged activities may point to Iran's resourcefulness in circumventing those sanctions and turn a spotlight on China's ability to police its own export restrictions.

It is hard to quantify the contribution of foreign firms and individuals to Iran's nuclear and missile programs, but analysts believe some vital components are all but impossible for Tehran to produce at home.

Contacted by Reuters on Feb 4, Li said he continued to get commercial inquiries from Iran but only for legitimate merchandise, such as steel products. Li said his company, LIMMT, had stopped selling to Iran once the United States began sanctioning it several years ago.

He dismissed allegations by the security officials that he had used deception, including changes of company names, to supply Iran with Chinese and foreign-made parts such as high-grade alloys that can be used to enrich uranium and guidance devices suitable for missiles.

"Sure, we did business with Iran, but we did not export the goods they said we did, missiles or whatever," Li said. "We still get inquiries from Iranian clients, but we don't respond to them."

A Chinese Foreign Ministry spokeswoman said Beijing was adhering to trade restrictions, including a U.N. ban on helping Iran build missiles that can deliver nuclear warheads.

Officials from Iran, including at firms the security officials said were clients of Li and at the embassy in Beijing, did not respond to requests for comment. A Chinese bank which the security officials said Li used for Iranian business denied it had breached U.N. sanctions.

SERIES OF U.S. MEASURES

In 2006, the U.S. Treasury barred Li from the U.S. financial system for allegedly selling goods with potential military uses to Iran.

Three years later, the New York County District Attorney unsealed a fraud indictment against Li and his metals company LIMMT on suspicion they had used false names to process further payments for sales to Iran through several U.S. banks.

The U.S. banks employed by Li were innocent of any wrongdoing because Li and other suspects had concealed their identities, the then District Attorney, Robert Morgenthau, said.

On Feb 4, 2013, Li said that at the time of the indictment he had felt there was no point in saying anything because U.S. courts and prosecutors "don't listen to reason. It's useless."

Three weeks ago, on February 11, the U.S. State Department issued fresh sanctions against Li, saying he had "engaged in missile technology proliferation activities that require the imposition of missile sanctions", and placing additional restrictions on any missile technology trade involving him.

A State Department official said Li had been sanctioned because of his "proliferation to Iran" since his 2009 indictment. Li did not respond to calls seeking comment on the Feb 11 action.

China reacted with irritation to the February 11 measures. Foreign Ministry spokeswoman Hua Chunying said the U.S. step "seriously violates the norms of international relations and harms China's interests" and urged the United States to immediately revoke "these irrational sanctions".

China has no extradition treaty with Washington.

ALLOYS, GYROSCOPES

The security officials allege that since the 2009 indictment Li, working in concert with the Iranian embassy in Beijing, had supplied parts to firms that make Iranian missiles, in particular the U.N.-blacklisted Shahid Bakeri Industrial group (SBIG). SBIG did not reply to faxes and emails sent by Reuters for comment.

The goods allegedly supplied included 15 metric tons of high-grade aluminum alloy, more than 20 metric tons of ultra-high strength steel, and 1,700 kg of graphite cylinders.

Li agreed in 2011 to supply 1,500 gyroscopes and accelerometers to SBIG, the security officials alleged, referring to devices that can be used in missile guidance and control systems - a quantity sufficient for about 500 missiles.

Gyroscopes are "controlled items" under the Missile Technology Control Regime (MTCR), an informal and voluntary partnership between 34 mainly Western countries. China is not a party to the MTCR but has similar export controls of its own.

Li also supplied more specialized devices known as fiber-optic gyroscopes, the officials allege; their main uses are in missiles, robots or remotely operated land or sea vehicles.

The officials accuse Li of advising SBIG and other Iranian clients to change details of shipments, including the falsification of the end-user and supplier details in contracts.

Li denies all the allegations.

Between 2010 and 2012, Li took over $10 million in payments from SBIG alone and travelled often to Iran, the officials allege. He used deception within China to hide his activities not only from the authorities but from Chinese companies as well, the officials added.

In 2012, they said, Li listed a Chinese company as a false end user to obtain repair equipment he intended to send to SBIG in Iran.

A diplomat in Iran's Beijing embassy helped Li, who is aged about 40, to fix meetings with defense officials when he visited Tehran, the security officials allege. In the Iranian capital, the officials said, some contacts knew him only as "The Tailor" to conceal his identity.

CRITICAL COMPONENTS

The officials alleged that some of his clients were not always satisfied with the quality of his goods but kept on using him, perhaps for lack of choice.

Asked in Beijing whether China knew of Li's purported activities, Foreign Ministry spokeswoman Hua said China's position was "clear and steadfast" on non-proliferation: China had always upheld U.N. Security Council resolutions on non-proliferation. If a Chinese individual or company was doing anything illegal, it would be dealt with.

An internal report for the U.S. Congress in December concluded that sanctions, respected by China, were making it increasingly tough for Tehran to obtain certain critical components and materials for its missiles.

From 2004 to 2007, Chinese arms transfer agreements with Iran totaled about $300 million at today's prices; between 2008 and 2011 total arms transfer agreements dropped to less than $50 million, according to the report by the non-partisan Congressional Research Service (CRS) on Iranian missiles.

Li said his company, LIMMT, had stopped selling to Iran once the United States began sanctioning it several years ago. He did not indicate a date, but the U.S. Treasury first sanctioned LIMMT in June 2006, citing its alleged support of and role in the proliferation of weapons of mass destruction to Iran.

"We used to export steel, things like that. Nothing to do with missiles," he said.

At two buildings in the northeastern city of Dalian which the security officials said had been used by Li, people either had never heard of him or said he had left some years ago.

(Additional reporting by William Maclean, Ben Blanchard and Michael Martina in Beijing and Dalian, Marcus George in Dubai, Dan Williams in Jerusalem, and Mark Hosenball, David Ingram and Anna Yukhananova in Washington; Editing by Janet McBride)

(william.maclean@thomsonreuters.com)(+97143664253)(Reuters Messaging: william.maclean.thomsonreuters.com@reuters.net)

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