09/05/2008 - 14:45

Japan's struggle to limit illegal dual-use exports

Masako TokiStephanie Lieggi

Stephanie Lieggi

Lieggi is a research associate in the East Asia Nonproliferation Program at the James Martin Center for Nonproliferation Studies (...

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Masako Toki

Masako Toki is the project manager and research associate in the Nonproliferation Education...

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Recent revelations of illegal transfers of sensitive materials by Japanese companies has again highlighted the fact that controlling the spread of dual-use materials remains a daunting challenge--even for a country with an advanced export-control system such as Japan.

In one recent case, Japanese authorities suspect that the Hiroshima-based Horkos Corporation knowingly falsified equipment specifications so it could export high-precision machinery to countries without applying for an export license. Another recent case involves Tokyo Vacuum and the Nakano Corporation, whose products were discovered by International Atomic Energy Agency (IAEA) inspectors in North Korean nuclear facilities. Prior to either of these cases, the Mitutoyo Corporation--the largest producer of high-tech precision-measuring machines in the world--was found to have supplied three-dimensional measuring devices to entities working with the A. Q. Khan network, among others.

On the heels of the Mitutoyo case, Tokyo enhanced its efforts to prevent export-control violations. But while those efforts may ultimately be effective, revelations about the newest cases are a clear reminder that Japan's sophisticated dual-use technology remains a target for WMD-related illicit trafficking networks.

The Mitutoyo case

Japanese authorities raided Mitutoyo's facilities on February 13, 2006, the result of an investigation that began when IAEA inspectors found two Mitutoyo precision-measuring devices at nuclear-related facilities in Libya in 2003 and 2004. (See "Evading Export Controls: Mitutoyo Corporation as a Case Study in Determined Proliferation" and "The Mitutoyo Case: Will Japan Learn from Its Mistakes or Repeat Them?") These devices were dual-use items that could assist in manufacturing centrifuges to enrich uranium for nuclear weapons. As evidence against the company mounted, it became clear to Japanese authorities that Mitutoyo had been intentionally skirting export controls for more than a decade. According to Japanese investigators, Mitutoyo may have transferred as many as 10,000 highly accurate measuring devices in a 10-year period without proper licenses.

The Mitutoyo violations were particularly egregious because of the company's prominence and the extent to which its management oversaw the violation efforts. In the early 1990s, as Japan increased control of certain dual-use items--such as Mitutoyo's three-dimensional measuring devices--company executives became concerned that tougher restrictions would cut into their profits. In response, Mitutoyo's leadership established the "export management committee" that oversaw the development of methods for exploiting weaknesses in Japan's export-control system. The committee ingeniously created a software program--sardonically code-named "CoCom" after the multilateral export-control regime--that made Mitutoyo's precision-measuring equipment appear less accurate than it actually was. Once installed, this software allowed Mitutoyo to declare that the equipment being shipped was below the threshold requiring an export license. Therefore, if Japanese custom authorities checked the machine prior to export, the software would mask the device's true accuracy.

The company also systematically relied on its subsidiaries to facilitate its illegal transfers, and its Singapore and Malaysia offices became important conduits for sales to third countries. For example, between 1992 and 1995, the number of exports by Mitutoyo to its subsidiary in Singapore soared from 20-30 annually to approximately 200 per year. In 2001, two measuring devices were exported via Mitutoyo's Singapore subsidiary to Scomi Precision Engineering (SCOPE) in Malaysia. SCOPE played a key role in the Khan network's efforts to supply Libya with a nuclear weapons program, with Khan associate B. S. A. Tahir establishing the Malaysian firm to manufacture centrifuge components for Libya. The Mitutoyo measuring devices were retransferred by Tahir to Libya via Dubai between December 2001 and December 2002, where the IAEA discovered them.

In June 2007, four former Mitutoyo executives were convicted of numerous export control violations, but each received suspended sentences--thus, escaping jail time. Mitutoyo itself paid a $350,000 fine and received a multi-phased export ban. The ban lasts three years--the maximum duration allowed under Japanese law. But because the ban only targets specific items and includes exceptions for customers in countries considered "safe" (i.e., the United States), the company isn't expected to suffer long-term setbacks.

The Horkos Corporation case

Although many saw the Mitutoyo case as an aberration, on July 31, the Metropolitan Police Department's Public Security Bureau and Hiroshima police raided the Horkos Corporation on suspicion that the company had illegally exported dual-use machine tools that could be used to develop  nuclear weapons. Authorities believe that the items, called machining centers, were illegally transferred to a number of countries between 2004 and 2006.

Although the exported machines can be used to manufacture automotive components and other civilian devices, they can also be used to produce components for centrifuge separation devices for uranium enrichment. Due to their dual-use nature, machine centers are controlled by Japan under its Foreign Exchange and Foreign Trade Law, and exporters need to obtain an export license from the Ministry of Economy, Trade, and Industry (METI).

To avoid METI's licensing requirements, Horkos declared at the time of export that its machines were of a lower caliber. Relevant company officials reportedly approved of the unauthorized exports and multiple Horkos employees are accused of falsifying customs declarations. (See "Toolmaker Probed for Nuke-Linked Illicit Trade") It remains unclear if the company was aware that its products could be diverted for military purposes.

Japanese authorities have been particularly concerned about Horkos exports to South Korea, which may have been re-exported to North Korea or unspecified Middle Eastern countries. The police haven't released details about the South Korean company, so it's unclear why these transfers have raised particular concern. Horkos is also being investigated for questionable transfers to China, Thailand, France, and the United States. In total, Horkos is suspected of having exported more than 200 machines centers over a two-year period in violation of Japanese export control laws.1

Like Mitutoyo, Horkos is a prominent company; in 2007, it employed 665 people and generated $192 million in sales. The involvement of such a well-established firm in what authorities believe was a coordinated effort to elude export-control requirements raises the question of whether Japan's current system can sufficiently deter companies from seeking profits at the expense of security.

The Tokyo Vacuum and Nakano Corporation cases

In mid-June, Japanese authorities raided the facilities of Tokyo Vacuum, located in Sagamihara, and the Nakano Corporation, a Tokyo trading company, suspected of the unlicensed export of vacuum pumps usable in uranium enrichment. As in the Mitutoyo case, the raids stemmed from findings made by the IAEA--this time as a result of inspections undertaken by the agency in July 2007 at the Yongbyon nuclear complex and other nuclear-related facilities in North Korea.2 Japanese authorities identified the transferred items [in Japanese] as an oil-diffusion pump, oil-rotary pump, and other relevant components. While there's been previous speculation that Japanese-origin products were used in developing Pyongyang's nuclear weapons, this was the first confirmed finding of such equipment at a North Korean facility.3

Tokyo Vacuum manufactured the pumps in question and then exported them to a customer in Taiwan by Nakano in July 2003. According to one media report, Japanese investigators suspect that the recipient was a Taipei-based trading company named Transmerits. That company appears to have then re-exported the pumps to Namchongang, a trading company in Pyongyang headed by the North Korean representative during the 2007 IAEA inspection of Yongbyon. No information has been released about the Taiwanese company and whether Taiwanese authorities are pursuing an export-control violation case against it. The pumps were reportedly used at North Korean nuclear facilities to remove impure substances from plutonium under strong vacuum pressure.4

After the raid, Nakano's president claimed he wasn't aware that the pumps would be re-exported to North Korea and that the manufacturer had told the trading company that the equipment didn't require an export license.5 But according to a METI press release [in Japanese], Nakano later admitted to investigators that the company recognized at the time of the transfer that the equipment could be re-exported to North Korea. Ultimately, government prosecutors chose not to press formal charges against Nakano because they couldn't prove that the president or anyone else in the company was aware that the pumps would be used for North Korea's nuclear weapons development.6 METI did issue a stern warning [in Japanese] on August 8 to Nakano about abiding by domestic export-control laws.

Both Tokyo Vacuum and Nakano had long-established trading partnerships with Taiwanese companies, and the transactions that led to the violations could have been easily overlooked by Japanese authorities since the Taiwanese end-user wasn't subject to strict export-control requirements. Unlike the Mitutoyo or Horkos, this case doesn't appear to be a result of blatant disregard for Japanese export controls, but instead, a lack of awareness and due diligence on the part of the companies concerned. Such a lack of awareness about export-control requirements among small- and medium-sized Japanese enterprises has been cited as a major cause of unauthorized transfers of sensitive dual-use products.

The challenge of keeping up with proliferation

A significant amount of Japan's foreign trade and industry is based on the manufacturing of advanced technology, much of which has dual-use applications. In this way, Tokyo's ability to control its trade in sensitive materials has a serious impact on international security and nonproliferation. As the recent violations make clear, the Japanese export-control system is struggling to keep up with the rapid growth in dual-use technology and globalized trade. Japan isn't alone, as export-control violations by U.S. and European companies highlight.7 The constantly changing nature of modern technology means that the governments of industrialized nations must struggle with the maintenance of control lists and export-control regulations that are outdated almost as soon as they're published.

Japan's proximity to North Korea further complicates Tokyo's efforts. North Korea's missile and nuclear programs are seen as significant threats to Japan's domestic security, so stopping Pyongyang's procurement of Japanese dual-use technology has been a driving force in Tokyo's nonproliferation efforts. After North Korea's 2006 missile and nuclear tests, the Japanese government significantly tightened export-control regulations targeting North Korea in an effort to close off potential loopholes for illegal exports to Pyongyang.8

High-profile violation cases such as Mitutoyo, along with heightened global concern about proliferation, prompted Tokyo to take other recent steps to prevent further diversion of Japanese-origin products and technologies to WMD-related programs. In April 2006, METI established a working group of export control and nonproliferation experts under the Industrial Structure Council's Subcommittee on Security Export Control to assist Japanese authorities in preventing the illicit transfer of sensitive technologies. In 2007, the working group submitted its recommendations, which included strengthened penalties for export-control violations. Under the new rules put forth by the Japanese government--not yet formally approved by parliament--levels of fines for export-control violations would increase at least tenfold, bringing the maximum fine up to $184,000 per item transferred.9

Tokyo is also improving the compliance of all companies, no matter the size. As the Mitutoyo and Horkos cases demonstrated, large companies with an understanding of their export-control responsibilities are hard to deter unless fines and criminal penalties possess significant teeth. But smaller companies such as Tokyo Vacuum and Nakano often plead ignorance--rightfully or wrongfully. To counter this, Japan's export-control system is focusing more attention on industry outreach and promoting internal compliance programs. Tokyo first spearheaded efforts to improve internal compliance programs after problems surfaced with export-control violations in the late 1980s. (See "Japan's Export Control Initiatives: Meeting New Nonproliferation Challenges") But while most of Japan's larger companies have internal compliance programs, the programs in many small- and medium-sized companies are still lacking.

Therefore, Japan must continue to work with industry to raise awareness of the security ramifications of noncompliance with export controls and make clear that companies that don't take export restrictions seriously will suffer financial and legal consequences. Because with so many Japanese companies involved with highly sensitive dual-use items, the potential for more violations to occur remains.

1"More Than 200 Machines Illegally Exported in 3 Years?" Yomiuri Shimbun, August 1, 2008.
2"Japanese Factory Raided After Parts Found in North Korea," BBC Monitoring Asia Pacific, June 12, 2008.
3"Japan-Made Pumps ‘Used at N-facilities in N. Korea,'" Daily Yomiuri, June 12, 2008.
4"Ex-DPRK Diplomat Bought Nuclear Pumps Found by IAEA in Yongbyon," Daily Yomiuri, July 4, 2008.
5"Japan Investigates North Korea Shipment," International Herald Tribune, June 13, 2008.
6Kyodo News Service, "Case Against Japanese Firm for Alleged Export of Pumps to North Korea Dropped," BBC Monitoring Asia Pacific, July 15, 2008.
7"Nuclear Black Markets: Pakistan, A. Q. Khan and the Rise of Proliferation Networks," International Institute for Strategic Studies Strategic Dossier, May 2007; for a list of U.S. companies recently punished for export-control violations by the Commerce Department, see "Don't Let This Happen to You!."
8"Export Controls Turn Up Heat on North Korea," Nikkei Weekly, October 23, 2006.
9"Stiffer Penalty Eyed for Illegal Exports," Asahi Shimbun, June 15, 2007.