Insights

Case Study:
Distributors Undermining an Industry Leader's Compliance Program

 

Now, more than two years into the war, missiles continue to fall on Ukraine—missiles containing Western parts, despite the unprecedented number of Western sanctions, export restrictions, and the compliance efforts of the manufacturers themselves.

Bloomberg addressed this continued flow of semiconductors in an article published on December 9th, 2024, titled “Russia’s Military Found a Surprisingly Simple Way to Buy US Chips.” The article explains the methods Russia uses to maintain these supply lines, focusing on the ordering and shipping processes for components from the Dallas based Texas Instruments (TI).

Artemis Research assesses this entire process centers on the resellers and distributors, based on analysis of this article and cross-referencing with other commercial databases. Therefore, it is critical that Western manufacturers thoroughly vet business partners to minimize risk of regulatory action and reputational damage from inadvertent export violations. In the following paragraphs, we break down the Bloomberg article, illustrating the role resellers and distributors play in the purchase and shipment of these goods.

 

 

Phase 1: Placing an Order

According to the Bloomberg study, the starting point for many illicit purchases is through Russian websites--in this case, getchips.ru and altchips.ru. The study explains that the pricing information on these two sites mirrors pricing information obtained directly from TI’s application programming interface (API), though TI only allows API access to entities they have previously screened and approved. It remains unclear how these sites obtained this information, though this suggests one of the approved entities may be offering this data to a third party.

Figure 1: The Ordering Process

 

 

Phase 2: Shipping the Item

Russian resellers of this equipment obtain the item from the United States via resellers in a third country—in this case, Hong Kong, according to the Bloomberg article. The goods are shipped commercially. In this particular network, they used the Russia airline, Aeroflot, and the freight company, Sea Global SCM LTD, which commercial business databases trace to China. The equipment presumably is then shipped to Russian end users, which often turned out to be Russian munitions manufacturers.

Figure 2: The Shipping Process

 

 

In summary, the entire process involves a global network spanning at least three countries, in which distributors and resellers play a critical role. While we cannot determine how often chips pass through a Western distributor versus directly to third-country resellers, in all cases, these companies are key. We expect this general process carries over to purchases from a variety of Western manufacturers:

  1. Manufacturer gives screened and authorized partners, such as distributors and price comparison websites, access to pricing information via its API
  2. Russian price comparison websites obtain pricing information from either Western price comparison websites or distributors
  3. Russian resellers likely also obtain pricing information via Western price comparison websites or distributors
  4. Russian customer seeks item through Russian reseller and views pricing information via reseller's site or a Russian price comparison website
  5. Reseller obtains item via other resellers and distributors, often located in countries besides Russia or the United States
  6. Russian end user purchases item from reseller and item is shipped to desired location 

 

Therefore, we recommend technology manufacturers undertake enhanced screening of all distributors beyond routine searches of traditional risk management databases. Our searches confirmed Bloomberg’s findings that that these Hong Kong-based companies were located in office buildings occupied by company formation agents—a company whose sole purpose is to form other companies on behalf of clients around the world, and well-known indicator of potentially illicit activity. They had also exported electrical components to Russian buyers in the past. Thus, taking the steps to examine the relationships, business incorporation data, and prior trade activity of distributors and their customers can thus help mitigate the risk of export diversion, regulatory violations, and a damaged reputation from bad press.