US sanctioned China’s top facial recognition firm over Uyghur concerns. It still raised millions

Show caption SenseTime, China’s largest facial recognition startup, claims to have the ability to ‘classify Uyghurs’. Photograph: Aly Song/Reuters China US sanctioned China’s top facial recognition firm over Uyghur concerns. It still raised millions SenseTime raised $512m from non-US investors and recently debuted on the Hong Kong stock exchange Johana Bhuiyan Fri 7 Jan 2022 06.00 GMT Share on Facebook

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SenseTime, China’s largest facial recognition startup, has come under increasing scrutiny by the US government for its alleged role in the surveillance of Uyghurs.

Over the past two years, the US has used sanctions to escalate pressure on the company, first by adding it to the government’s entity list, which restricts US exports to the company, and this December, by banning US investment in the firm.

But those sanctions have thus far had little effect on the company’s bottom line.

SenseTime recently made its debut on the Hong Kong stock market, months after writing in its initial IPO prospectus that the entity-list designation did not affect its business. And while the December investment ban initially appeared to have the impact the entity list designation could not, it was short-lived. The company postponed its IPO in response to the ban, but for just a few days, before going on to secure $512m from non-US investors, including Chinese government-backed funds.

The situation highlights a larger dilemma of how the US can hold companies accountable for their role in human rights violations perpetrated by the Chinese government.

After declaring China’s campaign against Uyghurs – a Turkic minority group who are mostly located in the Xinjiang region – a genocide in 2021, the US has made an effort to crack down on potentially complicit US and international companies and individuals through a variety of sanctions and regulatory moves. In December, for instance, Joe Biden signed a bill that bans imports from China’s Xinjiang region unless it can be proven that no forced labor was involved in the production.

However, the US is limited in its power over non-US companies like SenseTime, making it difficult to have an effect on the companies that goes beyond “naming and shaming”, as some experts put it. Even US companies like Tesla, which announced it was opening a showroom in Xinjiang on Monday, have withstood the country’s efforts to limit business in the region.

SenseTime surveillance software demonstration identifying customers’ movement patterns at a department store. Photograph: Thomas Peter/Reuters

“They’re trying to figure out what’s really going to have an impact and what’s symbolic,” said Douglas Jacobson, an attorney who represents companies on international trade related issues.

SenseTime did not respond to a Guardian request for comment but has maintained in previous comments that there is no ground for the entity-list designation. The 2019 patent which described the ability to classify Uyghurs “was neither designed nor intended in any way to discriminate against that or any other groups as such an action is a violation of our company values”, a spokesperson for the company, Simon Chang, said in September.

Why didn’t the entity-list designation do much?

Not all sanctions are created equal. When it comes to restricting international companies or foreign individuals, the US has a few tools in its arsenal, including investment bans and trade restrictions.

Those include the Bureau of Industry and Security’s entity list; the US treasury department’s non-specially designated nationals (SDN) Chinese military-industrial complex companies list, which bans US investment in a company; legislation like the National Defense Authorization Act, which prohibits the use or purchase of products from certain Chinese manufacturers by the federal government or anyone contracting with the government; and, one of the most restrictive tools, the SDN and blocked persons list.

Currently, SenseTime is on two of those lists: the entity and the non-SDN military industrial list. So far, the company has been able to proceed largely unaffected.

It all started in July 2019 when SenseTime filed a patent for a facial recognition feature that could, among other things, distinguish between people who were and were not ethnically Uyghur.

While its intended use remains unclear, the patent indicates the company would have the capacity to pick Uyghurs out in a crowd, a major concern in a country where Uyghurs have testified to constant surveillance that in some cases lands them in detention or forced labor camps.

SenseTime was added to the entity list in October 2019, which bans US entities from exporting goods to those companies, but SenseTime has since said the designation has little to no effect on its business.

Why not? The problem, experts say, is that the entity list makes more sense as a tool to limit hardware companies – like Huawei. Otherwise, it has little practical impact on a software company that doesn’t rely on US exports.

“The entity list has nothing to do with financial transactions or investments,” said Jacobson. “It only prohibits the export or re-export of goods, technology, or software that are subject to US export controls.”

With SenseTime, experts say, the power of US sanction is also limited by the fact that the company develops its software largely in house.

“I don’t know that there is really a mechanism that we have in the government right now to really deal with [companies like this],” said Jordan Brunner, a national security attorney who specializes in China, cybersecurity and sanctions. “It’s kind of like if China was trying to say, ‘well, we want GM or Ford to stop making cars in Detroit.’ It’s probably not going to happen.”

Chinese and US companies are increasingly bringing their supply chain in-house to reduce dependency on other countries, Brunner said. “[It’s] the idea that you don’t want to give your adversary any point of leverage to then be used against you.”

Stepping up the investment bans

Activists and experts have called for further sanctions to be imposed on companies like SenseTime for months. In September 2021, the Uyghur Human Rights Project, a research and advocacy group, called on the US government to impose further sanctions on SenseTime and other companies allegedly involved in China’s anti-Uyghur campaign.

On 10 December, days before SenseTime was scheduled to go public, the US treasury department announced it was banning all US investments in the firm because it “developed facial recognition programs that can determine a target’s ethnicity, with a particular focus on identifying ethnic Uyghurs”. SenseTime briefly delayed its IPO, but still managed to secure half a billion in non-US funding.

Though the ban requires existing investors to divest their shares within a year, lawyers for SenseTime have also presented a potential loophole that could allow investors to maintain their stake in the company, according to security research group IPVM. Attorneys with New York-based firm Hughes Hubbard & Reed argued in a letter published as a financial disclosure that the company’s US investors will not have to divest their SenseTime shares in spite of the ban because the treasury department specifically banned investments in a Hong Kong-based subsidiary of SenseTime, not the Cayman Islands parent company that went public. US investors in the company include Qualcomm, Fidelity International, Silver Lake Partners and IDG Capital. Fidelity spokesperson Nicole Goodnow said the firm does not comment on individual stocks. The other firms did not respond to a request for comment before publication.

Some experts argue that barring an addition to a more restrictive list such as the specially designated nationals and blocked persons list, which would block their assets and generally prohibit US individuals or entities from working with them, companies like SenseTime will probably continue their work unencumbered.

Jacobson said the delay to their IPO was probably just to “figure out how to move forward” without US investors, a problem they appear to have quickly solved. “Some reports indicate that the main source of the funds is the Chinese government,” Jacobson said. “As I mentioned, this shows that adding parties to OFAC’s non-SDN Chinese Military-Industrial Complex Companies List may not have a significant impact on the named companies.”

But Brunner argues it doesn’t mean the designation was entirely ineffective.

“On the one hand, it’s an effective tool for naming and shaming and denying [SenseTime] liquidity in the United States,” he said. “Which is the best we can do, but they may not feel the full impact the way we want them to.”

Louisa Greve, the director of global advocacy at the Uyghur Human Rights Project, agreed that the US investment ban can be a powerful tool, but said that more can be done to ensure individuals aren’t complicit in funding human rights violations.

Investment managers use a tool called environmental, social and governance screens to determine whether an entity is a sustainable or socially ethical investment. They help individuals filter the entities they invest in for anything from carbon emissions, to social issues like the company’s stance on guns and abortion. But there’s no method to screen for companies complicit in human rights violations or that aid in enabling totalitarian uses of surveillance, she said.

In fact, she said she had a hard time trying to persuade her retirement fund managers to get her out of any China-related stocks. Even though it was just a couple of hundred dollars in an index fund, Greve said, she didn’t want any of her money funding companies that may be involved in the campaign against Uyghurs and other forms of censorship and surveillance.

That’s why Greve thinks policy changes like the investment ban are actually worthwhile and is “a huge leap in leverage”. According to Greve, “it’s about complicity of American pension funds and university endowments as well as retirees’ own savings as well as people with investment portfolios”.

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