Component manufacturers and their distributors go to great lengths to comply with U.S. laws that restrict the sale of certain high-tech goods to nations that are considered unfriendly to the United States. These laws, in part, are designed to protect U.S. intellectual property and to keep weapons- and intelligence-based technologies out of the hands of hostile nations.
Although the Cold War is over, a recent case adjudicated in New Jersey illustrates how nations such as Russia get their hands on sensitive technology. Earlier this month a Russian man admitted his role in an international procurement network that obtained and smuggled more than $65 million worth of electronic components from the United States to Russia in violation of export control laws.
According to the office of U.S. Attorney Paul J. Fishman of the District of New Jersey, Alexander Brazhnikov Jr., 36, a naturalized U.S. citizen born in Moscow, was responsible for nearly 2,000 illegal shipments of regulated, sensitive electronics components, many of which wound up in the hands of Russian military and security forces. He also admitted going to extraordinary lengths to conceal the nature and destination of the shipments, as well to hide the tens of millions of dollars in illegal proceeds generated by the scheme.
According to documents filed and statements made in court: Brazhnikov Jr. and his companies are part of a sophisticated procurement network that has surreptitiously acquired large quantities of license-controlled electronic components from American manufacturers and vendors and exported those items to Russia on behalf of Russian business entities that were authorized to supply them to the Ministry of Defense of the Russian Federation, the Federal Security Service of the Russian Federation (FSB) and Russian entities involved in the design of nuclear warheads, weapons and tactical platforms.
The defendant conspired with his father, Alexander Brazhnikov Sr., owner of a Moscow-based procurement firm whose agents helped initiate the purchase of electronics components from United States vendors and manufacturers on behalf of the conspirators’ clients in Russia. Brazhnikov Jr. finalized the purchase and acquisition of the requested components from the various distributors, then repackaged and shipped them to Moscow. He routinely falsified the true identity of the end-user of the components and the true value of the components in order to avoid filling out required export control forms. Brazhnikov Jr. purposefully concealed the true destination of the parts that were exported by directing that the shipments be sent to various “shell” addresses in Russia – some of which have been identified as vacant storefronts and apartments – which were established and controlled by the Moscow-based network. All shipments initially directed to the shell addresses were redirected to a central warehouse controlled by the conspirators’ Moscow-based network.
High-tech distributors go to great lengths to avoid exporting controlled technologies. Many distributors receive data directly from the U.S. government; high-tech organizations and various international sources that helps flag suspect individuals, businesses, addresses, accounts and other identifiers. Distributors also maintain their own databases of customers that for one reason or another have been flagged. At Future Electronics Memphis-area distribution center, the distributor routinely compares orders with "do-not-sell" lists that are regularly updated. In the electronics supply chain, documents accompany all electronics components from factories to end-customers and back again in the event products are returned. However, cases such as Brazhnikov’s illustrate just how difficult it is to track, maintain and verify this information and documentation. Paper documents are still easily forged, supply chain experts say.
According to accounts of the investigation it appears that Brazhnikov was operating as recently as 2014. The U.S. government has adopted a number of practices, including the National Defense Authorization Act (NDAA) in 2011, to improve the traceability of components in the Department of Defense supply chain. Traceability is one way to prevent counterfeit components from entering the supply chain.
Another aspect of the case may be of particular concern to distributors that frequently extend credit to customers. According to the Department of Justice (DoJ), the funds for the Brazhnikov network’s illicit transactions were obtained from the various Russian purchases and initially deposited into one of the conspirators’ primary Russia-based accounts. Disbursements for purchases were made from that primary Russian account through one or more foreign accounts held by shell corporations in the British Virgin Islands, Latvia, Marshall Islands, Panama, Ireland, England, United Arab Emirates and Belize and ultimately into one of the defendant’s U.S.-based accounts. The network’s creation and use of dozens of bank accounts and shell companies abroad was intended to conceal the true sources of funds in Russia, as well as the identities of the various Russian defense contracting firms receiving U.S. electronics components.
Brazhnikov Jr. was arrested at his home on June 26, 2014, following a joint investigation by the FBI, the U.S. Department of Commerce (DOC) and the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (ICE-HSI), according to the DoJ. From January 2008 through June 2014, he was the owner, chief executive officer and principal operator of four New Jersey microelectronics export companies, each of which were used in the various conspiracies uncovered by the investigation. Following his arrest, special agents seized $4,075,237 in proceeds related to the charged offenses, as well as real property and other assets valued at more than $600,000.
Brazhnikov Jr . pleaded guilty before U.S. District Court Judge William J. Martini of the District of New Jersey. He was charged with one count of conspiracy to commit money laundering, one count of conspiracy to smuggle electronics from the United States and one count of conspiracy to violate the International Emergency Economic Powers Act (IEEPA), the DoJ reported.
The money laundering conspiracy charge to which Brazhnikov Jr. pleaded guilty carries a maximum potential penalty of 20 years in prison and a $500,000 fine. The smuggling and IEEPA conspiracy charges carry a maximum potential penalty, per count, of five years in prison and a $250,000 fine. Sentencing is scheduled for Sept. 15, 2015. Brazhnikov Jr. also agreed to the entry of a forfeiture money judgment of $65 million, according to the DoJ.