Front Companies: Who Is the End User?

Introduction

The Defense Security Service (DSS) receives many reports each year of suspected "front companies," which are referred to the FBI and U.S. Customs for investigation as appropriate. Front companies can present a serious problem to the U.S. Government and the defense industry, because they can potentially be used to circumvent export restrictions and embargoes.

The Technique

A front company frequently operates like a consultant. It works on behalf of a customer, often with the intent of hiding the identity of the end user. Front companies may be used to locate and acquire technology legally and then export it illegally to an unauthorized recipient. Suspicious indicators may include the following:

  • The U.S. contractor receives an unsolicited request for military-related information by fax, mail, email, or phone from a "relatively unknown" company. The request itself is simple, low cost, nonthreatening, and risk free.
  • The unsolicited request
    • is sent in "broken" English.
    • is sent on "shoddy" business letterhead or in an unprofessional manner in contrast to standard business practices.
    • frequently, but not always, involves a dual-use type of technology (electronics, avionics, communications), which may or may not require a license for export depending on the intended end use.
  • The front company
    • is only comprised of several employees. These employees may also have other incorporated businesses.
    • does not know much about the equipment being requested, which someone working with the equipment would reasonably be expected to know.
    • declines a maintenance warranty or operator training associated with the equipment.
    • conveys the impression the equipment is for a third party and the real end user is unknown.
    • may identify itself as being in the consulting or brokering business.
    • may have connections or business with a foreign embassy.
    • may be financed by a foreign bank.
    • may have an office in an embargoed country.
    • wants to close the deal quickly and provides the money up front.
  • The front company representative
    • may attempt to test the honesty of the U.S. contractor or its representative to determine whether an illicit deal can be arranged.
    • may ask if the U.S. contractor has offices in a third country to which the item can be shipped.
    • may offer financial incentives (bribes) to the U.S. contractor to overcome reluctance in shipping an item.
    • may imply that officials in the foreign country can be readily bribed to take part in an illicit deal.

Case Studies

A U.S. incorporated company in California sent an unsolicited request for information to purchase jamming equipment from a U.S. defense contractor. Jamming equipment is listed under the International Traffic in Arms Regulations (ITAR) and would require a license if exported outside the United States. The U.S. company requesting the jamming equipment consisted of only several people and was an unknown entity to the U.S. defense contractor. The request was sent in broken English on letterhead most likely made on a personal computer. The U.S. company requesting the jamming equipment was obviously not the end user and was more likely a front company.

In another incident, a U.S. company submitted a request for quote (RFQ) to a U.S. defense contractor on an aircraft part for a system configuration sold only to a southwest Asian country. The southwest Asian country has since been placed on a U.S. embargo list. The U.S. company submitting the RFQ was a small previously unknown company in Texas. The stated end use for the part was a west European country. The request was handwritten on business letterhead most likely produced on a home computer. The U.S. defense contractor became suspicious when a similar request for the same aircraft part arrived from a different U.S. company in Florida. In the second request, no end user was listed but the part number, quantity, and item number were exactly the same. The two U.S. companies submitting the RFQs were likely front companies either operated by or operating on behalf of the southwest Asian country.

Some front companies can be more blatant and obvious. A company, located in Florida, sent a letter and a few weeks later telephoned a U.S. defense contractor to establish a business arrangement for the sale of a classified airborne infrared countermeasures system. The U.S. defense contractor could not obtain an export license for this country and so declined to pursue the business arrangement. The company soliciting the business arrangement subsequently approached the U.S. defense contractor about exporting the countermeasures system through a foreign office or subsidiary in a country where an export license could be approved.

Security Countermeasures

The best security countermeasure is to know your customer. Many U.S. defense contractors conduct business with the same companies on a daily basis. When a "new company" enters the picture requesting sensitive or classified information and technology, prudent risk management would suggest doing a little checking of the company's history. If a company fits any of the indicators mentioned above and is cause for suspicion, the company facility security officer should notify the DSS Industrial Security Representative, FBI, and U.S. Customs, as appropriate.

Public Release #981210-05