US embassy cable - 05TAIPEI1924

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 001924 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
AMEMBASSY BEIJING PLEASE PASS TO AMCONSUL CHENGDU 
 
E.O. 12958: 04/25/2015 
TAGS: ECON, EINV, CH, TW, Cross Strait Economics 
SUBJECT: UMC CHAIRMAN FINED, INVESTIGATION CONTINUE 
 
REFS: (A) TAIPEI 709, (B) TAIPEI 1402 
 
CLASSIFIED BY AIT DIRECTOR DOUGLAS H. PAAL, REASON 1.4 D 
 
Summary 
------- 
 
1. (U) Taiwan's Financial Supervisory Commission (FSC) 
announced on April 20 that it would fine United 
Microelectronics Co. (UMC) Chairman Robert Tsao NT$ 3 
million (USD 95,000) for two separate violations of failure 
to disclose important information to stockholders.  The 
information concerned UMC's relationship with Mainland 
semiconductor manufacturer He Jian.  The FSC has indicated 
that it has completed this stage of its investigations into 
UMC but could reopen the case depending on the results of 
investigations by other Taiwan agencies.  Meanwhile, 
Taiwan's Investment Commission continues to look into UMC's 
relationship with He Jian and to review UMC's application 
to accept a 15-percent stake in the PRC firm in 
compensation for consulting services provided.  The Hsinchu 
County Prosecutors Office of the Ministry of Justice also 
continues its investigations into UMC.  End Summary. 
 
FSC - First Sanction Against UMC 
-------------------------------- 
 
2. (U) On April 20, Taiwan's Financial Supervisory 
Commission (FSC) announced that it would fine United 
Microelectronics Co. (UMC) Chairman Robert Tsao a total of 
NT$ 3 million (USD 95,000) for two separate violations. 
Tsao was fined NT$ 600,000 (USD 19,000) for failure to 
 
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disclose to shareholders in 2002 that it provided 
managerial and administrative assistance to He Jian 
Technology (Suzhou) Co. in exchange for an oral commitment 
that He Jian would provide some return to UMC at a later 
date.  In addition, Tsao must pay NT$ 2.4 million (USD 
76,000) -- the maximum fine -- for late disclosure of the 
March 4 Board of Directors decision to accept a 15-percent 
stake in He Jian in exchange for UMC's previous assistance. 
UMC did not announce the decision until March 17, well 
after the two-day limit allowed under Taiwan law. 
 
3. (U) FSC Deputy Director General Lee Chi-hsien told the 
press that the FSC would now close this stage of its 
investigation into FSC.  It has no further plans to impose 
sanctions against the firm unless or until further evidence 
of malfeasance appears.  Depending on the findings of the 
investigations of other government agencies, FSC may reopen 
the case to look at additional violations. 
 
MOEA - Investigating Violations, Reviewing Application 
--------------------------------------------- --------- 
 
4. (SBU) The Ministry of Economic Affairs (MOEA) Investment 
Commission continues its review of the He Jian case from 
two angles.  First, the Commission is considering whether 
He Jian violated the "Act Governing People's Relations 
Across the Taiwan Strait" by transferring prohibited 
technology to the PRC.  Emile Chang, the Commission's 
Deputy Executive Secretary, told AIT/T that if UMC is found 
guilty of such a violation it faces a fine of up to NT$ 25 
million (USD 790,000).  He would not speculate on how long 
the Commission would take to complete its investigations. 
 
5. (SBU) Second, the Commission is reviewing UMC's proposal 
to accept He Jian's offer to turn over a 15-percent stake 
in the firm.  The Commission must determine whether such a 
proposal meets Taiwan's strict regulations on semiconductor 
investment.  Chang expressed some skepticism, but refused 
to predict whether the Commission would approve the 
proposal.  It appears unlikely that such an investment 
could meet current Taiwan regulations.  He Jian already 
uses technology that Taiwan firms are prohibited from 
transferring to the Mainland.  According to press reports, 
MOEA Minister Ho Mei-yueh hinted quietly that although UMC 
could not accept shares, it might be permitted to accept 
other forms of remuneration in exchanging for the 
managerial consulting assistance that it claims to have 
provided He Jian. 
 
Ministry of Justice - Keeping Quiet 
---------------------------------- 
6. (U) Meanwhile, the Hsinchu County Prosecutors Office 
under the Ministry of Justice continues its investigations 
into criminal wrongdoing by UMC.  It has revealed few 
details on the progress of its investigation and the 
evidence it has recovered from raids on UMC's offices and 
interviews with UMC and He Jian executives.  The 
prosecutors have not indicated when they might file 
charges.  However, the travel ban imposed on 19 UMC and He 
Jian employees has been lifted.  The He Jian employees who 
had been stuck in Taiwan since the Lunar New Year holiday 
in February have returned to the Mainland.  Three employees 
are still prohibited from leaving Taiwan. 
 
Comment - Environment of Uncertainty 
------------------------------------ 
 
7. (C) The wheels of justice continue to grind slowly in 
the He Jian case.  To date, the fines that have been 
imposed or threatened are low compared to the potential 
gains if UMC is successful in legalizing its stake in He 
Jian.  It is hard to estimate the legal costs that UMC 
faces, let alone the costs imposed by the damage to its 
reputation.  However, if the Taiwan government expects its 
cross-Strait economic policies to have any teeth, it will 
have to make it clear that UMC faces serious legal 
sanctions.  Otherwise, Taiwan's companies and entrepreneurs 
will see little reason not to circumvent Taiwan law and 
invest illegally in the Mainland.  The results will have an 
impact on Taiwan's ability to enforce export controls that 
are important to U.S. interests.  The UMC case also shows 
that while Taiwan's cross-Strait restrictions are failing 
to keep advanced technologies out of the PRC, they are 
placing those firms that observe the letter of the law at a 
disadvantage.  Taiwan needs to rationalize these policies 
in a way that allows Taiwan firms to compete but preserves 
the island's vital interests as well.  End comment. 
PAAL