SenseTime hit with US investment ban as it prepares to go public

SenseTime’s big stock market debut may have hit a major snag because of tensions between the United States and China.

The Chinese artificial intelligence startup was supposed to price shares Friday in its initial public offering in Hong Kong, where it planned to raise up to $767 million.

But its preparations to go public were overshadowed by news that Washington was adding SenseTime to another trading blacklist.

The US Treasury department confirmed Friday that it had decided to place the company on a list of “Chinese military-industrial complex companies,” in which US President Joe Biden has banned Americans from investing.

The US Treasury said SenseTime was sanctioned because of the role its technology plays in enabling human rights abuses against the Uyghurs and other Muslim minorities in Xinjiang.

“SenseTime … owns Shenzhen Sensetime Technology Co. Ltd., which has developed facial recognition programs that can determine a target’s ethnicity, with a particular focus on identifying ethnic Uyghurs,” the department said in a statement. “When applying for patent applications, Shenzhen Sensetime Technology Co. Ltd. has highlighted its ability to identify Uyghurs wearing beards, sunglasses, and masks.”

Xu Li, chief executive officer of SenseTime Group Ltd., is identified by the company's facial recognition?system on a screen as he poses for a photograph at SenseTime's showroom in Beijing, China, on Friday, June 15, 2018.

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The impending US action was first reported by the Financial Times on Thursday.

In a statement Saturday, SenseTime said that “we strongly oppose the designation and accusations that have been made in connection with it.”

“The accusations are unfounded and reflect a fundamental misunderstanding of our company,” it added. “We regret to have been caught in the middle of geopolitical disputes.”

The firm also vowed to “take appropriate action to protect the interests of our company and our stakeholders,” without elaborating further.

SenseTime added that it operated “as a software company committed to promoting sustainable, responsible and ethical use of AI,” which has “complied with the applicable laws and regulations … in the jurisdictions where we conduct business.”

The company said it had formed an “AI Ethics Council, comprising both internal and external experts, [which] ensures that our business strictly adheres to recognized ethical principles and standards.”

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SenseTime, one of the world’s most valuable AI companies, has already faced controversy in recent years over allegations that it has been involved in human rights violations in Xinjiang.

The company has previously said that it has developed its “AI code of ethics to ensure our technologies are used in a responsible way,” and has said that sales to customers in Xinjiang have been in compliance with Chinese law.

The firm’s Beijing subsidiary is already on the US entity list, which meansit is barred from buying US products or importing American technology without a special license.

SenseTime said in its IPO prospectus that the ban does not “apply to other group entities that are legally distinct” from the Beijing unit.

The company also claimed that “none of our material investors, customers or suppliers had withdrawn their investment or ceased doing business with us due to the Entity List addition.”

But it has acknowledged potential headwinds, saying that “we are subject to the risks associated with international trade policies, geopolitics and trade protection measures, and our business, financial condition and results of operations could be adversely affected.”

AI under scrutiny

SenseTime, which was founded in 2014 in Hong Kong, generates hundreds of millions of dollars a year in revenue by deploying technology for everything from smart city systems to driverless vehicles.

The company is no stranger to the international spotlight, at one point even becoming the world’s most valuable AI startup in 2018. It is also a member of China’s national AI team, which aids the country with its tech superpower ambitions.

But the firm is best known for its facial recognition software, which has long been subject to controversy.

The use of such technology in policing and domestic security is widespread across China, but especially in the western region of Xinjiang, where up to 2 million people from Uyghur and other ethnic Muslim minorities have allegedly been put into internment camps, according to the US State Department.

Beijing maintains that the camps are vocational training centers that help to deradicalize citizens. But Uyghur exiles have described the crackdown as “cultural genocide,” with former detainees saying they were indoctrinated and abused.

SHANGHAI, CHINA - 2020/11/01: Chinese multinational technology company Huawei logo seen at their store. (Photo by Alex Tai/SOPA Images/LightRocket via Getty Images)

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Earlier this year, IPVM, an independent group that monitors video surveillance technology, said that SenseTime was mentioned in a patent application in July 2019, which suggestedthat it could identify people by ethnicity, specifically singling out “Uyghur” as a possibility.

The finding was the latest in a series of revelations questioning the facial recognition practices of Chinese tech giants, including Alibaba (BABA) and Huawei.

In a statement at the time, SenseTime told CNN Business that the reference to Uyghurs was “regrettable,” adding that it was “one of the examples within the application intended to illustrate the attributes the algorithm recognizes.”

“It was neither designed nor intended in any way to discriminate, which is against our values,” a spokesperson said. “We will update the patent at the next available opportunity.”

A screen showing a demonstration of SenseTime's SenseVideo pedestrian and vehicle recognition system at the company's showroom in Beijing in 2018.

More recently in its investment prospectus, SenseTime said that its “previous sales to customers in Xinjiang were in compliance with” Chinese laws, and that income from those sales were less than 1% over the last three years.

The company was planning to price shares between 3.85 and 3.99 Hong Kong dollars, or roughly 50 cents apiece, according to a stock exchange filing. That would put its valuation at approximately $17 billion at the top end of the range.

SenseTime was due to start trading in Hong Kong on Friday, December 17.

— Brian Fung and Ben Westcott contributed to this report.