Hammer falls on ZTE

Chinese telecom giant to pay more than $1 billion for violating U.S. export sanctions    Zhongxing Telecommunications Equipment Corp. and ZTE Kangxun Telecommunications Ltd., China’s second largest telecommunications manufacturer, on Tuesday were assessed a $1.2 billion penalty by the Commerce, Justice and Treasury departments for illegal shipments of U.S.-made electronics to Iran and North Korea in violation of the Export Administration Regulations (EAR) and Iranian Transactions and Sanctions Regulations.
   As part of the settlement, Shenzhen-based ZTE agreed to pay a penalty of $661 million to Commerce’s Bureau of Industry and Security (BIS), with $300 million suspended during a seven-year probationary period to ensure no future violations are committed by the Chinese company. The civil penalty is the largest ever imposed by BIS.
   If approved by a federal judge, the combined $1.2 billion in penalties from the three U.S. departments will be the largest ever imposed by the U.S. government in an export control case.
   As part of the plea deal, the U.S. District Court for the Northern District of Texas will consider imposing $430.5 million in combined criminal fines and forfeiture on ZTE as part of the plea agreement with the Justice Department. ZTE also agreed to pay the Treasury Department’s Office of Foreign Assets Control $100.9 million pursuant to a settlement agreement.
   In addition to the penalties, ZTE agreed to audit and compliance requirements to prevent future violations, and a seven-year suspended denial of export privileges, which the Commerce Department said “could be quickly activated if any aspect of this deal is not met.”
   Federal authorities investigated ZTE for five years, starting at the beginning of 2012, when allegations of illegal exports first surfaced in Reuters and other media reports. Despite knowledge of the U.S. investigations and repeated warnings to stop violating U.S. export control regulations, ZTE continued to divert U.S. technology to Iran. On March 7, 2016, the Commerce Department sanctioned ZTE by adding it to the Entity List, which created a license requirement to export, reexport or transfer (in country) to ZTE any items subject to EAR.
   However, the Commerce Department created a temporary general license in late March 2016 applicable to U.S. exports to ZTE, which remained in effect until June 30. The exemption was significant to the U.S. semiconductor industry, which could not afford to cut off its supply of components to ZTE, valued in the hundreds of millions of dollars.
   Commerce followed with an extension of the exemption, first valid through Aug. 30, then to Nov. 30, and another to Feb. 27. BIS stated in Federal Register notices that the reason for the extensions was that ZTE continued to cooperate with the U.S. government. The exemption was last extended on Feb. 23, but for just 30 days, signaling that the U.S. government was near a settlement with the Chinese telecom.

Despite knowledge of the U.S. investigations and repeated warnings to stop violating U.S. export control regulations, ZTE continued to divert U.S. technology to Iran.

   Meanwhile, the Commerce Department found evidence that ZTE continued to look for ways to throw off U.S. investigators into the start of 2016. It described how the company formed a 13-member “Contract Data Induction Team,” which between January and March 2016 was tasked with destroying, removing or sanitizing all transactions related to ZTE’s Iran business that post-dated March 2012; delete on a “nightly basis” all the team’s emails to hide its activities; and require each of the team members to sign a non-disclosure agreement regarding these actions.
   “Under the non-disclosure agreement, team members would be subject to a penalty of 1 million Renminbi (or approximately $150,000) payable to ZTE if it determined a disclosure occurred,” the Commerce Department said.
   Although the Trump administration can’t take credit for the ZTE investigation, it emphasized its desire to crack down on violators of U.S. export control regulations.
   “We are putting the world on notice: the game is over,” Commerce Secretary Wilbur Ross said in a statement. “Those who flout our economic sanctions and export control laws will not go unpunished—they will suffer the harshest of consequences.”
   Ross praised BIS staff for this “big accomplishment,” acknowledging the fact that the agency is “severely understaffed” at the moment.
   When asked by CNBC whether Commerce will be assessing similar heavy penalties in future export enforcement cases, Ross said “I don’t know if we’ll get $1 billion every time, but we will try our darndest to do so.”
   Zhao Xianming, ZTE’s new chairman and chief executive officer, said the company “acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company.”
   He added that the company’s goal is to “continue on our path of becoming a model for export compliance and management excellence.”
In November 2016, ZTE appointed Matt Bell, a U.S. lawyer, as chief export compliance officer.
   “Our global legal and compliance professionals will continue to work together to identify risk across the company and continually improve the effectiveness of our overall compliance program,” he said.
   Under Zhao’s leadership, ZTE has also set up a new CEO-led compliance committee, restructured its legal and compliance departments, expanded its export control compliance manual, added new automated tools and processes, and trained more than 45,000 employees on export controls and sanctions laws and company policies, with plans to aim this training in 2017 at corporate functions such as sales, procurement, research and development, and supply chain.
   “The main lesson from this case is the broad scope of U.S. jurisdiction on re-exports of U.S. products, which is something that many Chinese companies either did not agree with or chose to ignore,” said Douglas Jacobson, a Washington, D.C. international trade attorney who specializes in sanctions and export controls.