Clock’s ticking

Export control exemption for Chinese telecom company due to expire next week    A nearly yearlong exemption that allows U.S. companies to continue to export to a large Chinese telecommunications company under investigation for U.S. export violations is nearing its expiration.
   ZTE Corp., which is equivalent to a Verizon or AT&T, relies on U.S.-made semiconductors and other electronics to develop its mobile phones and other telecommunications equipment, which it in turn ships all over the world.
   If either an extension or resolution to the U.S. government’s investigation fails to be reached by Feb. 27, hundreds of millions of dollars in U.S. semiconductor component shipments to ZTE will come to a halt.
   Citing violations of federal export control regulations, the U.S. Commerce Department’s Bureau of Industry and Security in early March 2016 added ZTE and three of its affiliates to a list of entities prohibited from receiving U.S.-made exports.
   BIS said in a final rule published in the Federal Register at the time that ZTE Corp. “planned and organized a scheme to establish, control, and use a series of ‘detached’ (i.e. shell) companies to illicitly re-export [U.S. exports] to Iran in violation of U.S. export control laws.”
   The agency added that this activity by the Shenzhen-based company was “contrary to the national security and foreign policy interests of the United States.”
   In addition to ZTE Corp., the other related companies added to the agency’s so-called “Entity List” include ZTE Kangxun Telecommunications Ltd. and Beijing 8-Star in China, and ZTE Parsian in Iran.
   Based on its investigation and allegations, BIS said “no license exceptions are available for exports, reexports, or transfers (in-country) of items subject to the EAR (Export Administration Regulations), including EAR 99, to the entities being added to the Entity List.”
   However, the Commerce Department created a temporary general license in late March 2016 applicable to exports to ZTE, which remained in effect to June 30, 2016. Then Commerce followed with an extension valid through Aug. 30, then another to Nov. 30, and finally another to Feb. 27, 2017. BIS stated in the Federal Register notices that the reason for the extension was that ZTE continued to cooperate with the U.S. government with respect to the matter.
   Because of the nature of the ZTE violations, the investigation is being led by the Counterintelligence and Export Control Section (CES) of the Justice Department’s National Security Division. In addition, BIS and the Treasury Department’s Office of Foreign Assets Control (OFAC) have remained actively involved in the investigation.
   Observers of the ZTE investigation believe that it’s most likely that Justice, Commerce and Treasury departments will extend the exemption this week—in advance of Feb. 27—for another 90 days to reach a settlement.
   Another option is that a settlement could be reached this week between the three departments and ZTE prior to the exemption’s expiration, but this may be unlikely without a new Justice Department deputy attorney general or other senior appointees in place to review the case.
   The least favorable option for ZTE and those who export to them is for the departments to allow the exemption to expire. This would immediately force U.S. companies to shut down their business with ZTE, causing significant harm to their bottom lines, and perhaps stoke an international incident between China and United States.
   As electronics manufacturer Oclaro already warned in its filing to the U.S. Securities and Exchange Commission for the quarter ending Dec. 31, 2016, “Any action that precludes us from shipping product to ZTE, including the non-renewal of the temporary license, or to other customers in China, may have a material adverse impact on our revenues and results of operations.”