International Trade & Compliance Alert | March.14.2017
On March 7, U.S. authorities settled criminal and civil proceedings involving Zhongxing Telecommunications Equipment Corporation and certain of its affiliates (“ZTE”). ZTE is the largest publicly traded telecommunications manufacturer in China and the fourth largest telecommunications manufacturer in the world.
Charges against ZTE centered on allegations that the company supplied electronics products to Iran and North Korea in violation of U.S. economic sanctions and export controls. If the settlement is fully implemented, ZTE will pay at least $892 million, and as much as $1.19 billion, in fines and other penalties and endure years of intrusive U.S. government oversight. This is the largest penalty U.S. officials have ever imposed on a non-financial entity for violations of U.S. trade sanctions.
In a spectacular way, the ZTE settlement reinforces that non-U.S. companies should carefully assess whether their international activities implicate U.S. trade rules.
U.S. Sanctions and Export Controls
The ZTE settlement concerns U.S. requirements that generally forbid:
all exports from the United States of goods, services, software and technical information to Iran, North Korea and other U.S.-embargoed locations;
all supply by U.S. persons from outside the United States of such items to U.S.-embargoed locations; and
supply by anyone – including non-U.S. companies – of certain such items from outside the United States to U.S.-embargoed locations if the items originated in the United States or if they contain specified levels of U.S.-origin content.
“United States persons” are U.S. citizens and permanent resident aliens, legal entities organized under U.S. law, and anyone acting in the United States.
The requirements include economic sanctions regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and sanctions-related export controls administered by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”).
The third type of U.S. trade prohibition described above is often critical to non-U.S. companies. In its broad exercise of extraterritorial jurisdiction, U.S. authorities apply sanctions and export controls to trade by non-U.S. companies operating abroad based merely on the fact that the traded item (good, service, software or technical information) was created in the United States or contains some level of content that was created in the United States.
ZTE pled guilty to criminal charges that it conspired to violate sanctions and export control requirements through unauthorized supply of products to Iran, obstructed justice and made false representations to the U.S. government. ZTE simultaneously settled civil sanctions and export control claims brought by OFAC, without admitting guilt, and by BIS, admitting the alleged violations.
While ZTE reportedly gained around $143.5 million as a result of the alleged violations, the company agreed to pay over $892.3 million in fines and civil penalties, including paying over $430.4 million for criminal violations, with an additional $300 million payment obligation conditionally suspended over a seven-year probationary period. In addition, ZTE agreed to far-reaching commitments involving, among other features, an independent monitor of its operations, a program of compliance auditing, maintenance of compliance program arrangements and cooperation with U.S. authorities.
United States government agencies have emphasized allegations that ZTE, among other things, bought export-controlled U.S.-origin components, incorporated them into ZTE network infrastructure products and supplied those products to Iran. They have also stressed allegations that ZTE took elaborate steps to hide these activities from U.S. authorities and mislead enforcement officials.
Learning From the ZTE Settlement
First, the ZTE settlement shows that U.S. authorities are serious about enforcing sanctions and export controls to the full, unusually broad extent of their extraterritorial application. This is underscored by the disparity between the reported proceeds from alleged unlawful activity and the monetary penalties and nonmonetary arrangements, which will no doubt occasion enormous additional cost and business disruption.
While the case was investigated and prosecuted by the Obama administration, the penalties were imposed as one of the first actions of the Trump administration, with the Attorney General, Secretary of the Treasury and Secretary of Commerce announcing their respective agencies’ resolutions of the case. The Secretary of Commerce stressed, “We are putting the world on notice: the games are over . . . . Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences.”
Second, the ZTE case is extraordinary in at least two respects: (i) ZTE reportedly engaged in premeditated and deliberate, systematic and sustained, and concealed and covered-up violations of U.S. laws; and (ii) the evidence was clear-cut – ZTE’s highest level management, with the participation of its General Counsel, laid out in writing a plan to engage in these violations. In such an egregious case, the Department of Justice could be expected to seek to prosecute individuals involved in the violations. What may have avoided this result in these circumstances are the government-to-government concerns that derive from the difference between U.S. and Chinese Iran-related sanctions and export control measures. Non-Chinese companies’ executives may not be so fortunate in cases of noncompliance.
Third, a linchpin of the theory of liability is ZTE’s alleged supply to Iran of non-U.S. origin products manufactured outside the United States by a non-U.S. company due to their incorporation of U.S.-origin components. While the extraterritorial application of U.S. sanctions and export controls may be suspect as a matter of international law, the U.S. government has substantial leverage to extract significant settlements from non-U.S. companies.
In this case, the main source of leverage over ZTE was the U.S. government’s ability to block ZTE’s access to U.S. components, parts and technologies. This would have crippled the company’s ability to develop and manufacture its products globally. Indeed, the U.S. government issued a temporary license to enable ZTE to continue to deal with U.S. companies pending resolution of the enforcement action.
This leverage of the U.S. government enables it to extract severe settlement terms – including terms grossly disproportionate to the relative business value of a non-U.S. company’s activities relating to embargoed jurisdictions as long as such company’s business strategy requires access to the U.S. market. Moreover, there can be no doubt that the U.S. government can and will treat the theory of liability based on the U.S. source of parts and technology as the basis for major assessments of penalties – including criminal penalties.
Under these circumstances, non-U.S. companies’ development and promotion of effective trade compliance safeguards are plainly worthwhile if they prevent a fraction of the adverse implications of the ZTE settlement.
* * *
如果商品是源于美国的或至少包含一定源于美国的成分的，那么禁止任何人 – 包括非美国公司 – 将这些商品在美国之外供应至被美国贸易禁运覆盖的区域。
第二，中兴案有以下两个特别之处：（i）报告称中兴的行为有预谋和故意，系统而持续，并有隐藏和遮掩等违反美国法律的行为；（ii）证据明确 ——报告称有确凿证据显示中兴通讯的最高层管理层，与其法律总管一同参与制定了从事这些违法行为的计划。 在这种极端的情况下，司法部可以设法起诉参与违法行为的个人。基于某些原因，本案避免了这一结果，但非中国公司的高管在违规案件中可能就不会有那么幸运。