International Trade & Compliance Alert | April.30.2018
On April 15, 2018, the U.S. Commerce Department's Bureau of Industry and Security ("BIS") imposed a "denial order" against Zhongxing Telecommunications Equipment Corporation ("ZTE Corporation") and ZTE Kangxun Telecommunications Ltd. ("ZTE Kangxun"; collectively, "ZTE") under the Export Administration Regulations ("EAR"). The denial order springs from a March 2017 settlement of alleged export control and economic sanctions violations, including a criminal plea, relating to alleged transactions involving Iran and North Korea. The denial order broadly forbids supply to ZTE of goods, software and technology that originated in the United States or are otherwise subject to U.S. export control jurisdiction. The denial order is scheduled to last for seven years. But given the extraordinary business disruption caused by the denial order, there is pressure for BIS to suspend or limit the order based on new ZTE commitments to the U.S. government.
Building on our alert about ZTE's March 2017 settlement:
The ZTE group is China's second-largest maker of telecommunications equipment and the fourth-largest telecommunications manufacturer in the world. It relies heavily on U.S. equipment, software and technology to develop and produce its telecommunications products.
In March 2017, ZTE settled criminal and civil proceedings involving charges that centered on allegations that ZTE supplied electronic products to Iran and North Korea in violation of U.S. Trade Controls. U.S. government agencies emphasized that ZTE, among other things, allegedly bought export-controlled U.S.-origin components, incorporated them into ZTE network infrastructure products and supplied these products to Iran, and then took elaborate steps to hide these activities from U.S. authorities.
As part of the 2017 settlement, in addition to financial penalties of at least US$892 million and as much as US$1.19 billion, ZTE agreed to an independent monitor of its operations, a program of compliance auditing and maintenance of compliance program arrangements. Crucially, ZTE also agreed to a seven-year suspended denial order that could be activated based on a violation of the settlement agreement with BIS or if ZTE committed additional violations of the EAR. The denial order was activated by BIS on April 15, 2018, after BIS determined that ZTE made false statements about employee disciplinary actions both during settlement negotiations and after entrance into the settlement agreement. BIS apparently discovered that ZTE made allegedly false statements to the U.S. government only after BIS requested information and documentation showing that employee discipline had been implemented.
The denial order prohibits ZTE and, when acting for or on ZTE's behalf, its successors, assigns, directors, officers, employees, representatives or agents from directly or indirectly participating in transactions involving any goods, software or technology that are subject to U.S. jurisdiction under the EAR as described in the order.
Further, the denial order forbids anyone – wherever they are located and whether or not they are U.S. persons – to:
The denial order does not apply directly to subsidiaries or other affiliates of ZTE that are not acting for or on behalf of ZTE. In addition, it does not prohibit dealings with ZTE that have no connection to an item subject to the EAR. Transactions involving purely financial or investment matters with ZTE may not be prohibited. But companies should be aware that the U.S. government, including the U.S. Treasury Department's Office of Foreign Assets Control, could impose further sanctions on ZTE.
Under these circumstances, non-U.S. companies' development and promotion of effective U.S. Trade Controls compliance safeguards are plainly worthwhile if they prevent a fraction of the adverse implications of the ZTE settlement.
It is possible that the U.S. Department of Commerce will issue further guidance on implementation of the denial order.