China-based Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd (collectively “ZTE”) entered a guilty plea and agreed to pay a combined penalty up to $1.19 billion to settle criminal and civil allegations that ZTE violated U.S. export control laws and U.S. sanctions by illegally shipping U.S.-origin items to Iran.

The record-breaking settlement agreement was with the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of Justice (“DOJ”), and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”). The penalty assessed against ZTE included a $100,871,266 civil monetary penalty imposed by OFAC; a $430,488,798 in combined criminal fines and forfeitures; and a $661,000,000 penalty payable to BIS, of which $300,000,000 were suspended for a seven-year probationary period.

The investigation revealed that ZTE “engag[ed] in a multi-year conspiracy to violate the U.S. trade embargo against Iran to obtain contracts to supply, build, operate and maintain telecommunications networks in Iran using U.S.-origin equipment, and also illegally shipping telecommunications to equipment to North Korea in violation of the Export Administration Regulations.” During the probationary period, ZTE was required to not have any further malfeasance and if the U.S. government found out they were still committing any wrongdoings, then it would “trigger a seven-year denial of export privileges for the company, effectively locking out of the U.S. production pipeline.

ZTE’s Dealing in Iran, Obstruction of justice, and False Statement

ZTE “shipped approximately 32 million dollars of U.S. origin items to Iran without obtaining the proper export licenses from the U.S. government”. Once the U.S. government found out about the illegal shipments, a grand jury investigation was brought upon ZTE. While the grand jury investigation was still open, according to court documents, ZTE “took several steps to conceal relevant information from the U.S. government”. ZTE also had each of its employees who were involved with the Iran dealings, sign a nondisclosure agreement where they agreed to “keep confidential all information related to the company’s U.S. exports to Iran.

Why ZTE is Now Barred

On February 2nd, 2018, the Bureau of Industry and Security (BIS) requested ZTE to provide a status report on information relating to employee disciplinary actions. Two letters from November 30, 2016 and July 20, 2017 from ZTE counsel “described self-initiated employee disciplinary actions it asserted that it had taken to date and additional actions that the company said it would take in the near future because they were ‘necessary to achieve the Company’s goals of disciplining those involved and sending a strong message to ZTE employees about the Company’s commitment to compliance’.” Both letters that were sent to BIS were adamant in ZTE’s commitment to compliance. However on Monday, April 16th, the President issued an order “barring U.S. companies from shipping components to ZTE” after it was discovered that ZTE lied to BIS during the investigation. BIS found that of the 39 employees that had a role in the criminal plea and settlement agreement, only one had been denied a bonus due to the violations.

How ZTE is Fighting Back

ZTE did confirm that the letters to BIS about compliance were false statements and that they discovered the “failure to implement the stated employee disciplinary actions”. They also confirmed that they will reduce those 39 employees bonuses to the extent Chinese law will allow and are still committed to export control compliance and will further investigate into the matter.

ZTE has also stated that they will take “judicial measures to protect the legal rights and interests” of their company. In a press release issued by ZTE, it states that ZTE believes BIS “ignored ZTE’s arduous efforts, huge investment, and long-term progress in complying with export control compliance in the past two years”. They feel that BIS has treated them unfairly in imposing such a severe penalty and have hired a U.S. based law firm to do an independent investigation into the matter.

The U.S. Commerce Department will allow ZTE to present more evidence after the April 16th ruling on barring U.S. companies from selling to ZTE. “According to Commerce regulations, there is no appeals process, but the agency has “exercised discretion” to let ZTE present additional evidence through an “informal procedure,” the senior official said. ZTE’s response to the initial barring is that this will not only cause damage to the company but to all of its partners. So far it is not known whether allowing ZTE to present more evidence will help in bringing about a resolution between the U.S. government and ZTE.

Want to Know More?

 If you would like to learn more about ZTE’s violation and the importance of creating your export compliance plan, then please join Diaz Trade Consulting’s webinar event, Exporting 201, on May 22, 2018. Blog readers can register for FREE using the code “DTCCLIENTS”. Take advantage!

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