The Department of Commerce’s Bureau of Industry and Security’s July 23, 2018 Federal Register notice confirmed ZTE’s removal from the Denied Person’s List.
ZTE made full and timely payment of the assessed $1,000,000,000 penalty (see previous blog post of July 6, 2018). Moreover, ZTE complied with the escrow requirements respecting the $400,000,000 suspended portion of the civil penalty. Therefore, BIS terminated the April 15, 2018 Order and removed ZTE from the Denied Persons List.
It will remain to be seen whether ZTE can stay the course of compliance or whether it might yet have another failure. The stakes are likely high enough now, with painful lessons learned, to hope for continued compliance. This is particularly so now with the appointed U.S. compliance team in place.
On July 2, 2018, the Department of Commerce’s Bureau of Industry and Security (BIS) published a General Authorization for certain activities with ZTE. BIS had previously issued a Denial Order against ZTE on April 15, 2018 for the company’s failure to discipline personnel involved in prior violations of sanctions and export control laws (please the blog post from June 25th with more details).
The General Authorization permits the following through August 1, 2018 [when ZTE is expected to be in full compliance in replacing offending Board and Management personnel). After August 1st, BIS is expected to lift the Denial Order permanently (assuming ZTE takes its compliance obligations seriously this time around).
All persons, except those located in Country Group E (Cuban, Iran, North Korea, Sudan and Syria), can now undertake:
- Continued operation of existing networks and equipment, including software updates and patches, under contracts in force prior to April 15, 2018;
- Continued service and support to handsets, including software updates and patches, for ZTE phone models in existence prior to April 15, 2018;
- Cybersecurity research and vulnerability disclosures can be made to ZTE where such is critical to maintaining the integrity and reliability of communications networks and equipment; and
- BIS authorizes persons to receive payment to or from ZTE for transactions lawful under this authorization.
ZTE, the Chinese multinational telecommunications equipment and systems company headquartered in Shenzhen, Guangdong, China, is now serving as the infamous model for what not to do respecting sanctions violations.
In March 2017, ZTE pleaded guilty to illegally exporting U.S. technology to Iran and North Korea in violation of sanctions law and was fined a total of US$1.19 billion, subject to mitigation for good behavior. It was the largest-ever U.S. fine for export control violations, and the Bureau of Industry and Security featured the case at their annual update meeting in Washington D.C. last October, 2017. The presenters on the case noted the following lessons:
Lesson 1 -> Don’t lie and Don’t create false/misleading records!
Lesson 2 -> Don’t destroy evidence!
Lesson 3 -> Don’t rely on non‐disclosure agreements to cover‐up crimes!
Lesson 4 -> Don’t restart your criminal activity during the investigation!
Lesson 5 -> Don’t create a written, approved corporate strategy to systematically violate the law!
ZTE was allowed to continue working with U.S. companies, provided that it properly reprimand all employees involved in the violations. However, ZTE managed to add a “Lesson 6” to the list since that time.
Lesson 6 -> Don’t lie about reprimanding involved employees only to provide 35 of them with bonuses!
The Department of Commerce found that ZTE had violated these terms and made false statements regarding its compliance, having fired only 4 senior officials and still providing bonuses to 35 other employees involved in the violations. On 16 April 2018, the Department of Commerce banned U.S. companies from providing exports to ZTE for seven years.
The Trump administration, responding to the pleas of Chinese President Xi Jinping, reversed the ban. The Trump deal requires ZTE pay a $1 billion fine (which ZTE has already done) as well as place an additional $400 million in escrow as an incentive not to commit further violations. Moreover, ZTE must replace its senior management and engage an appointed U.S. team to monitor its compliance. Already, on June 18, the Senate voted to reinstate the ZTE ban.
The Trump administration is urging Congress not to undercut the President’s larger geopolitical strategy that involves leverage on China over North Korea as well as in trade talks with Beijing over market access and intellectual property protections. It remains to be seen whether the Senate ZTE ban reinstatement will be removed through the reconciliation process with the House bill.
Meanwhile, the South China Morning Post reports today that ZTE is leaving broken American Standard urinals unfixed to avoid breaching the US export ban!