ZTE Is Assessed $1.19 Billion in Penalties for Criminal and Civil Violations of Export Control and Economic Sanctions Laws and Regulations
March 10, 2017
On March 7, 2017, the U.S. government announced that China's Zhongxing Telecommunications Equipment Corporation and its affiliate, ZTE Kangxun Telecommunications Ltd. (collectively "ZTE"), have agreed to a global settlement with the U.S. Department of Justice (DOJ), the U.S. Department of Commerce, and the Office of Foreign Asset Control (OFAC) to settle numerous criminal and civil allegations that it knowingly violated U.S. export control and economic sanctions laws and regulations. ZTE will enter a guilty plea for conspiracy to unlawfully export in violation of the International Emergency Economic Powers Act (IEEPA),1 obstruction of justice, and making false statements to federal investigators. ZTE also agreed to pay combined civil and criminal penalties of up to $1.19 billion for violations of the Department of Commerce's Export Administration Regulations (EAR) and OFAC's Iranian Transactions and Sanctions Regulations (ITSR). In addition to the guilty plea and imposition of the largest monetary penalty ever imposed by the U.S. government for export control violations, ZTE has stringent and unprecedented audit requirements and must fully cooperate with DOJ, Department of Commerce, and OFAC export control investigations for the next three years.
Background on ZTE Violations
In 2012, the Dallas field office of the Department of Commerce's Bureau of Industry Security's (BIS's) Office of Export Enforcement, in partnership with the U.S. Attorney's Office for the Northern District of Texas, the DOJ's Counterintelligence and Export Control Section, the Federal Bureau of Investigation, and the U.S. Department of Homeland Security, opened an investigation into possible export violations by ZTE. Court documents state that ZTE created and engaged in a scheme to evade the U.S. embargo to Iran by supplying U.S.-origin goods to Iran. Specifically, ZTE purchased U.S.-origin goods and incorporated them into ZTE equipment before shipping the completed items to Iran and North Korea. Astonishingly, ZTE continued its business with Iran and shipped millions of dollars' worth of U.S.-origin parts to the sanctioned country while the U.S. government's investigation continued. ZTE was also alleged to have sent 283 shipments of EAR-controlled items such as routers, microprocessors, and servers to North Korea with knowledge that a violation of the EAR would occur in connection with the shipments.
As reported in previous WSGR Alerts, while it was investigating ZTE's exports to Iran, the Department of Commerce sanctioned ZTE in March 2016, when it added the company to the Entity List. As a result, a license was required to export, reexport, and complete an in-country transfer of any item subject to the EAR to ZTE, including EAR99 items.2 On March 24, 2016, BIS issued a temporary general license "suspending" the license requirement imposed by ZTE's status on the Entity List, thereby reverting the ZTE license requirements to the same levels that existed prior to ZTE's inclusion on the Entity List. This general license "suspending" the Entity List license requirement was set to continue through March 27, 2017.
Settlement and Penalties
As part of the settlement with BIS, ZTE has agreed to pay $661 million, with $300 million suspended during a seven-year probationary period to deter future export violations. Thus, for 380 violations of the EAR, ZTE was assessed approximately $1.7 million per violation and is paying approximately $950,000 per violation.
ZTE also agreed to pay $100,871,266 to OFAC in penalties to settle the civil allegations of 251 violations of the ITSR. Thus, ZTE is paying about $400,000 per violation to resolve the OFAC administrative case. The criminal penalties include a criminal forfeiture in the amount of $143,496,266 and a fine of $286,992. The criminal penalties of $430,488,798 mark the largest criminal fine to date in connection with an IEEPA prosecution. Additionally, the civil penalties signify the highest fine imposed by BIS. Together, the civil and criminal penalties comprise the largest export control violation fine and forfeiture ever imposed by the U.S. government.
Audit and Compliance
ZTE also agreed to a three-year corporate probation period which includes unprecedented active audit and compliance requirements designed to prevent and detect future violations. ZTE must hire an independent third-party compliance monitor for the entire three-year corporate probation period to review and assess the company's policies and procedures with regard to U.S. export controls and the terms of the plea agreement. The terms of the plea agreement also require ZTE to terminate or force the resignation of its general counsel, executive vice president for sales, executive vice president of logistics, and chief executive officer within six months of the signing of the agreement. The DOJ and Department of Commerce also reserve the right to assess the factual accuracy of any press release issued on the matter by ZTE or its subsidiaries and affiliates prior to its publication.
Entity List Status
BIS will recommend that ZTE be removed from the Entity List following acceptance of the plea by the U.S. District Court for the Northern District of Texas, entry of the plea, and the issuance of BIS's settlement order. Removal from the Entity List also requires the cooperation of other agencies not parties to this settlement. ZTE also faces a seven-year suspended denial of export privileges, which could be instated by BIS if any aspect of the deal is not met.
Cooperation with Law Enforcement
Under the terms of the plea agreement, ZTE must fully comply with requests for assistance in investigations of any violation of U.S. export control laws throughout the three year corporate probation period. ZTE's required cooperation with law enforcement may include factual disclosures about the company, interviews with company employees or officers, and assistance with investigations of third parties.
This settlement is notable not only for the large civil and criminal monetary penalties involved, but the imposition of remarkably burdensome requirements by the Department of Commerce that are unprecedented. In past enforcement actions, the U.S. Department of State and the DOJ have levied strict compliance requirements on parties in violation of the law, but this marks a shift in the Commerce Department's policy. Additionally, although other agencies have required compliance monitors, this step is extraordinary for the Commerce Department. The Commerce Department also required that ZTE admit the allegations in its settlement; an admission to the charges is not generally required in BIS's settlements. The five-year investigation and resulting sanctions attest to the U.S. government's commitment to enforce federal rules and regulations on exports. As noted by Commerce Secretary Wilbur Ross, "the games are over...Under President Trump's leadership, we will be aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers."3 Although the investigation began under the Obama administration, this settlement signals a desire by the Trump administration to rigidly enforce violations of sanctions and export controls.
Exporters should be aware that although ZTE's continued violations and subsequent concealment of violations were particularly egregious, ZTE also did not voluntarily disclose these violations. Here, ZTE chose the opposite approach and engaged in an elaborate scheme to obscure the violations. Under OFAC and BIS guidelines, parties can mitigate civil penalties through voluntary self-disclosure and cooperation with the agencies. We believe that the results would have been much different had ZTE voluntarily disclosed the violations and halted the wrongdoing once contacted by the U.S. government.
If you would like to discuss this matter or have any questions about export compliance in light of this information, please contact Josephine Aiello LeBeau, 202-973-8813, email@example.com; Melissa Mannino, 202-973-8856, firstname.lastname@example.org; Anne Seymour, 202-973-8874, email@example.com; or any member of the export control and economic sanctions regulatory practice at Wilson Sonsini Goodrich & Rosati.