On April 15, 2018, Zhongxing Telecommunications Equipment Corporation (ZTE Corporation) and ZTE Kangxun Telecommunications Ltd. (ZTE Kangxun) (collectively "ZTE") were added to the U.S. Department of Commerce's Bureau of Industry and Security's (BIS's) List of Denied Persons. As a result, ZTE cannot receive or participate in any way in a transaction involving virtually any commercial items exported from the U.S. until March 13, 2025, and third persons are prohibited from participating in most transactions involving U.S.-origin items and ZTE until March 13, 2025. BIS imposed this seven-year denial of export privileges against ZTE due to the fact that ZTE breached BIS's March 23, 2017, order and related settlement agreement regarding ZTE's violations of the Export Administration Regulations (EAR), the export control laws administered and enforced by BIS.
Seven-Year Denial of Export Privileges—What Does It Mean?
BIS imposed the most severe penalty in its arsenal on ZTE. While BIS was willing to suspend its denial order in prior years, despite issuing a record-high penalty of $1.19 billion for violating the U.S. trade embargo against Iran, BIS activated the denial order on April 15. BIS found, and ZTE acknowledged, that ZTE made repeated false statements to BIS, including during settlement negotiations and as part of its obligations under the March 23, 2017, order. These false statements relate to ZTE's failure to reprimand and withhold bonuses from employees who participated in ZTE's unlawful transactions involving Iran. ZTE did not proactively disclose the false statements to BIS. Accordingly, BIS activated the denial order, which includes various prohibitions, including:
- ZTE Corporation and ZTE Kangxun "may not, directly or indirectly, participate in any way in any transaction involving any commodity, software, or technology...exported or to be exported from the U.S. that is subject to the [EAR], or in any other activity that is subject to the [EAR]...."1
- No person may, directly or indirectly, take any action to export or reexport an item subject to the EAR to ZTE or participate in any way in a transaction that would facilitate ZTE use or acquisition of any item subject to the EAR.2
- No person may participate in any transaction to service an item subject to the EAR that has or will be exported from the U.S. that ZTE Corporation or ZTE Kangxun owns, controls, or possesses.3
Items subject to the EAR include dual-use or commercial items commodities, technology, and software that are exported from the U.S.
Summary of Prohibitions: What Can and Cannot Be Done
The denial of export privileges is broad, and the general rules include the following:
- Shipments of virtually any commercial commodity, technology, or software from the U.S. to ZTE are prohibited as of April 15, 2018.
- For instance, no updates, bug fixes, and patches, among others, for any software subject to the EAR may be sent to ZTE notwithstanding the fact that the underlying software was exported to ZTE in compliance with the EAR.
- Third persons are prohibited from participating in any way in a transaction involving any item subject to the EAR exported from the U.S. and ZTE, including servicing an item subject to the EAR or facilitating service of such an item that is owned, controlled, or possessed by ZTE or is otherwise for ZTE's benefit.
- For instance, companies may not accept returns, including for repairs, of any item subject to the EAR from ZTE.
- Companies may still collect payments from ZTE for shipments of items subject to the EAR that were made prior to April 15.
Conclusion
Effective April 15, 2018, ZTE Corporation and ZTE Kangxun are on BIS's List of Denied Persons. No person, U.S. or foreign, may send ZTE any items subject to the EAR or facilitate any such transaction. ZTE may not directly or indirectly participate in any transaction involving an item subject to the EAR that will be or has been exported from the U.S. No license exceptions are available, and to obtain authorization to engage in any prohibited transactions, a person must submit a written request to BIS's Office of Exporter Services as described in the EAR.
If you would like to discuss this matter, please contact Josephine Aiello LeBeau, 202-973-8813, jalebeau@wsgr.com; Anne Seymour, 202-973-8874, aseymour@wsgr.com; or any member of the export control and economic sanctions regulatory practice at Wilson Sonsini.
