Zhongxing Telecommunications Equipment Corporations, (“ZTE”), and its subsidiaries and affiliates entered into a settlement with three U.S. government agencies covering civil and criminal charges filed against the company. The proposed $1.9 billion settlement closes a five-year investigation into ZTE’s exporting and reexporting activities, whereby roughly $40 million of U.S.-origin goods passed through China to companies in Iran and North Korea. Some of these goods were controlled for national security, anti-terrorism and regional stability reasons.
The penalty sets a new record for EAR enforcement. It also points to a new level of cooperation between government agencies as they continue to pursue U.S. and non-U.S. companies who evade our export control and sanction laws. The Departments of Justice, Commerce and Treasury were all involved in this investigation and settlement.
Background on the violations
ZTE is charged with 380 violations of the EAR. Commerce alleged that ZTE conspired to evade the regulations – acting with knowledge of unlicensed shipments of telecommunication items through China to North Korea. BIS went further by alleging that ZTE had created an “evasion system” for the regulations. Specifically:
- ZTE is charged with importing U.S.-origin goods into China with the intent of reexporting the goods to Iran
- The company used third-party “isolation companies’ to serve as parties to contracts and to be responsible for supplying the U.S.-origin items, while ZTE controlled the ongoing operation throughout the process.
- ZTE removed logos and other marking from shipments containing the goods – even going so far as to comingle the U.S.-origin items with foreign-origin items in an effort to conceal and evade detection.
The Department of Justice added the following criminal charges to the indictment:
- Conspiracy to unlawfully export, reexport, and transship U.S.-origin servers, switches, routers and other components of a cellular network infrastructure to Iran
- Obstruction of justice by hiding data regarding it sales to Iran thereby providing false information to the Department of Justice, and deleting all communications related to the cover-up
- Making a materially false statement that ZTE was complying with the laws and regulations of the United States
The Department of the Treasury, Office of Foreign Assets Control (OFAC) charged ZTE with 251 violations of the Iran Transactions and Sanction Regulations (31 CFR Part 560).
Penalties highlight increased enforcement of the EAR
ZTE has agreed to the following settlements with the individual agencies. For the U.S. Department of Commerce, Bureau of Industry and Security (BIS):
- A penalty of $661 million, with $300 million suspended during a seven-year probationary period to deter future violations
- This is the largest civil penalty ever assessed by BIS
For the U.S. Department of Justice:
- A criminal penalty of $286,992,532 – the largest criminal fine under IEEPA
- A criminal forfeiture of $143,496,266
For the Department of the Treasury, Office of Foreign Asset Controls (OFAC):
- A civil penalty of $100,871,266 – this is 95% of the maximum statutory civil penalty
In addition, ZTE agreed to terminate all conduct leading to the alleged violations and will maintain internal policies and procedures that are designed to minimize future occurrence.
Lessons learned for all exporters
There are several takeaways and lessons learned that we can surmise from this penalty. These are good reminders for all exporters:
- Magnitude of the EAR Enforcement Effort: Understand that both U.S. and non-U.S. companies are affected by the actions taken against ZTE with regard to export control and sanction laws. If you are a U.S. parent company, it’s important to understand how your foreign subsidiary is conducting business on behalf of your organization. Pay particular attention to your export transactions, export documentation, parties to the transaction, end-use/end-user information, and other risk-based factors.
- Extraterritorial Reach and Leverage: Understand the extensive reach that the U.S. government maintains over non-U.S. parties that deal with goods and technology that are U.S.-origin. In the case of ZTE, the company was temporarily placed on the BIS Entity List for a period of time, in order to persuade them back to the negotiating table. Later, on March 29, BIS removed ZTE from the Entity List. Also note the overlapping regulatory regimes that govern these activities.
- Pay attention to the Supply Chain: Compliance isn’t just about export documents!
It is also about who you are dealing with. The key lesson here is: validate, validate, validate! Don’t be afraid to ask questions. If something doesn’t feel right, then it probably isn’t.
Bottom Line: While the fines and penalties are related to overseas transactions, $1.9 billion is not worth the notoriety and loss of business to any U.S.-based company or its overseas subsidiaries/affiliates.
Need help improving your compliance to help mitigate or avoid costly penalties? Request a no-charge consultation with one of our experts today.
Beverly Demma is a Sr. Consultant for Export Solutions -- a full-service consulting firm specializing in U.S. import and export regulations.