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  April 3rd, 2017 | Written by

Lessons from the Historic ZTE Enforcement Action

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  • US government has broad jurisdiction over export and sanctions matters.
  • Cooperation could have helped ease the penalty significantly in ZTE enforcement action.
  • Emphasis on compliance from the top helps problems from spreading.

On March 7, 2017, Chinese telecommunications company, Zhongxing Telecommunications Equipment Corp. (ZTE), signed on to three separate settlement agreements with the United States, agreeing to pay $892 million for violations of US sanctions and export controls. Even more could be due if ZTE strays from the commitments it has made under the settlement agreements. This is one of the largest penalties ever imposed by the US government for export and sanctions violations.

We think several lessons can be derived from this action.

Background. ZTE is one of the largest telecommunication and information technology companies in the world. According to its website, ZTE filed more patent applications in 2016 than any other company in the world. The company plays a significant role in the US telecommunications market.

According to press reports, investigations into ZTE’s practices date back to 2012, when it first submitted information to the US government about possible export violations.

To avoid US export controls and trade with Iran and North Korea, the company purportedly used code names for embargoed countries; deleted references to embargoed customers; removed its logo from shipments to Iran containing US-origin goods; and commingled US and non-US goods in packages to minimize detection by US officials.

In all, the US government asserted, ZTE supplied over 20 million US-origin goods to Iran.

In March 2016, the US government added two ZTE entities to the Entity List (maintained by the US Commerce Department) meaning that a license was needed to export or transfer nearly any US-origin product to the company. Almost immediately thereafter, the US government issued a general license to allow exports to the two ZTE entities designated on the Entity List.

This general license was apparently issued because of the importance of ZTE to the global telecommunications industry – and under the presumption that ZTE would cooperate with the US government in finalizing the settlement in this matter.

Lessons. While this matter really could be the basis of an entire class in law or business school, we would highlight the following three lessons that apply to every company involved in international business:

The US government maintains very broad jurisdiction over exports and sanctions violations. While ZTE has a significant presence in the United States, the company is ultimately based in China. Many violations apparently originated outside the United States and involved non-US persons. In fact, most of the largest sanctions and export enforcement actions have involved non-US companies. Clearly, US companies that commit export violations are targets for enforcement officials; just as clearly, non-US companies are too.

Importance of tone from the top. Publicly available information about this matter suggest that senior ZTE personnel had a role in the transactions that ZTE conducted, and may even have had an active role in the subterfuges used to try to avoid detection. Every exporter knows how difficult it is to comply with the myriad rules that govern trade from the United States or involving US-origin goods. Without clear emphasis on the importance of compliance from the highest ranks of an organization, it can be extremely hard to ensure compliance.

Value of cooperation. It seems likely that ZTE would have paid quite a price for these violations even if it had fully cooperated with the government upon learning of the problematic conduct. But it seems equally likely that the reason the ultimate penalty was so large is because of how ZTE tried to cover up its conduct, both on a day-to-day basis and when the government did inquire. According to the Justice Department press release announcing the settlement, the company “repeatedly lied to and misled federal investigators, its own attorneys and internal investigators.” As the saying goes, the cover up is worse than the crime.

Thad McBride is a partner and Cheryl Palmeri is an associate in Bass, Berry & Sims PLC’s Washington, D.C. office in the firm’s International Trade Practice Group. They focus on counseling clients on compliance with economic sanctions and embargoes, US export regulations (ITAR and EAR), and the Foreign Corrupt Practices Act (FCPA).