ZTE Pleads Guilty to Criminal Charges and Settles Civil Charges with BIS and OFAC
(Source: Thomsen & Burke, LLP)
Authors: Roszel C. Thomsen, Esq., Roz@t-b.com; Antoinette D. Paytas, Esq., Toni@t-b.com; and Maher M. Shomali, Esq., firstname.lastname@example.org, Wesley A. Demory, Esq. All of Thomsen & Burke, LLP.
Earlier today, ZTE Corporation and the Departments of Justice, Commerce and Treasury announced a global settlement of charges that ZTE violated the International Emergency Economic Powers Act (IEEPA), the Export Administration Regulations (EAR) and the Office of Foreign Assets Control (OFAC) Regulations.
In total, ZTE has agreed to pay the U.S. Government $892,360,064 and agreed to a significant conduct remedy, in the various plea and settlement agreements described below.
CRIMINAL VIOLATIONS OF IEEPA
ZTE agreed (contingent on the court's approval) to plead guilty to three criminal charges, including:
Conspiracy to unlawfully export, re-export 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 its sales to Iran, causing its defense counsel to unwittingly provide false information to the Department of Justice, and deleting all communications related to its cover-up; and
Making a materially false statement that it was complying with the laws and regulations of the United States.
The criminal penalties include a fine in the amount of $286,992,532, which represents the largest criminal fine in the history of IEEPA prosecutions, and a criminal forfeiture in the amount of $143,496,266, as well as a conduct remedy discussed below. Because a conduct remedy in a case involving the violation of IEEPA, EAR and OFAC regulations is unusual, a summary of the conduct remedy and its implications is included, below the discussion of ZTE's settlement agreements with the Departments of Commerce and Treasury.
SETTLEMENT OF CHARGES WITH COMMERCE DEPARTMENT
ZTE also agreed to settle charges with the Commerce Department's Bureau of Industry and Security ("BIS") of 380 violations of the EAR, including (1) Conspiracy (2) Acting with Knowledge of a violation in Connection with Unlicensed Shipments of Telecommunications Items to North Korea via China and (3) Evasion. As part of the settlement:
ZTE agreed to pay a penalty of $661 million to BIS, with $300 million suspended during a seven-year probationary period to deter future violations. This is the largest civil penalty ever imposed by BIS.
ZTE agreed to active audit and compliance requirements designed to prevent and detect future violations.
ZTE agreed to a seven-year suspended denial of export privileges, which could be activated by BIS if any aspect of this deal is not met.
BIS will recommend that ZTE be removed from the Entity List.
SETTLEMENT OF CHARGES WITH TREASURY DEPARTMENT
OFAC administers a comprehensive embargo on Iran as set forth in the Iranian Transactions and Sanctions Regulations ("ITSR"; 31 CFR part 560), including prohibitions on the indirect supply of goods from the United States to Iran, the re-exportation of U.S.-origin goods with knowledge that those items are intended for Iran, and any activity designed to evade or cause a violation of the ITSR. OFAC identified at least 251 ZTE transactions that violated these prohibitions.
ZTE ultimately settled with OFAC for $100,871,266, which was 95% of the maximum statutory civil penalty. As a condition to settlement, ZTE agrees that it has terminated all conduct leading to the apparent violations and will maintain internal policies and procedures that are designed to minimize the risk of future occurrences. Should ZTE willfully violate this condition, the settlement can become null and void, subjecting ZTE to additional OFAC enforcement activity.
Key takeaways for U.S. companies include the need to identify red flags when a customer refuses to disclose the ultimate destination of goods and when a customer involves an unknown intermediary without an adequate explanation.
The conduct remedy imposed on ZTE includes some of the elements addressed in the recently updated BIS Export Compliance Guidelines - The Elements of an Effective Compliance Program and elements that are above and beyond the guidelines. In addition, ZTE's press release regarding the Settlement includes additional compliance elements that the company implemented in its effort to implement an improved export compliance program. The standard elements of a compliance program that are addressed in the conduct remedy are:
Issuance of a statement of corporate policy of export control compliance from the chief executive officers of ZTE Corporation and ZTE Kangxun to ensure compliance with the EAR which will be distributed no less than annually to all relevant employees of ZTE Corporation and ZTE Kangxun and their subsidiaries and affiliates.
Implementation of a training program on applicable export control requirements to be provided to (a) its leadership, management, and employees and (b) the leadership, management and employees of its affiliates, subsidiaries, and other entities worldwide over which it has ownership or control.
Record retention as required by the EAR.
The elements that are above and beyond the BIS guidelines are:
Submission of six annual audit reports regarding export compliance.
Hiring an initial independent compliance monitor that is approved by the U.S. government for a three-year term. The duties of the monitor include preparing the initial three annual audit reports.
Hiring an independent compliance auditor, also approved by the U.S. government, for an additional three years to prepare the remaining three annual audit reports.
The audit reports must include a certification to BIS, executed under penalty of perjury, from the chief executive officer and chief legal officer of ZTE that to the best of their knowledge, after reasonable inquiry, ZTE and its subsidiaries and affiliates are in compliance with the terms of the Agreement including the compliance program obligations.
An affirmative duty to report potentially unlawful transactions to the U.S. government during the probationary period.
A requirement to meet at least annually with BIS to discuss any suggestions, comments or proposals for improvement ZTE may wish to discuss with BIS.
A requirement to provide copies of training materials, the training schedule and training locations to BIS on a quarterly basis until January 1, 2020.
In its press release, ZTE noted that it has:
Appointed a new Chairman and Chief Executive Officer and made major changes to the senior management team, all of whom have a mandate of leading a new ZTE with a best-in-class export compliance program.
Created a Chief Executive Officer-led Compliance Committee with the authority and remit to significantly change the company's policies and procedures, and provide greater oversight of support for the compliance initiatives.
Hired a new Chief Export Compliance Officer with responsibility for overseeing the continued development and improvement of the global export compliance program.
Created a separate compliance department with increased headcount to build the compliance program with full independence.
Issued a new Export Control Compliance Manual created in conjunction with the review of BIS to provide more detailed guidance to the employees. ZTE also now requires an annual Compliance Commitment Agreement from all employees.
Implemented a software automation tool which screens shipments from ZTE Corporation and certain subsidiaries for export control obligations. The system is used to determine which items are subject to the Export Administration Regulations (EAR), provides embargo and restricted party screening on the transactions, and places shipments on hold that require detailed classification analysis, application of license exceptions, or application of licenses when necessary.
The penalties assessed by Justice, Commerce and Treasury are significant. Cumulatively, they comprise the largest global settlement involving violations of IEEPA, the EAR and OFAC regulations in history.
Nevertheless, these announcements most likely are not the end of the ZTE saga. In its plea agreement with the Justice Department, ZTE specifically agreed to cooperate with the Justice Department regarding any criminal investigation it may undertake with respect to the activities of third parties. In its settlement agreement with the Commerce Department, that agency merely agreed to recommend removal of ZTE from the Entity List. Removal of ZTE from the Entity List will require the agreement of other agencies (including State and Defense, which are not parties to the global settlement) and publication of a new rule in the Federal Register.
Justice Publishes Summary of Major U.S. Export Enforcement, Economic Espionage, Trade Secret, and Embargo-Related Criminal Cases
The U.S. Department of Justice (DoJ) has published its Summary of Major U.S. Export Enforcement, Economic Espionage, Trade Secret, and Embargo-Related Criminal Cases, (January 2014 to the present: updated February 17, 2017), available at here.
The list contains a brief description of some of the major export enforcement, economic espionage, theft of trade secrets, and embargo-related criminal prosecutions by the Justice Department since January 2014. These cases resulted from investigations by the Homeland Security Investigations (HSI) [formerly Immigration and Customs Enforcement (ICE)], the Federal Bureau of Investigation (FBI), the Department of Commerce's Bureau of Industry and Security (BIS), the Pentagon's Defense Criminal Investigative Service (DCIS), and other law enforcement agencies.
AES Changes Impacted by Export Control Reform Implementation Rules
(Source: email@example.com, 22 February 2017.)
On July 28, 2016 and October 12, 2016, the Department of Commerce, Bureau of Industry and Security published final rules (available at here and here) that became effective December 31, 2016. As a result of these rules, the following changes were made to the Automated Export System (AES) in order for exporters and authorized agents to successfully report electronic export information in the AES.
(1) The Addition of "600 series" Export Control Classification Numbers (ECCN)
600-series ECCNs 1A607, 1B607, 1C607, 1D607, 1E607, 6B619, 6D619, 6E619, 7A611, 7B611, 7D611, and 7E611 were added to the AES ECCN reference table. See the following instructions to determine which "600 series" ECCNs are eligible for certain license types. By using any of the License Exceptions or "No License Required" (NLR), you are certifying that the terms, provisions, and conditions described in the EAR have been met.
C30 (BIS license), C40 (TMP), C41 (RPL), C42 (GOV), and C59 (STA) - All "600 series" ECCNs listed above are eligible to the extent permitted under part 740 of the EAR.
C33 (NLR) - All "600 series" ECCNs listed above are eligible only if exported to Canada. Some of these "600 series" items were previously authorized under an International Traffic in Arms Regulations (ITAR) Canadian exemption (SCA).
C35 (LVS) - The following "600 series" ECCNs are eligible: 1B607, 6B619, 7A611, and 7B611.
C44 (TSU) - The following "600 series" ECCNs are eligible: 1D607, 1E607, 6D619, 6E619,7D611, and 7E611.
If the "600 series" ECCNs are reported under any other license type, AES will generate a fatal error (FATAL ERR 666-ECCN MUST BE FROM APPROVED LIST) back to the filer. Please note that under 758.1 of the EAR, an AES filing is required for exports of items classified under "600 series" ECCNs, regardless of the value of the item or destination.
(2) Items subject to the EAR, including "600 series" ECCNs that are licensed by the State Department under the International Traffic in Arms Regulations (ITAR)
Under a delegation of authority, the State Department may license an item subject to the EAR on an ITAR license pursuant to new section 120.5(b) of the ITAR. If this occurs, the AES filer must report the ECCN (including "600 series" ECCNs) or the EAR99 designation in the ECCN field in AES, even if the license type is S05 (DSP-5). All other fields associated with license type S05 are required, such as registration number, significant military equipment indicator, DDTC eligible party certification indicator, USML category code, DDTC unit of measure and DDTC quantity.
A complete list of all of the AES License Type codes and reporting instructions for these types can be found at here.
For questions regarding these upcoming AES changes, please contact the Bureau of Industry and Security by email at ECR_AES@bis.doc.gov or at one of the phone numbers below.
Office of Technology Evaluation (located in Washington, DC): (202) 482-4933
Outreach and Educational Services Division (located in Washington, DC): (202) 482-4811
Western Regional Office (located in Irvine, CA): (949) 660-0144
Northern California branch (located in San Jose, CA): (408) 998-8806
Department of State Import and Export Electronic Filings for Licenses and License Exemptions
Source: Robert C. Rawls (firstname.lastname@example.org)
This pipeline is to provide guidance based on the Department of State, Directorate of Defense Trade Controls Federal Register Notice dated January 3, 2017. Persons not familiar with the Directorate of Defense Trade Controls (DDTC) import and export regulations are encouraged to read the International Traffic in Arms Regulations (ITAR), 22 CFR Parts 120-130. DDTC is the controlling and ultimate authority for international movements of United States Munitions List (USML) defense articles, technical data and defense services.
DDTC published a Federal Register Notice (FRN) amending the ITAR. The amendment requires that importers and exporters electronically submit the data, via their agent/filer or direct,at the time of entry and export via Customs Systems (Automated Commercial Environment and the Automated Export System) for the decrementation of permanent export licenses (DSP-5), temporary import licenses (DSP-61), temporary export licenses (DSP-73), licenses for classified materials (DSP-85), and goods controlled under the Foreign Military Sales (FMS) program (DSP-94), along with the submission of license exemption claims.
The regulatory changes became effective December 31, 2016.
For imports against DSP-61, DSP-73, DSP-85, FMS shipments and shipments under a license exemption, the electronic submission is the DDTC Partnership Government Agency (PGA) message set, and will be submitted at the time of entry. The PGA message set can only accept the data for one DDTC license or license exemption per one commodity line on the entry. That commodity line’s entered value will be used as the DDTC endorsement value. So, filers are required to “split the commodity entry line” to associate a single entry line with a single license whose entered value will represent the DDTC value.
<!--[if !supportLists]-->• <!--[endif]-->9808 – Certified Emergency War Materials - The primary and secondary classification must be included in your BEI. Expeditors will assign the license to the 9808 line item only and transmit to CBP. Upon receipt, CBP will increment the value associated with the 9808 classification only.
7501 line 1 - 9808.00.3000 – Hardware/DDTC value- *PGA transmission is required and includes license number*
9013.90.9000 - No value (associated HTS)
7501 line 2 - 9808.00.3000 - Repair value
9013.90.9000 – No value (associated HTS)
<!--[if !supportLists]-->• <!--[endif]-->Any free & dutiable classifications – Any other HTS
7501 line 1 - 9013.90.9000- Hardware/DDTC value- *PGA transmission is required and includes license number 1*
7501 line 2 - 9013.90.9000- Repair value
7501 line 3 - 9013.90.9000- Hardware/DDTC value- *PGA transmission is required and includes license number 2*
7501 line 4 - 9013.90.9000- Repair value
Import Valuation Examples:
There are times when the import and export values of a commodity are not the same due to changes in the condition of the commodity, for example repaired items. The importer/broker has three options regarding how the entry and PGA message set can be filed.
Example: The item is valued at $750 and it has been sent out of the country for repairs. The value of the repairs is $350.
At the time of export the value declared via the Electronic Export Information is $750. Upon entry the commodity line value is declared at $1100. The license will be decremented for $750 for the export and $1100 for the import.
At the time of export the value declared via the EEI is $750. Upon entry the broker files two Harmonized Tariff Schedule (HTS) lines, one for $750 with a DDTC PGA message set and the second HTS line using HTS 9802.00.50 for $350. The license would be decremented for $750 for both the import and export. Note, there may be additional documentary requirements is association with using HTS 9802.00.50.
At the time of export the value declared via the EEI is $750. Upon entry the broker files two HTS commodity lines, one for $750 with a DDTC PGA message set and the second HTS commodity for that commodity classification. The license would be decremented for $750 for both the entry and export.
For Exports related to a DSP5s, DSP-61s, DSP-73s, DSP-85s, FMS shipments, and license exemptions will continue to be filed via the Customs system (Automated Export System (AES)) for each commodity filing.
Per DDTC’s FRN, paper DSP-61 and DSP-73 licenses will no longer be required to be presented for incrementation or decrementation since the import and export transactions against the shipment will be captured in Customs systems. In order to ensure accurate license balances in Customs systems, for those DSP-61s and DSP-73s issued prior to January 3, 2017, license holders are requested to provide the following information to CBP (insert POC and address) in the form of a letter: the license number, the total value of all prior import shipments incremented against the license, and the date when this information was recorded. The historic import values are required since the data was not collected on the PGA record set. .
The license registrant is reminded of its temporary license requirements under 22 CFR 123.3 and 123.5 which will continue to be evidenced using the registrant’s business records. Given the automation, these business records may be subject to review by CBP in order to meet its requirements under 22 CFR 123.23 to “permit the shipment of defense articles identified on a license when the total value of the export does not exceed the aggregate monetary value (not quantity) stated on the license by more than ten percent…”
For the FMS program, the DSP-94 and the Letters of Offer and Acceptance, along with any amendments or modifications still have to be lodged with CBP. CBP is working on automation of this process and it is projected that the automation process will be completed in summer/fall 2017. CBP will provide updated guidance when that automation has been completed.
For the DSP-85 classified program, endorsements continue to be managed by the Defense Security Service.
Corrections related to the electronic import (PGA record set) transmissions can be made within 10 days of entry. Import corrections needed after 10 days or corrections for exports should be referred to Robert Rawls at Robert.Rawls@dhs.gov.
Any questions about this pipeline should be referred to Mr. Robert Rawls, Outbound Enforcement and Policy Branch Chief via email at Robert.Rawls@dhs.gov or phone at (202) 344-2847.
Company Fined $500K for 56 ITSR Violations by OFAC
By: Danielle McClellan
United Medical Instruments, Inc. (UMI) agreed to a settlement of $515,400 with the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) based on 56 alleged violations of the Iranian Transactions and Sanctions Regulations (31 C.F.R. Part 560). Between 2007 and 2009 it was found that UMI sold medical imaging equipment with knowledge that the goods were going to be reexported from the United Arab Emirates to Iran. The total value of the goods associated with the transactions was approximately $2,493,597.
OFAC considered the following to be mitigating factors:
The alleged violations occurred due to the actions of a single UMI employee rather than a systemic pattern of company-wide conduct;
UMI took remedial action in response to the alleged violations, including by voluntarily ceasing transactions involving Iran and by implementing new procedures and updating its compliance program to prevent the recurrence of similar sanctions violations;
UMI has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the alleged violations;
UMI cooperated with OFAC’s investigation by providing timely responses to OFAC’s correspondence and by entering into multiple statute of limitations tolling agreements; (5) UMI is a small business, as determined by the size standards set forth by the Small Business Administration; and (6) based on the financial condition of UMI, including significant financial difficulties experienced by the company in recent years, additional mitigation is warranted.
DHS/CBP Posts Clarification on DDTC Implementation Guide V1.5
(Source: CSMS# 17-000091, 22 February 2017.)
New ACE Programming
[Reference CSMS# 16-000993 Updated DDTC Implementation Guide V1.6, October 2016]
"Updated DDTC Implementation Guide V1.6, October 2016" was issued on December 5, 2016 announcing the posting of DDTC Implementation Guide V1.6, dated October 2016. However, V1.6 included the PG25 line value which was determined to be Post Core work and is not yet implemented. The schedule for this implementation has not yet been determined. Therefore the current and accurate version of the DDTC Implementation Guide is V1.5, dated May 2016. It can be found at here.
Related CSMS No. 16-000993
Florida Company Fined $27 Million for 150 Intentional EAR Violations
By: Danielle McClellan
Access USA Shipping, LLC (Access) of Sarasota, Florida was charged with 150 violations beginning in April 2011 and spanning to February 2013. The company went out of its way to conceal the fact that foreign customers were purchasing products through them without their US merchants knowing who the end users of their items were. Access mis-described, undervalued, and destroyed and/or altered export control documents to conceal the illegal exports. They also made sure that their foreign customers had a direct employee to order through to avoid any export scrutiny. They went as far as allowing foreign customers to send “wish lists” to Access employees who would then purchase the products from their US merchants with US credit cards and PayPal accounts in the name of Eric Baird, Access’s founder and then-owner and CEO or cards opened in the name of the employee making the order. The foreign customer would then reimburse Access or the employee; there were even situations when the shipments were delivered to the homes of Access employees to ensure that the US merchants would not become suspicious of the order and the end user.
Access also exported (or attempted to) items classified as ECCN 0A987 which are controlled for Crime Control reasons to Argentina, Austria, Hong Kong, Indonesia, Libya, South Africa, and Sweden without a BIS export license. It was also found that the company exported (or attempted to) items classified as ECCN 5A990 and controlled for anti-terrorism reasons as well as EAR99 items to Transsphere Oy, a company on the Entity List.
The company is ordered to pay $10 million right away and the other $17 million will be suspended for two years and waived if the company does not commit any violations during the two year probationary period.
Charging Letter: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2015/1102-e2490/file
BIS Extends Temporary General License for ZTE Corporations & ZTE Kangxun
On February 21, 2017 the Bureau of Industry and Security (BIS) extended a temporary general license that restored, for a specified time period, the licensing requirements and policies under the EAR for exports, reexports, and transfers (in-country) to ZTE Corporation and ZTE Kangxun that were added to the Entity List on March 8, 2016. The rule extends the general license to March 29, 2017.
Federal Register: https://www.gpo.gov/fdsys/search/pagedetails.action?granuleId=2017-03664&packageId=FR-2017-02-24&acCode=FR&collectionCode=FR
Company Fined $162K for Antiboycott Violations
By: Danielle McClellan
The Office of Antiboycott Compliance, Bureau of Industry and Security (BIS) has charged Pelco Inc. (Pelco) with 66 violations. Between May 2011 and January 2016 it was found that on 32 occasions Pelco was engaged in transactions involving the sale/transfer of goods and services from the US to the United Arab Emirates and Kuwait, activities in the interstate or foreign commerce of the US (Section 760.1(d)). In connection with these transactions, Pelco, with intent to comply with, further supported an unsanctioned foreign boycott by agreeing to refuse to do business with another person (prohibited by Section 760.2(a)).
In addition to those 32 charges, Pelco was charged with 34 violations of “Failing to Report the Receipt of a Request to Engage in a Restrictive Trade Practice or Foreign Boycott Against a Country Friendly to the US” (Section 760.5). This is not surprising, a company who agrees to an illegal boycott is not likely to report said boycott.
Pelco will pay $162K to settle the violations and will not be debarred as long as the settlement amount it paid.
Charging Letter: https://efoia.bis.doc.gov/index.php/documents/antiboycott/alleged-antiboycott-violations-2015/1100-a749/file