By: Danielle Hatch
In early 2017 China’s largest telecommunications company agreed to pay a nearly $900 million penalty to the US after entering a guilty plea for illegally shipping goods to Iran and North Korea. ZTE was charged with 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. The company also entered into a settlement with OFAC for violating the Iranian Transactions and Sanctions Regulations (“ITSR”; 31 CFR Part 560). More Information on these charges can be found here.
A March 2017 Order suspended the 7-year denial of ZTE’s export privileges as well as $300 million of the nearly $900 million penalty if ZTE complied with several probationary conditions. The conditions required ZTE, among other things, to submit six audit reports related to their compliance with US export regulations as well as truthful disclosures of any requested information (Section 764.2(g) of the EAR).
One of the many requirements of The Settlement Agreement and March 2017 Order was that ZTE provide BIS with a status report on specific employees related to the violations found during the investigation or identified in two letters (sent November 30, 2016 and July 20, 2017) that ZTE sent to employees regarding the violations. During BIS’s investigation there were 9 specific employees named related to violations, later, ZTE would identify a total of 39 employees who would have action taken against them related to the violations.
ZTE’s November letter to employees was sent while BIS was investigating the company’s violations and ZTE explained that they had self-initiated employee disciplinary actions that it had begun to take as well as additional actions that they would take in the future that would, be “necessary to achieve the Company’s goals of disciplining those involved and sending a strong message to ZTE employees about the Company’s commitment to compliance.”
ZTE’s July letter was similar to the November letter and once again asserted the company’s commitment to compliance and claimed that the disciplinary actions had sent a strong message to ZTE employees. The letter “confirmed that the measures detailed by ZTE with respect to discipline have been implemented” specifically to the nine named employees identified during the investigation. It should be noted that the individuals that were identified by enforcement agents were those that were signatories on an internal ZTE memorandum on how to evade US export controls or were identified on that memorandum as a “project core member” and/or had met with ZTE’s then CEO to discuss means to continue to evade US laws. In a nutshell, BIS wanted to see that ZTE had reprimanded the 39 employees and officials that were related to the violations through the two letters that they sent.
Cue the problem, which ultimately caused BIS to propose activation of suspended sanctions. ZTE didn’t really send those letters of reprimand as timely as they had led BIS to believe. Come to find out, the November 30, 2016 letter wasn’t sent to employees until February 2, 2018. Not to mention, all but one of the identified individuals received their full 2016 bonus, ZTE originally said this compensation would either be cancelled or decreased.
On March 6, 2018, ZTE indicated, via outside counsel that it had made false statements in the November and July letters. On March 13, 2018 BIS notified ZTE of a proposed activation of the sanctions conditionally-suspended under the Settlement Agreement and the March 2017 Order based on the company breaking the cooperation provision related to providing the US government with false statements. The notice letter to ZTE gave the company an opportunity to respond, of which they provided the following (found in FR 17646):
“In its letter, ZTE confirmed the false statements and, as discussed further infra, posed certain questions in rhetorical fashion. ZTE then proceeded to summarize its response upon ‘‘discovering’’ the failure to implement the stated employee disciplinary actions prior to March 2018, including its decision to notify BIS of the failures. The company also described the asserted remedial steps it had taken to date, including the issuance in March 2018, of the letters of reprimand that were to have been sent in 2016–2017. ZTE additionally asserted that, for current employees whose 2016 bonus should have been reduced (by 30% to 50%), it would deduct the corresponding amount from their 2017 annual bonuses ‘‘to the extent permitted under Chinese law.’’ ZTE also said it will pursue recovery from (certain) former employees of bonus payments for 2016 that the company had informed the U.S. Government would be reduced, but, contrary to those statements, were paid in full. Finally, ZTE reiterated what it described as the company’s serious commitment to export control compliance and summarized its plan to continue its internal investigation of the matter.”
Ultimately, the US Government found that this was the last straw for ZTE. They released the following statement and activated the suspended denial order in full and to suspend the export privileges for ZTE for a period of seven years (until March 13, 2025).
“In issuing the March 13, 2018 notice letter to ZTE, and in considering ZTE’s response, I have taken into account the course of ZTE’s dealings with the U.S. Government during BIS’s multi-year investigation, which demonstrate a pattern of deception, false statements, and repeated violations. I note the multiple false and misleading statements made to the U.S. Government during its investigation of ZTE’s violations of the Regulations, and the behavior and actions of ZTE since then. ZTE’s July 20, 2017 letter is brimming with false statements in violation of § 764.2(g) of the Regulations and is the latest in a pattern of the company making untruthful statements to the U.S. Government and only admitting to its culpability when compelled by circumstances to do so. That pattern can be seen in the November 30, 2016 letter, which falsely documented steps the company said it was taking and had taken, as well as in the 96 admitted evasion violations described in the PCL, which detailed the company’s efforts to destroy evidence of its continued export control violations.”
Here’s where the story gets interesting…
On May 13, 2018 President Donald Trump pledged in a tweet to help give ZTE “a way back into business, fast,” “Too many jobs in China lost. Commerce Department has been instructed to get it done!” Trump tweeted, adding that he was working with Chinese President Xi Jinping to help the company resume operations.
A day later, amid criticism over why Chinese jobs were a priority during trade and investment negotiations with China, Trump tweeted: “ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.”
Just last week it was released that a deal was in the works between Commerce and China that would involve China buying more US farm goods and removing tariffs on imported US agricultural products in exchange for the denial order against ZTE to be reconsidered. ZTE would still face “harsh” punishment, including enforced changes of management and changes at the board level.
Rumors are swirling that there was a “handshake deal” on ZTE between U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He during talks in Washington last week that would remove the ban in exchange for the purchase of more US agricultural products. Another person said China may eliminate tariffs on US agriculture products it assessed in response to US steel duties, and that ZTE could still be forced to replace its leadership, among other penalties. Both sources said the deal, which has not been confirmed, will likely be finalized before or during a planned trip by US Commerce Secretary Wilbur Ross to Beijing next week to help reach a broader trade pact to avert a trade war.
Federal Register: https://www.gpo.gov/fdsys/pkg/FR-2018-04-23/pdf/2018-08354.pdf