Archive for the ‘China’ Category

Chinese Intelligence Officer Charged with Espionage and Stealing Trade Secrets

2018/10/30

By: Danielle Hatch

Yanjun Xu (aka Qu Hui and aka Zhang Hui), a Chinese Ministry of State Security (MSS) operative, has been arrested and charged with conspiring and attempting to commit economic espionage and stealing trade secrets from several US aviation and aerospace companies. The MSS is the intelligence and security agency for China and is responsible for counter-intelligence, foreign intelligence and political security. It has the power to conduct espionage both in China and abroad.

The indictment explains that from 2013 to 2018, Xu targeted certain aviation companies (in and outside of the US) and proceeded to contact specific experts who worked within those companies. Xu was able to get some of them to travel to China, under the pretense that they would be delivering a university presentation. These employees travel was paid for in addition to stipends by Xu. GE Aviation was one of the companies listed in the indictment that Xu encountered.

Xu was extradited to the US this month, Assistant Director Bill Priestap of the FBI’s Counterintelligence Division explained, “This unprecedented extradition of a Chinese intelligence officer exposed the Chinese government’s direct oversight of economic espionage against the United States.”

Justice: https://www.justice.gov/opa/pr/chinese-intelligence-officer-charged-economic-espionage-involving-theft-trade-secrets-leading


Chinese National Sentenced to 46 Months in Prison for Illegal Exports

2018/10/29

By: Danielle Hatch

Si Chen, 33, known as “Cathy Chen” plead guilty to illegally exporting sensitive space communications technology to China was sentenced this month to 46 months in prison. Chen was arrested in May 2017 after an investigation by the Office of Export Enforcement uncovered her elaborate scheme involving illegal exports, money laundering, and forged passports.

Court documents show that from March 2013 to the end of 2015, Chen purchased and smuggled “jammers” which are used in military communications as well as devices used in space communication applications. The devices were worth more than $100,000 and required a license from the Department of Commerce for regional stability and national security reasons. Chen forged her passport, she used a Chinese passport with her photo on it and the name, “Chunping Ji” which she used to rent an office in Pomona, California where she would receive the export-controlled items. After she had the items, she would then ship them to Hong Kong using the false name on the passport, false product descriptions, and she undervalued the items on the shipping documents to avoid red flags or suspicions. Once the items reached Hong Kong they were then transshipped to China. Chen received the money for the items via an account at a bank in China in one of her family member’s names once the items reached China.

United States Attorney Nick Hana explained during the sentencing, “This defendant knowingly participated in a plot to secretly send items with military applications to China. The smuggled items would be used in a number of damaging ways, including in equipment that could jam our satellite communications. We will aggressively target all persons who provide foreign agents with technology in violation of US law.”

Justice: https://www.justice.gov/usao-cdca/pr/pomona-woman-sentenced-federal-prison-scheme-smuggle-restricted-space-communications


U.S. Slaps Export Controls on Dozens of Chinese Firms Over ‘Threat To National Security’ As Trade Tensions Escalate

2018/08/30

(Source: South China Morning Post, 2 Aug 2018.) [Excerpts.]

Trade tensions continue to rise between the world’s two largest economies as the US added dozens of export control restrictions to Chinese companies and added 44 Chinese entities to its export control list for posing “significant risk” to US national security or foreign policy interests. These controls will limit access to products that the US commerce department believes could have dual military or civilian use and may deny companies key components such as nuclear materials, telecoms equipment, lasers, and sensors.

The new restrictions impact key parts to China’s Made in China 2025 policy including air defense systems, satellite communications systems, semiconductors, and aerospace products. The Made in China 2025 policy was created to further China’s initiatives to become a hi-tech powerhouse, but the US views it as a threat to its global technological supremacy.

After announcing the latest US moves, US trade representative Robert Lighthizer said that Washington needs to “take strong defensive actions to protect America’s leadership in technology and innovation” and added: “China’s government is aggressively working to undermine America’s hi-tech industries and our economic leadership through unfair trade practices and industrial policies like Made in China 2025.”

Source: https://www.scmp.com/news/china/diplomacy-defence/article/2157932/us-slaps-export-controls-dozens-chinese-firms-over

 


President Signs Export Controls Legislation Subjecting Emerging and Foundational Technologies to Enhanced Controls

2018/08/30

(Source: Vinson & Elkins LLP, 14 Aug 2018.)

By: David R. Johnson, Esq., drjohnson@velaw.com, +1 202-639-6706; and Daniel J. Gerkin, Esq., dgerkin@velaw.com, +1 202-639-6654. Both of Vinson & Elkins LLP.

The President has signed the National Defense Authorization Act of 2019 (“NDAA”), which, in addition to expanding the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”) to review foreign direct investment,1 implements the Export Control Reform Act of 2018 (“ECA”), which sharpens the focus of the U.S. government on emerging and foundational technologies that are deemed not to have been adequately addressed by the prevailing U.S. export control regimes. The NDAA also places limits on the procurement of equipment and services from certain Chinese entities, though certain Members of Congress had adamantly advocated for much more stringent restrictions.

Please find a more detailed discussion of certain of the key aspects of the ECA, as well as the procurement-related restrictions set forth in the NDAA, below.

Export Controls Act of 2018

Permanent Statutory Authority for U.S. Export Controls. With limited exceptions, the ECA repeals the Export Administration Act of 1979, which lapsed several years ago and has been statutorily authorized each year since pursuant to Executive Orders issued under the International Emergency Economic Powers Act (“IEEPA”). Accordingly, the ECA now serves as the permanent statutory authority for the U.S. Export Administration Regulations (“EAR”), which generally govern the export, reexport, and in-country transfer of commercial and dual-use commodities, software and technology, and which are administered by the Bureau of Industry and Security, U.S. Department of Commerce (“BIS”).2

Treatment of Emerging and Other Types of Critical Technologies. In addition to ensuring permanent statutory authority for the existing commercial and dual-use export controls regime, the ECA directs the President, in coordination with the Departments of Commerce, Defense, State, and Energy to develop a “regular and robust process to identify the emerging and other types of critical technologies of concern and regulate their release to foreign persons as warranted regardless of the nature of the underlying transaction.” Specifically, these agencies are tasked by the ECA with identifying “emerging and foundational technologies” that are essential to the national security of the United States, but which are not currently controlled for export purposes.3

The process for identifying such technologies will be informed by publicly available information, classified information, information arising out of the CFIUS review process, and information generated by the various BIS advisory committees, and will take into account the development of such technologies in foreign countries, the effect export controls might have on continuing U.S. development efforts, and the effectiveness of export controls with respect to limiting the proliferation of such technologies to foreign countries.

The identified technologies will, following a notice and comment period, be subjected to enhanced U.S. export controls, possibly to include licensing requirements, and will be proposed for inclusion in multilateral export control regimes. At a minimum, licenses will be required for countries subject to a U.S. embargo, including those that solely are arms embargoed, such as China.4 Please note that license applications submitted by or on behalf of a joint venture, joint development agreement, or similar collaborative arrangement may require the identification of any foreign person with a significant ownership interest in a foreign person participating in the arrangement.

The following activities will be excepted from any licensing requirements:

  • The sale or lease of a finished item and the provision of associated technology if such items and technology are generally made available to customers, distributors, or resellers;
  • The sale or license to a customer of a product and the provision of integration or similar services if such services generally are made available to customers;
  • The transfer of equipment and provision of associated technology to operate the equipment if the foreign person could not use the equipment to produce critical technologies;
  • The procurement by a U.S. person of goods or services, including manufacturing services, from a foreign person if the foreign person has no rights to exploit any technology contributed by the U.S. person other than to supply the procured goods or services; and
  • Contributions and associated support provided by a U.S. person to an industry organization related to a standard or specification, whether in development or declared, including any license of, or commitment to license, intellectual property in compliance with the rules of any standards organization.

The ECA requires reporting to Congress and to CFIUS every 180 days regarding actions taken to identify and control emerging and foundational technologies.

Changes to Licensing Process. The ECA mandates that applications for licenses address “the impact of a proposed export of an item on the United States defense industrial base” and an assessment of whether “the denial of an application for a license or a request for an authorization of any export that would have a significant negative impact on such defense industrial base.” By significant negative impact, the ECA means:

  • “A reduction in the availability of an item produced in the United States that is likely to be acquired by the Department of Defense . . . for the advancement of the national security of the United States, or for the production of an item in the United States for the Department of Defense . . . for the advancement of the national security of the United States.”
  • “A reduction in the production in the United States of an item that is the result of research and development carried out, or funded by, the Department of Defense . . . to advance the national security of the United States, or a federally funded research and development center.”
  • “A reduction in the employment of United States persons whose knowledge and skills are necessary for the continued production in the United States of an item that is likely to be acquired by the Department of Defense . . . for the advancement of the national security of the United States.”

Criminal and Civil Penalties. Like the IEEPA, the ECA authorizes criminal penalties of up to $1 million and imprisonment for not more than 20 years. However, the ECA increases the current inflation-adjusted maximum civil penalty to the greater of $300,000 or twice the value of the underlying transaction. These also are the criminal and civil penalties set forth in the Anti-Boycott Act of 2018.

Treatment of Certain Chinese Telecommunications Equipment Manufacturers and Service Providers

Over the objections of Sen. Marco Rubio, among others, the NDAA ultimately did not reimpose sanctions on Chinese telecommunications equipment manufacturer and service provider, Zhongxing Telecommunications Equipment Corporation (“ZTE Corporation”), and certain of its affiliates, which were subject to a BIS denial order arising out of U.S. export control violations stemming from transactions involving Iran and North Korea. That denial order was terminated, effective July 13, 2018.

The ECA does, however, prohibit federal agencies from procuring or obtaining, or entering into contracts with entities using, equipment, systems, or services that, in turn, use Chinese-origin telecommunications equipment or services deemed to be a “substantial or essential component of any system” or “critical technology as part of any system.” The targeted Chinese-origin telecommunications equipment or services are:

  • Telecommunications equipment produced by Huawei Technologies Company or ZTE Corporation or any subsidiary or affiliate of such entities;
  • For the purpose of public safety, security of government facilities, physical security surveillance of critical infrastructure, and other national security purposes, video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Technology Company, Dahua Technology Company, or any subsidiary or affiliate of such entities;
  • Telecommunications or video surveillance services provided by any of the above-named entities or using the above-described equipment; and
  • Telecommunications or video surveillance equipment or services produced or provided by an entity reasonably believed to be owned or controlled by, or otherwise connected to, the Chinese government.

 

Visit our website to learn more about V&E’s Export Controls and Economic Sanctions practice. For more information, please contact Vinson & Elkins lawyers Dave Johnson or Daniel Gerkin.

The changes to the CFIUS review process are discussed in greater detail at http://www.velaw.com/Insights/President-Signs-Sweeping-Expansion-of-CFIUS-Review-of-Foreign-Direct-Investment/.
2 The EAR also encompass the regulations that govern the participation of U.S. persons in unsanctioned foreign boycotts. These regulations now are permanently authorized by the Anti-Boycott Act of 2018.
Please note that the EAR currently allow for the imposition of temporary controls on items in accordance with their interim classification within Export Control Classification Number 0Y521.
4 The ECA also requires a review of the current controls on exports, reexports, and in-country transfers for military end uses and military end users in U.S. and United Nations arms-embargoed countries, as well as a review of the Commerce Control List of items that currently are not subject to any licensing for U.S. arms-embargoed countries.


Company Fined $155,000 for Screening Related Violations

2018/08/30

By: Danielle Hatch

Mohawk Global Logistics Corp. has been fined $155,000 for 3 violations of the Export Administration Regulations (EAR) related to exporting to companies on the Entity List.

Around August 2012 Mowhawk exported an LNP-20 Liquid Nitrogen Plant (EAR99 and valued at $33,587) to the All-Russian Scientific Research Institute of Experimental Physics (VNIIEF). The company had a screening process in place and when they screened VNIIEF they got a hit and the shipment was initially flagged. During the BIS investigation Mowhawk acknowledged that the export supervisor accidently overrode (or ignored) the red flag and the shipment was processed. Mowhawk filed EEI and listed the shipment as No License Required (NLR) which would have been accurate had the end user not been on the Entity List. Since VNIIEF is a denied party a license is always required to export any items subject to the EAR. This was the 1st of 3 total charges.

In February 2014 and August 2015, Mokhawk once again exported to an organization on the Entity List, but this time they were in China. The company exported Real-Time Back Reflection Laue Camera Detectors and Accessories (EAR99 and valued at $177,156) to the University of Electronic Science and Technology of China (UESTC). Once again, Mowhawk used screening software, but this time it failed to flag the transaction because Mowhawk didn’t screen UESTC’s full, unabbreviated name. This could be a common mistake, however, all of the documents that UESTC provided to Mowhawk clearly identified UESTC’s full name as it was listed on the Entity List along with an almost exact matching address. The shipment was processed in February 2014 and they filed EEI as NLR. As with the first charge, had the export not gone to someone on the Entity List a license likely would not have been required.

In August 2015 Mowhawk exported the same exact items to UESTC after they had been returned for warranty repair. This time, Mowhawk didn’t screen the transaction at all using their screening software and there was no EEI filed in connection with this particular export to UESTC. These transactions were charges 2 and 3.

Settlement Agreement:

  • Pay $135,000 in 3 separate payments
  • Payment of the remaining $20,000 is suspended as long as the company pays the $135,000 on time.
  • If payments are not received on time, BIS may issue an order denying all of Mowhawk’s export privileges
  • Mowhawk can’t take any action or make any public statement denying the allegations in the BIS Charging Letter or Order

Order and Charging Letter: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2018/1193-e2561/file


Strict Export Regulations May Be Costing Us Industry Billions in Foreign Sales

2018/07/30

(Source: Defense News, 18 June 2018.)

A new RAND report (a source for research on policy ideas and analysis) studying the spread of unmanned aerial vehicles suggests that the current export controls for drones might be hurting the US more than helping.

US competitors like China and Russia are filling the void that has been left by the limitation on US drone exports in markets like the Middle East where the US historically dominated in sales. Over the past several years, Jordan, Saudi Arabia, and United Arab Emirates (UAE) were denied requests to buy American drones, and have since turned to China to purchase similar systems. The Trump administration recently revealed a new set of export policies concerning military technology in an attempt to facilitate the transfer of military technology, but the changes do not change the status of drones under the Missile Technology Control Regime.

How does the MTCR work?

The MTCR is a voluntary export control group of 35 nations who collaborate to prevent signatories from proliferating longer-range cruise and ballistic missile technology. The arms control regime was extended to UAVs because early iterations of drones were considered a subset of cruise missile technology due to their active guidance system.

The regime divides missiles into two categories. This article will cover Category I.

Category I:

  • Capable of delivering a 500 kg payload more than 300 km
  • Sale of category I systems is restricted by a “strong presumption of denial” (meaning they are only exported in rare circumstances)
  • MQ-9 Reaper, RQ-4 Global Hawk and MQ-4 Triton are well-known unmanned systems that fall under this category

Drone proliferation

RAND found that 10 nations use category I drones, and more than 15 use near-category I systems that register just below the MTCR’s payload and distance restrictions. The report states that these increased proliferation rates are due to countries like China, Israel, and the UAE who are not part of the MCTR. More countries are expected to follow suit which will cause a “growing threat to U.S. and allied military operations,” the report says.

While category I systems can deploy missiles, their main threat lies in “their ability to conduct intelligence, surveillance, and reconnaissance (ISR) operations against U.S. forces prior to hostilities,” according to RAND. “Adversaries that would otherwise have difficulty detecting U.S. force deployments, monitoring U.S. operations, and maintaining targeting data on U.S. units can employ UAVs to maintain situational awareness of U.S. capabilities.”

The report identifies Russia, China, and Iran as unfriendly nations that will try to utilize drones to complicate US military operations.

A US-sized hole

Due to restrictions on US drone exports, competitors have established themselves in a market Rand expects to “grow from about $6 billion in 2015 to about $12 billion in 2025.”

“What you are enabling the competition to do is not just to sell some hardware,” Linden Blue, General Atomic’s chief executive, told reporters during an Aug. 16, 2017 roundtable at the company’s headquarters in Poway, California. “You’re enabling it to build a customer base for at least 20 years, I would say. You’re enabling them to build a logistics system. It will take them many years to get to where we are right now, but you’re helping them start out. They should be very thankful.”

Details: https://www.defensenews.com/newsletters/unmanned-systems/2018/06/18/strict-export-regulations-may-be-costing-us-industry-billions-in-foreign-sales/


Chinese National Arrested for Conspiring to Illegally Export U.S. Origin Goods Used in Anti-Submarine Warfare to China

2018/07/30

(Source: Justice, 21 Jun 2018.) [Excerpts.]

Defendant allegedly illegally exported devices used to detect and monitor sound underwater.

Shuren Qin, 41, a Chinese national residing in Wellesley, Mass., was arrested and charged in connection with violating export laws. Qin was born in the People’s Republic of China and became a lawful permanent resident of the United States in 2014, according to charging documents. Qin runs several companies in China, which import U.S. and European goods used in underwater or marine technologies into China. Below lists his violations and findings from court documents:

  • Charged with violating export laws by conspiring with employees affiliated with the People’s Liberation Army (PLA) to illegally export U.S. origin goods to China.
  • Also charged with making false statements to acquire a visa to enter the United States and become a lawful permanent resident under the EB-5 Immigrant Investor Visa Program.
  • It is alleged that Qin was in communication with and/or receiving taskings from entities affiliated with the PLA, including the Northwestern Polytechnical University (NWPU), a Chinese military research institute, to obtain items used for anti-submarine warfare.
  • From at least July 2015 to December 2016, Qin allegedly exported approximately 78 hydrophones (devices used to detect and monitor sound underwater) from the United States to NWPU without obtaining the required export licenses from the Department of Commerce.
  • Qin concealed from the U.S. supplier that NWPU was the end-user and created false information to be filed with the United States Government.
  • Qin made false statements on his visa application stating that he had never “engaged in export control violations or other unlawful activity.” However, it is alleged that Qin engaged in many violations of U.S. export laws since 2012.
  • In an interview with Customs and Board Patrol Officers in November 2017, Qin stated that he “only” exported instruments that attach to a buoy. However, Qin had allegedly exported remotely-operated side scan sonar systems, unmanned underwater vehicles, unmanned surface vehicles, robotic boats, and hydrophones. These items have military applications and can be used for weapon delivery systems, anti-submarine warfare, mine counter-measures as well as intelligence, surveillance and reconnaissance activities.

The charge of conspiring to violate U.S. export laws results in a sentence of no greater than 20 years in prison, three years of supervised release, and a fine of $1 million. The charge of visa fraud results in a sentence of no greater than 10 years in prison, three years of supervised release, and a fine of $250,000. Sentences are imposed by a federal district court judge based upon the U.S. Sentencing Guidelines and other statutory factors.

The details contained in the indictment are allegations. The defendant is presumed to be innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

Details: https://www.justice.gov/usao-ma/pr/chinese-national-arrested-conspiring-illegally-export-us-origin-goods-used-anti-submarine


BIS Issues an Order Terminating the Denial Order Against ZTE

2018/07/30

(Source: Commerce/BIS, 13 Jul 2018.)

On March 23, 2017, Zhongxing Telecommunications Equipment Corporation of Shenzhen, China, and ZTE Kangxun Telecommunications Ltd. of Hi-New Shenzhen, China (collectively, “ZTE”) entered into a settlement agreement with the Bureau of Industry and Security, U.S. Department of Commerce (BIS) to resolve 380 violations of the Export Administration Regulations (EAR) admitted by ZTE.

ZTE has followed the settlement terms and conditions by making a full and timely payment of $1,000,000,000 as ordered and has complied with the escrow requirements relating to the $400,000,000 suspended portion of the civil penalty. Therefore, BIS has terminated the 15 April 2018 Order, and BIS will remove ZTE from the Denied Persons List.

This order does not modify any provision of the Superseding Order or the Superseding Settlement Agreement.

[Note: The 15 April 2018 Order is available here.]

Details: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2018/1184-e2559/file


The Fall and Rise of ZTE

2018/05/30

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.

Additional Details:

Federal Register: https://www.gpo.gov/fdsys/pkg/FR-2018-04-23/pdf/2018-08354.pdf

Article: https://www.reuters.com/article/usa-china-zte-talks/update-1-u-s-china-nearing-deal-to-remove-u-s-sales-ban-against-zte-sources-idUSL3N1ST1WX

Article: https://www.reuters.com/article/us-zte-ban/chinas-zte-says-main-business-operations-cease-due-to-u-s-ban-idUSKBN1IA1XF


US Firms Part Ways with China’s ZTE Monitor

2018/02/08

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.

Part of the settlement with OFAC required the company to hire an initial independent compliance monitor approved by the US government for a three-year term. The monitor is responsible for preparing the initial three annual audit reports to be provided to the US government. In addition, ZTE had to hire an independent compliance auditor, also approved by the US government, for an additional three years to prepare the remaining three annual audit reports.

Guidepost Solutions and Larkin Trade International were hired in June 2017 by the US monitor, James Stanton, a Texas civil and personal injury lawyer in charge of the oversite regime for ZTE. Stanton’s job is to help evaluate ZTE’s US export controls compliance and sanctions laws, and mitigate any future violations. US District Judge Ed Kinkeade, who presided over the ZTE sanctions case, actually rewrote the agreement to put Stanton in charge of monitoring the company before signing off on the plea deal. It has been said that Stanton has a lack of experience in US trade controls and the order naming him is sealed, leaving the reasoning behind the judge’s decision unclear. This situation is a bit of an anomaly because generally, the Department of Justice chooses an independent monitor in corporate criminal cases from candidates proposed by the company, which is how the agreement was originally written before Judge Kinkeade rewrote it. ZTE and the Justice Department agreed to Judge Kinkeade’s choice and the changes to the monitorship agreement, sources said, because the plea had already been negotiated and filed in the judge’s court and a temporary license allowing ZTE to continue to obtain US made goods was about to expire.

In December 2017, rumors broke out that Guidepost Solutions and Larkin Trade International had resigned in August 2017 from the job of actively auditing ZTE. Although the exact reason is unclear, some say it was a result of  Stanton restricting their access to ZTE documents and officials, which ultimately hindered their ability to effectively monitor the company. Stanton’s first report was due to the US government last month and this report, as well as the subsequent 2 reports will decide whether the company is liable for an additional fine of $300 million or being added to the US denial list.

Nearly all parties related to the case, including Guidepost Solutions, Larkin Trade International, Judge Ed Kinkeade, and James Stanton have all declined requests for comments based on this news. Additional details about this story and the ties between Judge Kinkeade and James Stanton can be found at https://www.reuters.com/article/us-usa-zte-exclusive/u-s-experts-resign-from-monitoring-chinas-zte-corp-sources-idUSKBN1EG03R