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