Archive for the ‘China’ Category

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


Seiler Instrument to Pay $1.5 Million in Forfeiture to the United States

2018/02/08

Source: Department of Justice

Seiler Instrument & Manufacturing Company, Inc., a Kirkwood-based defense contractor, admits fault to the company’s use of optical materials imported from China in the weapons sights which the company improperly certified as compliant with the Buy American Act and will pay the United States $1,500,000.00 in forfeiture. The company manufactured the parts under a series of contracts with the Department of Defense. Pursuant to a pretrial diversion agreement Seiler Instrument has made an initial payment of $500,000.00 and will make additional payments of $500,000.00 in each of the next two years. The company also agrees to enter a plea of guilty to a false statement charge in the event that the company does not meet the full terms of the agreement.

Seiler Instrument is a long-time defense contractor which specializes in the production of fire control systems, including sighting devices for weapons, which are used on all United States Military Howitzer and mortar systems.  The pretrial agreement concluded after an investigation into the company’s business practices and how its proceedings reflect import and export regulations governing the procurement of materials used to manufacture defense systems. Two of these provisions include the Buy American Act and the International Traffic in Arms Regulations which place limitations on the export of restricted technical data used in the procurement and manufacturing process to countries such as China. The agreement states that Seiler Instrument took actions to correct problems and has further agreed to have its compliance program monitored by the Department of Defense.

This case was investigated by the Defense Criminal Investigative Service (Department of Defense, Office of Inspector General), the U.S. Immigration and Custom Enforcement’s (ICE) Homeland Security Investigations (HSI), the Army CID Major Procurement Fraud Unit and the U.S. Department of Commerce, Bureau of Industry and Security – Office of Export Enforcement, Chicago Field Office. The Defense Contract Management Agency also provided substantial assistance in this investigation.

More Details: https://www.justice.gov/usao-edmo/pr/seiler-instrument-pay-15-million-forfeiture-united-states


Miltech, Inc. of Northampton, MA Receives 18 Charges of Alleged Export Violations

2017/11/15

By: Ashleigh Foor

On September 25, 2017, Miltech, Inc. of Northampton, MA was charged a civil penalty of $230,000 due to engaging in conduct prohibited by the EAR when it exported items subject to the EAR from the United States to China and Russia without the required BIS Licenses. On eighteen separate occasions between, on, or around October 14, 2011 and July 14, 2014, Miltech exported active multiplier chains, items classified under Export Control Classification Number (“ECCN”) 3A001.b.4 and valued in total at approximately $364,947, without seeking or obtaining the licenses required for these exports pursuant to section 742.4 of the EAR. These items are controlled on national security and anti-terrorism grounds.

Miltech received 18 charges of 15 C.F.R. § 764.2(a) for engaging in prohibited conduct. $180,000 of the $230,000 penalty must be paid within 30 days, and the remaining $50,000 will be suspended and waived after two years if Miltech fulfills the terms of its settlement agreement and this order.  The company will not be debarred if penalty is paid as agreed and Miltech complies with other terms of this settlement.


Chinese National Pleads Guilty to Attempting to Export “Bananas”

2017/05/11

By: Danielle McClellan

For the past 6 years, 53 year old Fuyi Sun has attempted to purchase carbon fiber for the Chinese military (according to court records). A few years ago Sun contacted what he thought was a US company that distributed carbon fiber, but was, in fact, an undercover entity created by Homeland Security Investigations (HSI) and staffed by undercover agents. The company, “UC Company,” was asked by Sun to supply M60 Carbon Fiber which is a high-grade carbon fiber that is used in sophisticated aerospace and defense applications, specifically for drones and other government defense applications. M60 Carbon Fiber requires a license for export to China for nuclear non-proliferation and anti-terrorism reasons.

During the course of the relationship between UC Company and Sun, he often suggested various security measures they should take to make sure they would both remain protected from the “U.S. Intelligence.” He instructed the undercover agents to use the word “banana” instead of “carbon fiber” in all communications…he inquired about purchasing 450 kilograms of banana in one email. He also instructed agents to remove identifying barcodes for the carbon fiber, prior to transshipment,  and instructed them to identify it as “acrylic fiber” in customs documentation.

On April 11, 2016, Sun traveled from China to New York to purchase the M60 Carbon Fiber from UC Company. On April 11th and 12th Sun met with undercover agents and suggested to them that the Chinese military was the ultimate end-user for the carbon fiber, he also explained that he personally worked in the Chinese missile program. He further asserted that he had a close relationship with the Chinese military, and would be supplying the M60 Carbon Fiber to the Chinese military or to institutions closely associated with it. He agreed to purchase two cases of the carbon fiber on the 12th from UC Company and provided them with $23,000 in cash for the carbon fiber and then provided an additional $2,000 as compensation for the risk that he believed they were taking to illegally export the carbon fiber to China without a license. Sun was arrested the next day.

Sun pled guilty to attempting to violate the International Emergency Economic Powers Act (IEEPA), which carries a maximum sentence of 20 years in prison. The maximum sentence in this case will be prescribed by Congress. Sun will be sentenced on July 26, 2017.

Details: https://www.justice.gov/opa/pr/chinese-national-pleads-guilty-attempting-illegally-export-high-grade-carbon-fiber-china


Exporting to Hong Kong? Don’t Forget Your Written Proof for Hong Kong!

2017/05/11

By: John Black

Effective April 19, 2017, the Bureau of Industry and Security (BIS) has new documentation requirements for export and reexports under licenses and license exceptions to and from Hong Kong.

BIS will  require persons planning on exporting and reexporting to Hong Kong any items subject to the Export Administration Regulations (EAR) and controlled on the Commerce Control List (CCL) for national security (NS), missile technology (MT), nuclear nonproliferation (NP column 1), or chemical and biological weapons (CB) reasons to obtain, prior to the export or reexport, a copy of a Hong Kong import license or a written statement from the Hong Kong Government that such a license is not required. The purpose of this change is to require that the Hong Kong Government issue an import license as an acknowledgement that sensitive EAR-controlled items are entering Hong Kong and as an agreement to prevent unauthorized reexport or transfer of those items to prohibited destinations. Interestingly, the prohibited destination that most concerns the US is the People’s Republic of China (PRC). The EAR treats Hong Kong as a separate “country” from the PRC even though the PRC, the United Nations, and nearly everybody else in the world considers Hong Kong to be part of the PRC because Hong Kong is part of the PRC.

Leaving behind the interesting point that the EAR treats Hong Kong as if it is not part of the PRC, there are a lot of details in this new rule. In addition what was described above, this rule will also require persons planning on reexporting from Hong Kong any item subject to the EAR and controlled for NS, MT, NP column 1, or CB reasons to obtain a Hong Kong export license or a statement from Hong Kong government that such a license is not required.

View full details of the rule at http://www.learnexportcompliance.com/News/The-Export-Control-Update-February-2017.aspx#EAR

BIS FAQs Related to Rule: https://bis.doc.gov/index.php/policy-guidance/foreign-import-export-license-requirements/hong-kong

Federal Register: https://www.gpo.gov/fdsys/pkg/FR-2017-01-19/pdf/2017-00446.pdf


Man Pleads Guilty to Stealing Sensitive Military Documents from United Technologies and Exporting Them to China

2017/01/31

By: Danielle McClellan

Yu Long, 38, a citizen of China and permanent resident of the US, plead guilty on December 19, 2016 to one count of conspiracy to engage in the theft of trade secrets as well as one count of unlawful export and attempted export of defense articles from the US. Long worked as a Senior Engineer/Scientist at United Technologies Research Center (UTRC) from May 2008 to May 2014 where he worked on F119 and F135 engines. During this time Long always intended to return to China to work on research projects at state-run universities in China using the knowledge and materials he was acquiring at UTRC. During 2013 and 2014, Long was recruited by Shenyang Institute of automation (SIA), of China, where he substantiated claims that he could provide documents from his work at UTRC and examples of projects on which he worked.

On May 30, 2014, Long left URTC and began travelling back and forth between the US and China with a UTRC external hard drive that he unlawfully retained after his employment ended. On November 7, 2014, Long was arrested, two days after he attempted to board a plane to China with sensitive, proprietary and export controlled documents from Rolls Royce, not URTC. His checked baggage was inspected by CBP officer in Newark, NJ, where the hard drive was found with all of the proprietary, export controlled information.

After his digital media was seized it was found that he had voluminous files protected by the ITAR and EAR, as well as files proprietary to UTRC, Pratt, and Rolls Royce. UTRC confirmed that the hard drive that he stole and accessed in China contained not only documents and data from projects long worked on, but also from projects that he did not work on. It was found that he obtained Pratt and Rolls Royce proprietary information from a project that the US Air Force had convened a consortium of major defense contractors to work together to see if they could collectively lower the costs of specific metals used.

A sentencing date has not been set but Long faces a maximum term of imprisonment for 15 years for the theft of trade secrets charge and 20 years of imprisonment for violated the Arms Export Act.

More Information: https://www.justice.gov/opa/pr/chinese-national-admits-stealing-sensitive-military-program-documents-united-technologies


Entrapment or Conspiracy? Either Way…Woman Sentenced to Over 4 Years in Prison for Conspiracy to Export to China

2016/09/06

By: Danielle McClellan

Wenxia Man, aka Wency Man, 45 of San Diego, was sentenced this month to 50 months in prison for conspiring to violate the Arms Export Control act by trying to export and cause the export of fighter jet engines, an unmanned aerial vehicle (drone) and related technical data to the People’s Republic of China.

Wency Man ran a family business with her husband that produced small electronic components used in cell phones and some radio devices. Around March 2011 she began trying to find jet fighter industry sources to help her find out what it would take to export a fighter jet to China. One of her “jet fighter industry source” contacts alerted federal authorities to Man and an undercover investigation was launched. Eventually Man began communicating with an undercover agent who said he worked for a fictitious company in Broward County; he told Man he could get her the following items on her list:

  • Pratt & Whitney F135-PW-100 engines used in the F-35 Joint Strike Fighter;
  • Pratt & Whitney F119-PW-100 turbofan engines used in the F-22 Raptor fighter jet;
  • General Electric F110-GE-132 engines designed for the F-16 fighter jet;
  • General Atomics MQ-9 Reaper/Predator B Unmanned Aerial Vehicle, capable of firing Hellfire Missiles; and
  • Technical data for each of these defense articles

Wency was trying to get all of the listed items sent to Xinsheng Zhang in China. Zhang works for the China military and the items would have been used by the government of China. Man explained to the undercover agent that Zhang was a “technology spy” and wanted stealth technology. The drone that he wanted was $50 million, and that didn’t include any of the fighter jets.

On June 9, 2016, Man was convicted of one count of conspiring to export and cause the export of defense articles without the required license, although it should be noted that this export would never have been approved by the US government. Man’s lawyer attempted to have the jury verdict thrown out based on the fact that, “It was our position that there was no conspiracy and that she was entrapped,” Alex Strassman (Man’s lawyer) said. “It was pretty clear what would have happened if the government would have left her alone. Nothing more would have happened.”

Fast forward a few months and Wency has been sentenced to 50 months in prison which proves that conspiring can be just as bad as following thru…even if there was almost zero percent chance of your plan actually becoming a reality.

Read More: https://www.justice.gov/opa/pr/california-woman-sentenced-50-months-prison-conspiring-illegally-export-fighter-jet-engines

Editor’s Note:  This story reminded me of the great song by Emerson, Lake and Palmer.  –JB

Wency Man

She had ITAR drones
And tech data by the score
All advanced technology
For export out the door

Ooooh, what a Wency Man she was
Ooooh, what a Wency Man she was

 

Hot section and stealth
They made up her bed
A technology spy
By which she was led

Ooooh, what a Wency Man she was

Ooooh, what a Wency Man she was

 

She procured technology
For her country and Peking
Of her honor and her glory
The people would sing

Ooooh, what a Wency Man she was

Ooooh, what a Wency Man she was

A conviction found her
“You’re guilty” the judge cried
No lawyer could save her
But she didn’t get fried
Ooooh, what a Wency Man she was
Ooooh, what a Wency Man she was


Company Pays $100,000 for One Transfer of ITAR Technical Data to PRC Citizen Employee

2016/08/09

By: Danielle McClellan

Microwave Engineering Corporation (Microwave) of Andover, MA has pled guilty to one charge of an unauthorized export of a defense article to a foreign person and will pay $100,000 to settle the matter. The company designs and manufactures high-power, broadband passive components, antennas, and waveguides for radio frequency microwave and communication systems. The majority of Microwave’s business comes from orders for custom-designed parts and providing research and development services. Microwave’s products are used in both military and commercial applications and are often integrated into other systems.

The company has submitted over 120 authorizations with DDTC since 2007 and maintained a Technology Control Plan (TCP) which was approved by the Defense Security Service. Between September 2009 and September 2011 Microwave employed a foreign person (citizen of the People’s Republic of China) as a Research Scientist. The employee did obtain an H-1B visa in conjunction with the employment. Microwave’s Export Control Officer explained to the employee’s supervisor that the employee “could only work on general research concepts and could not work on anything related to specific product design or production.” By May 2010 the employee was moved to a segregated work space.

While the employee was employed with Microwave the then president, Dr. Rudolf Cheung, and another engineer repeatedly provided the employee with ITAR-controlled technical data (USML Category XI(b))  without obtaining authorization. Between December 2009 and June 2010 the employee received technical data related to five research and manufacturing projects. Of the five projects, only one actually resulted in a purchase order and finally a developed component in November 2011. Authorization was never obtained from DDTC for this project and the transfer of ITAR-controlled technical data to the employee related to the project was a violation. The Export Control Officer for Microwave became aware of the transfer of technical data for the project in May 2010 and worked to limit the unauthorized transfers.

On January 20, 2012, Microwave disclosed to DDTC the illegal transfer of technical data which also happened to be the day that Dr. Cheung pled guilty to an unrelated criminal violation of the AECA. The Department of State released the following as mitigating factors in the charging letter:

  • Respondent’s submission of a voluntary disclosure under ITAR § 127.12
  • Acknowledging both the charged violation and other potential violations;
  • The exceptional cooperation of the company during the Department’s review of the disclosed conduct; and
  • The reduced likelihood of future violations due to demonstrated improvements in Respondent’s internal compliance program.

The Department also considered countervailing factors.  Most notably:

  • Deficiencies in Respondent’s export compliance program prior to the charged violation;
  • The involvement of a foreign person from the People’s Republic of China, a proscribed destination under ITAR § 126.1 and by statute (Suspension of Certain Programs and Activities, Pub. L. No. 101-246, title IX, § 902,104 Stat. 83 (1990) (amended 1992));
  • The amount of time between discovery of the issues and notification of the Department; and
  • The potential harm to national security.

Charging Letter: http://pmddtc.state.gov/compliance/consent_agreements/pdf/MEC-PCL.pdf

Consent Agreement: http://pmddtc.state.gov/compliance/consent_agreements/pdf/MEC_CA.pdf


CEO Sentenced to 7 years in Prison and Will Pay $1.1 Million

2016/04/06

By: Danielle McClellan

Founded in 1996, Valley Forge manufactured momentum wheels that were used in spacecraft. Between 2004 and 2008 the company’s revenues declined and the company moved into the direction of weapon detection systems found in airports and photonuclear detection systems used to find bio-chemical weapons and explosives on cargo ships beginning in 2009.

During this time, Louis Brothers was the CEO of Valley Forge and began selling nearly $37 million worth of semiconductors to China. He hid the transactions and concealed the profits from the sales which would later lead to 31 counts of conspiracy, aiding and abetting illegal exports of defense articles, and conspiracy to launder money. These charges were in violation of the US Arms Export Control Act and the violations occurred to boost Valley Forge’s business finances.

US Securities and Exchange Commission filings show that Valley Forge’s revenue grew from $132,000 in 2008 to $3.2 million in 2009 and finally peaked at $18.6 million in 2010. The large jump in revenue was explained to have come from the sale of aerospace products and other mechanical devices, including two orders worth a gross profit of $2 million…no sales to China were mentioned.

In 2013 the US Attorney’s Office seized $1.5 million in the company’s bank accounts and later explained to stockholders about the investigation. The stockholders did not deny any sales to Hong Kong, however they believed the transactions were legal. A year later, Louis Brothers and his wife were arrested and eventually released on a $500,000 bond related to the charges. At that time they both pleaded not guilty and denied all sales to China. A pending class-action lawsuit was also brought on by shareholders against them.

In late 2013 Valley Forge filed for bankruptcy with assets of $500,000-$1 million and debts in excess of $1-10 million.
Brothers entered into a guilty plea to seven of the 31 counts and will serve a total of 93 months in prison for selling military-grade microchips to Hong Kong. He will also forfeit $1.1 million in a monetary judgement. He could have faced 125 years in prison based on all charges. He admitted in the agreements that between 2009 and 2013 he intentionally avoided notifying the Department of State about the illegal exports and proceeded to label his shipments as “computer parts” in order to conceal the true identity of the items. Brothers also admitted that he falsified paper work to make it appear that the money he received from the sales of the illegal microchips were profits from another business that he personally owned in Kentucky.

Additional Details: http://www.bizjournals.com/cincinnati/news/2016/03/04/former-cincinnati-ceo-sentenced-to-7-years-in.html and https://www.justice.gov/opa/pr/former-chief-executive-officer-sentenced-over-seven-years-prison-illegally-exporting


China’s ZTE Added to BIS Entity List: The Impact on ZTE, US and Non-US Companies

2016/04/06

By: Douglas N. Jacobson, Esq., Jacobson Burton Kelly PLLC, djacobson@jacobsonburton.com, 202-431-2407

Editor’s Note: See the article above for a March 24, 2016 update for the status of two of the ZTE entities.  This article is included here because it provides excellent information and insight regarding the original action.
The Commerce Department’s Bureau of Industry and Security published a notice on March 8, 2016 in the Federal Register (reprinted below) announcing that China’s ZTE Corporation (ZTE or ZTEC), and three of its affiliates, have been added to the Entity List.

Founded in 1985 and headquartered in Shenzhen China, ZTE, whose shares are traded on the Shenzhen, China and Hong Kong stock exchanges, is China’s second largest telecommunications company. ZTE is also the world’s seventh largest producer of smartphones and has operations in the US and more than 160 other countries. ZTE has annual revenues of more than $12 billion per year.

ZTE is being added to the BIS Entity List for allegedly reexporting US origin products to sanctioned countries, including Iran, and for planning “a scheme to establish, control, and use a series of “detached” (i.e., shell) companies to evade US export controls.
This action, which comes after a four-year investigation of ZTE by BIS’s Office of Export Enforcement and the Federal Bureau of Investigation, will have a major impact on ZTE and US and non-US companies.

BIS Entity List

The BIS Entity List, found at Part 744 of the US Export Administration Regulations (EAR), includes non-US businesses, research institutions, government and private organizations, individuals, and other types of legal persons, that are subject to specific license requirements for the export, reexport and/or transfer (in-country) of specified items. Parties are added to the Entity List by BIS when there is an increased risk of diversion of US-origin items or where the parties engaged in activities contrary to U.S. national security and/or foreign policy interests. BIS has been using the BIS more frequently in the past few years.

Specific entries on the Entity List identify the items that are subject to a license requirement and BIS’s licensing policy regarding any license applications that are submitted.

Parties Added to Entity List and Licensing Requirements
As a result of BIS’s action, which takes effect immediately, BIS will impose a license requirement for all persons and companies, wherever located, to export, reexport or transfer to “all items subject to the EAR” to the following four companies:

  1. Zhongxing Telecommunications Equipment (ZTE) Corporation (also referred to as ZTEC)Address: ZTE Plaza, Keji Road South, Hi-Tech Industrial Park, Nanshan District, Shenzhen, China;
  2. Beijing 8 Star International Co. Address: Unit 601, 6thFloor, Tower 1, Prosper Center, No. 5, Guanghua Road, Chaoyang District, Beijing, China;
  3. ZTE Kangxun Telecommunications Ltd. Address: 2/3 Floor, Suite A, Zte Communication Mansion Keji (S) Road, Hi-New Shenzhen, 518057 China
  4. ZTE Parsian. Address No. 100, Africa Ave., Mirdamad Entersection [sic], Tehran, Iran.

The license review policy for all four entities is “presumption of denial”, meaning that is not likely that BIS will approve any license applications to these four parties.

Because the license requirement for all four companies applies to all “items subject to the EAR”, as defined in section 734.3 of the EAR, a license will be required to export, reexport or transfer all US-origin goods, software or technology, wherever located, whether classified as EAR99 or listed on the Commerce Control list (i.e., identified with an ECCN number, such as ECCN 3A001).
This will also have an impact on non-US companies because the license requirement will also apply to any item produced outside the US and sold to the four ZTE entities that incorporates US-origin parts, components, software if the total value of the controlled US content exceeds the de minimis level in section 734.4 of the EAR (e.g., 25% for reexports to China).

Impact on ZTE and US and non-US companies

This action will have a major impact on ZTE and many US companies as it has been estimated that ZTE sources more than 40% of its parts and components from US suppliers. As a result of  ZTE’s size and international footprint, US and non-US companies should immediately screen their customer databases to make sure that ZTE is flagged as a party subject to Entity List restrictions and that any shipments be stopped. While the BIS notice contains a “savings clause” for certain items that were already en route aboard a carrier to ZTE, there is no “grandfathering” of items that had been ordered but have not been shipped.

Unlike parties included on OFAC’s SDN List, the addition of ZTE to the Entity List does not prohibit US or non-US persons from engaging in financial transactions with ZTE or require that any of the listed companies’ assets be frozen. Rather, BIS is restricting the export, reexport or transfer of any goods, technology, or software to these ZTE companies. Also, unlike OFAC, BIS does not control the export of services to a listed party. However, the term “technology” is broadly defined in the EAR to include certain types of information, including specific information necessary for operation, maintenance, repair, overhaul and refurbishing of items subject to the EAR.

In addition, BIS does not have a 50% rule that applies to companies owned by the four ZTE companies listed. BIS has stated that the licensing requirements imposed on a listed entity by virtue of its being listed do not per se apply to its subsidiaries, sister companies, or other legally distinct affiliates that are not listed on the Entity List. However, BIS has also stated that if affiliates of the listed company act as an agent, a front, or a shell company for the listed entity in order to facilitate transactions that would not otherwise be permissible with the listed entity, then the company is likely violating General Prohibition 10 and other provisions of the EAR. Therefore, exporters are encouraged to take extra steps in an effort to make sure that items are not ultimately destined for the listed entities.

Reasons for Adding ZTE to Entity List

The Federal Register notice specifies that ZTE was added to the BIS Entity List because it reexported controlled US origin items to Iran in violation of US law. In addition, BIS noted that the company created an internal document entitled: “Proposal for Import and Export Control Risk Avoidance” describing how ZTE planned and organized a scheme to use a series of shell companies to reexport controlled items to Iran in violation of US export control laws.

In an unusual move, BIS published on its website documents obtained during its investigation of ZTE to support its findings. These documents, which are published below, are very thorough and read like a playbook on how to circumvent US export controls.

These documents, which were posted by BIS in their original Mandarin and translated English versions, provide detailed information on ZTE’s understanding of how US export control laws applied to them and the repercussions if they were unable to continue with their work in the US sanctions countries, including Iran, Sudan, North Korea, Cuba and Syria. The documents even included a summary of the enforcement actions that could be taken against the company, including listing the US supply chain, and provided examples of prior export control issues the company had faced, and recent enforcement cases brought against other Chines companies. The documents show that ZTE tried to attract members to its export control team by paying a bonus.

For example, the “Proposal for Import and Export Control Risk Avoidance” describes how ZTE planned to establish and use “detached” (i.e., shell) companies and other measures to avoid “risks of import and export control”. The document suggests that the company use the Jebel Ali Free Zone in Dubai as the “primary choice” to locate one of the companies. The document also describes ways to properly handle and pack the goods to minimize the risks to ZTE.

Repercussions

Because ZTE is a major telecommunications company the addition of ZTE to the Entity List has already had ripple effects. ZTE’s stock has been suspended from trading on the Hong Kong and Shenzhen Stock Exchanges and China’s Ministry of Foreign Affairs denounced the BIS actions in the following statement:
“The Chinese side is firmly opposed to the US using domestic laws to place sanctions on Chinese companies. The Chinese side urges the US side to call off the wrong action lest it should jeopardize economic cooperation and relationship between China and the US.”

Representative Eliot L. Engel (D-NY), Ranking Member of the House Committee on Foreign Affairs, called for further sanctions on ZTE in the following statement:

“Today’s (March 8, 2016) action to impose a virtual embargo on exports to China’s number-two telecom company, ZTE, reveals publicly for the first time that this company has systematically violated U.S. sanctions on Iran, North Korea, and other proscribed countries. ZTE bought U.S. telecom equipment and illegally incorporated it into communications systems for the Iranian and North Korean security, military, and intelligence agencies. I commend the federal agents at the Commerce Department, FBI, and Homeland Security Department for carrying out this four-year investigation. Additional criminal charges are likely to be brought. I believe that the U.S. sanctions should be extended to cut off all ZTE commercial activity and investment in the United States.”

It has been widely reported that BIS and the FBI commenced an investigation on ZTE’s compliance with US export control laws in 2012. It has also been reported that senior ZTE executives have not traveled to the US over the past few years for fear of being arrested.

Given the activities described in the ZTE documents and the language in the Entity List notice, it appears likely that ZTE will remain in the crosshairs of the US Government for some time to come.