Archive for the ‘Violations & Fines’ Category

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.


Swedish Telecom Company Pays Penalty for Sanctions Violation

2018/08/30

By: Thad McBride on July 19, 2018

Thad McBride is a member at Bass, Berry & Sims PLC (Washington, DC) and leads the firm’s International Trade Practice Group. He regularly counsels clients on compliance matters related to economic sanctions and embargoes, export controls, CFIUS, US anti-boycott controls, customs, and other import controls. In addition, he guides clients through internal audits and investigations and represents companies facing government investigations and enforcement actions. He is a regular contributor to the firm’s Government Contracts and International Trade blog and can be reached at tmcbride@bassberry.com

POSTED IN INTERNATIONAL TRADESANCTIONS (OFAC)

  • Ericsson Caused Violation by Having U.S. Party Ship Equipment to Sudan
  • U.S. Employee Facilitated Sudan Business
  • OFAC Expects Parties Conducting International Business to Have Robust Compliance Processes

In June 2018, the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) announced that Ericsson, a Swedish telecommunications company, agreedto pay approximately $145,000 for violating U.S. sanctions on Sudan.  Among other things, this is one of the few OFAC enforcement actions explicitly premised on a non-U.S. actor causing a U.S. company to violate U.S. sanctions.

Non-U.S. Companies Can Violate Sanctions If They Cause a Violation

According to OFAC, the violations involved Ericsson, AB (EAB), which is based in Sweden, causing a U.S. seller of a satellite hub to export that hub from the United States to Sudan.  Interestingly, in connection with EAB’s purchase of the satellite hub, an EAB employee communicated about the matter with Ericsson’s compliance department.  In those communications, the EAB employee was informed that the purchase of the satellite would violate Ericsson’s sanctions compliance policy.

Yet the EAB employee proceeded with the acquisition, with support from an Ericsson employee in the United States.  OFAC asserted that the two Ericsson employees agreed to identify “Botswana” as the destination of the satellite hub.  The EAB employee then structured the acquisition so that the satellite hub was shipped through several other countries, including with help from a third party in Lebanon, before eventually arriving in Sudan.

U.S. Employee Facilitated Transaction by Supporting the Sudan Business

It appears that, when the Ericsson U.S. employee was first contacted by his counterparts at EAB, he informed them that he could not be involved in any Sudan business.  But subsequently, he did assist his EAB counterparts by providing technical guidance related to the Sudan project.  (The U.S. employee sent one e-mail related to Sudan in which “East Africa” was listed as the subject of the e-mail.)  The U.S. employee also met in person with an EAB employee to discuss the project.

There is no indication that the U.S. employee had any role in purchasing or shipping the satellite hub to Sudan.  Nonetheless, by providing guidance and advice about the Sudan project, the U.S. employee facilitated that project and thereby violated U.S. sanctions on Sudan.  Like other U.S. sanctions programs, under U.S. sanctions on Sudan, U.S. persons were prohibited from indirectly supporting (or facilitating) a project in Sudan that the U.S. person could not engage in directly.

Conduct Occurred Well Before Recent Lifting of U.S. Sanctions on Sudan

As we have discussed in prior blog posts (see this January 2018 blog post), it typically takes a long time for OFAC to impose penalties for sanctions violations.  The conduct at issue in the Ericsson matter occurred in 2011 and 2012.  Ericsson tolled the statute of limitations during OFAC’s investigation of the matter.

In fact, by the time Ericsson agreed to settle the matter, U.S. sanctions on Sudan had been lifted.  However, the U.S. government does maintain export controls on Sudan under the Export Administration Regulations.  As a result, an export license is needed to export most U.S.-origin items to Sudan, even though economic sanctions have been lifted.

This illustrates one of the practical challenges for U.S. companies considering business in Sudan.  Discussions about that business and even the provision of business services are generally permitted without a license.  Actual exports of products still usually require a license.  So Sudan is not entirely open for business from a U.S. perspective.

Compliance Is Complicated, Appropriate Resources Are Needed

The compliance narrative in this matter is jumbled.  As detailed above, the Ericsson compliance department advised the EAB employee – correctly – about the potential liability associated with Sudan business.  The U.S. employee of Ericsson originally responded to requests related to Sudan by stating his inability to work on a Sudan project.  Yet both the EAB employee and the Ericsson U.S. employee proceeded with the Sudan business.

This seems on its face like a situation in which company employees went rogue.  Notably, the company disclosed the violation to OFAC, which is one reason that OFAC imposed a penalty well below the statutory maximum amount (roughly $360,000).

Yet in imposing any penalty, OFAC indicates that Ericsson could have done better.  In particular, in the press release related to the matter, OFAC states the following:

This enforcement action highlights the importance of empowering compliance personnel to prevent transactions prohibited by U.S. economic and trade sanctions.  Entities should ensure their sanctions compliance teams are adequately staffed, receive sufficient technology and other resources, and are delegated appropriate authority to ensure compliance efforts meet an entity’s risk profile.

The Bass, Berry & Sims international trade team works closely with clients to assess their risks and put in place effective, cost-efficient measures to prevent and detect trade compliance violations.  OFAC clearly expects such measures.  Feel free to contact us anytime if we can assist in developing and implementing them.


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


Newly Unsealed Federal Indictment Charges Iranian Businessman with Illegally Exporting Nuclear Nonproliferation-Controlled Materials from Illinois

2018/07/30

(Source: Justice, 21 Jun 2018.)

Saeed Valadbaigi, also known as “Saeed Valad” and “Saeed Baigi,” is an Iranian businessman who conspired with the owner of a European company to illegally export nuclear nonproliferation-controlled materials to Iran from Illinois, according to a newly unsealed federal indictment. Valadbaigi,56, is considered a fugitive and a warrant for his arrest was issued in 2016 and remains outstanding.

In 2011 Valadbaigi plotted to illegally export U.S.-origin 7075 T6 Aluminum tubing from Illinois to Iran by way of Belgium and Malaysia, the indictment states. The indictment states that the size and type of the aluminum is subject to U.S. regulations for nuclear nonproliferation purposes. According to the charges, Valadbaigi’s smuggling plan was an effort to avoid U.S. laws and export control regulations.

The newly unsealed indictment accuses Valadbaigi of the following:

  • Three counts of wire fraud
  • Two counts of attempting to violate the international emergency economic powers act
  • One count of conspiracy to defraud the united states
  • One count of illegally exporting articles from the united states
  • One count of making false statements on a U.S. export form
  • Illegally exporting titanium sheets from a company in northern Illinois, to Iran, by way of the republic of Georgia, the United Arab Emirates, and Malaysia
  • In 2012, ordered acrylic sheets from a company in Connecticut and falsely claimed that the sheets would be used only in Hong Kong which he later allegedly arranged to be transshipped to Iran

Sentencing:

  • Each count of wire fraud and attempting to violate the IEEPA results in a maximum sentence of 20 years in prison
  • The illegal export charge is punishable by up to ten years in prison
  • The conspiracy and false statement counts are each punishable by up to five years

The public is reminded that an indictment is not evidence of guilt.  The defendant is presumed innocent and entitled to a fair trial at which the government has the burden of proving guilt beyond a reasonable doubt. If convicted, the Court must impose a reasonable sentence under federal statutes and the advisory U.S. Sentencing Guidelines.

The charges against Valadbaigi are part of an investigation that previously resulted in the conviction of Nicholas Kaiga, who managed and later owned the Belgium company that did business with Valadbaigi. Kaiga admitted in a plea agreement that he was aware the 7075 Aluminum was subject to U.S. export controls and that it could not be exported to Malaysia without a license from the U.S. Department of Commerce, which neither he nor Valadbaigi possessed. Kaiga admitted that he used his company, Industrial Metals and Commodities, as an intermediary to export the 7075 Aluminum tubing from a company in northern Illinois, to Belgium and then to Malaysia, on behalf of Valadbaigi. Kaiga pleaded guilty to violating U.S. export control regulations and was sentenced in 2015 to two years and three months in a U.S. prison.

Details: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20180627.aspx


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


Use Caution: Air Cargo Industry Experiences Increasing Compliance Regulations

2018/06/29

By: Ashleigh Foor

(Source: Bobsguide, 29 May 2018.)

Air cargo industry, be warned: regulations are ever-increasing in 2018, leading to more fines and penalties for those involved in illegal trade. A Maersk company recently violated international sanctions by carrying arms components with the potential for military use from North Korea to Egypt. This is just one example of what appears to be a lack of strong compliance procedures that diligently screen parties, goods, and destinations involved in a transport.

The use of air cargo continues to increase as it is the fastest means of transport for sending goods all over the world, but with many high profile sanctions breaches in the news many are left wondering if the industry can abide by these increasing regulations while still fulfilling the need for speedy exports. These new levels of regulation are due to the air cargo industry being used to launder money and fulfill terrorist objectives. Air cargo companies are currently required to check Airway Bills (AWBs) against sanctions and dual-use goods watch lists. Noncompliance can lead to hefty fines, loss of export/import privileges, along with reputational damage and even prison time.

The air cargo industry is in danger of losing its competitive advantage – speed – due to the burden of compliance regulations. The International Air Transport Association (IATA) believes that if these increased regulations are not dealt with and followed efficiently then costs will increase – slowing transit and hurting the industry’s unique selling point.

Currently, around 50% of AWBs globally are still processed on paper rather than electronically (e-AWBs). IATA is highly recommending a change from outdated paper-based processes to automated and digital screening solutions so that airway bills are verified with speed and accuracy. Companies that still rely on manual checks are at an immediate disadvantage.

One air cargo company leading the way in overhauling its compliance processes is Lufthansa Cargo. They have implemented a digital sanctions and dual-use goods screening engine that automatically checks cargo documentation to identify any irregularities that could pose a risk. The technology scans descriptions of goods to identify if they have the potential for military use as well as checks origin and destination locations to confirm the cargo is not moving to or from a sanctioned territory.

With all of the changes taking place and scandals in the headlines recently, automation and digitization of processes are not simply great goals to strive towards – they’re expected and necessary for staying compliant. Air cargo companies must evolve to meet higher regulatory requirements, and ultimately, to do their part in protecting global security.


ZTE Chairman Promises No MORE Violations & US Imposes Most Severe Penalty to Date

2018/06/29

By: Danielle Hatch

ZTE Chairman Yin Yimin released a letter in the first part of June to customers and employees promising that there would be no further compliance violations. He apologized to customers for the disruption that the violations of US export controls caused and apologized to ZTE’s 80,000 employees whose jobs were in jeopardy after ZTE was put on the US denial list and no longer had access to US technology which suspended most of the company’s operations. **An employee who asked not to be identified further confirmed Yin sent a letter but would not confirm its contents.

The US did agree to restore ZTE’s access to US components in hopes of reducing the likelihood of a prolonged escalation of tensions over tariffs.

Yimin’s letter did say that the issue will not be fully resolved until the US government approves the agreement and unspecified conditions are met. Below you will find the conditions specified by BIS.

BIS will remove ZTE from the DPL Denied Persons List after ZTE makes the required payment and deposit into escrow. Under the new agreement, ZTE must pay $1 billion and place an additional $400 million in suspended penalty money in escrow before BIS will remove ZTE from the Denied Persons List. These penalties are in addition to the $892 million in penalties ZTE has already paid to the U.S government under the March 2017 settlement agreement.Within 30 days of the date of the order, BIS will select and ZTE shall retain at its expense an independent Special Compliance Coordinator (“SCC”) to coordinate, monitor, assess, and report on compliance by ZTE and its subsidiaries and affiliates worldwide. This team of Special Compliance Coordinators will be answerable to BIS for a period of 10 years. Their function will be to monitor on a real-time basis ZTE’s compliance with U.S. export control laws. This is the first time BIS has achieved such stringent compliance measures in any case. These collectively are the most severe penalty BIS has ever imposed on a company.

ZTE must also:

  • Replace the entire board of directors and senior leadership for both entities
  • Complete and submit nine audit reports of its compliance with U.S. export control laws;
    Ensure that all records required to be kept or retained under the Regulations are stored in or fully accessible from the United States;
  • Publish on its website all Export Control Classification Numbers as necessary to determine applicable requirements;
  • Hold two public symposia in China regarding compliance with applicable U.S. export control regulations.
  • Suspended Debarment: 10 years from the date of this order, unless ZTE completes the full and timely payment as described above.

BIS Press Release: https://www.commerce.gov/news/press-releases/2018/06/secretary-ross-announces-14-billion-zte-settlement-zte-board-management

Order: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2018/1181-e2556/file

Details: https://www.mytwintiers.com/news/report-zte-chairman-promises-no-more-violations-apologizes/1225834182


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


Turkish Banker Receives 32 Months for Violating U.S. Sanctions Against Iran Involving Billions of Dollars

2018/05/30

By: Ashleigh Foor

On January 3, 2018, a five-week jury trial wrapped up and convicted Mehmet Hakan Atilla, 47, a resident and citizen of Turkey, to 32 months for conspiring with others in a scheme to violate U.S. economic sanctions imposed on the Islamic Republic of Iran. The violation involved billions of dollars’ worth of Iranian oil proceeds held at Atilla’s employer (Turkish Bank-1).

Atilla, a Turkish banker, Reza Zarrab, an international gold trader, and others defrauded U.S. financial institutions by using them to conduct transactions on behalf of the government of Iran and other Iranian entities which were barred by U.S. sanction. They did so by making these transactions falsely appear as if they involved food, therefore falling within humanitarian exceptions to the sanctions regime.

Atilla lied to U.S. Treasury officials about Turkish Bank-1’s activities and its supposed compliance efforts to avoid subjecting the bank to U.S. sanctions. Atilla and his co-conspirators’ deceptions led U.S. banks to unknowingly process international financial transactions in violation of the IEEPA, and to launder through the U.S. financial system funds promoting the scheme.