On March 8, 2016, the US Department of Commerce, Bureau of Industry and Security (BIS) published a Federal Register notice adding Chinese company Zhongxing Telecommunications Equipment (ZTE Corporation), along with three closely related entities, to the BIS Entity List. As a result of this designation, a license will be required to export, re-export, or transfer (in-country) to any of the four listed entities “items subject to the Export Administration Regulations” (EAR). A license will also be required for any transaction in which one of the four named entities “act[s] as purchaser, intermediate consignee, ultimate consignee, or end user of items subject to the EAR.” The licensing policy for such applications will be a presumption of denial, meaning that licenses will not be approved without a compelling reason for the US government to overcome the presumption. Similarly, license exceptions are not available for exports, re-exports, or in-country transfers of items subject to the EAR to the four entities.
Items “subject to” the EAR include the following:
- All US origin items wherever located in the world
- Any item in the United States and being exported to any of these entities from the United States
- Any foreign-made item that contains more than 25% US origin “controlled” content (or, for exports or reexports to Iran, North Korea, Sudan, or Syria, 10% “controlled” content) (the so-called “de minimis” rule).
- Any foreign-made item that is the direct product of US origin technology or major plant and equipment located abroad, where the foreign-made product and the US-origin technology or major plant and equipment are controlled for “national security” reasons
ZTE Corporation, founded in 1985 and based in Shenzhen, China, is one of the world’s largest telecommunications equipment makers with operations in 160 countries, according to its website. It also is a major manufacturer of mobile handsets. The company’s shares trade on the Hong Kong and Shenzhen stock markets. ZTE Corporation also has significant trading relationships with several US companies, including Qualcomm, Microsoft, and IBM. The three other entities added to the BIS Entity List include two of ZTE Corporation’s Chinese affiliates, ZTE Kangxun Telecommunications Ltd. and Beijing 8-Star International Co., and an Iranian entity, ZTE Parsian.
In the Federal Register notice, BIS states that it is adding ZTE Corporation and the three related entities to the Entity List “for actions contrary to the national security and foreign policy interests of the United States.” Specifically, BIS cites the entities’ involvement in a scheme developed by ZTE Corporation to re-export controlled items to Iran contrary to US law. According to internal company documents cited by BIS, ZTE Corporation designated ZTE Kangxun Telecommunications Ltd to purchase controlled items and provide them to an intermediary trading company for re-export to Iran. Beijing 8-Star would play this intermediary role, which included signing contracts with Iranian clients, making purchases of controlled items, and re-exporting the items from China to Iran. ZTE Parsian would then provide contracted engineering services to ZTE clients in Iran receiving the controlled items.
The Federal Register notice references two ZTE Corporation documents in support of the BIS decision, which BIS has posted on its website. BIS describes the first company document, “Report Regarding Comprehensive Reorganization and Standardization of the Company Export control Related Matters,” as indicating that the company had re-exported controlled items to sanctioned countries contrary to US law, and was aware of the related risks based on an onsite BIS inspection and concerns expressed by suppliers who suspected that ZTE was involved in illicit activity. The second document, “Proposal for Import and Export Control Risk Avoidance,” is described by BIS as a proposal overseen by the company’s legal department to evade US export control laws through the use of shell companies and intermediaries. On the basis of this document, BIS states that ZTE corporation “planned and organized a scheme to establish, control, and use a series of [shell] companies to illicitly re-export controlled items to Iran in violation” of US law.
The US government’s addition of ZTE Corporation to the Entity List, which the Chinese government has strongly opposed, is particularly notable considering the size of the company and its significant international trading presence. Also, it is unusual for BIS to publically release inculpatory internal company documents related to its designations. The BIS designation makes clear that BIS will take action against persons (including non-US companies) suspected of violating US export control laws, and will pursue vigorous enforcement where it suspects that an exporter or reexporter is engaged in the unlawful diversion of controlled items.
Companies engaged in the export or reexport of items “subject to” the EAR should consider carefully the potential application of EAR restrictions, and should avoid participating in diversion activity. Many companies that engaged with a ZTE entity as a supplier, partner, or customer prior to the March 8th notice, are increasing their due diligence efforts related to those activities, implementing additional measures to prevent diversion, and in some cases even putting a hold on their activities not only with listed ZTE entities, but also with non-listed ZTE entities pending the implementation of adequate compliance measures. The Entity List additions are a further reminder that, when doing business with Iran that has any potential nexus to the United States (such as the potential involvement of US suppliers or the US financial system), companies should be mindful of US sanctions and export control restrictions.