The U.S. Department of Commerce Bureau of Industry and Security (BIS) today announced that it has extended for a period of two months a previously granted temporary reprieve from U.S. export sanctions on China’s ZTE Corporation. Those sanctions were imposed on ZTE and several of its subsidiaries for allegedly attempting to circumvent U.S. export control laws by reexporting products containing U.S.-origin components to Iran. This short-term extension, granted without explanation of its underpinnings, suggests that ZTE has made enough progress in adopting reformative compliance measures to forestall reinstatement of U.S. sanctions at least temporarily, but that such efforts are a work in progress and that it has not yet completed negotiations with BIS regarding the terms of a final resolution of the charges against it.

On March 8, 2016, BIS announced that ZTE, along with three of its subsidiaries, were being sanctioned for attempting to circumvent U.S. export control laws by unlawfully reexporting U.S.-origin items to Iran. In a telling display of the long reach, and power, of U.S. extraterritorial jurisdiction, BIS imposed on all persons and companies, wherever located, a license requirement for the export, reexport or transfer of any item subject to the Export Administration Regulations – including all U.S.-origin goods, software and technology -- to ZTE and its three affiliates, whether as purchasers, intermediate receivers, or end-users; and BIS ordained that any application for such a license would be subject to a policy of presumptive denial. These sanctions imposed a virtual embargo on ZTE’s access to U.S. components, which are a significant part of, and essential to, the billions of dollars of telecommunications networking gear and smartphones that ZTE sells worldwide annually.

The severity of the sanctions was not surprising in light of the “smoking gun” evidence obtained by BIS, following a four year investigation by BIS and the FBI, of a complex and convoluted plan intended to enable ZTE, without detection, to circumvent U.S. export control laws. A document labeled Top Secret Highly Confidential was a virtual playbook for the establishment of shell companies, issuance of separate contracts, routing of payments, and other actions intended to allow ZTE to sell products containing U.S. components to Iran and other countries identified by the U.S. as state sponsors of terrorism. The plan, arising out of what was dubbed “Project One”, recommended a model “because it’s harder for the U.S. Government to trace it or investigate the real flow of the controlled commodities ….” Indeed, ZTE appears to have appreciated the extreme risk of the strategy on which it was embarking, describing the consequences of violating U.S. export laws as including civil and criminal penalties and being put on a blacklist that would prohibit U.S .companies from continuing to deal with ZTE.

BIS’s March 8 announcement of sanctions, with its global impact on ZTE and its implications for other international companies as well, sent shockwaves throughout China and worldwide, causing a temporary suspension of trading of ZTE’s stock. Yet, just days later, on March 23, 2016, in a surprising development, BIS issued interim relief in the form of a temporary license suspending the sanctions through June 30, 2016. At that point, unless the U.S. removed the sanctions or issued another temporary suspension, specific licenses presumably once again would be required and presumptively denied for exports, reexports or transfers of EAR-controlled items/technology to ZTE.

Today, just two days before the temporary license was set to expire, BIS announced a further short-term extension of the temporary license, through August 30, 2016. Although that development is certainly of some relief to ZTE, it does not remove the cloud hanging over ZTE or the inhibition of many of its suppliers to resume a free flow of components to the company until the matter is fully resolved.

We will have to wait further to learn the ultimate outcome of the case. Even if ZTE adopts a compliance program that satisfies U.S. demands, and otherwise cooperates with the U.S. investigation (including possible inquiry into its distributors and end-customers in Iran and other state-sponsor-of-terrorism countries), it is possible that BIS will impose monetary and other penalties, including intrusive reporting requirements, as the price of avoiding being cut off from its U.S. suppliers. The ZTE saga stands as a stark reminder that non-U.S. companies are subject to the extraterritorial application of U.S. export control laws and violate them at their own risk.