On March 8, 2016, the United States Commerce Department's Bureau of Industry and Security (BIS) published a notice in the Federal Register announcing that China's ZTE Corporation (ZTE), along with three of its affiliates, were added to the Entity List for attempting to circumvent US export control laws and reexporting US origin items to Iran in violation of US law.
The Entity List additions serve as a further reminder that non-US companies are subject to the extraterritorial application of US export control laws. A culture of compliance is key when non-US companies are doing business that has any potential nexus to the United States (including the potential involvement of the US financial system or US suppliers).
Non-US companies must therefore be mindful of US sanctions internationally, as well as US export control restrictions capable of having significant negative impacts on an entity's global operations. Adding the company to the Entity List functions as a virtual embargo against China's second largest telecommunications company and the world's seventh largest producer of smartphones.
ZTE operates in the United States and more than 160 other countries, with annual revenues exceeding US$12 billion per year. Trading in ZTE shares, listed on the Hong Kong stock exchange, was temporarily suspended during March. The action comes as a result of a four year investigation by BIS and the FBI that has recently prevented ZTE senior executives from visiting the US for fear of being arrested. Not only is this action already having a major impact on US and non-US companies that work with ZTE, but it is also a cause of concern for companies worldwide whose export compliance policies and procedures put them at similar risk.
BIS adds parties to the Entity List when there is a heightened risk of US-origin items being diverted (e.g., to other countries or unauthorized end-users), or when a party engages in activities that contravene US national security and/or foreign policy interests. Parties on the Entity List are subject to specific license requirements for exporting, reexporting and/or in-country transfers of specified items.
As such, BIS imposed a license requirement for all persons and companies, wherever located, to export, reexport or transfer "all items subject to the EAR" to ZTE and three of its affiliates (Beijing 8 Star International Co., ZTE Kangxun Telecommunications Ltd., and ZTE Parsian). A license from the US government would also be required for any transaction in which one of the four ZTE entities acts as a purchaser, an intermediate receiver, or an end user of items subject to the EAR.
This license requirement applies to all US-origin goods, software or technology wherever located. Upon review, licenses for exports to ZTE and its listed affiliates are subject to a policy of presumptive denial. However, as of March 23, 2016, BIS has issued interim relief in the form of a temporary general license set to remain in place until June 30, 2016 (at which point specific licenses will once again be required and presumptively denied for exports, reexports, or transfers of EAR-controlled items/technology to ZTE, unless the US removes the sanctions or issues another general license).
The effect of ZTE's Entity List designation is global in scope because, among other reasons, the US government considers within its jurisdiction any item/technology that is manufactured in the US or sourced from the US. In other words, as ZTE discovered, if an item is shipped from the US to another country, in many instances the US government will maintain jurisdiction over that item - and enforce its export control laws against handlers of that item (such as placing sanctions on an entity, like ZTE) - even though the item is no longer in the US and possessed by a non-US entity.
Companies worldwide work with ZTE in the development, production and distribution of smart phones and other telecommunications products. The trade required for these transactions between ZTE and the US or non-US companies has - until March - been largely eligible to occur with limited restrictions from the US government. Now, due to the US government's control over items/technology that leave the US, and the vast trade network involving ZTE related products, companies worldwide must be mindful of the US government's sanctions against ZTE and the resulting impact on transactions related to US -sourced items/technology. For example, a German company (e.g., distributor, reseller or manufacturer) that purchases US-sourced items, must fully understand the US law applicable to those items prior to selling those items onward (such selling the items onward to ZTE) so as to not violate US law related to sanctions or denied parties.
This designation highlights the fact that BIS will pursue non-US companies suspected of violating US export control laws. Moreover, it is clear that BIS is actively engaging in vigorous enforcement actions where it suspects the unlawful reexport or diversion of controlled items. In this case, since the license requirement related to ZTE also applies to any item produced outside the US incorporating US-origin parts, components, or software (where the value of the controlled US content exceeds the de minimis level promulgated by §734.4 of the EAR), customer database screening is essential even for non-US companies. To comply with US export control laws, both US and non-US companies should immediately flag ZTE as a party subject to Entity List restrictions and shipments scheduled to take place beyond the window of the temporary general license should be expedited to go out before June 30, 2016, or stopped/suspended while ZTE remains on the Entity List. Additionally, if an item is exported during this regulatory limbo, but the license is subsequently revoked, the exporter will be effectively incapable of providing warranty service on that item.
Not only do companies need to exercise extreme caution when transacting with ZTE (to avoid potentially illegal exports, reexports or transfers), but companies must also pay especially close attention to their own export compliance procedures to avoid being the subject of similar BIS action or investigation. Companies exporting or reexporting items "subject to" the EAR should carefully consider the potential application of EAR restrictions, and should avoid engaging in diversion activity. Companies that have utilized ZTE as a supplier, partner, or customer must enhance their due diligence efforts related to export activities and immediately begin implementing additional measures to prevent export control violations. In the wake of this designation, non-US companies should place a hold on their activities with not only the listed ZTE entities, but also with other non-listed entities operating under similar policies and practices - pending the implementation of adequate export compliance measures at those operations.
Numerous additional considerations exist for importers and exporters concerning the extraterritorial application of US law including recent action by US Customs and Border Protection issuing nationwide detention orders for products produced by forced labor in China. Please click here for more information.