Key Notes:

  • Combined penalty of $1.19 billion from Departments of Commerce, Treasury and Justice
  • In addition to monetary penalties, ZTE must hire an unaffiliated third-party export consultant and agree to active audit and compliance requirements
  • While ZTE will be denied export privileges from the United States for seven years under the settlement, this denial has been suspended pending good behavior and continuing cooperation
  • Commerce Secretary Ross: “We are putting the world on notice: the games are over”

On March 7, 2017, Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd., known collectively as “ZTE,” agreed to combined civil and criminal penalties of $1.19 billion for the illegal shipment of telecommunications equipment to Iran and North Korea in violation of the Export Administration Regulations (EAR), the Iranian Transactions and Sanctions Regulations (ITSR) and the International Emergency Economic Powers Act (IEEPA). ZTE is one of the world’s largest manufacturers of telecommunications equipment, and relies heavily on U.S. companies and U.S.-origin goods for components. The civil penalty is the largest ever imposed by the Bureau of Industry and Security at the Department of Commerce (BIS) and the Office of Foreign Assets Control at the Department of the Treasury (OFAC), and the combined penalties are the largest fine and forfeiture ever levied by the U.S. government in an export control case.

This investigation and resulting penalties serve as important reminders to both U.S. and foreign companies that there is a steep price to pay for attempting to circumvent U.S. economic sanctions and export control laws and regulations. A robust compliance program with regular training and auditing is essential, as is a commitment from company officials in supporting compliance, in order to avoid this kind of outcome.

While this investigation was initiated prior to President Trump assuming office, the tone of administration officials in announcing this settlement echoes their campaign promise of more forceful trade enforcement. In announcing the settlement, Commerce Secretary Ross stated, “We are putting the world on notice: the games are over. Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences. Under President Trump’s leadership, we will be aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers.”

Investigation Findings

From January 2010 to about March 2016, ZTE engaged in (1) the exportation, sale or supply, directly or indirectly, of goods from the United States to Iran or the government of Iran; (2) the reexportation of U.S.-origin goods subject to the EAR from a third country with knowledge that the goods were intended specifically for Iran or the government of Iran; and (3) activity that evaded or avoided, attempted and/or conspired to violate, and/or caused violations of the prohibitions set forth in the ITSR.

Specifically, ZTE engaged in at least 251 transactions involving U.S.-origin goods valued at $39,622,972 with Iranian entities. ZTE ordered, procured, shipped, transferred, supplied and/or facilitated or coordinated the delivery or supply of over21,219,092 U.S.-origin goods to Iran. Approximately 274,735 of the U.S.-origin goods reexported or supplied to Iran were controlled and appear on the Department of Commerce’s Commerce Control List (CCL).

BIS also found that ZTE made 283 shipments of U.S.-origin controlled items to North Korea between February 2010 and June 2015, knowing that such shipments violated the EAR. Similar to ZTE’s activities with Iran, the company exported and reexported telecommunications equipment to agents of the North Korea Posts and Telecommunications Co.

According to the findings, ZTE (1) obscured and concealed from U.S. suppliers its intent to reexport the goods to prohibited countries, (2) commingled U.S.-origin goods in packages with foreign-origin goods with the specific goal of concealing U.S.-origin items, (3) used various codenames at different times for Iran to avoid detection, (4) utilized third-party isolation companies effectively controlled by ZTE to serve as procurement and/or end-user intermediaries for U.S.-origin goods specifically destined for Iran, and (5) deleted any references to Iran and Iranian customers in ZTE’s internal communications and documents after the U.S. government agencies opened an investigation.

Internal documents reveal that ZTE and its highest-level leadership were aware that their conduct violated U.S. economic sanctions and export control laws and took measures to conceal their conduct. ZTE was specifically aware that the U.S. government maintained a policy of denial for exports and reexports to Iran. These documents revealed that ZTE believed that obtaining such export and reexport authorizations were practically impossible, and that violations of U.S. law would be “inevitable” if ZTE exported and/or reexported U.S.-origin goods to Iran.

The U.S. government’s findings determined that ZTE began to reexport to Iran in January 2010 and continued to do so until March 2012, when a Reuters news story exposed ZTE’s business activities there. During this time, it exported goods, services and technology to Iran to enhance Iran’s telecommunications infrastructure. Items shipped to Iran included routers, microprocessors and servers controlled under the EAR for national security, encryption, regional security and/or anti-terrorism reasons.

The March 2012 Reuters news story triggered the U.S. government’s investigations into ZTE’s activities. Despite the report and investigation, in November 2013 ZTE resumed its activities with Iran. ZTE’s leadership instituted directives authorizing various divisions of the company to surreptitiously resume business with Iran, including by using a new third-party isolation company to conceal the resumption of prohibited activities. ZTE also formed and operated internally a 13-member “Contract Data Induction Team” that destroyed, removed or sanitized all materials concerning transactions or other activities relating to ZTE’s Iran business after March 2012; deleted on a nightly basis all of the team’s emails to conceal the team’s activities; and required each of the team members to sign a non-disclosure agreement covering the ZTE transactions and activities the team was tasked with hiding. It was not until ZTE had been added to the BIS Entity List in March 2016 that the company informed the U.S. government of its resumption of Iran-related business activities.

Finally, the investigation found that ZTE made knowingly false and misleading representations and statements, and was engaged in an elaborate scheme to prevent disclosure to and affirmatively mislead the U.S. government, by deleting and concealing documents and information from the outside counsel and forensic accounting firm that ZTE had retained with regard to the investigation.

OFAC Settlement Agreement

ZTE agreed to pay a penalty of $100,871,266 as part of its settlement agreement with OFAC. OFAC determined that ZTE engaged for a number of years in a pattern of conduct that sought to evade and circumvent the ITSR, willfully violating U.S. economic sanctions. OFAC deemed ZTE’s conduct as a “multi-year and systemic practice of utilizing third-party companies to surreptitiously supply Iran with a substantial volume of U.S.-origin goods.” ZTE did not make a voluntary self-disclosure of the violations, and OFAC determined that the violations constituted an egregious case as the company’s actions were “developed and approved by the highest levels of its management.”

ZTE also agreed to pay a penalty of $661,000,000 as part of its settlement agreement with BIS, with $300 million suspended during a seven-year probationary period to deter future violations. In addition to the monetary penalty, ZTE agreed to active audit and compliance requirements designed to prevent and detect future violations and a seven-year suspended denial of export privileges that could be quickly activated if any aspect of the settlement agreement is not met by ZTE. ZTE must also hire an unaffiliated third-party consultant with expertise in U.S. export control laws to conduct external audits. Any credible evidence of a potential violation or unlawful transaction uncovered by this auditor must be reported to ZTE’s general counsel and, if necessary, to BIS. The terms of the BIS settlement agreement require ZTE to comply with the OFAC settlement and payment of that civil penalty, and pay the criminal fine and comply with the plea agreement with the Department of Justice.

Department of Justice Settlement Agreement

In its portion of the investigation, the Department of Justice determined that “ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports.” All of this was done with knowledge at the highest levels of management within the company, and, when investigated, “the company repeatedly lied to and misled federal investigators, its own attorneys and internal investigators.” The case in the U.S. District Court for the Northern District of Texas involved criminal counts of (1) conspiracy to unlawfully export goods to Iran, (2) obstruction of justice, and (3) providing false statements to a federal agency. While the plea agreement must be approved by the court, ZTE has agreed to pay $430,488,798 in combined criminal fines and forfeiture for violations of the IEEPA.

Under all of the settlements, ZTE must continue to cooperate with OFAC, BIS and the Department of Justice in ongoing investigations by providing further documents and making witnesses available.

For any U.S. or multinational company, a substantive export compliance program is essential. In response to national security concerns and foreign policy objectives, the U.S. government has promulgated stringent, far-reaching regulations to control exports and enforce economic sanctions. All companies that engage in international transactions are potentially affected by these laws. As this ZTE settlement confirms, penalties for failure to comply can be severe and may result in significant ramifications for companies’ business operations and reputations.