On June 7, 2018, the US Department of Commerce announced that Zhongxing Telecommunications Equipment Corporation (“ZTE Corporation”) and ZTE Kangxun Telecommunications Ltd. (“ZTE Kangxun” and, collectively with ZTE Corporation, “ZTE”) had agreed to additional penalties and compliance measures to secure their removal from the Bureau of Industry and Security (“BIS”) Denied Persons List and regain access to US products and components. The new agreement imposes significant additional fines on ZTE, requires the company to carry out management changes, and institutes strict compliance requirements. Importantly, ZTE has not yet been removed from the Denied Persons List and remains subject to the existing restrictions until certain steps are taken. Nevertheless, the agreement sets out a path forward for ZTE to soon resume operations that had otherwise stalled due to the lack of access to US items.

According to the Department of Commerce’s press release, under the new agreement ZTE will be removed from the Denied Persons List after paying an additional fine of USD 1 billion and placing USD 400 million in escrow as suspended penalty money. ZTE must also retain and pay for a special compliance team that is selected by and answerable to BIS for ten years as it continues to monitor ZTE’s compliance with US export controls. Further, ZTE is required to replace the entire board of directors and senior executive leadership of both ZTE Corporation and ZTE Kangzun within thirty days. Finally, BIS will impose another denial order that is suspended for ten years but could be activated in the future if ZTE commits additional export control violations. BIS described these measures as the most severe penalties BIS has ever imposed on a company.

As described in more detail here, the US Government’s enforcement action targeting ZTE first garnered attention in March 2016 when ZTE was added to BIS’s Entity List and subjected to strict export licensing requirements. ZTE eventually entered into a settlement agreement in March 2017, and this agreement provided for a combined civil and criminal penalty and forfeiture of USD 1.19 billion. The agreement also provided for a seven-year suspended denial order that could be activated by BIS if the agreement’s terms were not met and/or if ZTE committed additional violations of the EAR. BIS activated this denial order and placed ZTE on the Denied Persons List in April 2018 after determining that ZTE had made false statements before, during, and after the settlement agreement negotiations relating to senior employee disciplinary actions. More details about the activation of this denial order are available here.

As a result of this denial order, ZTE was essentially cut off from sourcing the US parts and components necessary to manufacture its products and reportedly was forced to cease operations. On May 13, 2018, after discussing the matter with the Chinese Government, President Trump tweeted that he had instructed the Commerce Department to seek a deal with ZTE to allow the company to resume business. The agreement announced on June 7 is the result of that instruction.