March 22, 2017
By Anna Sayre, Legal Content Writer SanctionsAlert.com

On March 7, three U.S. regulators – the Department of Treasury’s Office of Foreign Assets Control (OFAC), the Department of Commerce’s Bureau of Industry and Security (BIS), and the Department of Justice (DOJ) – entered into a coordinated settlement with Zhongxing Telecommunications Equipment Corporation (ZTE), in which the company agreed to a record-breaking combined $1.19 billion in civil and criminal penalties for knowingly shipping illegal telecommunications equipment to Iran and North Korea in violation of U.S. sanctions law. ZTE, a Chinese publicly traded telecommunications manufacturer, is the largest in China and the fourth largest telecommunications manufacturer in the world.

The fines imposed by the regulators represent the largest penalty ever imposed by BIS, and the largest ever imposed by OFAC against a non-financial entity. If the criminal plea is accepted bya federal judge, it will be the largest criminal fine by the DOJ in connection with an IEEPA prosecution.

Details of Coordinated Settlement

Under the settlement, the Chinese cell phone manufacturer has agreed to the following:

  • to pay a civil penalty of $661 million to BIS, with $300 million suspended during a seven-year probationary period,for violating the Export Administration Regulations (EAR);
  • to pay a civil penalty of $100.8 million to OFAC for violating the Iranian Transactions and Sanctions Regulations (ITSR); and
  • to plead guilty as well as(pending approval by the courts) to pay a criminal penalty of over $430 million to the DOJ ($286,992,532 fine and $143,496,266 in criminal forfeiture) for, among other things,conspiring to violate the International Emergency Economic Powers Act (IEEPA).

In addition, ZTE has also agreed to active monitoring and compliance requirements designed to prevent and detect future violations. If ZTE violates any aspect of the agreement, it could trigger a seven-year suspended denial of export privileges for the company.

Adrienne Braumiller, Partner at Braumiller Law Group in Dallas, Texas, who specializes in international trade and export controls, reminds us that, “we should not assume large companies – like ZTE – have robust procedures or internal control programs. Regardless of the company’s size, U.S. suppliers must continue to exercise due diligence in their day-to-day activities, request customers to sign end-user or end-use certificates (if appropriate), and incorporate flow-down export control clauses in their contracts in order to protect their companies.”

US-Parts

The case against the Chinese tech giant centered on allegations that ZTE violated US economic sanctions and export controls by supplying electronics products to Iran and North Korea that had “US-origin components”.

According to case documents, for a period of almost six years, ZTE obtained US-origin items – including dual-use goods on the Department of Commerce’s Commerce Control List (CCL) – incorporated some of those items into ZTE equipment and shipped the ZTE equipment to customers in Iran and/or North Korea.

This seemingly tenuous connection to the US market is enough to trigger US extraterritorial jurisdiction.

‘Long Arm’

The unusually ‘long-arm’ of US sanctions and export regulations stems from the general trade prohibitions that forbid any exports of goods, services, software, and technical information to Iran, North Korea or any other US embargoed location if it is:

  • directly from the US;
  • by a US person (whether in the U.S. or outside the U.S.); or in this case,
  • from anyone, including non-U.S. companies, as long as the items originated in the U.S. or contained specified levels of U.S.-origin content.

For non-U.S. companies, the third type of trade prohibition is crucial and, oftentimes, overlooked. In its broad and ever-expanding exercise of extraterritorial jurisdiction, U.S.regulators are able to apply impose U.S. sanctions and export control regulations to trades made by non-U.S. entities based merely on the fact that the traded item was created in the U.S. or contains some level of content that was created in the U.S. This one connection is sufficient to subject an otherwise foreign company to U.S. jurisdiction, and as a consequence, the large fines that may result.

It should be noted, however, that ZTE’s alleged violations were greatly exacerbated by ZTE’s failure to cooperate with U.S. authorities. ZTE sometimes intentionally devised elaborate plans to hide illegal activities from U.S. authorities and mislead enforcement officials.Though cooperation would not exonerate ZTE’s actions, its blatant flouting of U.S. law contributed to its ultimate penalty.

Bryan Early, Associate Professor of Political Science at the University of Albany in New York, says that, though “the ZTE case is a notable achievement in holding a major sanctions-busting firm accountable for its violations, the U.S. Government will still continue to face a pervasive problem of U.S. companies seeking to profit from undercutting sanctions.”Professor Early adds that, “if anything, the ZTE case suggests the U.S. Government should be investing greater amounts of resources in both industry outreach and its enforcement efforts in this area.”

Indeed, this is not the first time ZTE felt the reach of U.S. export controls. Earlier, in March 2016, ZTE was also found to violate U.S. sanctions by selling U.S.-made goods to Iran. Allegedly, the telecommunications provider used shell companies in China and Iran to illicitly re-export controlled items to Iran in violation of U.S. export control laws. As a result, ZTE was temporarily blocked from buying any technology from U.S. companies without a special license from the Department of Commerce. A few weeks later, the U.S. government temporarily lifted the restrictions.

“Putting the World on Notice”

According to Acting Assistant Attorney General McCord,“ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports…ZTE then repeatedly lied to and misled federal investigators, its own attorneys and internal investigators. Its actions were egregious and warranted a significant penalty,” said McCord. “Companies that violate these laws – including foreign companies – will be investigated and held to answer for their actions.”

Secretary of Commerce, Wilbur J Ross, reiterated the sentiments of the DOJ by saying, “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,” said Secretary Ross. “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.”

US authorities have made it quite clear that they are very serious about enforcing sanctions and export controls to the full extent of their extraterritorial application.

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