On April 15, 2018, the Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a denial order against ZTE Corporation and ZTE Kangxun Telecommunications Ltd. (collectively “ZTE”), effectively banning U.S. companies from providing components to ZTE because the company had failed to comply with the terms of a disciplinary agreement reached in March 2017 arising from violations of U.S. export control restrictions against Iran and North Korea. It is estimated that U.S. companies provide nearly 25-30 percent of the components used in ZTE products. ZTE’s U.S. subsidiary advertises that it has been ranked by independent industry analysts as the fourth-largest supplier of mobile devices in the U.S. overall and second-largest supplier of prepaid devices.
As previously reported here, in March 2016, BIS implemented export restrictions after corporate documents revealed an alleged failure to comply with U.S. sanctions against Iran. In March 2017, ZTE entered into a settlement agreement with BIS and the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) for a combined civil and criminal penalty and forfeiture of $1.19 billion relating to ZTE’s practice of illegally shipping telecommunications equipment to Iran and North Korea, making false statements and obstructing justice by failing to disclose the transactions to and misleading the U.S. government.
Under the terms of the settlement agreement, $300 million of the civil penalty and a denial of export privileges were suspended for a probationary seven-year period subject to several conditions. Among those conditions, ZTE agreed to take disciplinary action against employees identified as participating in the illegal activity. After conducting status follow ups and requesting letters of assurance from the Company, BIS determined that ZTE failed to impose the disciplinary action and many of the employees had received their full bonuses. Thus, BIS determined that ZTE had continued its pattern of deception and practice of making false statements to the U.S. government. Secretary of Commerce, Wilbur L. Ross, Jr. issued a statement announcing activation of the denial order stating “ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”
The Denial Order prohibits U.S. and non-U.S. persons from exporting or re-exporting products or technology subject to the Export Administration Regulations (EAR), directly or indirectly, to ZTE. Non-U.S. companies are now prohibited from engaging in the following activities: (1) exporting or re-exporting items subject to the EAR to ZTE (this would include U.S.-origin items or technology re-exported to ZTE from a foreign country or potentially incorporated into a foreign manufactured product and then re-exported to ZTE); (2) facilitating ZTE’s receipt of such products; or (3) shipping goods or software to be used to service any ZTE-owned or controlled products that are subject to the EAR. This denial of export privileges took effect immediately and will continue for seven years until March 13, 2025.
Companies engaged in transactions with ZTE must closely review any transactions to ensure that they are not supplying goods or technology subject to the EAR to ZTE, directly or indirectly. Should you have any questions related to this recent denial order or for additional guidance on navigating U.S. export control and sanctions programs, contact Cortney Morgan or Grant Leach.