On Monday evening June 18, the U.S. Senate adopted draft legislation in its version of the National Defense Authorization Act for Fiscal Year 2019 (the “2019 Defense Bill”) which would: (i) prevent the U.S. Department of Commerce – Bureau of Industry and Security (“BIS”) from fulfilling its agreement to suspend current export controls applicable to Zhongxing Telecommunications Equipment Corporation of Shenzen, China and ZTE Kangxun Telecommunications Ltd. of Hi-New Shenzhen, China (collectively “ZTE”), and (ii) expand existing language in the 2019 Defense Bill to prohibit all U.S. government agencies from contracting with ZTE. The Senate approved this bill by a vote of 85-10. After last night’s vote, it has been reported that ZTE shares have dropped more than 25%. The U.S. House and Senate will still need to reconcile the differences in their versions of the 2019 Defense Bill before they send it to the President, but if they can do so while retaining enough votes to override a Presidential veto then BIS will be unable to remove ZTE from the Denied Persons list and ZTE will continue to be subject to export and re-export prohibitions in transactions involving U.S. origin goods, software and technology.
This legislation was predated by an investigation culminating in March of 2017 when several U.S. government agencies found that ZTE violated various U.S. export controls and trade sanctions by illegally re-exporting controlled U.S.-origin telecommunications equipment to Iran and other prohibited destinations. As a result of these findings, BIS placed ZTE on its “Denied Persons List” which prohibits any export or re-export of U.S. origin items to ZTE. However, BIS and ZTE entered into a settlement agreement whereby BIS agreed to suspend ZTE’s Denied Persons designation conditioned upon ZTE’s payment of over $850 million in penalties and agreement to take additional compliance measures.
Then, in April of 2018, BIS reimposed ZTE’s Denied Persons designation after determining that ZTE had breached the terms of its settlement agreement. Shortly thereafter, in May of 2018, the U.S. House of Representatives adopted its version of the 2019 Defense Bill and included a provision to prohibit only the U.S. Department of Defense from contracting with ZTE. While the U.S. Senate was preparing its most recent version of the 2019 Defense Bill, BIS reached another agreement with ZTE on June 7, 2018 and tentatively agreed to re-suspend ZTE’s Denied Persons designation in exchange for ZTE’s payment of an additional $1 billion in penalties and implementation of even stricter compliance measures. This re-suspension has not yet taken effect and BIS’s announcement did not commit to a re-suspension date. BIS will be unable to fulfill this agreement if the Senate’s version of the 2019 Defense Bill becomes law.
In any event, for the time being, persons considering transactions with ZTE should be aware that ZTE currently remains listed on the Denied Persons List and subject to the export and re-export restrictions described above. The U.S. Export Controls and Trade Sanctions team at Husch Blackwell will continue to closely monitor future legislation and BIS announcements. For more information concerning U.S. export controls, please contact Cortney Morgan or Grant Leach.