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July 17, 2018

Commerce Department Lifts ZTE Denial Order

By: Mike Wilson

The U.S. Department of Commerce, Bureau of Industry and Security (BIS) announced on July 11, 2018 that it had reached an agreement with Chinese telecommunications giant Zhongxing Telecommunications Equipment (ZTE) Corporation of Shenzen, China to lift BIS’s previous order denying ZTE’s export privileges.  This agreement comes just weeks after ZTE announced that it was halting operations as a result of BIS’s activation of the denial order.


The Trump Administration reconsidered its position following requests from the Chinese government and after ZTE agreed to replace its board of directors and appointed a new chairman.  That said, U.S. lawmakers subsequently introduced bipartisan legislation aiming to restore penalties and prohibit U.S. government agencies from purchasing or leasing equipment from ZTE.
Below is a brief examination of the events leading to the current agreement.


Penalties Imposed and Initial Granting of Suspended Denial Order
In March 2017, ZTE agreed to a suspended seven-year denial of export privileges – along with $1.19 billion in penalties and forfeitures – after illegally shipping telecommunications equipment to Iran and North Korea in violation of U.S. economic sanctions.  As part of the settlement, ZTE described self-initiated employee disciplinary actions it claimed it had taken, and also identified additional disciplinary actions (including issuance of letters of reprimand to employees involved in the illegal actions) that ZTE would take in the near future to send a strong message to its employees about the company’s commitment to compliance. 


In July 2017, ZTE sent BIS a status update to confirm that these disciplinary measures had indeed been implemented against employees who had either signed an internal ZTE memorandum discussing how to evade U.S. export controls, were part of the evasion scheme, had otherwise internally discussed means to continue evading U.S. law, or had been involved in extensive efforts to destroy or conceal evidence of the evasion scheme.


BIS Activates Denial Order Against ZTE
In February 2018, BIS requested that ZTE provide a status report on disciplinary actions that were to be taken against these employees, including information about current titles, positions, responsibilities, and pay and bonus information.  BIS subsequently learned that the letters of reprimand had not actually been issued, and in fact were not issued until after BIS had requested the new status report.  Moreover, BIS learned that all but one of the employees received full bonus payments.


As a result of the false statements ZTE made both during and after the settlement negotiations, in April 2018 BIS activated the previously suspended denial order, thus prohibiting ZTE from engaging in any transaction involving any item exported, or to be exported, from the U.S.  The order also prohibited other companies and individuals from exporting on ZTE’s behalf, and from facilitating ZTE’s acquisition of any item subject to the Export Administration Regulations.  Shortly thereafter, ZTE announced that it was halting major operating activities and petitioned BIS for a suspension of the denial order.


New BIS Agreement with ZTE
BIS and ZTE recently reached an agreement to once again suspend the denial order.  After ZTE replaced its board of directors and appointed a new chairman, BIS and ZTE executed an escrow agreement requiring ZTE to pay $400 million into escrow.  ZTE then made the escrow deposit, and on July 13, 2018, BIS issued a notice lifting the previous denial order.  BIS has also instituted a new 10-year suspended denial order against ZTE as part of the parties’ settlement agreement.  A monitor will be selected to oversee ZTE’s compliance with U.S. export controls and sanctions compliance.


The Commerce Department has stated that “the ZTE settlement represents the toughest penalty and strictest compliance regime the Department has ever imposed in such a case.  It will deter future bad actors and ensure the Department is able to protect the United States from those that would do us harm.”


While the denial order against ZTE is being lifted, it remains unclear how this situation will play out given the recent introduction of bipartisan legislation in the U.S. Senate seeking to reimpose penalties and prohibit U.S. government agencies from transacting with ZTE.  We will continue to follow additional developments as they occur.