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Exports to Major Chinese Telecom Company Banned

Monday, April 16, 2018

The U.S. announced April 16 a ban on exports to China’s second-largest telecommunications firm, the latest penalty against that company for violating U.S. export controls.

The Department of Commerce placed Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. (collectively, ZTE) on the Entity List in March 2016 following its determination that they were involved in a scheme to establish, control, and use a series of shell companies to illicitly reexport controlled items to Iran. However, the DOC subsequently suspended the associated restrictions on exports to ZTE of goods subject to the Export Administration Regulations until March 2017, when ZTE was removed from the Entity List following an agreement with the DOC that resulted in a $1.19 billion penalty as well as active audit and compliance requirements designed to prevent and detect future violations.

The agreement also provided for a seven-year suspended denial of export privileges, which the DOC now states that it is lifting because ZTE was found to have made false statements regarding employee discipline. “ZTE made false statements to the U.S. government when [it was] originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation.” said Secretary of Commerce Wilbur Ross. “Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”

As a result, effective immediately and extending through March 13, 2025, the following are prohibited with respect to ZTE.

- exports or reexports to or on behalf of ZTE of any item subject to the EAR

- any action that facilitates the acquisition or attempted acquisition by ZTE of the ownership, possession, or control of any item subject to the EAR that has been or will be exported from the U.S., including financing or other support activities related to a transaction whereby ZTE acquires or attempts to acquire such ownership, possession, or control

- any action to acquire from or facilitate the acquisition or attempted acquisition from ZTE any item subject to the EAR that has been exported from the U.S.

- obtaining from ZTE in the U.S. any item subject to the EAR with knowledge or reason to know that the item will be, or is intended to be, exported from the U.S.

- engaging in any transaction to (a) service any item subject to the EAR that has been or will be exported from the U.S. and that is owned, possessed, or controlled by ZTE or (b) service any item, of whatever origin, that is owned, possessed, or controlled by ZTE if such service involves the use of any item subject to the EAR that has been or will be exported from the U.S. (servicing means installation, maintenance, repair, modification, or testing)

To ensure compliance with this broad export ban, companies that have conducted business with ZTE should consider implementing a comprehensive compliance response plan. Among other things, this plan should identify and prohibit any potential export activity with ZTE, including shipments (either direct or through third parties), release of technical data or software, and access to support sites, and address how to effectively communicate within and outside the company on ZTE business and related questions.

For more information, please contact ST&R’s Export Controls and Sanctions Practice lead Steven Brotherton at (415) 490-1430.

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