A ban on exports to a major Chinese telecommunications company could be lifted soon after the Department of Commerce announced that the company has agreed to a significant fine and extensive compliance requirements.

In March 2016 the Bureau of Industry and Security placed Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. (collectively, ZTE) on the Entity List because they (a) were involved in a multi-year conspiracy to supply, build, and operate telecommunications networks in Iran using U.S.-origin equipment in violation of the U.S. trade embargo and (b) committed hundreds of U.S. sanctions violations involving the shipment of telecommunications equipment to North Korea. BIS 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.

However, BIS determined that ZTE violated that agreement by making false statements about the steps it took to discipline employees concerning the original violations and in April 2018 imposed a seven-year ban on exports to ZTE. The company asked BIS to lift the ban, which apparently caused it to cease major operations, and Beijing reiterated the request in trade talks with U.S. officials. Unexpectedly, President Trump agreed to the request, explaining that ban would cause the loss of “too many jobs in China” and negatively affect the U.S. suppliers from which ZTE purchases a “big percentage of individual parts” for its products.

On June 7 DOC announced that the export ban will be lifted once ZTE pays $1 billion and places an additional $400 million in suspended penalty money in escrow. Currently prohibited shipments to ZTE may not resume until this takes place.

In addition, the settlement agreement includes the following components.

- ZTE will be required to retain for ten years a team of special compliance coordinators selected by and answerable to BIS who will monitor ZTE’s compliance with U.S. export control laws on a real-time basis.

- ZTE must replace the entire board of directors and senior leadership for both entities.

- A ten-year denial of export privileges will be suspended but can be activated in the event of additional violations.

DOC states that this settlement sets a new precedent for monitoring to assure compliance with U.S. law, noting that embedding compliance officers into the company “vastly improves the speed with which the Department of Commerce can detect and deal with any violations.”

President Trump’s decision to lift the export ban on ZTE has been met with opposition by members of Congress on both sides of the aisle and legislation is under consideration in the House and Senate that would limit his ability to take such action.

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

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