China: Chinese Telecom Giant ZTE Makes History With Guilty Plea And $1.19 Billion Settlement For Sending US Export-Controlled Goods To Iran And North Korea

Keywords: Chinese, Telecom, ZTE, Commerce Department

Following a five-year investigation and a scandal that threatened the loss of its supply chain, China's Zhongxing Telecommunications Equipment Corporation, its subsidiaries and affiliates (collectively "ZTE") have concluded settlement agreements with the US Departments of Justice, Commerce, and the Treasury. In total, ZTE agreed to combined civil and criminal penalties of $1.19 billion and pled guilty to shipping US-origin items illegally to Iran and North Korea, obstructing justice and making a material false statement. As part of the settlement, ZTE will remain under probation for an additional seven-year period and submit itself to active auditing and monitoring by the US government.

The settlement follows a key turning point in the case last year when the Commerce Department took a bold and aggressive action to blacklist ZTE, one of China's largest companies and one of the largest telecommunications equipment firms in the world. Faced with a crippling loss of its supply chain, ZTE was forced to negotiate with US enforcement officials regarding allegations of an elaborate and far-reaching diversion scheme involving company management. The case is just the latest example of the US government's intention to pursue and penalize both US and non-US companies that violate US export control and sanctions laws. While the case is noteworthy for both the nature of the conduct and the sheer size of the penalties involved, it also conveys important lessons for the board and management of any company that wishes to avoid a similar fate.


According to ZTE's settlement agreements, over the course of more than six years, ZTE exported or reexported nearly $40 million worth of US-origin goods through China to Iran in knowing violation of US export control and sanctions laws against those countries. In addition, the company also made hundreds of shipments of controlled goods to North Korea in violation of export control laws. ZTE's practices were specifically designed to evade these laws through the use of third-party "isolation companies," were approved by the highest levels of company management and continued in secret even while the company was under investigation—a trifecta of damning actions that led to the record penalty imposed.

As ZTE bid on and secured contracts worth hundreds of millions of dollars to install cellular and landline network infrastructure in Iran, it developed an elaborate system to fulfill those contracts using US-origin items, including dual-use goods controlled by the US government for national security and anti-terrorism reasons. This evasive system included:

  • Importing US-origin goods into China with the purpose of reexporting them to Iran;
  • Using third-party "isolation companies," including a company called Beijing 8 Star, to serve as parties to contracts and to be responsible for supplying the US-origin goods while ZTE itself effectively controlled these companies throughout the process; and
  • Removing logos and other markings from shipments containing the goods and comingling them with foreign-origin goods in an effort to conceal them and evade detection.

Following press coverage in 2012 of the company's business dealings in Iran and alleged violation of US sanctions, ZTE temporarily stopped its business dealings with Iran. The coverage prompted a US government investigation into the company's dealings in Iran. Although ZTE informed the US government that it was winding down operations, leaders at the highest levels of the company decided to resume the company's business dealings with Iran, including its efforts to divert US goods to the country.

ZTE took several steps to conceal its new procurement campaign from investigators. The company sought and used a "new, more capable third-party" to serve as the isolation company in the scheme. ZTE also assembled a team of IT employees to engage in a project to "alter, process, sanitize, and/or remove references to Iran in the company's internal databases" and then had the IT team delete their emails related to the project. In addition, ZTE apparently deleted and concealed records from, and otherwise provided "incomplete and/or otherwise altered information" to, outside counsel and forensic accountants retained in the investigation, knowing that such information would eventually be shared with the US government.

In 2016, the Commerce Department placed ZTE on the Entity List, thereby prohibiting all third parties from trading in goods, software and technology originating in the United States or containing more than de minimis US content. This prohibition immediately threatened to cut off ZTE from its suppliers, prompting the Chinese company to enter into settlement discussions with the US government.

Lessons Learned

The sheer size of the penalties against ZTE has attracted the attention of companies around the world and sends a message about the seriousness with which the US government will pursue both US and non-US companies that violate its export control and sanctions laws. But the case also holds broader lessens for the boards and management of any company that wishes to avoid ZTE's fate.

Enforcement Focus on Diversion, Transshipment and Illicit Procurement. The conduct at the heart of the case highlights a high-priority focus for US enforcement officials—the use of procurement agents and transshipment routes to divert goods to prohibited countries and end users/end uses. As the case record demonstrates, ZTE's scheme arose from its need to procure US export-controlled components in order to fulfill its contracts with Iran, as well as a belief that it could evade US law through schemes to conceal the actual intended destination and end user. Significant US government resources are focused on evaluating and monitoring customs and export declarations, parties to the transactions, end-user and end-use information and other risk factors. Indeed, the lengths to which ZTE went appear to reflect a recognition of this enforcement focus and an elaborate yet ultimately failed effort to evade scrutiny.

Extraterritorial Reach and Leverage. The case reflects the extensive reach of the US government over non-US parties that deal in goods and technology with a US nexus and the overlapping regulatory regimes governing that activity. Many non-US companies may wonder why ZTE, a non-US company, would concede US jurisdiction and settle these charges with the US government at all. When the Commerce Department designated the company on the Entity List in 2016, it effectively made it illegal for third parties, whether US or non-US, to provide critical US parts, components and related software and technology to ZTE. In addition, US banks were prohibited from clearing dollar transactions for ZTE. The threatened loss of its supply chain and dollar payments brought ZTE quickly to the negotiating table to deal with the US government and begin a process that ultimately led to this extraordinary settlement.

Aggravating Factors. The case also offers an important illustration of the aggravating factors that exacerbated ZTE's penalties and treatment in the case with respect to both civil and criminal liability. With respect to the civil penalties, both the Commerce and Treasury Departments maintain enforcement guidelines under which the primary drivers of any penalty amount are the number and value of the violative transactions, whether the violations were voluntarily self-disclosed to the agencies and whether the case involves certain aggravating factors that make it "egregious." In determining whether a particular case is "egregious," both agencies give substantial weight to (1) the willfulness or recklessness of the conduct, (2) senior management's awareness of the conduct at issue, (3) the harm to sanctions programs' objectives and (4) the individual characteristics of the party that committed the violation. In this case, the facts as publicly reported clearly supported a determination that the civil violation was "egregious," and indeed there were referrals to the Justice Department for parallel criminal prosecution.

Multi-Agency Investigations and Enforcement. ZTE was pursued aggressively over a five-year period, as multiple US agencies investigated. The case reflects the significant investigative resources that the US government brings to bear in these matters. Over the course of five years, the joint investigation involved investigative agents from the Departments of Justice, Homeland Security, Commerce, and the Treasury, as well as from the FBI. The multi-agency settlement drove higher penalties in this case. ZTE had to settle with not just one agency but three—$661 million (Commerce), $100 million (Treasury) and $430 million (Justice)—thus compounding the impact of its conduct.

Management and Board Governance Considerations. As with other notorious cases, perhaps the most significant lesson of this case relates to the critical impact that management and boards can have on the ultimate outcome of a case when violations are discovered or suspected. Much of the narrative in the settlement documents focuses not just on ZTE's initial diversion scheme or management's involvement in that scheme but on the company's subsequent cover-up (including misleading its own outside counsel and advisors) when it became clear that the US government was investigating the matter.

Rather than taking steps immediately to bring ZTE's conduct into compliance, management's elaborate effort to conceal was ultimately futile and in the end involved an expensive and years-long campaign that drained significant resources and guaranteed harsher treatment. The initial decisions a company makes in response to the discovery of violations, including those involving its own management, regarding whether, how and in what manner to manage an investigation and disclose violations are critical. Companies that wish to avoid ZTE's fate must be prepared to protect themselves by having in place appropriate and robust governance mechanisms, including appropriate board oversight and a plan to ensure independent investigation of potentially significant violations.

Originally published on 10 March 2017

Visit us at

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2017. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions