This month, a combined settlement was reached with one of China's biggest manufacturers of telecom equipment, Zhongxing Telecommunications Ltd. (ZTE). The settlement consists of a combined USD 1.19 billion fine, with ZTE's plea agreement still waiting for court approval. The overall settlement includes:
- a guilty plea of ZTE and a USD 430,488,798 fine payable to the US Department of Justice (DOJ) for conspiring to violate the US International Emergency Economic Powers Act (IEEPA), obstruction of justice and making material false statements;
- a fine of nearly USD 101 million for 251 violations of the US-Iranian Transactions and Sanctions Regulations (ITSR) payable to the Office of Foreign Assets Control (OFAC) of the US Department of Treasury; and
- a total fine of USD 661 million for violations of the US Export Administration Regulations (EAR) and the ITSR imposed by the Bureau of Industry and Security (BIS) of the US Department of Commerce. An interesting detail is that ZTE agreed to pay an additional amount of USD 300 million to BIS if it commits any violations over the next seven years.
In recent years, the number and severity of enforcement actions in economic sanctions and export control cases have grown. If the plea agreement is approved by the federal judge, this settlement is one of the largest settlement amounts ever in a US export control case. The settlement provides another clear example of the broad extraterritorial scope of US economic sanctions and export controls. Specifically, non-US companies that export or re-export US-origin goods should be aware that they are subject to US export control laws in relation to those exports or re-exports.
ZTE allegedly shipped telecommunications equipment to Iran for several years. ZTE's highest level management team approved, developed and implemented a company-wide plan, and used that plan to allow third-party companies to conceal and facilitate ZTE's business with Iran. The third-party companies provided a pass-through and buffer entity for shipments of US-origin goods destined for Iran and at the same time obscured ZTE's involvement with Iran and reduced the risks of detection by the US authorities. The shipments to Iran included US-origin goods controlled for anti-terrorism, national security, regional stability and encryption item purposes.
In 2012, a media outlet published a report alleging that ZTE had signed a contract with a telecommunications company in Iran. According to OFAC, ZTE learned shortly afterwards that the US government was investigating the company's business dealings with Iran as a result of this publication. According to the DOJ, after the publication ZTE communicated more than once to the US government that it had stopped its Iran-related activities and therefore was no longer violating US economic sanctions and export control laws. However, ZTE's highest level management team allegedly decided to resume trade with Iran, and thus, according to the authorities involved, wilfully ignored the broad scope of US economic sanctions and export control laws. This stopped last year when BIS suspended the export privileges of ZTE by adding the company to the Entity List. Shortly afterwards, ZTE not only destroyed all material evidence, but also modified information that would have shown that it was continuing to pursue trade with Iran. According to BIS, ZTE "sanitised all materials" and asked employees involved to sign non-disclosure agreements and keep the information related to exports to Iran of US-origin goods confidential.
For more information regarding the conduct that led to the apparent violations, see the Settlement Agreement between OFAC and ZTE here and the plea agreement of the DOJ here.
Announcing the settlement, the Secretary Ross of the BIS used firm language to reflect its position on enforcement: "We are putting the world on notice: the games are over. Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences. Under President Trump's leadership, we will be aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers."
The DOJ, OFAC and BIS have been aggressively enforcing US economic sanctions and export control laws in recent years. Although ZTE was already under investigation prior to President Trump taking office, the statement made by Secretary Ross emphasises the apparent willingness of the Trump administration to adopt a similar enforcement approach.
The high settlement amount is mainly the result of the extraordinary facts and circumstances of this matter, including the sophisticated scheme used by ZTE to circumvent US economic sanctions, the alleged level of noncompliance, its false statements to the US government relating to the continuation of its business with Iran, and its obstruction of the investigation by the US government. Although these circumstances make this an exceptional case, it does confirm the broad scope of US economic sanctions and export control laws. Therefore, non-US companies that export or re-export US-origin items should be aware of the broad scope of US jurisdiction in relation to those transactions in order to avoid any potential liability.
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