Ending a five-year investigation, ZTE Corp. (“ZTE”), the second-largest producer of telecommunications equipment in China, entered into a plea agreement with the US Department of Justice (“DOJ”) and settlement agreements with the US Department of Commerce’s Bureau of Industry (“BIS”) and the US Department of Treasury’s Office of Foreign Assets Control (“OFAC”), for violations of US sanctions against Iran and US export controls, making false statements to the US government, and obstruction of justice (complete plea/settlement agreements are available at the following links: DOJ, BIS and OFAC). If the criminal plea with the DOJ is approved by a federal judge, the combined $1.19 billion in penalties would be the largest fine and forfeiture ever levied by the US government in an export control case.
Despite the hefty penalties, ZTE avoided a denial of export privileges which, among other things, would have prohibited ZTE from sourcing US components. BIS placed ZTE on the Entity List on March 8, 2016 (81 FR 12004), effectively denying ZTE’s export privileges for a limited time, but then restored ZTE’s export privileges, using a series of temporary licenses. The denial of export privileges could have severely crippled the company, which is highly-dependent on US-origin chips and other components for its phones and other products.
In a stipulated statement of facts filed with the court, the company has acknowledged that senior managers, including ZTE’s General Counsel, concealed shipments of US components destined for Iran via “isolation companies” designed to insulate ZTE from civil or criminal liability. It was also stipulated that these shipments continued even after the DOJ began its 2012 investigation into ZTE’s conduct. ZTE also acknowledged concealing shipments from its external legal counsel, thereby causing counsel to unknowingly present false information to the DOJ. ZTE further acknowledged that it formed an internal unit to hide records of the Iran shipments from an outside forensic accounting firm hired at the behest of outside counsel to investigate the matter.
As part of the settlement agreement with BIS and the plea agreement with the DOJ, ZTE, among other things, is required to (i) appoint an independent compliance auditor/monitor who will assess and report to the US government ZTE’s compliance efforts as well as its adherence to the terms of the plea agreement and with US sanctions and export controls, (ii) submit annual audit reports on ZTE’s compliance with US export controls for the next six years, (iii) provide training on US export controls to ZTE’s senior management, and (iv) implement a “best-in-class” export compliance program for ZTE.
The multi-year and multi-agency investigations of ZTE demonstrate that the US government is committed to enforcement of US export controls and sanctions. That includes administrative and criminal enforcement in the context of activities involving non-US companies operating primarily outside the United States.