On July 13, 2018, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) issued an order (“Termination Order”) immediately terminating the denial order issued on April 15, 2018 against Zhongxing Telecommunications Equipment Corporation (“ZTE Corporation”) and ZTE Kangxun Telecommunications Ltd. (“ZTE Kangxun” and, collectively, “ZTE”) that had prohibited dealings with ZTE involving items subject to US jurisdiction. ZTE has been removed from the Denied Persons List, and exporters and reexporters are no longer generally prohibited from supplying to ZTE items subject to US jurisdiction, including parts and components, or servicing such items for ZTE.
The Termination Order is the latest development in BIS’s long-running enforcement case against ZTE, China’s second-largest producer of telecommunications equipment and a major customer for US chips and components. The matter first attracted public attention in March 2016 when ZTE Corporation, ZTE Kangxun, and two other ZTE entities (Beijing 8-Star and ZTE Parsian) were added to the BIS Entity List and subjected to a strict licensing requirement for all items subject to US jurisdiction. Transactions involving ZTE Corporation and ZTE Kangxun only were authorized under a series of temporary licenses to minimize the crippling effects of the action. In March 2017, ZTE finally reached a $1.19 billion combined civil and criminal settlement with BIS, OFAC, and the Department of Justice subject to a 7-year suspended denial order. Then, in April 2018, the US Government activated that suspended denial order based on apparent false statements made by ZTE to BIS before and after the agreement was reached. ZTE essentially became cut off from sourcing the US parts and components necessary to manufacture its products and was reportedly forced to cease operations.
In June 2018, following discussions between President Trump and the Chinese Government, BIS announced a superseding settlement agreement (previously described here) that anticipated removal of the denial order on ZTE in exchange for additional monetary penalties and heightened compliance measures. BIS also issued limited service authorizations, including allowing continued support of existing networks and equipment and for ZTE phones (as previously described here) while compliance with the superseding settlement agreement was pending.
A Commerce Department press release explains that the Termination Order was issued after ZTE fulfilled its obligations to pay a $1 billion penalty and to place $400 million in escrow pursuant to the superseding settlement agreement. These amounts are in addition to the $361 million in penalties ZTE has already paid to BIS under the original March 2017 settlement agreement, and together these payments represent the largest civil penalty for violations of US export controls. The superseding settlement agreement also requires that ZTE retain an external compliance coordinator answerable to BIS for a period of ten years to monitor and report on ZTE’s compliance. If there is evidence of further noncompliance by ZTE during this ten year period, ZTE will forfeit the funds placed in escrow and BIS could activate another suspended denial order for a ten-year period.
US Commerce Secretary Wilbur Ross stated that the ten-year suspended denial order, the $400 million in escrow, and the new compliance coordinator will allow the US Department of Commerce to effectively monitor and enforce the superseding settlement agreement with ZTE in furtherance of US national security interests. According to the Commerce Department, such measures set a new precedent for monitoring to ensure compliance with US laws.
