ZTE Pleads Guilty to Criminal Charges and Settles Civil Charges with BIS and OFAC

(Source: Thomsen & Burke, LLP)

Authors: Roszel C. Thomsen, Esq., Roz@t-b.com; Antoinette D. Paytas, Esq., Toni@t-b.com; and Maher M. Shomali, Esq., maher@t-b.com, Wesley A. Demory, Esq. All of Thomsen & Burke, LLP.

Earlier today, ZTE Corporation and the Departments of Justice, Commerce and Treasury announced a global settlement of charges that ZTE violated the International Emergency Economic Powers Act (IEEPA), the Export Administration Regulations (EAR) and the Office of Foreign Assets Control (OFAC) Regulations.

In total, ZTE has agreed to pay the U.S. Government $892,360,064 and agreed to a significant conduct remedy, in the various plea and settlement agreements described below.
CRIMINAL VIOLATIONS OF IEEPA

ZTE agreed (contingent on the court’s approval) to plead guilty to three criminal charges, including:

1. Conspiracy to unlawfully export, re-export and transship U.S.-origin servers, switches, routers and other components of a cellular network infrastructure to Iran;
2. Obstruction of justice by hiding data regarding its sales to Iran, causing its defense counsel to unwittingly provide false information to the Department of Justice, and deleting all communications related to its cover-up; and
3. Making a materially false statement that it was complying with the laws and regulations of the United States.

The criminal penalties include a fine in the amount of $286,992,532, which represents the largest criminal fine in the history of IEEPA prosecutions, and a criminal forfeiture in the amount of $143,496,266, as well as a conduct remedy discussed below. Because a conduct remedy in a case involving the violation of IEEPA, EAR and OFAC regulations is unusual, a summary of the conduct remedy and its implications is included, below the discussion of ZTE’s settlement agreements with the Departments of Commerce and Treasury.
SETTLEMENT OF CHARGES WITH COMMERCE DEPARTMENT

ZTE also agreed to settle charges with the Commerce Department’s Bureau of Industry and Security (“BIS”) of 380 violations of the EAR, including (1) Conspiracy (2) Acting with Knowledge of a violation in Connection with Unlicensed Shipments of Telecommunications Items to North Korea via China and (3) Evasion. As part of the settlement:

1. ZTE agreed to pay a penalty of $661 million to BIS, with $300 million suspended during a seven-year probationary period to deter future violations. This is the largest civil penalty ever imposed by BIS.
2. ZTE agreed to active audit and compliance requirements designed to prevent and detect future violations.
3. ZTE agreed to a seven-year suspended denial of export privileges, which could be activated by BIS if any aspect of this deal is not met.
4. BIS will recommend that ZTE be removed from the Entity List.

SETTLEMENT OF CHARGES WITH TREASURY DEPARTMENT

OFAC administers a comprehensive embargo on Iran as set forth in the Iranian Transactions and Sanctions Regulations (“ITSR”; 31 CFR part 560), including prohibitions on the indirect supply of goods from the United States to Iran, the re-exportation of U.S.-origin goods with knowledge that those items are intended for Iran, and any activity designed to evade or cause a violation of the ITSR. OFAC identified at least 251 ZTE transactions that violated these prohibitions.

ZTE ultimately settled with OFAC for $100,871,266, which was 95% of the maximum statutory civil penalty. As a condition to settlement, ZTE agrees that it has terminated all conduct leading to the apparent violations and will maintain internal policies and procedures that are designed to minimize the risk of future occurrences. Should ZTE willfully violate this condition, the settlement can become null and void, subjecting ZTE to additional OFAC enforcement activity.

Key takeaways for U.S. companies include the need to identify red flags when a customer refuses to disclose the ultimate destination of goods and when a customer involves an unknown intermediary without an adequate explanation.
CONDUCT REMEDY

The conduct remedy imposed on ZTE includes some of the elements addressed in the recently updated BIS Export Compliance Guidelines – The Elements of an Effective Compliance Program and elements that are above and beyond the guidelines. In addition, ZTE’s press release regarding the Settlement includes additional compliance elements that the company implemented in its effort to implement an improved export compliance program.   The standard elements of a compliance program that are addressed in the conduct remedy are:

1. Issuance of a statement of corporate policy of export control compliance from the chief executive officers of ZTE Corporation and ZTE Kangxun to ensure compliance with the EAR which will be distributed no less than annually to all relevant employees of ZTE Corporation and ZTE Kangxun and their subsidiaries and affiliates.
2. Implementation of a training program on applicable export control requirements to be provided to (a) its leadership, management, and employees and (b) the leadership, management and employees of its affiliates, subsidiaries, and other entities worldwide over which it has ownership or control.
3. Record retention as required by the EAR.

The elements that are above and beyond the BIS guidelines are:

• Submission of six annual audit reports regarding export compliance.
• Hiring an initial independent compliance monitor that is approved by the U.S. government for a three-year term. The duties of the monitor include preparing the initial three annual audit reports.
• Hiring an independent compliance auditor, also approved by the U.S. government, for an additional three years to prepare the remaining three annual audit reports.
• The audit reports must include a certification to BIS, executed under penalty of perjury, from the chief executive officer and chief legal officer of ZTE that to the best of their knowledge, after reasonable inquiry, ZTE and its subsidiaries and affiliates are in compliance with the terms of the Agreement including the compliance program obligations.
• An affirmative duty to report potentially unlawful transactions to the U.S. government during the probationary period.
• A requirement to meet at least annually with BIS to discuss any suggestions, comments or proposals for improvement ZTE may wish to discuss with BIS.
• A requirement to provide copies of training materials, the training schedule and training locations to BIS on a quarterly basis until January 1, 2020.

In its press release, ZTE noted that it has:

• Appointed a new Chairman and Chief Executive Officer and made major changes to the senior management team, all of whom have a mandate of leading a new ZTE with a best-in-class export compliance program.
• Created a Chief Executive Officer-led Compliance Committee with the authority and remit to significantly change the company’s policies and procedures, and provide greater oversight of support for the compliance initiatives.
• Hired a new Chief Export Compliance Officer with responsibility for overseeing the continued development and improvement of the global export compliance program.
• Created a separate compliance department with increased headcount to build the compliance program with full independence.
• Issued a new Export Control Compliance Manual created in conjunction with the review of BIS to provide more detailed guidance to the employees. ZTE also now requires an annual Compliance Commitment Agreement from all employees.
• Implemented a software automation tool which screens shipments from ZTE Corporation and certain subsidiaries for export control obligations. The system is used to determine which items are subject to the Export Administration Regulations (EAR), provides embargo and restricted party screening on the transactions, and places shipments on hold that require detailed classification analysis, application of license exceptions, or application of licenses when necessary.

CONCLUSION

The penalties assessed by Justice, Commerce and Treasury are significant.  Cumulatively, they comprise the largest global settlement involving violations of IEEPA, the EAR and OFAC regulations in history.

Nevertheless, these announcements most likely are not the end of the ZTE saga.  In its plea agreement with the Justice Department, ZTE specifically agreed to cooperate with the Justice Department regarding any criminal investigation it may undertake with respect to the activities of third parties.  In its settlement agreement with the Commerce Department, that agency merely agreed to recommend removal of ZTE from the Entity List.  Removal of ZTE from the Entity List will require the agreement of other agencies (including State and Defense, which are not parties to the global settlement) and publication of a new rule in the Federal Register.

Source Documents:

• DOJ Press Release
• ZTE’s Press Release
• BIS Settlement Agreement
• OFAC Settlement Agreement