Business Crimes Hotline

The $1.19 billion worth of penalties and fines are split among several U.S. agencies. The Commerce Department's Bureau of Industry Security (BIS) settled with ZTE for $661 million, which represented the largest civil penalty ever imposed by the BIS. $300 million of this payment will be suspended providing that ZTE abides by the terms of the settlement agreement. In addition, ZTE and the Department of the Treasury's Office of Foreign Assets Control (OFAC) have entered a settlement agreement whereby ZTE will pay the OFAC over $100 million.

The Department of Justice (DOJ) is awaiting court approval in the Northern District of Texas for a plea deal entered into by ZTE, in which it agreed to pay over $430 million in criminal fines and forfeiture. The DOJ charged ZTE with one count of obstruction of justice, one count of making a false statement to federal investigators, and one count of conspiracy to unlawfully export in violation of the International Emergency Economic Powers Act (IEEPA). Mary B. McCord, acting assistant attorney general, said, “[t]he plea agreement alleges that the highest levels of management within the company approved the scheme.”

ZTE will also have to abide by certain compliance and auditing policies as well as pay these fines in order to avoid a suspension of its export privileges. Secretary of Commerce Wibur L. Ross called these penalties “unprecedented.”

ZTE violated U.S. sanctions by purchasing American-made products and technology and then using those materials in its products that it eventually exported to other countries, including Iran and North Korea. Some of these products went to companies in Iran, including companies associated with the Iranian government, to assist the country in building its telecommunications networks. As a result, ZTE benefited by receiving contracts for hundreds of millions of dollars from Iran. This was in direct violation of the U.S. sanctions against Iran at the time.

The government's investigation into ZTE began in 2012 based on media reports. In the course of the investigation, the government discovered a conspiracy stretching back to at least January 2010 that lasted to April 2016. Part of the investigation uncovered documents that described how ZTE planned to use shell companies to hide its export of certain products to Iran. In March 2016, in response to these findings, the Commerce Department stated that it planned to require American companies doing business with ZTE to apply for a special license to do so, though the New York Times reported that the rule never actually went into effect.

In April 2016, ZTE announced a new CEO, Zhoe Xianming. Regarding this settlement, Xianming said, “ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company.”

In addition to violating the U.S. sanctions, ZTE also undertook an organized campaign to deceive investigators. From January to March of 2016, ZTE had a team of individuals that were responsible for destroying documents and erasing any evidence of wrongdoing regarding business with Iran. The company also had this team delete all of their emails at the end of each day and required its members to sign a non-disclosure agreement, a violation of which would result in a $150,000 fine.

In the course of the investigation, the government found documents suggesting that another rival Chinese company was also involved in violating the laws regarding sanctions. The New York Times reported that there was evidence to believe the company also implicated was Huawei Technologies, a company that produces telecommunications equipment. It is one of the largest suppliers of equipment for mobile telecommunications networks in the world. It has been subpoened by the Commerce Department regarding its sales of American-made products and technology to Iran, North Korea, Sudan, Syria, and Cuba.

When announcing the settlement with ZTE, Secretary Ross stated, “[t]hose 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.”

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Business Crimes Hotline was written by Katherine Monks, an associate at Mayer Brown LLP, Washington, DC.

WASHINGTON, DC

Chinese Telecom Company Hit with $1.19 B in Fines

On March 7, 2017, the Department of Commerce announced that a major Chinese company, Zhong- xing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. (ZTE), agreed to pay $1.19 billion in civil and criminal penalties in exchange for violating U.S. sanctions and selling U.S.-made products and technology to North Korea and Iran. ZBE's actions violated both the Export Administration Regulations (EAR) and Iranian Transactions and Sanctions Regulations (ITSR).

The $1.19 billion worth of penalties and fines are split among several U.S. agencies. The Commerce Department's Bureau of Industry Security (BIS) settled with ZTE for $661 million, which represented the largest civil penalty ever imposed by the BIS. $300 million of this payment will be suspended providing that ZTE abides by the terms of the settlement agreement. In addition, ZTE and the Department of the Treasury's Office of Foreign Assets Control (OFAC) have entered a settlement agreement whereby ZTE will pay the OFAC over $100 million.

The Department of Justice (DOJ) is awaiting court approval in the Northern District of Texas for a plea deal entered into by ZTE, in which it agreed to pay over $430 million in criminal fines and forfeiture. The DOJ charged ZTE with one count of obstruction of justice, one count of making a false statement to federal investigators, and one count of conspiracy to unlawfully export in violation of the International Emergency Economic Powers Act (IEEPA). Mary B. McCord, acting assistant attorney general, said, “[t]he plea agreement alleges that the highest levels of management within the company approved the scheme.”

ZTE will also have to abide by certain compliance and auditing policies as well as pay these fines in order to avoid a suspension of its export privileges. Secretary of Commerce Wibur L. Ross called these penalties “unprecedented.”

ZTE violated U.S. sanctions by purchasing American-made products and technology and then using those materials in its products that it eventually exported to other countries, including Iran and North Korea. Some of these products went to companies in Iran, including companies associated with the Iranian government, to assist the country in building its telecommunications networks. As a result, ZTE benefited by receiving contracts for hundreds of millions of dollars from Iran. This was in direct violation of the U.S. sanctions against Iran at the time.

The government's investigation into ZTE began in 2012 based on media reports. In the course of the investigation, the government discovered a conspiracy stretching back to at least January 2010 that lasted to April 2016. Part of the investigation uncovered documents that described how ZTE planned to use shell companies to hide its export of certain products to Iran. In March 2016, in response to these findings, the Commerce Department stated that it planned to require American companies doing business with ZTE to apply for a special license to do so, though the New York Times reported that the rule never actually went into effect.

In April 2016, ZTE announced a new CEO, Zhoe Xianming. Regarding this settlement, Xianming said, “ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company.”

In addition to violating the U.S. sanctions, ZTE also undertook an organized campaign to deceive investigators. From January to March of 2016, ZTE had a team of individuals that were responsible for destroying documents and erasing any evidence of wrongdoing regarding business with Iran. The company also had this team delete all of their emails at the end of each day and required its members to sign a non-disclosure agreement, a violation of which would result in a $150,000 fine.

In the course of the investigation, the government found documents suggesting that another rival Chinese company was also involved in violating the laws regarding sanctions. The New York Times reported that there was evidence to believe the company also implicated was Huawei Technologies, a company that produces telecommunications equipment. It is one of the largest suppliers of equipment for mobile telecommunications networks in the world. It has been subpoened by the Commerce Department regarding its sales of American-made products and technology to Iran, North Korea, Sudan, Syria, and Cuba.

When announcing the settlement with ZTE, Secretary Ross stated, “[t]hose 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.”

*****
Business Crimes Hotline was written by Katherine Monks, an associate at Mayer Brown LLP, Washington, DC.