27 April 2018
U.S. Bans Exports to Major Mainland Chinese Telecommunications Company
The United States announced on 16 April a ban on exports to mainland China’s second-largest telecommunications firm, the latest penalty against that company for violating U.S. export controls. While this measure is not linked to the recent trade enforcement actions that Washington has pursued against Beijing, it is nonetheless another sign of the deteriorating trade relationship between the two economic superpowers.
The U.S. Department of Commerce placed Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. (collectively, ZTE) on the Entity List in March 2016 following its determination that they were involved in a scheme to establish, control and use a series of shell companies to illicitly re-export controlled items to Iran. However, the DOC subsequently suspended the associated restrictions on exports to ZTE of goods subject to the Export Administration Regulations until March 2017, when ZTE was removed from the Entity List following an agreement with the DOC that resulted in a US$1.19 billion penalty as well as active audit and compliance requirements designed to prevent and detect future violations.
The agreement also provided for a seven-year suspended denial of export privileges, which the DOC now states that it is lifting because ZTE was found to have made false statements regarding employee discipline. For example, while ZTE informed the U.S. government that it had taken or would take action against 39 employees and officials that the company had identified as having a role in the violations that led to the criminal plea agreement and the settlement agreements, ZTE did not issue the letters of reprimand described in a 30 November 2016 letter to BIS until approximately a month after BIS’s 2 February 2018 request for a status report on corrective measures implemented by the company. In addition, all identified individuals except one received a bonus for 2016. BIS contends that these false statements were not corrected by ZTE even in part until March 2018, more than 15 months from ZTE’s 30 November 2016 letter and approximately a year after the settlement agreement was reached.
“ZTE made false statements to the U.S. government when [it was] originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation.” said U.S. Secretary of Commerce Wilbur Ross. “Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”
As a result, effective immediately and extending through 13 March 2025 the following are prohibited with respect to ZTE.
- exports or re-exports to or on behalf of ZTE of any item subject to the EAR
- any action that facilitates the acquisition or attempted acquisition by ZTE of the ownership, possession or control of any item subject to the EAR that has been or will be exported from the United States, including financing or other support activities related to a transaction whereby ZTE acquires or attempts to acquire such ownership, possession or control
- any action to acquire from or facilitate the acquisition or attempted acquisition from ZTE any item subject to the EAR that has been exported from the United States
- obtaining from ZTE in the United States any item subject to the EAR with knowledge or reason to know that the item will be, or is intended to be, exported from the United States
- engaging in any transaction to (i) service any item subject to the EAR that has been or will be exported from the United States and that is owned, possessed or controlled by ZTE or (ii) service any item, of whatever origin, that is owned, possessed or controlled by ZTE if such service involves the use of any item subject to the EAR that has been or will be exported from the United States (servicing means installation, maintenance, repair, modification or testing)
To ensure compliance with this broad export ban, U.S. companies that have conducted business with ZTE are likely to consider implementing a comprehensive compliance response plan. Among other things, this plan would normally identify and prohibit any potential export activity with ZTE, including shipments (either direct or through third parties), release of technical data or software and access to support sites, and address how to effectively communicate within and outside the company on ZTE business and related questions.
In a statement issued on 20 April, ZTE described the ban as “extremely unfair” and vowed to pursue all legally available avenues to safeguard its legitimate rights and interests, although it will also try to reach a mutually-acceptable resolution through dialogue. A spokesperson for mainland China’s Ministry of Commerce, meanwhile, declared that “the action targets China, however, it will ultimately undermine the United States itself.”