On March 7, we learned that Zhongxing Telecommunications Equipment Corporation (ZTE) concluded 3 settlement agreements that could result in penalties as high as $1.2 billion for its violations of U.S. sanctions and export controls laws. Although the amount of the fines results from particularly egregious conduct on the part of ZTE to conceal its violations even during the period of investigation, the case highlights three valuable lessons for all exporters. This is especially true given Secretary of Commerce Wilbur Ross’s pronouncement that the case signals the new Administration will be “aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers.”
- Disclosure is Key. The Department of Treasury’s Office of Foreign Assets Control (OFAC) subjected ZTE to a maximum civil penalty of just over $106 million (the largest ever for a non-financial institution) because the company did not make a voluntary disclosure and because the violations were particularly egregious. Under OFAC’s penalty guidelines, when companies voluntarily disclose and cooperate with OFAC, penalties can be significantly reduced. Of particular importance to OFAC was that not only did the company fail to disclose but it also took elaborate steps to conceal its violations. Although the extent of ZTE’s cover-up is uniquely remarkable, the substantial penalties are a valuable reminder of the carrots and sticks at play in determining penalties under both sanctions and export controls laws. For some understanding of how these regimes work, see my post from last July on the Department of Commerce’s Bureau of Industry and Security (BIS)’s penalty guidelines, which largely mirror those used by OFAC.
- Enhanced Coordination Between Agencies. The Department of Justice’s national security team collaborated closely with both OFAC and BIS, throughout the five-year investigation of ZTE. This collaboration marks enhanced cooperation between DOJ, OFAC, and BIS not only during investigations but also in detecting violations of sanctions and export control laws. In recent years there has been increased training of U.S. Attorney offices on export controls and sanctions law and national security attorneys at DOJ have become increasingly involved in detecting violations of and enforcing sanctions and export control laws.
- Supply Chain Compliance. ZTE used several companies that it effectively controlled and that were in its distribution network to conceal the fact that it was selling U.S.-controlled goods to Iran. These companies served as end-user intermediaries and helped ZTE stay under the radar of U.S. authorities. Companies that have distribution networks must be diligent to ensure that their supply chain members do not transship U.S.-controlled goods in violation of U.S. sanctions and export control laws. Due diligence with regard to ultimate country of destination has long been a part of an effective sanctions and export controls compliance program. ZTE teaches that supply chain and end user awareness should be a priority given the seeming increased capacity of the U.S. government to go after foreign entities, detect violations and target distributor relationships that arguably evade sanctions and export control laws.