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Ending a five-year investigation, ZTE Corp. (“ZTE”), the second-largest producer of telecommunications equipment in China, entered into a plea agreement with the US Department of Justice (“DOJ”) and settlement agreements with the US Department of Commerce’s Bureau of Industry (“BIS”) and the US Department of Treasury’s Office of Foreign Assets Control (“OFAC”), for violations of US sanctions against Iran and US export controls, making false statements to the US government, and obstruction of justice (complete plea/settlement agreements are available at the following links: DOJ, BIS and OFAC). If the criminal plea with the DOJ is approved by a federal judge, the combined $1.19 billion in penalties would be the largest fine and forfeiture ever levied by the US government in an export control case.

Despite the hefty penalties, ZTE avoided a denial of export privileges which, among other things, would have prohibited ZTE from sourcing US components. BIS placed ZTE on the Entity List on March 8, 2016 (81 FR 12004), effectively denying ZTE’s export privileges for a limited time, but then restored ZTE’s export privileges, using a series of temporary licenses.  The denial of export privileges could have severely crippled the company, which is highly-dependent on US-origin chips and other components for its phones and other products.

In a stipulated statement of facts filed with the court, the company has acknowledged that senior managers, including ZTE’s General Counsel, concealed shipments of US components destined for Iran via “isolation companies” designed to insulate ZTE from civil or criminal liability. It was also stipulated that these shipments continued even after the DOJ began its 2012 investigation into ZTE’s conduct.  ZTE also acknowledged concealing shipments from its external legal counsel, thereby causing counsel to unknowingly present false information to the DOJ. ZTE further acknowledged that it formed an internal unit to hide records of the Iran shipments from an outside forensic accounting firm hired at the behest of outside counsel to investigate the matter.

As part of the settlement agreement with BIS and the plea agreement with the DOJ, ZTE, among other things, is required to (i) appoint an independent compliance auditor/monitor who will assess and report to the US government ZTE’s compliance efforts as well as its adherence to the terms of the plea agreement and with US sanctions and export controls, (ii) submit annual audit reports on ZTE’s compliance with US export controls for the next six years, (iii) provide training on US export controls to ZTE’s senior management, and (iv) implement a “best-in-class” export compliance program for ZTE.

The multi-year and multi-agency investigations of ZTE demonstrate that the US government is committed to enforcement of US export controls and sanctions. That includes administrative and criminal enforcement in the context of activities involving non-US companies operating primarily outside the United States.

Author

Eunkyung Kim Shin is an associate of Baker McKenzie’s International Commercial Practice Group and the International Trade Compliance Sub-Practice Group in the Chicago office. Eunkyung advices clients on various regulatory compliance and trade issues, concentrating on the US export controls such as the Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR), economic and trade sanctions, US customs and import laws, the US Foreign Corrupt Practices Act (FCPA), and foreign anti-bribery laws.

Author

Lloyd advises clients on compliance with the International Traffic in Arms Regulations administered by the US Department of State, and the Export Administration Regulations administered by the Department of Commerce. He has assisted in conducting internal investigations and compliance audits, drafting export licenses and Technical Assistance Agreements, developing comprehensive compliance programs and drafting voluntary disclosures. Lloyd also advises on trade sanctions administered by the Treasury Department’s Office of Foreign Assets Control. He has experience drafting license applications for sanctioned countries and parties, conducting internal investigations into potential sanction violations, drafting voluntary disclosures, and conducting due diligence ahead of mergers and acquisitions. A Certified Fraud Examiner and former police detective, Lloyd also conducts complex internal investigations on behalf of clients into potential violations of various regulations. He has interviewed witnesses and subjects, reviewed large volumes of data for relevant evidence, analyzed complex regulatory requirements and prepared investigative reports provided to government agencies.

Author

Ryan Fayhee is a partner in Baker McKenzie´s Washington, DC. Mr. Fayhee previously was with the United States Department of Justice for 11 years, where he was a leading national security prosecutor in the areas of economic espionage, export controls, sanctions enforcement and cybercrime. Through a number of investigations and prosecutions, Mr. Fayhee received special recognition from the Attorney General for devising a model approach to the identification and disruption of foreign military supply and proliferation networks. He also led an investigation and prosecution of a multinational company that resulted in the largest criminal fine to date for sanctions violations. Mr. Fayhee later served a term as the National Export Control Coordinator, the principal Department of Justice attorney overseeing export control and embargo investigations and prosecutions nationally. He was also a Trial Attorney with the Civil Frauds Section and an Assistant United States Attorney in the Northern District of Illinois, assigned most recently to the National Security and Cybercrime Section.

Author

Sylwia Lis is a partner and member of the International Trade, Compliance and Customs Steering Committee in Baker McKenzie. She has extensive experience advising companies on US laws relating to exports and reexports of commercial goods and technology, defense trade controls and trade sanctions — including licensing, regulatory interpretations, compliance programs and enforcement matters. She also has advised clients on national security reviews of foreign investment administered by the Committee on Foreign Investment in the United States (CFIUS), including CFIUS-related due diligence, risk assessment, and representation before the CFIUS agencies.