Things are not looking good for Chinese telecommunications equipment giant ZTE. Being placed on the Denied Persons List tends to have that kind of impact.
After its scheme to evade United States sanctions and export controls on Iran was uncovered, the company was placed on the Entity List. This meant it was excluded from any trade (exports, reexports, transfers) involving items “subject to the EAR”. That banishment was soon ended, after ZTE entered into a settlement agreement with the Bureau of Industry and Security.
Besides accepting a $661 million penalty (payment of $300 million of which was conditionally suspended) and promising to mend its ways in the future, ZTE agreed to oversight by an independent compliance auditor and continuing BIS scrutiny of its activities. In follow-up letters, it represented to BIS that it was undertaking disciplinary measures against upper and mid-level managers who were involved in the sanctions-busting activity.
It turns out, however, that the disciplinary measures had not been taken at the time ZTE had claimed they were. ZTE then, belatedly, acknowledged that it had made false statements to BIS on this point, a major no-no under the settlement agreement’s “obligation of truthful disclosure.”
BIS was not amused at what constituted (in the agency’s view) mendacity that breached the settlement agreement’s terms. The agency reviewed ZTE’s earlier “pattern of deception, false statements, and repeated violations” and “cover-up” of these bad acts. It found that the post-settlement deceptions indicated that the settlement terms “did not induce ZTE to ensure it was engaging with the U.S. Government truthfully.” It does not appear that there were any further “substantive” regulatory violations; at least, none are specified in the BIS Denial Order.
As a consequence, BIS has placed ZTE on the Denied Persons List for seven years. This means, of course, that ZTE is prohibited from obtaining any articles “subject to the Export Administration Regulations” during that period. Moreover, ZTE is prohibited from “Carrying on negotiations concerning, or ordering, buying, receiving, using, selling, delivering, storing, disposing of, forwarding, transporting, financing, or otherwise servicing in any way, any transaction involving any item exported or to be or to be exported from the United States that is subject to the Regulations.” ZTE is, therefore, prohibited from providing service or other support for U.S.-origin items that it obtained even before the denial order went into effect.
Everyone other than ZTE is prohibited from supplying to ZTE items subject to the EAR, or servicing any such items “owned, possessed or controlled by” ZTE. This seems to leave out servicing by third parties of articles that ZTE had previously sold to customers. Of course, other restrictions may preclude third parties from such doing so, such as General Prohibition 10’s coverage of specified activities “with knowledge that a violation . . . has occurred.”
So, ZTE is effectively cut off from U.S.-origin goods and technology, and its erstwhile suppliers are barred from continuing their business. While this strikes me as a harsh punishment for failures to report information correctly, as opposed to ongoing substantive violations, BIS makes the decisions and we’re all bound by them. ZTE’s fate provides a stark warning to the rest of us of the potential consequences of export control violations.