ZTE has entered into a global settlement with the US government regarding its conduct relating to US export controls and sanctions. While the agreement with the Office of Foreign Assets Control (OFAC) takes effect immediately, the agreement with the United States Department of Justice (DOJ) is pending approval from the US District Court for the Northern District of Texas. Similarly, Court approval of the DOJ agreement is a prerequisite before Bureau of Industry and Security (BIS) will issue its settlement Order.
As part of the resolution, ZTE has agreed to a criminal and civil penalty of US $892,360,064, and an additional penalty of US $300,000,000 to BIS that will be suspended during the seven-year term on the condition that the company complies with the requirements in the agreement with BIS and that ZTE will continue to work with an independent compliance monitor and auditor.
A statement from DOJ stated that the Chinese IT firm agreed to enter a guilty plea and to pay a US $431 million penalty to the US for conspiring to violate the International Emergency Economic Powers Act (IEEPA) by “illegally shipping U.S.-origin items to Iran, obstructing justice and making a material false statement.”
“ZTE simultaneously reached settlement agreements with the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). In total ZTE has agreed to pay the U.S. Government $892,360,064. The BIS has suspended an additional $300,000,000, which ZTE will pay if it violates its settlement agreement with the BIS,” the DOJ said in the statement.
“ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports. The plea agreement, which is pending before the Court, alleges that the highest levels of management within the company approved the scheme. ZTE then repeatedly lied to and misled federal investigators, its own attorneys and internal investigators. Its actions were egregious and warranted a significant penalty,” said Acting Assistant Attorney General McCord, according to the DOJ statement.
“ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” said Dr Zhao Xianming, Chairman and CEO, ZTE Corporation. “Instituting new compliance-focused procedures and making significant personnel changes has been a top priority for the company. We have learned many lessons from this experience and will continue on our path of becoming a model for export compliance and management excellence. We are committed to a new ZTE, compliant, healthy and trustworthy.”
Zhao was named the firm’s Chairman and CEO in April 2016 with a mandate to lead a new ZTE with a best-in-class export compliance program.
“The agreements we reached will enable us to move forward in a stronger position than ever before,” continued Zhao. “We are grateful to all of our customers, partners, employees and stakeholders who have stood by us throughout this difficult time. With this agreement behind us and our compliance program firmly established, we can confidently grow our business with suppliers, continue to provide innovative technology solutions to our partners, and execute our growth strategies as a new ZTE.”
“ZTE has made tremendous progress in building a world-class compliance program and I look forward to working with others in the company’s leadership to further build and improve our operations and processes,” said Matt Bell, who was appointed ZTE’s Chief Export Compliance Officer in November 2016. “We are creating a global team of experienced compliance professionals, and our compliance trainings have been strengthened and reinforced at every level of the company. We are constantly reviewing and improving policies and procedures to keep up with an ever-changing regulatory landscape and working to reinforce the strategic business advantage a strong compliance program has in the marketplace. Our global legal and compliance professionals will continue to work together to identify risk across the company and continually improve the effectiveness of our overall compliance program.”
During recent months and in the lead up to the agreement with the US government, the company has invested in extensive reforms to create a leading export compliance program. Apart from appointing anew CEO and Chief Export Compliance Officer, ZTE has taken further actions to reform its export compliance program.
These include: removing compliance from the responsibility of the legal department and creating a separate compliance department with increased headcount to build the compliance program with full independence; issuing a new Export Control Compliance Manual created in conjunction with the review of BIS to provide more detailed guidance to the employees as well as requiring an annual Compliance Commitment Agreement from all employees.
ZTE has also implemented a software automation tool which screens shipments from ZTE Corporation and certain subsidiaries for export control obligations. The system is used to determine which items are subject to the Export Administration Regulations (EAR), provides embargo and restricted party screening on the transactions, and places shipments on hold that require detailed classification analysis, application of license exceptions, or application of licenses when necessary. The company further trained over 45,000 staff on export controls and sanctions laws and company policies in 2016 and is continuing these general awareness trainings in 2017 while also rolling out more targeted training for critical functions such as sales, procurement, R&D and supply chain.
BIS is expected to recommend that ZTE be removed from the Entity list, conditioned on court approval of the DOJ agreement, entry of the plea, and the issuance of BIS’s settlement Order.