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The plight of Chinese telecommunications giant Zhongxing Telecommunications Equipment Corporation (ZTE) may have eased this week, as U.S. and Chinese officials met in Washington for high-level trade talks.
On April 15, 2018, the U.S. Commerce Department's Bureau of Industry and Security (BIS) reactivated trade restrictions and re-imposed a $300 million fine against ZTE – barring the company from procuring critical U.S. components and effectively suspending the company's business operations. The Commerce action came following the discovery that ZTE had continued to mislead investigators both during a probationary period and following March 2017 settlement agreements struck with the U.S. Departments of Commerce, Justice, and Treasury, for a combined penalty of $1.19 billion. As part of the settlements, ZTE admitted to knowingly violating U.S. sanctions and export control laws by selling sensitive U.S. technology to Iran and to making false statements about the trade. ZTE falsely claimed that it had reprimanded employees complicit in the scheme. The company came clean only when pressed, which led Commerce to conclude that "ZTE still cannot be relied upon to make truthful statements" and to reactivate the trade restrictions.
However, what was initially seen as an enforcement action separate from a broader trade conflict between the United States and China shifted following two presidential tweets earlier this week. In a tweet on May 13, President Donald Trump linked the two, saying that he is working with the Chinese president to "give massive Chinese phone company, ZTE, a way to get back into business, fast" and that the "Commerce Department has been instructed to get it done!" And in a May 14 tweet, President Trump wrote that the issue "is also reflective of the larger trade deal we are negotiating with China."
The timing of this possible accommodation raises a number of questions. It comes fewer than two weeks after President Trump announced the U.S. withdrawal from the Iran nuclear accord and the re-imposition of sweeping U.S. sanctions – notably those targeting companies and governments around the world doing business with Iran. In this context, why would the U.S. administration be willing to ease impactful trade restrictions against a Chinese firm that knowingly and repeatedly violated U.S. sanctions and export controls? Why would the administration seek to cushion the blow of these restrictions by looking for "alternative remedies," as Commerce Secretary Wilbur Ross reportedly suggested earlier this week? And does this mingling of sanctions enforcement and trade policy indicate that other companies might see similar penalties eased or waived as part of broader trade deals? How does such easing fit into the administration's newly declared "maximum pressure" policy on Iran?
A group of 33 Senate Democrats expressed concern about the administration's shift on ZTE. In a May 15 letter to the President, they argued that "bargaining away law enforcement power over bad actors such as ZTE undermines the historically sharp distinction between sanctions and export control enforcement and routine trade decisions." Republican Senator Marco Rubio warned against allowing ZTE "to operate in U.S. without tighter restrictions," given national security and espionage concerns. Indeed, a multi-year investigation by the House Select Committee on Intelligence concluded in October 2012 that ZTE "cannot be trusted to be free of foreign state influence and thus pose[s] a security threat to the United States and to our systems." During the investigation, ZTE refused to answer Congressional questions about its contracts with Iran and its compliance with U.S. export control laws.
ZTE's Sanctions Evasion Scheme
Over a period of six years, ZTE exported over 20 million U.S.-origin items to Iran, worth over $2 billion, in violation of U.S. export control laws and sanctions. The scheme began in 2010, when ZTE's Tehran-based affiliate, ZTE Parsian, negotiated a contract with the Telecommunication Company of Iran (TCI) to further expand TCI’s telecommunication network. Fulfilling the contract required U.S.-origin goods and components, many of which are controlled by the Commerce Department for national security or anti-terrorism reasons. ZTE signed a second contract in 2010 with another Iranian telecommunications company, Ertebatat Tamin Shams Novin (Tamin), to provide equipment for 1,000 cell towers in Iran. This contract, too, required U.S.-origin, Commerce-controlled goods.
To circumvent U.S. license requirements and trade rules, ZTE established an elaborate re-export scheme that involved lying to U.S. suppliers by declaring China to be the end-use destination, co-mingling U.S.-origin products with ZTE products in shipments to Iran, and deliberately falsifying customs declarations to omit the U.S.-origin goods. ZTE executives also tasked a committee with finding "isolation companies," or third-party companies, that were used to facilitate the procurement of U.S. goods and their re-export to Iran while concealing ZTE's involvement. In order to pursue trade with Iran despite several U.S. government investigations, ZTE created a "contract data induction team" (CDIT) to sanitize all documentation related to the Iran deals. The company also lied to its own defense counsel about its trade with Iran, causing its counsel to make false statements to U.S. investigators.
False Statements Continue
As part of the March 2017 settlement, ZTE promised to initiate disciplinary action against 39 individuals identified as complicit in the scheme. This action – issuing letters of reprimand and docking 2016 bonuses – was, according to ZTE, "necessary to achieve the Company's goals of disciplining those involved and sending a strong message to ZTE employees about the Company's commitment to compliance." In letters to BIS dated November 30, 2016 and July 20, 2017, ZTE described the disciplinary action it had allegedly taken or would take.
However, ZTE’s claims about disciplinary action proved to be false. The letters of reprimand were not issued until March 2018 – following a query by BIS the previous month. On March 6, ZTE admitted to making false statements in its earlier letters to BIS. In addition, all but one of the 39 individuals received their full 2016 bonus, indicating that these individuals were rewarded for their complicity in the scheme.
When faced with ZTE’s violations under the settlement, the Commerce Department determined that severe trade restrictions were needed. Imposing the $300 million suspended fine alone would be unlikely to induce the company to implement promised compliance steps or submit truthful disclosures. Cutting off the U.S. import and export market to ZTE, however, is a crippling blow to the company. ZTE is critically reliant on U.S.-origin technology for the smartphones and telecommunications equipment the company sells around the world, as American companies reportedly supply up to 30 percent of the components. In addition, ZTE is the fourth largest smartphone supplier in the United States.
Following the re-imposition of trade restrictions in mid-April, which added both ZTE and its China-based subsidiary ZTE Kangxun to the BIS Denied Persons List, trade in the company's shares was suspended in Hong Kong and Shenzhen. In a statement on May 9, the company said that because of the U.S. restrictions "the major operating activities of the company have ceased." It has since provided additional information to the Commerce Department and has asked Commerce to ease the trade restrictions. The company's fate now appears to be contingent on the outcome of the high-level trade talks between the U.S. and China.
Business as Usual
The absence of severe trade restrictions until now may have contributed to ZTE's failure to change its duplicitous behavior. An April 2017 Iran Watch report (Lesson Learned or Business as Usual?) anticipated this outcome, arguing that record financial penalties and mandated compliance changes might not be enough to incite a true change in corporate culture. The report pointed to inadequate changes in ZTE's leadership, the failure of Commerce to penalize all complicit third-party companies involved in the scheme, and the fact that the financial penalties, while hefty, were less than what ZTE earned by illegally trading with Iran.
Several ZTE executives in place during the scheme continue to hold significant positions at the company. Zhao Xianming took over as CEO in April 2016; he has been at the company since 2001 and previously served as ZTE's Chief Technology Officer and an executive vice president. Yin Yinmin, who held various executive positions at the company since 2004, was appointed Chairman of the Board in March 2017.
Moreover, all of the directors, supervisors, senior management, and key employees profiled in the company's 2017 Annual Report held a position at ZTE, a subsidiary, or a ZTE shareholding organization over the course of the six years the scheme took place. All but one of the 14 individuals listed on ZTE's Board of Directors served on the board during this time frame as well.
The settlement also failed to hold accountable all third-party companies integral in assisting ZTE with the scheme. ZTE relied on "isolation companies" to facilitate the procurement of U.S. origin-goods and their re-export to Iran, while concealing ZTE’s role. Beijing 8-Star and Far East Cable Co Ltd. were two such companies identified by name in the settlement documents. However, only Beijing 8-Star was added to Commerce's Entity List. No action was taken against Far East Cable, despite clear evidence that the company knowingly re-exported U.S-origin goods to Iran on behalf of ZTE and was fully aware of U.S. export laws prohibiting such trade. The settlement documents also reference the existence of an unnamed "isolation company" that supported similar trade with North Korea.
Far East Cable continues to do business in the United States, exporting $4.7 million worth of goods between April 2016 and December 2017. The company also continues to engage Iran. It attended Iran’s 17th International Electricity Exhibition in November 2017, "in a bid to expand [its] overseas markets." A company press release noted that Far East Cable staff “visited many large wire and cable manufacturers in Iran to actively discuss Iran’s […] potential cooperation opportunities.”
The next chapter for ZTE is unfolding amidst an effort by the U.S. administration to mount a broad economic sanctions campaign against Iran and amidst rising trade tensions between the United States and many of its major trading partners. From statements this week, President Trump appears willing to relent on robust sanctions enforcement against ZTE in the context of larger trade deals. This may lead other companies and governments to seek similar accommodations and may weaken the maximum pressure campaign the administration wants to mount against Iran.
For example, the Justice Department has opened a criminal investigation into whether another Chinese-company – ZTE competitor Huawei Technologies Co. – also violated U.S. sanctions on Iran. This investigation comes on the heels of administrative subpoenas issued by both the Commerce and Treasury Departments. The Huawei investigation may, like ZTE, get caught up in the broader trade dispute between the United States and China. If the investigation finds that Huawei violated U.S. sanctions on a comparable scale to ZTE, the U.S. government would be well served to apply the lessons of the ZTE case, by mandating real leadership change and penalizing all complicit third parties.
The outcome for ZTE may also have a bearing on the approach taken by European governments as they seek a way to preserve the Iran deal following the U.S. withdrawal. These governments also are undertaking high-level trade talks with the United States. Several major European companies have announced plans to pull out of Iran in recent days unless they can come to an arrangement with the U.S. government. The French oil firm Total, for instance, said it is "engaging with the French and U.S. authorities to examine the possibility of a project waiver" to continue a $1 billion natural gas development project in Iran. Total plans to wind down operations in Iran if it fails to win such a waiver.
If the United States proves unwilling to let stand penalties against ZTE, a company that knowingly and repeatedly supplied Iran with sensitive U.S. technology, does it intend to penalize firms engaging in trade and investment in Iran's energy sector – in particular given that until recently the U.S. supported such business in the context of the nuclear accord?
 “ZTE Corporation Agrees to Plead Guilty and Pay Over $430.4 Million for Violating U.S. Sanctions by Sending U.S.- Origin Items to Iran,” Press Release, U.S. Department of Justice, March 7, 2017, available at https://www.justice.gov/opa/pr/zte-corporation-agrees-plead-guilty-and-pay-over-4304-million-violating-us-sanctions-sending.
 "Order Activating Suspended Denial Order Relating to Zhongxing Telecommunications Equipment Corporation and Zte Kangxun Telecommunications Ltd.," U.S. Department of Commerce Bureau of Industry and Security, Federal Register, Vol. 83, No. 78, April 23, 2018, p. 17646, available at https://www.gpo.gov/fdsys/pkg/FR-2018-04-23/pdf/2018-08354.pdf.
 Randy Woods and Jenny Leonard, "Trump Muddies ZTE Role in China Talks as Ross Reviews Sanctions," Bloomberg, May 14, 2018, available at https://www.bloomberg.com/news/articles/2018-05-14/ross-says-u-s-eyeing-alternatives-to-sanctions-on-china-s-zte.
 Press Briefing by Sarah Sanders, White House, May 9, 2018, available at https://www.iranwatch.org/library/governments/united-states/executive-branch/white-house/press-briefing-press-secretary-sarah-sanders-excerpts-0.
 "Schumer, Wyden, Brown Lead 33 Senators in Calling on Trump Administration to Put American Jobs, National Security Before China," Democratic Policy and Communications Committee, May 15, 2018, available at https://www.democrats.senate.gov/newsroom/press-releases/schumer-wyden-brown-lead-33-senators-in-calling-on-trump-administration-to-put-american-jobs-national-security-before-china.
 Jacob Pramuk, "Republican Sen. Marco Rubio Warns: Trump's Reversal on China's ZTE is a National Security Risk," CNBC, May 14, 2018, available at https://www.cnbc.com/2018/05/14/marco-rubio-slams-trump-reversal-on-chinese-company-zte.html.
 "Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE," Permanent Select Committee on Intelligence, U.S. House of Representatives, 112th Congress, p. 45, October 8, 2012, available at https://intelligence.house.gov/sites/intelligence.house.gov/files/documents/huaweizte%20investigative%20report%20(final).pdf.
 An Iran Watch report published in April 2017 describes the sanctions evasion scheme, which is summarized here, in detail. See Jerrica Goodson and Valerie Lincy, "Lesson Learned or Business as Usual?," April 4, 2017, available at https://www.iranwatch.org/sites/default/files/zte_report_complete_1.pdf.
 Settlement Agreement between Zhongxing Telecommunications Equipment Corporation, et al. and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), ENF 40001, p. 4, March 7, 2017, available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170307_zte_settlement.pdf; “ZTE Corporation Agrees to Plead Guilty and Pay Over $430.4 Million for Violating U.S. Sanctions by Sending U.S.- Origin Items to Iran,” Press Release, U.S. Department of Justice, March 7, 2017, available at https://www.justice.gov/opa/pr/zte-corporation-agrees-plead-guilty-and-pay-over-4304-million-violating-us-sanctions-sending.
 "Order Activating Suspended Denial Order Relating to Zhongxing Telecommunications Equipment Corporation and Zte Kangxun Telecommunications Ltd.," U.S. Department of Commerce Bureau of Industry and Security, Federal Register, Vol. 83, No. 78, April 23, 2018, pp. 17644-17648, available at https://www.gpo.gov/fdsys/pkg/FR-2018-04-23/pdf/2018-08354.pdf.
 Valerie Volcovici and Michael Martina, "In concession, Trump will help China's ZTE 'get back into business'," Reuters, May 13, 2018, available at https://www.reuters.com/article/uk-usa-china-zte/trump-working-with-chinese-president-to-help-chinas-zte-get-back-into-business-idUSKCN1IE0QI.
 U.S. Smartphone Share: By Quarter," Counterpoint, February 27, 2018, available at https://www.counterpointresearch.com/us-market-smartphone-share/.
 "Recent Changes to the Denied Persons List, Bureau of Industry and Security," U.S. Department of Commerce, April 24, 2018, available at https://www.bis.doc.gov/index.php/the-denied-persons-list.
 "Overseas Regulatory Announcement Progress of Material Matter in relation to Suspension of Trading," ZTE Corporation, May 16, 2018, available at http://www.hkexnews.hk/listedco/listconews/SEHK/2018/0516/LTN20180516235.pdf.
 Sijia Jiang, China's ZTE Says Main Business Operations Cease Due to U.S. Ban, Reuters, May 9, 2018, available at https://www.reuters.com/article/us-zte-ban/chinas-zte-corp-says-main-business-operations-have-ceased-due-to-u-s-ban-idUSKBN1IA1XF
 “ZTE Corporation Reaches Settlement with U.S. Authorities,” Press Release, March 7, 2017, ZTE via PR Newswire, https://www.prnewswire.com/news-releases/zte-corporation-reaches-settlement-with-us-authorities-300419401.html; "Zhao Xianming-President/Executive Director, ZTE Corp,” Bloomberg, available at https://www.bloomberg.com/profiles/people/16021560-xianming-zhao..
 “ZTE Names Yin as Chairman,” Global Telecoms Business, March 14, 2017, available at
 ZTE Annual Report 2017, ZTE Corporation, pp. 113-122, 141, 2017, available at http://res.www.zte.com.cn/mediares/zte/Investor/20180326/E1.pdf.
 Settlement Agreement between Zhongxing Telecommunications Equipment Corporation, et al. and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), ENF 40001, pp. 8-9, March 7, 2017, available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170307_zte_settlement.pdf.
 Ibid; Additions to the Entity List, U.S. Department of Commerce Bureau of Industry and Security (BIS), Federal Register
Vol. 81 No. 45, March 8, 2016, available at https://www.bis.doc.gov/index.php/forms-documents/aboutbis/newsroom/1440-81-fr-12004-entity-list-final-rule/file.
 United States of America v. ZTE Corporation, United States District Court for the Northern District of Texas Dallas Division, 3-17CR-0120K, Factual Resume, pp. 3, 16, March 7, 2017, available at https://www.justice.gov/opa/press-release/file/946281/download.
 "Report Regarding Comprehensive Reorganization and the Standardization of the Company Export Control Related Matters," ZTE Corporation," ZTE Corporate Document, August 25, 2011, available at https://www.iranwatch.org/sites/default/files/report_regarding_comprehensive_reorganization_and_the_standardization_of_the_company_export_control_related_matters.pdf.
 Far East Cable Co. Ltd, Shipments, April 2016-December 2016, accessed via Panjiva on May 2, 2018.
 Stu Woo, Aruna Viswanatha, "Huawei Under Criminal Investigation Over Iran Sanctions," The Wall Street Journal, April 25, 2018, https://www.wsj.com/articles/huawei-under-criminal-investigation-over-iran-sanctions-1524663728.
 "US withdrawal from the JCPOA: Total’s position related to the South Pars 11 project in Iran," Total Press Release, May 16, 2018, available at https://www.total.com/en/media/news/press-releases/us-withdrawal-jcpoa-totals-position-related-south-pars-11-project-iran.