Department of Commerce Announces Sanctions Deal with China’s ZTE, but Will Congress Block It?

On June 7, 2018, the U.S. Department of Commerce announced that Zhongxing Telecommunications Equipment Corporation of Shenzhen, China (ZTE Corporation) and ZTE Kangxun Telecommunications Ltd. of Hi-New Shenzhen, China (ZTE Kangxun) (collectively, ZTE) had agreed to additional penalties and compliance measures to replace Commerce’s Bureau of Industry and Security (BIS) denial order imposed as a result of ZTE’s violations of its March 2017 settlement agreement. On April 15, 2018, BIS activated the suspended denial order against ZTE after learning that ZTE had not disciplined numerous employees responsible for the violations that led to the settlement agreement. Instead, ZTE rewarded those employees with bonuses. With the imposition of the denial order by BIS, ZTE announced in early May 2018 that all major operating activities of the company had ceased as a result of the denial order. On May 13, 2018, President Trump, against the advice of U.S. law enforcement and intelligence officials, announced that “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”

Under the new agreement, ZTE must pay $1 billion and place an additional $400 million in suspended penalty money in escrow before BIS will remove ZTE from the Denied Persons List. According to the Department of Commerce, ZTE will also be required to retain a team of “special compliance coordinators selected by and answerable to BIS for a period of 10 years. Their function will be to monitor on a real-time basis ZTE’s compliance with U.S. export control laws.” ZTE will also replace the entire board of directors and senior leadership for both ZTE entities. The new agreement will continue to impose a denial order that will be suspended for 10 years, which BIS can activate in the event of additional violations during this 10-year probationary period.

The earlier March 2017 settlement agreement with BIS, in which ZTE paid a civil penalty of $661 million, resulted from a multi-year conspiracy to supply, build and operate telecommunications networks in Iran using U.S.-origin equipment in violation of the U.S. trade embargo and sanctions against Iran, and sanctions violations involving the shipment of telecommunications equipment to North Korea. ZTE made false statements and obstructed justice by creating an elaborate scheme to prevent disclosures to and affirmatively mislead the U.S. government. In addition to the monetary penalty, ZTE had agreed to a seven-year suspended denial of export privileges, which could be activated if any aspect of the agreement was not met and/or if the company committed additional violations of the Export Administration Regulations. The earlier settlement agreement with ZTE is available here.

Congressional reaction to the president’s efforts to ease sanctions on ZTE continues to be negative and harsh. Senate Democratic Leader Charles Schumer (D-NY) has called on Congress to undo President Trump’s action and stated, “When it comes to China, despite his tough talk, this deal with ZTE proves the president just shoots blanks.” In a tweet, Republican Senator Marco Rubio (R-FL) noted deep concern, stating that “This ‘deal’ with #ZTE may keep them from selling to Iran and North Korea. That’s good. But it will do nothing to keep us safe from corporate & national security espionage. That is dangerous. Now Congress will need to act to keep America safe from #China.” On June 7, 2018, Senators Schumer and Rubio, along with Tom Cotton (R-AR) and Chris Van Hollen (D-MD), introduced an amendment to the National Defense Authorization Act for Fiscal Year 2019 to respond to the national security threat posed by ZTE. The amendment would prohibit all U.S. government agencies from purchasing or leasing telecommunications equipment and/or services from ZTE, its subsidiaries or affiliates. It would also ban the U.S. government from using grants and loans to subsidize ZTE, and it would restore penalties and sanctions on ZTE for violating U.S. export control laws. A similar amendment has been adopted on pending legislation that would reform and update the operations of the Committee on Foreign Investment in the United States (CFIUS). It remains to be seen whether there will be sufficient bipartisan support for such measures to eventually be passed and have the necessary votes to override a likely veto from the president.