ZTE, a telecommunications company established in the People’s Republic of China, today agreed to pay a record-high combined civil and criminal penalty of $1.19 billion, pending approval from the courts, for violating U.S. sanctions by sending U.S.-origin items to Iran.
ZTE has agreed to enter a guilty plea, which is contingent on the court’s approval, and pay a fine in the amount of $287 million, and a criminal forfeiture in the amount of $143.5 million. The criminal fine represents the largest criminal fine in connection with an International Emergency Economic Powers Act (IEEPA) prosecution.
The plea agreement also requires ZTE to submit to a three-year period of corporate probation, during which time an independent corporate compliance monitor will review and report on ZTE’s export compliance program. ZTE is also required to cooperate fully with the Department of Justice regarding any criminal investigation by U.S. law enforcement authorities.
A criminal information, filed March 7 in federal court in the Northern District of Texas, charges ZTE with one count of knowingly and willfully conspiring to violate the IEEPA, one count of obstruction of justice and one count of making a material false statement. ZTE waived the requirement of being charged by way of federal indictment, agreed to the filing of the information and has accepted responsibility for its criminal conduct by entering into a plea agreement with the government.
OFAC and BIS settlements. Additionally, 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). OFAC announced a $100.9 million settlement agreement with ZTE and its subsidiaries and affiliates.
ZTE also agreed to pay a penalty of $661 million to BIS, with $300 million suspended during a seven-year probationary period to deter future violations. This civil penalty is the largest ever imposed by the BIS.
If the criminal plea is approved by a federal judge, the combined $1.19 billion in penalties from Commerce, the Department of Justice, and the Department of Treasury, would be the largest fine and forfeiture ever levied by the U.S. government in an export control case.
“We are putting the world on notice: the games are over,” Secretary of Commerce Wilbur Ross said in a statement. “Those who flout our economic sanctions and export control laws will not go unpunished; they will suffer the harshest of consequences.”
“In addition to these monetary penalties, ZTE also agreed to active audit and compliance requirements designed to prevent and detect future violations and a seven-year suspended denial of export privileges, which could be quickly activated if any aspect of this deal is not met,” the BIS press release stated.
ZTE’s scheme. According to court documents, for a period of almost six years, ZTE obtained U.S.-origin items—including controlled dual-use goods on the Commerce Department’s Commerce Control List (CCL)—incorporated some of those items into ZTE equipment and shipped the ZTE equipment and U.S.-origin items to customers in Iran. ZTE engaged in this conduct knowing that such shipments to Iran were illegal.
ZTE further lied to federal investigators during the course of the investigation when it insisted, through outside and in-house counsel, that the company had stopped sending U.S.-origin items to Iran. “In fact, while the investigation was ongoing, ZTE resumed its business with Iran and shipped millions of dollars’ worth of U.S. items there,” the Justice Department stated.
ZTE also created an elaborate scheme to hide the data related to these transactions from a forensic accounting firm hired by defense counsel to conduct a review of ZTE’s transactions with sanctioned countries. It did so knowing that the information provided to the forensic accounting firm would be reported to the U.S. government by outside counsel.
“Outside counsel was not aware of this scheme and indeed was wholly unaware that ZTE had resumed business with Iran,” the Justice Department stated. “After ZTE informed its counsel of the scheme, counsel reported, with permission from ZTE, the conduct to the U.S. government.”
Iran business. According to court documents, between January 2010 and January 2016, ZTE, either directly or indirectly through a third company, shipped approximately $32,000,000 of U.S.-origin items to Iran without obtaining the proper export licenses from the U.S. government. In early 2010, ZTE began bidding on two different Iranian projects. The projects involved installing cellular and landline network infrastructure. Each contract was worth hundreds of millions of U.S. dollars and required U.S. components for the final products.
In December 2010, ZTE finalized the contracts with Iranian customers. The contracts were signed by four parties: the Iranian customer, ZTE, Beijing 8 Star and ZTE Parsian. Court documents explain that ZTE identified Beijing 8 Star (8S) as a possible vehicle for hiding its illegal shipments of U.S. items to Iran. It intended to use 8S to export U.S.-origin items from China to ZTE customers in Iran. As part of this plan, ZTE supplied 8S with necessary capital and took over control of the company.
Under the terms of the Iran contracts, ZTE agreed to supply the “self-developed equipment,” collect payments for the projects and manage the whole network. ZTE Parsian was to provide locally purchased materials and all services.
8S was responsible for “relevant third-party equipment,” which primarily meant parts that would be subject to U.S. export laws. ZTE intended for 8S to be an “isolation company,” that is, ZTE intended for 8S (rather than ZTE) to purchase the embargoed equipment from suppliers and provide that equipment under the contract in an effort to distance ZTE from U.S. export-controlled products and insulate ZTE from U.S. export violations. However, 8S had no purchasing or shipping history and no real business reputation.
Ultimately, although 8S was a party to the contracts, ZTE itself purchased and shipped the embargoed goods under the contract. In its shipping containers, it packaged the U.S. items with its own self-manufactured items to hide the U.S.-origin goods. ZTE did not include the U.S. items on the customs declaration forms, though it did include the U.S.-origin items on the packing lists included inside of the shipments.
In early 2011, when ZTE determined that the use of 8S was insufficient to hide ZTE’s connection to the illegal export of U.S.-origin goods to Iran, senior management of ZTE ordered that a company-level export control project team study, handle and respond to the company’s export control risks. In September 2011, four senior managers signed an Executive Memo, which proposed that the company identify and establish new “isolation companies” that would be responsible for supplying U.S. component parts necessary for projects in embargoed countries. The isolation companies would conceal ZTE’s role in the transshipment scheme and would insulate ZTE from export control risks.
In March 2012, Reuters published an article regarding ZTE’s sale of equipment to Iran. In response, ZTE made a decision to temporarily cease sending new U.S. equipment to Iran. By November 2013, however, ZTE had resumed its business with Iran. Beginning in July 2014, ZTE began shipping U.S.-origin equipment to Iran once again without the necessary licenses.
Instead of using 8S, however, ZTE identified a new isolation company. ZTE signed a contract with the new isolation company, which in turn signed contracts with the two Iranian customers. According to the new scheme, ZTE purchased and manufactured all relevant equipment—both U.S.-origin and ZTE-manufactured—and prepared them for pick-up at its warehouse by the new isolation company. The new isolation company then shipped all items to the Iranian customers. Shipments to Iran continued from January 2014 through January 2016.
Obstruction and false statement. According to court documents, despite its knowledge of an ongoing grand jury investigation into its Iran exports, ZTE took several steps to conceal relevant information from the U.S. government. It further took affirmative steps to mislead the U.S. government. In the summer of 2012, ZTE asked each of the employees who were involved in the Iran sales to sign nondisclosure agreements in which the employees agreed to keep confidential all information related to the company’s U.S. exports to Iran.
During meetings throughout late 2014, late 2015 and early 2016, outside counsel for ZTE, unaware that the statements ZTE had given to counsel for communication to the government were false, represented to the Justice Department and federal law enforcement agents that ZTE had stopped doing business with Iran and therefore was no longer violating U.S. export laws.
Similarly, in July 2015, in-house counsel for ZTE accompanied outside counsel in a meeting with the DOJ and federal law enforcement agents and reported that ZTE was abiding by U.S. laws. That statement was also false.
ZTE also hid data related to its resumed illegal sales to Iran from a forensic accounting firm hired by defense counsel to conduct an internal investigation into the company’s Iran sales. ZTE knew the forensic accounting firm was reviewing its systems and knew that the analysis was being reported to the DOJ and U.S. law enforcement.
To avoid detection of its 2013-2016 resumed illegal sales to Iran, ZTE formed the “contract data induction team” (CDIT). The CDIT was comprised of approximately 13 people whose job it was to “sanitize the databases” of all information related to the 2013-2016 Iran business.
The team identified and removed from the databases all data related to those sales. ZTE also established an auto-delete function for the email accounts of those 13 individuals on the CDIT, so their emails were deleted every night—a departure from its normal practices—to ensure there were no communications related to the hiding of the data.