By: John Black
In the March 24, 2106 Federal Register the Bureau of Industry and Security temporarily reversed part of the most significant export control penalty in at least 32 years (i.e., as long as I have been in export compliance) which BIS imposed when it placed Chinese telecommunications giant ZTE in the EAR Entity List on March 8, 2016. The result of that action was to prohibit all exports and reexports of all items subject to the EAR to four named ZTE entities—this penalty far exceeds the multi-million dollar penalties BIS has imposed on others who have violated the EAR. For me, the only EAR action that approaches the significance of the ZTE penalty is the addition of 20 plus Delft companies to the Denial List back in the 1980s.
Please see Doug Jacobson’s excellent article on the original BIS action against ZTE after this article.
On March 24, 2016, BIS announced a temporary general license authorizing the use of EAR license exceptions and No License Required (NLR) according to the EAR in place prior to BIS adding these two ZTE entities that were put on the Entity List on March 8, 2016:
- Zhongxing Telecommunications Equipment (ZTE) Corporation (also referred to as ZTEC)
- ZTE Kangxun Telecommunications Ltd.
- These two ZTE entities remain on the EAR Entity List:
- Beijing 8 Star International Co.
- ZTE Parsian
By creating a temporary general license that is valid through June 30, 2016, BIS gives some relief to companies all over the world who do business with these two important entities which are critical companies that contribute significantly to ZTE’s global sales of over $16 billion. No doubt, in response to BIS’ addition of ZTE to its Entity List, ZTE and its lawyers flooded into a wide range of US Government entities requesting some sort of relief from the historically significant penalty. I would have to guess that many non-ZTE companies expressed their concern to the US Government about how they were being harmed by the listing of ZTE.
Of course, BIS may at any time cancel the temporary general license. Not only that, but the general license expires at the end of June if BIS takes no further action. If you do business with ZTE, you should prepare for the worst even if you benefit now from the temporary general license.
Your Compliance Challenge Now: Red Flags When Dealing with ZTE
Many exporters and reexporters have overlooked the fact that it may be prudent to consider that there is a Red Flag indicating a high risk of illegal diversion of EAR items any time you do business with any ZTE company. In its original action against ZTE, BIS published documents showing how ZTE constructed a network of entities to hide illegal shipments to Iran. In the case of ZTE, the illegal diversion scheme was not limited to the actions of a few unscrupulous sales people but involved senior ZTE officials creating a complex system, which may demonstrate that ZTE policy has been to make significant efforts to hide intentional violations of US trade controls.
It is unusual for BIS to publish such documents that show the evidence and background of illegal actions. Without a doubt, everyone now knows that ZTE, at a high level, has taken extensive actions both to intentionally violate US trade controls and to hide its violations. So, now that you know it, thanks to BIS publishing evidence, it can be argued that you should presume there is a significant risk of ZTE illegally diverting the items it gets from you to unauthorized countries or recipients (e.g., the two ZTE entities that remain on the Entity List). If there is a Red Flag that indicates a risk that ZTE will illegally divert the items it gets from you, that means that you should exercise more than average due diligence for your transfers of items controlled by the EAR to any ZTE entity. That does not mean that you may not do business with ZTE, but it does mean it would be prudent to ask additional questions or obtain additional assurances in writing from ZTE to give you confidence that ZTE will not illegally transfer your items.