On June 11, the U.S. Department of Commerce`s Bureau of Industry and Security (BIS) issued a replacement agreement with ZTE Corporation and ZTE Kangxun Telecommunications Ltd (“ZTE”) and an accompanying replacement order. The deal replaces a March 2017 agreement between the BRI and ZTE, which made allegations that ZTE violated U.S. export controls and economic sanctions imposed on North Korea and Iran. The new agreement will rescind a seven-year refusal order imposed by the BIS on ZTE on April 15, 2018 for violating the March 2017 agreement with the BIS by making false statements to the Agency. The new transaction prohibits BIS from rescinding the refusal order until ZTE pays a $1 billion fine and withdraws $400 million in the event of a future violation. ZTE also agreed to fire its directors and senior management, establish an independent compliance team providing real-time reports directly to BIS, conduct a series of audits, and publish U.S. export classification and content calculation for its AEOI items, to help its trading partners comply with U.S. export controls.
In return, the BIS imposed a new ten-year refusal order in the replacement agreement, but agreed to suspend it as long as ZTE complies with the terms of the new agreement. As we recently reported, Minister Ross activated the previously suspended refusal order on April 15, 2018, based on the finding that ZTE made false statements to the BIS during transaction negotiations in 2016 and during its trial period in 2017. At the time of the transaction, ZTE paid fines of $892 million and committed to firing four senior executives and disciplining 35 others for their conduct in connection with previous sanction violations. Instead, ZTE rewarded employees and executives involved in this illegal behavior with bonuses. After finding this breach of the agreed terms, the BIS activated the refusal order, initially suspended as part of the 2017 comparison, which in turn placed ZTE on the BIS`s list of rejected persons, which largely prohibits anyone from interacting with ZTE in export-related functions and transactions. A Commerce Department press release explains that the termination order was issued after ZTE fulfilled its obligations to pay a $1 billion fine and file $400 million under the replacement compensation agreement. These amounts are in addition to the $361 million penalties already paid by ZTE to the BIS under the initial March 2017 transaction agreement, and these payments together constitute the largest civil penalty for violating U.S. export controls. The replacement agreement also requires ZTE to retain an external compliance coordinator, under the authority of the BIS for a period of ten years, to monitor and report on ZTE`s compliance. If there is evidence of further non-compliance by ZTE during this ten-year period, ZTE will suspend the trust funds and may activate another refusal order suspended for a period of ten years. . .