ZTE's US related export control case reflects the serious consequences of foreign companies violating the US export control system.The subsequent compliance rectification measures taken by ZTE also provide coping strategies and reference for other enterprises.

The relevant departments of the Chinese government reacted quickly to the US government's decision to sanction ZTE.The Ministry of Commerce of China issued a statement expressing strong dissatisfaction and firm opposition to the relevant practices of the United States.China has consistently and firmly opposed the use of its domestic legal system by the United States to lay off Chinese enterprises,and urged the United States not to adopt such erroneous practices,in order to avoid damaging Sino US economic and trade cooperation and bilateral relations.

On March 7,2017,the Secretary of Commerce of the United States,Wilbur Ross,announced that ZTE Communications Co.,Ltd.(hereinafter referred to as"ZTE")admitted that it had illegally exported telecommunications equipment to Iran,in violation of the United States Export Administration Regulations and the Iran Transaction and Sanctions Regulations.ZTE has reached a settlement with the United States government,with a penalty amount of up to$1.19 billion,a record high.This article will not discuss for the time being whether the US government's handling plan is legitimate or reasonable,but the case objectively reflects the serious consequences of foreign companies violating the US export control system,and serves as a wake-up call for Chinese companies that ignore such risks.The subsequent compliance rectification measures taken by ZTE also provide coping strategies and lessons for Chinese enterprises that may be affected by the US export control system.

Analysis

of the US Export Control System The US government controls the export of sensitive equipment,software,and technology as a means of promoting national security interests and foreign policy objectives.The United States export control system mainly targets two types of products and technologies:products and technologies for military and defense purposes,and dual-use products and technologies.Chinese companies are often involved in export restrictions aimed at the latter.The Bureau of Industry and Security(BIS)under the United States Department of Commerce is the main executive authority for export control of dual-use products,including authorization and approval for the export of dual-use products and technologies.However,during the specific review of export applications,the U.S.Department of Commerce may delegate the decision-making power to other relevant ministries that are more familiar with the products and technologies involved,such as the U.S.State Department,the Department of Defense,the Department of Energy,and the National Aeronautics and Space Administration.

The legislation on export control in the United States mainly includes the Export Administration Act,the Arms Export Control Act,the International Emergency Economic Rights Act,and supporting regulations,rules,and guidelines.The Export Administration Act authorizes the United States Department of Commerce to cooperate with other government agencies to jointly control the export or transit of dual-use goods,software,and technology originating in the United States.In addition to the export control rules established in the multilateral system,the United States Department of Commerce also implements certain export and reexport controls in accordance with foreign policy,particularly against certain countries,entities,and individuals that the Secretary of State of the United States identifies as sponsors of international terrorism,and subject to domestic unilateral or United Nations sanctions.

The list of export controlled products in the United States mainly includes three aspects:the Commercial Control List(CCL),the United States Arms List(USML),and the Nuclear Regulatory Commission Control(NRCC).Dual-use products and technologies involving export controls on Chinese enterprises and individuals are specified in the commercial control list.Exporters must apply for a license for the export of items on the control list.In the process of reviewing license applications,the United States government usually considers the following factors:applicant qualifications;Information on all parties involved in the transaction;Determine the appropriateness of the quality and quantity of the product to be exported based on the end user and purpose;Any legal obstacles to the proposed export;The impact of the proposed export behavior on national security;The impact of proposed export actions on foreign policy includes,but is not limited to,potential impacts on regional stability,human rights issues,and multilateral control systems.When determining whether a certain American product can be exported or whether a license is required for export,foreign enterprises should consider the following three aspects:first,determining whether the relevant product is included in the control list;Second,whether the final destination of the product is controlled and whether export requires a license;Third,whether the end-user and end use of the product are restricted,and whether export requires a license.

With certain extraterritorial jurisdictional effects

According to Section 734.4 of the United States Export Administration Act,the United States export control system has extraterritorial effects in the following situations,applicable to the export behavior of foreign exporters to specific countries and regions:related products are manufactured in the United States;Foreign manufactured products use American products as components or raw materials,and the composition exceeds a certain proportion;Foreign products are produced using American technology or software;Or foreign products produced by factories located outside the United States that use U.S.technology or software.

Regardless of whether the U.S.exporter is the U.S.parent company of a Chinese subsidiary or the U.S.subsidiary of a Chinese parent company,if it is suspected of violating end use and end-user restrictions,shipping products with limited end use out of the United States,or delivering dual-use technology to restricted end users,relevant enterprises and individuals may be subject to sanctions under the U.S.export control laws.

US companies that violate US export control regulations will be subject to civil penalties(companies are subject to high fines),administrative penalties(companies lose future export rights),and criminal penalties(company executives may face imprisonment).Foreign enterprises that violate U.S.export control regulations may be listed on the"Entity List"by the U.S.government,which means they are considered to be engaged in activities that violate U.S.national security or foreign policy interests.In addition,enterprises that violate export control regulations may also be confiscated by the United States government of goods intended for export within the United States;Or be included in the"Designated Sanctions List"to freeze their assets in the United States and restrict their transactions in the United States.

The relevant departments of the Chinese government reacted quickly to the US government's decision to sanction ZTE.The Ministry of Commerce of China issued a statement expressing strong dissatisfaction and firm opposition to the relevant practices of the United States.China has consistently and firmly opposed the use of its domestic legal system by the United States to lay off Chinese enterprises,and urged the United States not to adopt such erroneous practices,in order to avoid damaging Sino US economic and trade cooperation and bilateral relations.From a business perspective,ZTE is the world's fourth largest manufacturer of communication equipment,providing more than 100000 jobs in the United States,and forming a broad interest chain with many American suppliers.However,globally,the core chip technology is in the hands of American suppliers.After the United States government included ZTE in the"entity list",once American suppliers were prohibited from supplying ZTE,ZTE would be unable to operate and produce normally,thereby losing its existing market share and causing unimaginable losses.This makes ZTE unable to defy the penalties imposed by the US government and courts.

In the case of

ZTE Company's export control related to the United States,the US Department of Commerce listed ZTE Company on the"physical list"for illegally exporting to Iran and violating US export control regulations,and took measures to restrict its export,prohibiting domestic component suppliers from exporting components,software,equipment,and other technical products to ZTE Company.

This penalty is based on allegations by the US government against ZTE for conspiring with illegal exports,obstructing the administration of justice,and providing false statements to federal investigators."Collusive illegal export"refers to ZTE's unauthorized collusion with others and consent to export,re export,and transshipment of U.S.products(especially servers,switches,routers,and other components of Honeycomb network infrastructure)through China to Iran from the beginning of 2010 to April 2016 without obtaining an export license from the United States Department of Finance.Obstruction of judicial administration refers to the fact that from 2013 to April 2016,ZTE's defense lawyers unintentionally provided false information to the Ministry of Justice and federal law enforcement officials by hiding its sales data to Iran from 2013 to 2016,impeding the review process of the grand jury.The provision of false statements refers to the fact that in July 2015,ZTE Company made false statements during the enforcement process of the Federal Bureau of Investigation of the United States Department of Justice,promising to comply with the laws and regulations of the United States.

According to materials disclosed by the United States court,in order to circumvent the long-term embargo measures imposed by the United States on Iran,ZTE adopted the business model of establishing a"quarantine company"between January 2010 and March 2016,selling a large number of American products to Iran.In December 2010,ZTE entered into a contract with an Iranian customer,which was signed by the Iranian customer,ZTE,Beijing Eight Star Company(hereinafter referred to as"8S"),and ZTE Iran Co.,Ltd.According to the terms of the contract,ZTE agreed to provide"self developed equipment",charge fees for the project and manage the entire network;ZTE Iran Limited provides locally sourced materials and all services;8S is responsible for"related third-party equipment",which mainly refers to components subject to U.S.export laws.ZTE intends to treat 8S as a"quarantine company,"which means that 8S(rather than ZTE)will purchase prohibited equipment from suppliers and provide the equipment according to the contract,so that ZTE can stay away from U.S.export control products,thereby isolating ZTE from violations of U.S.export controls.However,due to the fact that 8S does not have the history and commercial reputation to purchase or transport,it is ultimately up to ZTE itself to purchase and transport the embargoed goods under the contract.To hide goods originating in the United States,ZTE used homemade packaging in its containers and did not list American goods on its customs declaration form.However,under United States export control regulations,the establishment of quarantine companies is illegal.During the subsequent investigation,ZTE took a series of measures to conceal the above practices,thereby violating more relevant regulations of the United States on export controls.

On March 7,2017,ZTE and the US government reached a settlement on the US government export control investigation case,and ZTE will pay approximately$890 million in criminal and civil penalties.In addition,the US$300 million fine originally scheduled to be paid by ZTE to the US Department of Commerce's Industry and Security Bureau will be suspended,and the final need to pay will depend on ZTE's compliance with the settlement agreement in the next seven years.After the court approves the Justice Department's agreement and the U.S.Department of Commerce's Industry and Security Bureau issues a settlement order,the Industry and Security Bureau will recommend removing ZTE from the"entity list.".

Compliance Advice for Chinese Enterprises The

incident of ZTE being heavily punished for violating the US export control system indicates that the US government enforces strict laws,and any illegal act that circumvents its export controls and other trade regulations will lead to serious legal consequences.Statistics show that in recent years,there are around 100 cases of penalties imposed by enterprises or individuals in the United States for violating export controls each year.Among them,there are many cases involving Iran and China,which account for about 50%of the punishment cases.Chinese enterprises,especially high-tech enterprises,are vulnerable to U.S.export control regulations if they have product and technology cooperation or purchase business with U.S.enterprises.

Faced with the compliance risk of the United States export control system,Chinese enterprises should first fully understand the United States export control system,carefully evaluate whether the traded products,end users,and export destination countries are subject to the restrictions of the United States export control system in their daily export activities,and whether export transactions require the application of a license.Secondly,in the transaction documents with American companies,intermediaries,and importers,the responsibilities and obligations of both parties in each specific transaction link should be clearly agreed upon to avoid violations of export control regulations.In addition,enterprises should establish a system for the collection,collation,and preservation of documents related to transactions in controlled goods,and properly preserve relevant transaction records,so that when investigated by regulatory authorities,they can promptly provide true and accurate information to defend.For export enterprises with a large number of U.S.related businesses,in addition to taking the above basic measures,they should also establish a complete export compliance system by referring to the Export Management and Compliance Plan(EMCP)published by the Export Control and Compliance Department of the Export Services Office of the Department of Commerce,Industry and Security.The purpose of the EMCP is to ensure that companies comply with U.S.export control policies for dual-use products,software,and technology.It lists nine elements of export compliance,including management commitments and compliance with risk management agreements.After the court approves the Justice Department's agreement and the U.S.Department of Commerce's Industry and Security Bureau issues a settlement order,the Industry and Security Bureau will recommend removing ZTE from the"entity list.".

Compliance Advice for Chinese Enterprises The

incident of ZTE being heavily punished for violating the US export control system indicates that the US government enforces strict laws,and any illegal act that circumvents its export controls and other trade regulations will lead to serious legal consequences.Statistics show that in recent years,there are around 100 cases of penalties imposed by enterprises or individuals in the United States for violating export controls each year.Among them,there are many cases involving Iran and China,which account for about 50%of the punishment cases.Chinese enterprises,especially high-tech enterprises,are vulnerable to U.S.export control regulations if they have product and technology cooperation or purchase business with U.S.enterprises.

Faced with the compliance risk of the United States export control system,Chinese enterprises should first fully understand the United States export control system,carefully evaluate whether the traded products,end users,and export destination countries are subject to the restrictions of the United States export control system in their daily export activities,and whether export transactions require the application of a license.Secondly,in the transaction documents with American companies,intermediaries,and importers,the responsibilities and obligations of both parties in each specific transaction link should be clearly agreed upon to avoid violations of export control regulations.In addition,enterprises should establish a system for the collection,collation,and preservation of documents related to transactions in controlled goods,and properly preserve relevant transaction records,so that when investigated by regulatory authorities,they can promptly provide true and accurate information to defend.

For export enterprises with a large number of U.S.related businesses,in addition to taking the above basic measures,they should also establish a complete export compliance system by referring to the Export Management and Compliance Plan(EMCP)published by the Export Control and Compliance Department of the Export Services Office of the Department of Industry and Security of the United States Department of Commerce.The purpose of the EMCP is to ensure that companies comply with U.S.export control policies for dual-use products,software,and technology.It lists nine elements of export compliance,including management commitment,risk assessment,compliance standards,compliance training,export compliance screening,records,audit,reporting,error correction,and provides detailed operational guidance and related document templates for each element,which is highly practical.

In terms of establishing a daily export compliance system for enterprises,the corrective measures taken by ZTE after settling with the US government can be used for reference by other Chinese enterprises.First,significant adjustments have been made to the senior management team,with the appointment of a new CEO and company management team,aiming to create a first-class export control compliance system;The second is to establish a new compliance management committee,under the direct leadership of the CEO,to make significant changes to the company's systems and processes,and strengthen the importance and support for compliance management;The third is to reorganize the Legal and Compliance Management Department,separate the compliance function from the legal department,establish an independent compliance management department,and add compliance professionals to ensure the independence of the compliance department;Fourth,appoint an American lawyer with rich experience as the chief export compliance officer,responsible for supervising and promoting the continuous development and improvement of the global export control compliance system;Fifth,improve the"Export Control Compliance Manual",provide more detailed compliance guidance for employees,and require all employees to sign the"Compliance Commitment Letter"every year;Sixth,adopt new automated tools and processes to scan the product shipments of ZTE and certain subsidiaries to meet export control requirements,and promote them to subsidiaries around the world;Seventh,training global employees on laws,regulations,and policies related to export control,and targeted training for key departments such as sales,procurement,research and development,and supply chain.

This article is translated by software translator for reference only.