On March 22, ZTE Corp. agreed to pay $430 million and pled guilty to violating the International Emergency Economic Powers Act in Texas Federal Court as part of an $892 million multi-agency settlement agreement over claims it unlawfully shipped technology from the United States to Iran in violation of U.S. sanctions. The settlement is estimated to have wiped out two years’ worth of net profits for the company.
Earlier this month, the U.S. Departments of Justice, Commerce, and the Treasury announced simultaneous agreement with ZTE over its scheme to export these U.S.-made electronics without obtaining proper export licenses. The Chinese telecommunications giant also bid on two projects based in Iran involving cellular and landline network infrastructure, which would include using components from the U.S. ZTE was also accused of trying to cover up its dealings with Iran.
“ZTE Corporation not only violated export controls that keep sensitive American technology out of the hands of hostile regimes like Iran’s – they lied to federal investigators and even deceived their own counsel and internal investigators about their illegal acts,” said Attorney General Jeff Sessions in a statement earlier this month.
In addition to the financial penalties, ZTE was sentenced to three years of corporate probation where an independent corporate compliance monitor will review their export compliance program.
The DOJ portion of the settlement including a guilty plea to the IEEPA charge as well as one count of obstruction of justice and one count of making a material false statement in front of U.S. District Judge Ed Kinkeade.
According to prosecutors, from January 2010 to January 2016, ZTE directly or through a third party shipped the technology, which included routers, microprocessors, and servers overseas, and then tried to mask these operations.
“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 contract in an effort to distance ZTE from U.S. export-controlled products, and insulate ZTE from U.S. export violations,” said prosecutors.
This company was the first, but not the last, of these shell companies, meant to provide distance for ZTE from its Iranian contracts. Government officials say ZTE went so far as to establish an auto-delete function for email accounts of employees tasked with the sanitizing company databases after the sales were completed. This practice was also used to deceive a forensic accounting firm hired by its own outside counsel.
ZTE is also accused of lying to federal investigators by claiming the illegal activities had stopped. “While the investigation was ongoing, ZTE resumed its business with Iran and shipped millions of dollars’ worth of U.S. items there,” according to a statement issued by the DOJ.
In March of 2016, the U.S. Department of Commerce banned U.S. companies from selling components and products containing U.S.-made components to ZTE, because it violated U.S. sanctions on trade with Iran.
The settlement was announced one year after ZTE was publicly sanctioned for its alleged sales. If ZTE violates any part of the settlement agreement with any of the agencies, it could be on the hook for a total of $1.19 billion, as the company faces $300 million of suspended penalties from the Department of Commerce.
The company also plead guilty to accusations of making similar illegal shipments to North Korea.
“ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” said Dr. Zhao Zianming, chairman and CEO of ZTE, in a statement earlier this month. “Instituting new compliance-focused procedures and making significant personnel changes has been a top priority for the company. We have learned many lessons from this experience and will continue on our path of becoming a model for export compliance and management excellence.”
The plea agreement culminates a five-year investigation handled by the DOJ, the U.S. Attorney’s Office for the Northern District of Texas, the FBI, the Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Homeland Security, and U.S. Immigration and Customs Enforcement’s Homeland Security Investigations.