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DOC Announces Deal to Lift Export Ban on Major Mainland Chinese Telecom Company as Congress Seeks to Maintain Restrictions

A ban on exports to a major mainland Chinese telecommunications company could be lifted soon after the U.S. Department of Commerce announced that the company has agreed to a significant fine and extensive compliance requirements. Then again, the U.S. Congress is considering legislation that would prevent President Trump from reversing the ban.

In March 2016 the U.S. Bureau of Industry and Security placed Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. (collectively, ZTE) on the Entity List because they (i) were involved in a multi-year conspiracy to supply, build and operate telecom networks in Iran using U.S.-origin equipment in violation of the U.S. trade embargo and (ii) committed hundreds of U.S. sanctions violations involving the shipment of telecom equipment to North Korea. BIS subsequently suspended the associated restrictions on exports to ZTE of goods subject to the Export Administration Regulations until March 2017, when ZTE was removed from the Entity List following an agreement with the DOC that resulted in a US$1.19 billion penalty as well as active audit and compliance requirements designed to prevent and detect future violations.

However, BIS determined that ZTE violated that agreement by making false statements about the steps it took to discipline employees concerning the original violations and in April 2018 imposed a seven-year ban on exports to ZTE. The company asked BIS to lift the ban, which apparently caused it to cease major operations, and Beijing reiterated the request in trade talks with U.S. officials. Unexpectedly, President Trump agreed to the request, explaining that ban would cause the loss of “too many jobs in China” and negatively affect the U.S. suppliers from which ZTE purchases a “big percentage of individual parts” for its products.

On 7 June, the DOC announced that the export ban will be lifted once ZTE pays US$1 billion and places an additional US$400 million in suspended penalty money into an escrow account in a U.S. bank approved by BIS. Currently prohibited shipments to ZTE may not resume until this takes place. In addition, the settlement agreement includes the following components.

  • ZTE will be required to retain for ten years a team of special compliance co-ordinators selected by and answerable to BIS who will monitor ZTE’s compliance with U.S. export control laws on a real-time basis.
  • ZTE must replace the entire board of directors and senior leadership for both entities.
  • A ten-year denial of export privileges will be suspended but can be activated in the event of additional violations.

The DOC states that this settlement, which is collectively the most severe penalty BIS has ever imposed on a company, sets a new precedent for monitoring to assure compliance with U.S. law. According to the agency, embedding compliance officers into the company “vastly improves the speed with which the Department of Commerce can detect and deal with any violations.”

President Trump’s decision to lift the export ban on ZTE has been met with opposition by members of Congress on both sides of the aisle and legislation is under consideration in the House and Senate that would limit his ability to take such action. The Senate has added to an annual defence authorisation bill a provision that would prevent the president from lifting the export ban or other penalties until he shows that ZTE has not committed any export violations for at least a full year. This provision would also nullify any action by the president to lift the ban before the bill is enacted. In the House, meanwhile, Reps. Ted Deutch (Democrat-Florida) and Ileana Ros-Lehtinen (Republican-Florida) have introduced a stand-alone bill (H.R. 6053) to prevent the president from modifying the export ban.

Senators on both sides of the aisle are supporting the provision as a way to bolster U.S. national security, citing ZTE’s history of violations as well as suspicions about the role it and other mainland Chinese telecom companies might be playing in Beijing’s cyber-espionage efforts. However, White House Deputy Press Secretary Hogan Gidley argued that these concerns would be adequately addressed by the penalties announced on 7 June, which “will ensure ZTE pays for its violations and [give] our government complete oversight of their future activity without undue harm to American suppliers and their workers.” Administration officials say they will work to have the provision removed when the defence bill goes to a House-Senate conference.

Content provided by Picture: HKTDC Research
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