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Largest Ever Civil Penalty for Export Control Violations Assessed on Mainland Chinese Company

The DOC announced on 7 March that a mainland Chinese company has agreed to a record-high combined civil and criminal penalty of US$1.19 billion for an “egregious scheme” to illegally ship telecommunications equipment to Iran and North Korea. Commerce Secretary Wilbur Ross said this penalty, the largest ever imposed by the U.S. government in an export control case, highlights that the Trump administration “will be aggressively enforcing strong trade policies” and that “those who flout our economic sanctions and export control laws … will suffer the harshest of consequences.”

The penalty amount includes a US$661 million penalty to be paid to the Bureau of Industry and Security (with US$300 million suspended during a seven-year probationary period), US$430.5 million in combined criminal fines and forfeiture under a plea agreement with the Department of Justice, and US$100.8 million as part of a settlement agreement with the Office of Foreign Assets Control. The company has also agreed to active audit and compliance requirements designed to prevent and detect future violations as well as a seven-year suspended denial of export privileges that DOC states “could be quickly activated if any aspect of this deal is not met.”

From January 2010 through April 2016 the company conspired to evade the U.S. embargo against Iran to obtain contracts with and related sales from Iranian entities to supply, build, operate and/or service large-scale telecom networks in Iran, the backbone of which would be U.S.-origin equipment and software. Shipped items included routers, microprocessors and servers controlled under the Export Administration Regulations for national security, encryption, regional security and/or anti-terrorism reasons.

According to information from DOC and OFAC, members of the company’s highest-level management were specifically aware of and considered the legal risks of engaging in the illegal activities prior to signing contracts with Iranian customers and supplying U.S.-origin goods to Iran. After telling the U.S. government the company had ceased its Iran-related activities following the initiation of a government investigation, those leaders decided to surreptitiously resume those activities, which continued until BIS added the company to the Entity List in 2016. Under the direction of those leaders the company engaged in an elaborate scheme to delete evidence of the illegal activities and make knowingly false and misleading representations and statements to U.S. law enforcement agencies.

In related news, BIS has extended from 27 February to 29 March the expiration date of a temporary general licence allowing exports of goods subject to the EAR from the United States to ZTE Corporation (Zhongxing Telecommunications Equipment Corporation) and ZTE Kangxun Telecommunications Ltd.

Restrictions on such exports were imposed on 8 March 2016 when BIS placed these entities (and two others) on the Entity List following its determination that they were involved in a scheme to establish, control and use a series of shell companies to illicitly re-export controlled items to Iran. BIS subsequently issued a temporary general licence that suspended these restrictions and restored the licence requirements, licence review policies and licence exceptions under the EAR that applied prior to 8 March to exports, re-exports and transfers (in-country) to these two entities. BIS has said this licence may be renewed if it determines that these entities are timely performing their undertakings to the U.S. government and otherwise co-operating in resolving the matter.

For the other two entities (Beijing 8-Star and ZTE Parsian) there continues to be a licence requirement for all items subject to the EAR and a licence review policy of presumption of denial. The licence requirement applies to any transaction in which items are to be exported, re-exported or transferred (in-country) to either of these entities or in which they act as purchaser, intermediate consignee, ultimate consignee or end-user. In addition, no licence exceptions are available for exports, re-exports or transfers (in-country) to these entities.

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