ZTE Fine Shows Big Sanctions Aren't Just For Banks Anymore

ZTE Corp. could be on the hook for a nearly $1.2 billion penalty for violating export control rules for Iran and North Korea, putting the Chinese telecom titan in the type of crosshairs usually reserved for financial institutions and keeping compliance officers squarely on guard.

The company found itself on the receiving end of a three-pronged walloping from the U.S. Departments of Treasury, Commerce and Justice following a five-year probe that unearthed its efforts to sell goods with U.S.-origin components to the heavily sanctioned nations and its attempts to cover it up.

Only time will tell if the action signals a sea change for the types of companies targeted with hefty penalties, but Morrison & Foerster LLP partner and former Assistant Attorney General John Carlin suggests that a steady move toward collaboration among government agencies makes it a distinct possibility.

“We came up with a strategy based on that and did education sessions with all the U.S. attorneys’ offices and changed the way we did metrics for what constitutes a successful case,” Carlin told Law360. “I do think there is an increased likelihood in significant enforcement action for non-banks in this area.”

Carlin was describing a steady bit of reorganization within the DOJ over the past several years that saw the agency’s sanctions and national security teams working more closely with Commerce and Treasury to identify questionable sales.

ZTE was tagged with $892 million in fines across its three settlement agreements Tuesday, with just under half of that total still subject to approval by a Texas federal court. Additionally, the company could pony up another $300 million if it backslides on its settlement with Commerce’s Bureau of Industry and Security.

That level of penalty usually only gets handed out to financial giants like BNP Paribas or Commerzbank for their roles in financing illicit trading. But ZTE fell into a dangerous enforcement nexus that brought down the full heft of the government’s enforcement apparatus.

This was particularly true in the context of the Treasury settlement, under which the agency’s Office of Foreign Assets Controls extracted a payment of just over $100 million, the largest penalty ever given to a non-bank.

“In the past, when OFAC went hunting, it set its sights on non-U.S. financial institutions for the largest penalties,” Kirkland & Ellis LLP partner Mario Mancuso told Law360. “Today, OFAC widened the aperture.”

The settlements with ZTE came one year after Commerce placed the company on its so-called Entity List, effectively banning it from doing any business with U.S. companies. The agency eventually issued reprieves from that ban as the two parties hashed out the settlement, but a DOJ official remarked Wednesday that the initial listing proved to be a "game-changing event" in bringing ZTE to the table.

As he announced the enforcement action against ZTE on Tuesday, Commerce Secretary Wilbur Ross certainly indicated that the Trump administration would not be taking its foot off the gas with regard to sanctions and export control enforcement anytime soon, though he didn't indicate that the tech sector would be under specific scrutiny.

“We are putting the world on notice: the games are over,” he said. “Those who flout our economic sanctions and export control laws will not go unpunished — they will suffer the harshest of consequences. Under President Trump’s leadership, we will be aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers.”

Others said it was too soon to ascertain whether a tangible shift in enforcement was imminent, noting that the penalties against ZTE were so high because the scheme the company pulled off was particularly egregious.

According to the various settlement documents released Tuesday, not only did ZTE knowingly facilitate sales of sensitive technology containing U.S. parts to Iran and North Korea, it even resumed those sales after the government began its probe.

To cover its tracks, the company went so far to hide data relating to its dealings that it established an auto-delete function for the email accounts of employees tasked with sanitizing company databases after the sales, thereby deceiving a forensic accounting firm hired by its own outside counsel at Clifford Chance LLP.

"It is so unprecedented in the scheme, and the cover-up and the conspiracy to evade U.S. sanctions, that there aren't really any takeaways for a case that is so brazen like this," Jacobson Burton Kelley PLLC partner Doug Jacobson told Law360.

ZTE’s top brass indeed signed off on the illicit transactions, so while there may not seem to be too many lessons to glean about compliance due diligence, Baker Botts LLP partner Ginger Faulk noted that ZTE’s use of so-called isolation companies to act as intermediaries could serve notice to other companies with complex supply chains.

“Companies should be asking themselves whether their distribution network and any touchpoints that network might have with sanctioned countries, when viewed in the most unfavorable light, places them at risk of being accused of using their distributor and intermediary relationships to evade U.S. sanctions laws,” Faulk told Law360.

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