China’s ZTE joins an unwanted club of US sanctions busters

US sanctions programme, an extension of the nation’s foreign policy, is given bite by the dominance of the US dollar in global finance, America’s stranglehold on the parts and software that are essential in technology products, and the size of the largest consumer market on earth

PUBLISHED : Wednesday, 22 March, 2017, 11:03am
UPDATED : Wednesday, 22 March, 2017, 11:51pm

ZTE Corp, China’s largest listed telecommunications equipment supplier, earlier this month joined the unenviable fraternity of companies that paid stiff penalties after pleading guilty to breaching the United States’ longstanding sanctions on Iran and North Korea.

The company was slapped with a total penalty of US$1.2 billion on March 8, becoming the first technology company alongside some of the world’s largest banks as the biggest US sanctions busters to settle with Washington.

The US sanctions programme is an extension of the nation’s foreign policy. Its bite is reinforced by the dominance of the US dollar in global finance, America’s stranglehold on the parts and software that are essential in technology products, and by virtue of the US being the largest consumer market in the world.

“If an organisation wants to do business with the US or have any presence in the US, then violating sanctions can result in severe penalties,” said Paul Haswell, a partner at international law firm Pinsent Masons. “The US is such an important trading partner that compliance with its sanctions is something that all internationally competitive businesses have to follow.”

US sanctions vary in scope, according to the US Office of Foreign Assets Control, which is under the US Department of the Treasury.

Some are broad-based and oriented geographically, which is the case for Iran and North Korea. Others are “targeted”, such as counterterrorism and cybersecurity-related sanctions, which focus on specific individuals and entities.

Following a five-year US investigation, ZTE agreed to settle its case jointly with the US departments of commerce, justice and treasury. It marked the largest fine ever levied by the US government in an export control sanction.

Of the total penalty, US$300 million payable to the Bureau of Industry and Security under the commerce department will be suspended during a seven-year probationary period.

In response, ZTE president Zhao Xianming acknowledged the company’s missteps. Before stepping down as its chairman, Zhao had pointed out that establishing “new compliance-focused procedures and making significant personnel changes had been a top priority for the company”.

ZTE also agreed to a three-year term in which an independent compliance auditor will regularly monitor the firm’s compliance with US export control laws and performance of obligations under its settlement.

In addition, ZTE was ordered to provide extensive training on export control requirements to its management and employees, including those of the firm’s subsidiaries or other entities that it owns.

“The large penalty reflected how ZTE actively tried to conceal its breaches and cover up the full extent of what it had done wrong even as the investigation was going on,” Haswell said.

The commerce department found that ZTE conspired to evade the US embargo against Iran and North Korea. The Shenzhen-based company was also found to have projects in Sudan, Syria and Cuba, according to confidential ZTE documents dated 2011 that the department released.

It said ZTE engaged in “an elaborate scheme to prevent disclosure to and affirmatively mislead the US government by deleting and concealing documents and information” from the lawyer and forensic accounting firm that the company retained during the US investigation.

“ZTE is not the first technology company to be fined for violating US sanctions; lower penalties are levied against smaller firms quite frequently for minor breaches,” Haswell said. “Many organisations, especially banks, have been subjected to penalties for dealing with restricted persons or countries under US sanctions. The scale of such breaches determines the severity of the fine imposed.”

In June 2014, French bank BNP Paribas pleaded guilty and agreed to pay a record US$8.9 billion penalty for illegally processing financial transactions for countries subject to US economic sanctions, according to the US Department of Justice.

BNP Paribas acknowledged that from at least 2004 through 2012, it knowingly and wilfully moved more than US$8.8 billion through the US financial system on behalf of sanctioned Sudanese, Iranian and Cuban entities. BNP Paribas also admitted to using various sophisticated schemes to conceal from US regulators its illicit transactions.

ZTE’s large fine also served as a deterrent to other technology companies from committing such breaches, Haswell said.

“The Office of Foreign Assets Control may well be considering whether other Chinese companies trading in the US could have breached sanctions,” Haswell said.

“Huawei Technologies would surely be at the top of this list, given the ZTE investigation and the fact that in June last year, Huawei was issued with a subpoena by the US commerce department to turn over all information relating to the export or re-export of US technology to Cuba, Iran, North Korea, Sudan and Syria.”

The US government has also remained concerned about China’s role in the proliferation of weapons of mass destruction and missiles, according to a report published by the US Congressional Research Service in January 2015.

Those concerns included Chinese companies supplying key technologies to Pakistan’s nuclear and missile programmes.

In December 2012, Nanjing-based China Nuclear Industry Huaxing Construction pleaded guilty in a US criminal case for illegal exports of high-performance epoxy coatings to the Chashma-2 nuclear reactor project in Pakistan, the report by the research service said.

In September 2001, the Bush administration imposed sanctions, which denied exports of satellites for two years, on China Metallurgical Equipment Corp for the proliferation of missile technology to Pakistan.

The US State Department ruled in August 2003 that government-owned China North Industries Corp substantially contributed to missile proliferation in an unidentified country, resulting in a two-year ban for the company on export licences from the US and imports from China.

“There is a market for all kinds of technologies in the countries subject to certain US sanctions, and there will always be money to be made from selling technologies to these areas,” Haswell said. “Chinese companies with international ambitions will need to ensure they stay on the right side of these sanctions.”