17 May 2018

US targets ZTE and Huawei for export control and economic sanctions violations

In April 2018, the U.S. Department of Commerce’s Bureau of Industry and Security revoked the export privileges of ZTE, China’s biggest producer of telecom equipment, for seven years. The loss of export privileges for US-origin parts and software has severely affected ZTE’s business, and has forced it to cease its major operating activities. During the same month, the U.S. Department of Justice is also reported to have initiated a criminal investigation against ZTE’s rival and fellow Chinese company, Huawei Technologies.

On 13 May 2018, President Trump indicated that he had ordered measures to get ZTE “back into business”. How this will play out and whether this will imply a full or partial revocation of the most recent enforcement action against ZTE is still unclear.

In any event, the enforcement actions against Huawei and ZTE show that non-US companies should be mindful of the broad extraterritorial scope of US rules on export control and economic sanctions in order to avoid any liability risks. In particular, it is important to be cautious in dealing with US-origin items, even if there is no other link to the US in the contemplated transaction.

The denial of export privileges order prohibits ZTE from participating in any transaction subject to U.S. Export Administration Regulations (EAR) until 13 March 2025. The prohibition affects the exporting of US-origin parts and software necessary for the company to produce its telecommunications equipment and smartphones. In addition, the order prohibits any American individuals or businesses from exporting this technology to ZTE.

The Bureau of Industry and Security (BIS) issued the order as a result of ZTE’s violation of the settlement agreement reached in March 2017. The settlement amount itself was remarkable: USD 1.19 billion (for details on ZTE’s earlier violations and of the subsequent settlement agreement, see In context of March 2017). The violations of the settlement agreement included multiple false statements by ZTE to US authorities during the probation period following the conclusion of the agreement. The denial of export privileges has severely affected ZTE’s business. As a result, on 9 May 2018 the company announced that it had ceased its major operating activities.

The ZTE case took an unexpected turn on 13 May 2018, when President Trump tweeted that he and President Xi Jinping were “working together to give…ZTE a way to get back into business”. This statement resulted in broader negotiations between China and US on China’s trade concessions, particularly the reduction of China’s trade surplus with the US, and access to China’s telecommunications market. It now seems that an enforcement case relating to US export control and economic sanctions against an individual Chinese company is bound to be transformed into a negotiating tool in broader China – US trade talks. What legal instruments the US government will use to mitigate the consequences of the export ban on ZTE, as well as the practical implications of these measures, remains unclear.

Against this background, an investigation relating to China’s largest smartphone producer – Huawei Technologies – is also worth mentioning. Shortly after the denial of export privileges to ZTE had been announced, a media outlet reported that Huawei was under criminal investigation by the U.S. Department of Justice (DOJ) for allegedly violating US sanctions against Iran. No official information has been shared in relation to this news. Huawei is also said to have been subpoenaed by the U.S. Department of Commerce and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) in relation to its export and re-export of US technology to Cuba, Iran, North Korea and Syria. Similar to ZTE, Huawei’s business relies on US components.

The two enforcement actions exemplify the continued tension in US – China trade relations. As President Trump’s announcement in relation to ZTE seems to add a geopolitical component to an individual enforcement case, it remains to be seen whether and to what extent this will have wider effects on the traditionally aggressive enforcement practices. US national security concerns over Chinese companies further complicate the issue. According to an April 2018 report of the US-China Economic and Security Review Commission, both Huawei and ZTE are among “nefarious actors linked to China” that “have targeted the networks of private sector entities and private sector government contractors in order to obtain sensitive government information and to exploit vulnerabilities within federal information systems.”

Non-US companies should be mindful of the broad extraterritorial scope of US rules on export control and economic sanctions, and be cautious in their dealings with persons, items and jurisdictions subject to these rules. We will monitor the trends in this area, as well as the ZTE and Huawei cases in particular, and keep you informed on any important developments.