On April 16, 2018, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) imposed a denial order involving Zhongxing Telecommunications Equipment Corporation of Shenzhen, China (ZTE Corporation) and ZTE Kangxun Telecommunications Ltd of Hi-New Shenzhen, China (ZTE Kangxun). The denial order, effective immediately, restricts ZTE Corporation and ZTE Kangxun from participating in any way in any transaction involving any hardware, software, or technology that is exported / re-exported or to be exported / re-exported from the United States and is subject to the U.S. Export Administration Regulations (EAR). The denial order also restricts any person from engaging, directly or indirectly, in certain EAR-related activities involving ZTE Corporation or ZTE Kangxun.
Restricted activities include exporting or re-exporting to ZTE Corporation or ZTE Kangxun any hardware, software, or technology subject to the EAR (including U.S.-origin items abroad and foreign-made items with more than 25 percent controlled U.S. content), as well as facilitating acquisition of such items by the ZTE entities, and servicing EAR-controlled items that are owned, possessed or controlled by the ZTE entities. It should be noted that with respect to non-U.S. items that incorporate U.S. content, such U.S. content is “controlled” where a license would be required to export it to the country of destination as indicated by the Commerce Control List and BIS Country Chart.
Restrictions on servicing also include servicing items in ZTE’s possession that are not subject to the EAR if, in providing the service, a person uses an item that is subject to the EAR. “Service” in this context means installation, maintenance, repair, modification, or testing. The restrictions in the order last for a period of seven years, until March 13, 2025.
The Commerce Department’s action follows a March 2017 settlement agreement related to ZTE activities in violation of U.S. law regarding Iran and North Korea. Commerce found that those activities involved “an elaborate scheme to hide the unlicensed transactions from the U.S. Government, by deleting, destroying, removing, or sanitizing materials and information.”
Commerce activated the suspended denial order in reaction to Commerce’s findings that ZTE had continued to make false statements to Commerce, particularly regarding disciplinary action for ZTE employees involved in the activity with Iran and North Korea. Commerce stated that the activity was “part of an unacceptable pattern of false and misleading statements and related actions”.
This denial order is already having a significant impact on the two entities, with collateral effects on affiliates, and on all entities who are in the supply chain or provide support services for ZTE where they have items subject to the EAR to be used in the relationship.