Have A Billion Dollar Export Penalty? Let’s Not.

A record-setting payment of $1,190,000,000.00 by ZTE Corporation of Richardson, Texas (“ZTE”) shows the enormous risks today of underestimating U.S. export enforcement. The International Emergency Economic Powers Act gives the President of the United States broad authority to regulate international transactions and exports. Pursuant to two Executive Orders issued by President Clinton in the mid 1990’s, the Iranian Transactions and Sanctions Regulations (“ITSR”)  was created that prohibit, among other things, exportation or re-exportation of U.S. products to Iran without a license from the Office of Foreign Asset Control (“OFAC”).

Almost a year ago,  the Obama administration accused ZTE of violating ITSR and the Export Administration Regulations (“EAR”), restricting the export of products that could make a significant military contribution to Iran or other countries. Fast forward to today, and ZTE has plead guilty to charges of unlawful conspiracy to export U.S. goods (to both North Korea and Iran), obstruction of justice and knowingly and willfully making a materially false statement during the investigation. ZTE settled the lawsuit for the largest sanctions penalty in history: $1.19 billion divided between the U.S. Department of Justice, OFAC and the Bureau of Industry and Service (“BIS”). Below are some ideas of how to avoid becoming the record holder for the largest trade sanctions penalty:

What ZTE did: Senior management was aware of, and even condoned, illegal activities and non-compliance with trade laws.

Best Practices: Create a company culture of honesty and compliance, starting with top level management. It is up to senior management to establish clear company policies regarding compliance with all export policies because they, better than anybody else, understand the high risks associated with non-compliance. Senior management behavior is an example for the rest of the company so it should clearly show what are acceptable export practices.

What ZTE did: ZTE sought out and used “isolation companies” to re-export U.S. products to embargoed countries in order to hide ZTE’s involvement.

Best Practices: Take a look at the process third parties which you may employ use to complete their business.  Request written verification that they comply with trade laws and memorialize this via a contract in which the third party commits to complying with U.S. trade laws. The main point is to create and maintain transparency – with teeth –  regarding interactions between your company and any third party involved in your business transactions.

What ZTE did:  Incredibly, once the investigation had begun, ZTE asked its employees to sign nondisclosure agreements to conceal the illegal trade with Iran.

Best Practices:  Concealment is almost always worse than the initial crime! Create a company plan that empowers employees to report compliance issues. Even if it turns out there is no compliance issue at the moment, you are given the chance to address a minor problem before it turns into a major (record setting) compliance issue.  See our January 20, 2016 post regarding Voluntary Disclosures, which can greatly lessen or even eliminate penalties  (“New BIS Export Enforcement Guidelines”.)

What ZTE did: After learning of the impending charges, ZTE instituted a “contract data induction team” whose purpose was to identify and remove data related to the Iran transactions.

Best Practices:  Again, the concealment activity failed and brought on a Billion Dollar (!) penalty. When establishing an effective compliance plan for your company, it should include a method of safe and reliable record keeping. The plan should include the types of records to keep and when they can be destroyed as well as steps to be taken should the company face an accusation of violating laws.

Ultimately, your goal should be to establish company policies that respect and enforce compliance best practices.  If an issue should arise, the company is then prepared to assist with and minimize the effect of any violation and/or investigation, rather than hinder and thereby compound it.

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