March 8, 2016

U.S. Commerce Department Imposes Sanctions on Chinese Global Telecommunications Manufacturer ZTE Corporation

The U.S. Commerce Department has placed Chinese telecommunications equipment manufacturer ZTE Corporation on the Entity List, prohibiting exports to ZTE Corporation of items subject to the Export Administration Regulations, including U.S.-origin hardware, software, and technology. The designation comes in response to ZTE’s apparent reexport of controlled dual-use items from the United States to Iran in violation of U.S. law.

On Tuesday, March 8, the U.S. Department of Commerce placed Zhongxing Telecommunications Equipment Corporation, known as ZTE, on the Entity List, along with affiliates ZTE Kangxun Telecommunications Ltd., Beijing 8-Star International Co., and ZTE Parsian. The designation follows the U.S. Government’s finding that ZTE violated U.S. law regarding exports to Iran and had acted “contrary to the national security and foreign policy interests of the United States” by using shell companies to “illicitly reexport controlled items to Iran in violation of U.S. export control law.”

Although exports that were already en route to ZTE aboard a carrier are exempted, the regulation has immediate effect and makes unlawful any unlicensed exports, reexports, or in-country transfers to ZTE and its affiliates. Exports and reexports to ZTE of U.S.-origin items are now subject to a mandatory licensing policy under which the Commerce Department will apply a presumption of denial.

This designation will have a profound impact on the telecommunications sector in the United States and abroad. Deeply embedded in the global supply chain for high-end telecommunications and computer networking equipment, ZTE is the world’s fourth largest supplier of smartphones with approximately 7% of the global market share. ZTE has described U.S. companies Microsoft, Intel, IBM, Avaya, and Honeywell as “key strategic partners.” Companies in this sector — including U.S. companies, and non-U.S. companies that trade in U.S.-origin items — are advised to evaluate their customer base to ensure that they are not supplying U.S.-origin items to ZTE or its affiliates, whether directly or indirectly through intermediaries.

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This alert does not constitute legal advice and anyone seeking to do business with ZTE, its affiliated companies, or any other individual or business on the Entity List should consult legal counsel before doing so.

If you would like additional information about the issues addressed in this Client Alert, please contact Rich Matheny, who chairs Goodwin Procter’s National Security & Foreign Trade Regulation Practice, or the Goodwin Procter attorney with whom you typically consult.