By George W. Thompson
While the words “drama” and “export controls” usually don’t appear in the same sentence, here’s a tale of export control drama that should appeal to specialists as well as the general public.
Citing documents that purportedly show a scheme to violate the Export Administration Regulations (EAR), the Bureau of Industry and Security (BIS) has placed Chinese wireless telecommunications manufacturing giant Zhongxing Telecommunications Equipment Corporation (ZTE) on the Entity List. As a consequence, a license is now required to export, reexport or transfer all items subject to the EAR to ZTE and three of its named affiliates.
The Entity List is a compilation of organizations and individuals that have been found to be “acting contrary to the national security or foreign policy interests of the United States.”
In the past, most designees were engaged in illicit proliferation activities. More recently designated parties include supporters of terrorism and business enterprises in sanctioned countries, such as in the Crimea region covered by Ukraine-related sanctions against Russia. The standards for inclusion are broad enough to encompass any party viewed as subverting U.S. policy abroad.
Threat of Violations Warranted Placement on Entity List
The Federal Register notice announcing the designations asserted that ZTE, two of its Chinese affiliates and its Iranian affiliate acknowledged violating EAR prohibitions on reexports to sanctioned countries, Iran in particular. They also allegedly plotted to establish front companies as covers for their dealings with Iran. The risk that the ZTE companies would violate the EAR warranted their inclusion on the Entity List.
As support for its action, BIS published internal corporate documents detailing the plot, available here and here.
This is juicy stuff. Among other things, the documents acknowledge weaknesses in ZTE’s compliance program; while this is hardly damning in itself, there are specific instances where possible violations are identified. The planned solution involved the adoption of the “Detached [Business] Model”, in which ZTE’s role in supplying EAR-controlled items with Iran would be masked by trading through puppet intermediaries.
Cutoff of Export Trade with ZTE
While it’s clear that the documents were not meant for outside dissemination, we don’t know whether the evasion scheme was implemented. BIS apparently concluded there was sufficient evidence to warrant effectively shutting down ZTE’s ability to obtain goods and technology from the United States. ZTE’s internal documents noted the crippling effect that placement on the U.S. “blacklist” would have on the company. This prophecy has now come true.
Due to the designation, exports, reexports and in-country transfers to ZTE and its named affiliates of all items subject to the EAR is now prohibited without a BIS license. License applications face a presumption of denial. ZTE’s U.S. and foreign suppliers face penalties themselves if they fail to meet this requirement.
I’ll admit this may not be James Bond-level excitement, but in the normally staid world of export controls, it constitutes a major bombshell. Since I’m sure BIS is investigating whether violations did, in fact, occur, we may not have heard the last of it. In the meantime, there’s, at least, one lesson here: it’s a very bad idea to plan evasion of U.S. export controls, memorialize those plans and then let BIS get hold of them.
