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Government Professionals (Staff) Recommended a Lesser Monetary Penalty, But the Harsher Export Ban Was Activated

In the last few months, the name ZTE, the Chinese telecoms giant, has become a familiar name for the wrong reasons. On April 16, the Commerce Department, as part of an ongoing enforcement action against ZTE primarily for violations of U.S. sanctions against Iran and North Korea, activated a “denial order” blocking ZTE’s access to essential U.S. components needed to conduct its key lines of its business. Just over three weeks later, on May 9, ZTE announced that its “major operating activities . . . had ceased” “as a result of the Denial Order.”

ZTE’s announcement was not surprising. Given its dependence on U.S. components, the debilitating (if not life-ending) impact of the denial order was foreseeable. Notwithstanding the record-setting severity of the enforcement measures taken against ZTE, the case was probably of interest to a limited audience, including ZTE’s customers, supply chain, regulators, policy professionals, and lawyers in relevant practice areas.

On May 13, the U.S. President transformed the ZTE case from a matter of narrow interest to a major news story, and controversy. That day, the President tweeted: “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”

Why, many wondered, was the “America First” president working to save jobs in China while simultaneously threatening trade war with the country?Others, including in Congress, publicly opposed the President’s plan. A House committee approved language in an appropriations bill blocking the President from reversing the export ban on ZTE. A Senate committee followed with a similar move. The House-passed version of the National Defense Authorization Act for Fiscal Year 2019 (NDAAincludes language that, among other measures, would substantially or entirely exclude ZTE from the supply chain by prohibiting federal agencies from contracting with vendors that use ZTE equipment, systems or services (the same NDAA prohibitions apply to Chinese firm Huawei).

In addition to pending legislation, some members of Congress and others have argued that the ZTE export ban should stand because, among other reasons, ZTE is a threat to national security (the NDAA contains a recitation of select national security concerns raised by U.S. government entities about ZTE (and Huawei) from 2011). Senator Rubio, for example, said that he views the ZTE enforcement “in the context of the larger China issue” and as “an opportunity to impose a real cost on China for everything else that they’re doing.”

The sentiments expressed by Senator Rubio and others reflect commercial, competition, policy, and strategic concerns held by business, policy makers, defense and national security officials, and others about China and Chinese firms like ZTE and Huawei. But when raised in the context of and as a justification for a specific legal enforcement action, the sentiments blur lines between what should primarily be an enforcement based on facts and laws applicable to ZTE’s conduct, rather than a blunt force instrument for advancing separate or wider policy objectives that would more properly be furthered by other existing laws or enforcement actions, or new laws.

Not only do some of the reactions to the President’s tweet muddle legal and policy lines, the Trump Administration’s stated strategy to leverage sanctions, along with anti-corruption and anti-money laundering laws, to “coerce and deter” economic rivals like China does so as well. With respect to ZTE, the Administration’s strategy, along with statements made by Secretary Ross when he initially announced the ZTE enforcement action and later fuel questions about what legal, policy and tactical considerations are and have been at play in the matter. In a May 24 interview with CNBC, Secretary Ross elaborated on the process leading to Commerce’s decision to activate the ZTE export ban, stating in part that:

“There were two things that we could do [after learning that ZTE had lied to the government in breach of its March 2017 court-approved settlement agreement]. One was to simply take the extra $300 million [portion of the penalties that were assessed in March 2017 but suspended subject to ZTE’s compliance]. The other was to put them in a denial order, meaning that they can not get U.S. technology that’s on the list. I chose to do the stronger of the two remedies and, frankly the staff had recommended doing the milder one– the 300 million, but really I wanted to make sure we would change the behavior of this company because they had been bad actors. So that’s how we got to the first decision.”

The stand-out point here is that “the staff” (presumably, government lawyers and other career professionals) recommended the lesser penalty. While Secretary Ross’ stated rationale to impose the harsher penalty to change ZTE’s behavior may have been sound, the recommendation of the career professionals with expertise in sanctions and export controls enforcement should, perhaps, have carried the day (it should be noted that if the $300 million penalty had been activated in April, the export ban would have remained an option while the settlement agreement was in force). Secretary Ross’ description of the process leading to the export ban and the mess that has followed it give more reason to ask whether, in the first place, the export ban was the right (or best) remedy under applicable laws and the objectives served by them.


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Post Author: MassPoint PLLC

MassPoint PLLC is a boutique law and strategy firm that works with diverse clients to meet legal, strategy, and risk management needs in a globalized, complex world.