Earlier today, the Bureau of Industry and Security (BIS) announced the imposition of denial of export privileges (Denial Order) against Zhongxing Telecommunications Equipment Corporation, of Shenzhen, China (ZTE Corporation) and ZTE Kangxun Telecommunications Ltd. of Hi-New Shenzhen, China (ZTE Kangxun) (collectively, ZTE).
Denial Orders are issued by the Assistant Secretary for Export Enforcement of BIS denying the export privileges of a company or individual. A denial of export privileges prohibits a person from participating in any way in any transaction subject to the EAR. Furthermore, it is unlawful for other businesses and individuals to participate in any way in an export transaction subject to the EAR with a denied person.
Under the terms of the Denial Order, no person may, directly or indirectly, do any of the following:
- Export or reexport to or on behalf of ZTE any item subject to the EAR;
- Take any action that facilitates the acquisition or attempted acquisition by ZTE of the ownership, possession, or control of any item subject to the EAR that has been or will be exported from the United States, including financing or other support activities related to a transaction whereby ZTE acquires or attempts to acquire such ownership, possession or control;
- Take any action to acquire from or to facilitate the acquisition or attempted acquisition from ZTE of any item subject to the EAR that has been exported from the United States;
- Obtain from ZTE in the United States any item subject to the Regulations with knowledge or reason to know that the item will be, or is intended to be, exported from the United States; or
- Engage in any transaction to service any item subject to the EAR that has been or will be exported from the United States and which is owned, possessed or controlled by ZTE, or service any item, of whatever origin, that is owned, possessed or controlled by ZTE if such service involves the use of any item subject to the EAR that has been or will be exported from the United States. For purposes of this paragraph, servicing means installation, maintenance, repair, modification or testing
Under the Denial Order, all sales, shipments, or services of items subject to the EAR by any person – United States or foreign – are prohibited, including any sales to a distributor or third party where the products or services are intended for ZTE.The Denial Order was imposed on ZTE as a result of allegedly false statements by ZTE to BIS following the large export enforcement settlement last year. BIS issued the Denial Order despite ZTE’s protests that the order would “destroy the company.” Given these circumstances, while we cannot be certain, it seems unlikely that there will be any quick interim relief to the prohibitions of the Denial Order, as there was last year when ZTE was subject to a similar prohibition. By its terms, the Denial Order will remain in effect until March 13, 2025.
The products that are subject to the EAR and prohibited under this Denial Order consist of:
- All items in the United States, including in a U.S. Foreign Trade Zone or moving in transit through the United States from one foreign country to another;
- All U.S.-origin items wherever located;
- Foreign-made commodities that incorporate controlled U.S.-origin commodities, foreign-made commodities that are “bundled” with controlled U.S.-origin software, foreign-made software that is commingled with controlled U.S.-origin software,to the extent subject to the EAR;
- Certain foreign-made direct products of U.S.-origin technology or software, as described in §736.2(b)(3) of the EAR; and
- Certain commodities produced by any plant or major component of a plant located outside the United States that is a direct product of U.S.-origin technology or software.
In order to prevent evasion, BIS may extend the denial order to any person, firm, corporation, or business organization related to ZTE by affiliation, ownership, control, or position of responsibility in the conduct of trade or related services. The EAR provides a process for extending the denial order under §766.23. It is not yet clear whether BIS will extend the order to all ZTE-affiliated entities, including, for example, ZTE’s U.S. subsidiary.
Companies engaged in trade with ZTE should immediately: (1) identify all pending and near-term transactions with ZTE (including sales, shipments, returns, technical support, and services); (2) identify the ZTE counter-party on all transactions, including ZTE purchases through distributors or resellers; and (3) seek advice from counsel on further activities with ZTE.
A copy of the Denial Order can be viewed at commerce.gov.
Client Alert 2018-094
