ZTE Pays the Price for Circumventing Sanctions and Export Controls
Here is a real zinger – clients sometimes do not tell their lawyers the truth.
I will wait a minute while you get off the floor because I know everyone is shocked and amazed that this happens. But in the recent ZTE case, which we will discuss, the client company lied several times to its in-house and outside counsel resulting in false representations to the US government.
To be sure, we often know that “little” omissions occur in the investigation and representation function when counsel interacts with the Justice Department. No defense counsel knows everything and often defense counsel is learning more about a client, and at a faster pace, then the government, at least that is what they should be doing to adequately represent their clients.
The ZTE case represents a brazen set of corporate lies and misconduct, probably the most egregious example of corporate lying to counsel and in turn to the government.
ZTE agreed to plead guilty and pay $430 million for conspiring to violate the Iran sanctions, obstructing justice and making a false statement. Simultaneously, ZTE reached agreements with the Department of Commerce’s Bureau of Industry and Security (BIS) and the Department of Treasury’s Office of Foreign Assets Control (OFAC). The total criminal and civil penalties was approximately $892 million. ZTE suspended an additional $300 million, which ZTE will pay if it violates its settlement agreement with the BIS.
ZTe’s criminal conduct spanned six years, and centered on the export of US-origin, dual-use items listed on the Commerce Departments Control List (CCL) which were incorporated into ZTE equipment and shipped to customers in Iran. ZTE knew the conduct ws illegal and went to great lengths to hide the conduct internally and from the government. Throughout the course of the investigation, ZTE knowingly lied to the government when it insisted, as represented by counsel that the conduct had stopped, when in fact the conduct was continuing. Indeed, ZTE shipped millions of dollars of equipment to Iran knowing that it represented to the contrary to the government.
ZTE’s cover up went beyond lying to the government and involved elaborate schemes to hide data related to the illegal shipments from forensic accounting firms hired to review the transactions, and knowing that the forensic accounting firm would represent to the government the status of possible illegal shipments. Eventually, ZTE informed its counsel of he scheme and permitted counsel to inform the government that it had been lying to the government (and counsel) for years.
All told, ZTE shipped approximately $32 million in equipment to Iran without obtaining proper export license. ZTE’s products were used to construct cellular and landline communications networks.
To disguise the illegal contracts, ZTE created a number of separate companies that were funded and controlled by ZTE. These companies were listed as “isolation companies” and portrayed as third parties as a means to skirt US sanctions against Iran. Even though these isolation companies entered into the contacts with Iran, ZTE shipped the equipment, and packaged the equipment to deceive the real manufacturer and party responsible. The outside labels did not disclose the US-origin equipment, while the internal packing slips included a list of the US-origin equipment. Later, four ZTE executives created a new scheme to circumvent US sanctions against Iran, using new isolation companies.
After ZTE’s scheme was reported by Reuters news, ZTE temporarily ceased sending shipments, but shortly thereafter, resumed illegal shipments.
ZTE’s cover up scheme was elaborate. Despite knowing there was an ongoing grand jury investigation, ZTE had employees involved in the shipments execute non-disclosure agreements. Subsequently, outside counsel represented to the government that ZTE had ceased all shipments. In a separate meeting with US officials, in-house and outside counsel represented to the government that the illegal shipments had ceased. That representation was false (unbeknownst to counsel). ZTE officials lied to in-house and outside counsel causing them, in turn, to lie to the government.
As part of the overall concealment, ZTE employees were instructed to “sanitize the databases” of all information, related to the sales to Iran. These same individuals implemented an auto-delete function for all of their emails that resulted in the deletion of all of their emails each night in order to avoid detection by the forensic accounting firm.