Lying and Accountability: ZTE Pays the Price

Despite our political dialogue and the often-heard charges of fake news and lying, telling the truth still matters in a variety of contexts.  For example, Special Counsel Mueller has made various characters in the Russia investigation plead guilty to the crime of making false statements.

The US Department of Commerce recently announced that Zhongxing Telecommunications Equipment Corporation of Shenzen China and ZTE Kangxun Telecommunications Ltd. (collectively referred to as “ZTE”) have been denied export privileges – because of its false statements made to Commerce Department officials. (Copy HERE).

In March 2017, ZTE agreed to pay civil and criminal penalties and forfeiture of $1.19 billion for illegally shipping telecommunications equipment to Iran and north Korea, making false statements and obstructing justice and affirmatively misleading the US Government.  As part of this settlement, ZTE agreed to a seven-year suspended denial of export privileges, which could be activated if ZTE violated the terms of the settlement agreement or violated Export Administration Regulations.

For some reason, ZTE is unable to provide truthful information to the US Government.  Despite its record of lies and deceit, after the settlement, ZTE continued to lie to the Commerce Department during its probationary period by claiming that it had imposed specific disciplinary punishments to various senior officials when, in fact, they had not been disciplined.  In fact, the ZTE employees were paid bonuses instead of being disciplined.  ZTE only acknowledged that it had made these false statements when asked to provide documents and information to confirm that the employees had been disciplined.

ZTE’s records of lies is discouraging to say the least.  ZTE made false statements when it was originally caught and put on the Commerce Department’s prohibited Entity List, made false statements during the settlement discussions and then again after its settlement.  ZTE’s culture of deceit is undeniable and calls into question whether the organization can ever be trusted.

Under the Commerce Department’s Denial Order, ZTE now cannot export any of its products – a death sentence for a global telecommunications company – for seven years.

Unfortunately, a number of recent enforcement actions involving banks and telecommunications companies have highlighted blatant misrepresentations made by company officials to US Government regulatory and enforcement agencies.  Everyone knows the importance of responding truthfully to government inquiries but these recent enforcement actions have highlighted specific lies and misrepresentations made to US Government officials.

While the facts in the ZTE case are disturbing, there still is a question that needs to be answered – what measures did in-house and outside counsel take to ensure that ZTE’s representations to the government were accurate?  Given ZTE’s track record, what level of due diligence did outside counsel conduct to verify the accuracy of any representation made to the government concerning the employees who were allegedly disciplined?  My rhetorical questions beg the answer – lawyers need to step up and demand more than just representing a client’s questionable representation.  In my view, any attorney should have demanded the same confirmation that the government ultimately requested from ZTE.

I know it is easy to second guess ZTE’s actions, but the legal profession has to stand up – it is one thing to zealously represent a client – it is another to fail to prevent or investigate false statements by a client that has a record of lying to the government.

ZTE now has to fight for its life.  The seven-year suspension is not the end of the story.  ZTE is continuing to meet with government officials in an effort to have the suspension lifted.  I suspect ZTE will present the government with an elaborate internal procedure governing statements made to government representatives to ensure accuracy and appropriate sign offs by corporate officials.  Frankly, this is something that ZTE and every company should already have in place.  Eventually, ZTE will pay more money, make more commitments of compliance and resume business as usual – the question is not whether they can restore any reputation for truthfulness, but whether ZTE can ever be trusted again.

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