On April 15, 2018, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) imposed a seven-year Denial Order (Order) against Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. (collectively, ZTE). BIS imposed the Order upon finding that ZTE made false statements to BIS during and after negotiating a $1.19 billion settlement in 2016 for violating U.S. export controls and economic sanctions targeting Iran and North Korea. Commerce Secretary Wilbur Ross stated “ZTE misled the Department of Commerce . . . This egregious behavior cannot be ignored.”

The Order affects business activities of U.S. persons and non-U.S. persons in several ways. Specifically, U.S. and non-U.S. persons are prohibited from undertaking a number of transactions with ZTE, including:

• Exporting or reexporting items subject to the Export Administration Regulations (EAR) for or on behalf of ZTE;

• Facilitating 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;

• Acquiring or facilitating that acquisition or attempted acquisition from ZTE of any item subject to the EAR that has been exported from the United States;

• Obtaining from ZTE in the United States any item subject to the EAR with reason to know the item is intended to or will be exported from the United States; and

• Engaging in any transaction to install, maintain, repair, modify, or test any item subject to the EAR that has been or will be exported from the United States that is owned, possessed, or controlled by ZTE, or service such an item of any origin using an item subject to the EAR.

The Order also prohibits ZTE from carrying on negotiations concerning, or ordering, buying, receiving, using, selling, delivering, storing, disposing of, forwarding, transporting, financing, otherwise servicing, or benefiting from any transaction involving any item subject to the EAR exported or to be exported from the United States. Although this provision targets ZTE’s behavior, General Prohibition Ten of the EAR prohibits persons from proceeding with transactions with knowledge that a violation—such as the foregoing activity by ZTE—has occurred, is about to occur, or is intended to occur.

The Order presents significant compliance responsibilities for any company that supplies to or buys from ZTE. Because the EAR regulates export transactions—not imports into the United States—the Order is written in such a way as to apply to imports of items previously exported from the United States, which requires manufacturers to know the origin of goods they trade. The Order also applies to “items subject to the EAR,” which includes items in, or transiting through, the United States. This also covers foreign-made items that contain more than a de minimis level of U.S.-origin controlled content and foreign-made items based on national security-controlled U.S. technology or by a plant designed or constructed based on national security-controlled U.S. technology. This confirms that the Order creates a new compliance obligation for manufacturers to conduct thorough supply chain due diligence.

In sum, U.S. and multinational manufacturers should consult compliance counsel to determine the extent to which they may be impacted by the Order and also monitor BIS for additional guidance.