On June 11, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) published a superseding settlement agreement with ZTE Corporation and ZTE Kangxun Telecommunications Ltd. (“ZTE”) and an accompanying superseding order. The agreement replaces a March 2017 agreement between BIS and ZTE, which settled allegations that ZTE violated U.S. export controls and economic sanctions targeting North Korea and Iran. The new agreement will lift a seven-year Denial Order that BIS imposed on ZTE on April 15, 2018 for violating March 2017 agreement with BIS by making false statements to the agency.

Importantly, the Denial Order – which strictly limits ZTE’s access to items subject to the Export Administration Regulations (“EAR”) – was still in effect as of July 1, 2018. Until BIS lifts the Denial Order, manufacturers that supply products to ZTE and customers that purchase products from ZTE must comply with its provisions. As we have reported previously, the Denial Order strictly limits U.S. and non-U.S. persons’ transactions with ZTE involving items subject to the EAR, including U.S.-origin items, items physically present in the United States, and non-U.S.-origin items that contain U.S. content. “Items” include commodities, software, or technology (broadly defined to include know-how, drawings, designs, etc.).

The new settlement prohibits BIS from lifting the Denial Order until ZTE pays a $1 billion penalty and escrows $400 million in case of future violations. ZTE also agreed to fire its directors and senior management, install an independent compliance team to provide real-time reporting directly to BIS, conduct a series of audits, and publish the export controls classification and U.S.-origin content calculations for its items that are subject to the EAR to assist its trading partners in complying with U.S. export controls. In exchange, BIS imposed a new ten-year Denial Order in the superseding settlement, but agreed to suspend it as long as ZTE abides by the terms of this new agreement.