This note considers the decision in the OFAC settlement (the “Settlement”). The full text of the settlement can be found here and the OFAC Enforcement Notice can be found here.
The total fine marks one of the largest imposed by the US against a non-financial institutional entity for sanctions violations. As implied by the OFAC Settlement, the size of the fine reflects, in large part, what was referred to by OFAC as the “egregious nature” of the violations by ZTE of US sanctions law and export controls relating to Iran.
It was alleged by OFAC, that for a period of six years from 2010 to 2016, ZTE’s top management developed, approved and implemented a plan to disguise and facilitate illegal business with Iran through an elaborate and complex scheme including (among other things):
- obscuring the source of packages which contained US origin goods which were destined for Iran by removing or attempting to remove ZTE logos and other identification from the packages
- altering ZTE’s database to delete any references to Iran and Iranian customers, and
- using special vehicles ie third party companies to carry out procurement and or/act as the end user intermediary for US origin goods destined for Iran and/or Iranian customers.
As early as 2012, there were media reports that ZTE was conducting Iran-related business in breach of US sanctions. This prompted several US government agencies: the OFAC, the Department of Commerce’s Bureau of Industry and Security, the Department of Homeland Security, and the Department of Justice (collectively the "US Government Agencies") to commence an investigation into its activities.
In response to the investigation by the US Government Agencies, ZTE’s management announced that it would cease its Iran-related business in 2012. However, according to reports from the US Government Agencies, ZTE’s management decided in 2013, to commence Iran-related business and allegedly removed evidence of potential sanctions violations by ZTE.
What was the breach?
The basis for the US’s case against ZTE was two-fold:
- ZTE conspired to construct telecommunications networks in Iran using US origin technology, in breach of US sanctions and export controls, and
- ZTE made shipments of controlled US origin equipment, including electronic hardware, such as servers and routers, to Iran, in breach of US export controls.
It is alleged by OFAC that ZTE concluded at least 251 illegal transactions at a total value of approximately US$ 396,222,972.
What was the consequence for ZTE?
The Settlement Agreement offered by OFAC to ZTE allows both parties to avoid a lengthy court dispute over the allegations.
The entering into the Settlement Agreement means that the OFAC agreed to release and discharge ZTE, without any finding of fault, from any and all civil liability in connection with the apparent violations that are the subject matter of the Settlement, so long as ZTE complies with the terms of the Settlement.
In consideration for such release, ZTE is obliged to (amongst other things) pay a fine of US$ 100,871,266 to OFAC. The large nature of the fine can be largely explained by certain aggravating factors provided in OFAC’s Enforcement Note, namely:
- OFAC’s finding that ZTE’s senior management intentionally disregarded US sanctions and re-commenced Iran-related business in breach of sanctions despite being subject to a federal investigation by the US Government Agencies
- the measures taken by ZTE to allegedly hide evidence of its transactions with Iran, including the establishment of a specific team to document its internal databases to mask such transactions and the usage of third party companies to mask the source of the US origin goods, and
- the lack of proper systems of control and sanctions compliance at ZTE despite it being large and sophisticated company.
OFAC’s Economic Sanctions Enforcement Guidelines contain a number of factors that outline whether OFAC should “aggravate” or “mitigate” its enforcement response (referred to as General Factor A and General Factor B). Examples are whether the alleged sanction violation was carried out intentionally or recklessly, as well as whether the party in question was aware of the conduct in question. The ZTE Settlement mentions that ZTE “had actual knowledge that the conduct giving rise to the apparent violations took place”, which resulted in its actions being considered as having aggravating factors, significantly impacting on penalty considerations.
ZTE has also been subject to criminal and other fines by the US Government Agencies, resulting in a total fine against ZTE, including the Settlement, of US$ 1.192bn.
What messages can we take from this case?
The diligence exercised by the US Government Agencies should serve as a warning to companies, particularly to foreign companies doing or planning to do business in US sanctioned countries, to remain vigilant about their business practices and to ensure that they comply with US export controls and sanctions law.
Companies doing or planning to do business in US sanctioned countries should consider adopting the following non-exhaustive list of good practices, if they have not already done so:
- identifying the extent to which US sanctions law may be relevant and triggered by a transaction/arrangement
- checking that its compliance structure has sufficient controls in place to identify and warn of instances where US origin goods are exported to countries which are subject to US sanctions
- ensuring that adequate and regular sanctions compliance training and policies are provided and are in place when doing business in countries that are subject to a sanctions regime
- self-reporting and remedial action for any sanctions violation once a company becomes aware of it so as to reduce any aggravating factors from an OFAC enforcement perspective, and with regards to any potential settlement with OFAC, and
- obtaining legal advice to obtain further clarity in areas of uncertainty.
The ZTE settlement clearly demonstrates that US sanctions can be relevant to companies that are not based in the US or that are not subsidiaries of a US company.
We assume the Settlement avoided ZTE being added to the OFAC Foreign Sanctions Evaders (FSE) List, which would have had a material adverse impact on ZTE’s business. The FSE List is a means by which OFAC can list any foreign (ie non US) entity that has caused or facilitated the breach by a US entity of US Sanctions on Iran. Once listed on the FSE List, the entity is barred access to the US financial and commercial systems, and no US entity is permitted to do any business with that entity.
Should you have any questions or concerns with regards to Iran-related sanctions or doing business in Iran in a sanctions-compliant manner, please feel free to contact us.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.