Op Ed: US Fires Trade Blunderbuss At ZTE And Hits Many Targets

March 14, 2016

Law360, New York (March 14, 2016, 10:46 AM ET)

Last week, the United States Department of Commerce published an amendment to the Export Administration Regulations that imposes a license requirement for all exports of items “subject to the EAR” to China’s communications equipment giant ZTE Corp. and three affiliates. “Subject to the EAR” encompasses virtually all U.S.-origin items and many foreign-origin items with U.S.-origin content — not just sensitive items. The stated grounds for the action are the sort of conduct that would lead to calls to “throw the book at them.” ZTE is said to have engaged in an elaborate system of deception in order to sell products to Iran that would have been barred by U.S. trade controls on Iran.

The EAR mechanism for this control action is the addition of these four companies to the “Entity List.” Exports and reexports to them that had been license-free now require an export license from Commerce’s Bureau of Industry and Security. There is a “presumption of denial” of licenses. So, consider who gets hit.

Companies all over the world are engaged with ZTE in the development, production and distribution of smart phones and other telecommunications products. Most of the trade involved has until now been eligible to go license-free to ZTE from the U.S. or to ZTE from a foreign company that uses U.S.-sourced products, technology or content. Given the variety and complexity of these established trade and business relationships, ZTE will not be the only “victim.” Managers around the world are surely concerned that their U.S. sourcing has now become an obstacle to continued dealings with ZTE — and not just for sales to China or to countries like Iran. For example, the French company that needs something from ZTE to enhance the equipment it builds with some components from the U.S. may well have a headache — and which sourcing gets changed is uncertain. ZTE would not be the only victim of the broad disruption of these relationships.

It cannot be said that use of the Entity List sanction was required to keep ZTE from engaging with impunity in the asserted sanctions busting. The stated ZTE actions appear to include many that would be violations of existing U.S export control laws. These laws include well established enforcement procedures, administrative and criminal, that provide broad reach for the imposition of fines and denial orders. These penalties can be severe, and the severity can be related to the seriousness of the offense. The imposition of these penalties is subject to due process requirements — prior notice the opportunity for a hearing and proper adjudication.

The entity listing process is quite different. The basis for listing is vague — “acting contrary to the national security or foreign policy interests of the United States.” No court or administrative law judge is involved. Rather, imposition is by a majority vote of members of an interagency board and termination or modification of the sanction requires unanimous agreement.

The Entity List was not born this way. It was introduced in 1997, not as a new export license requirement, but as a means for informing the exporting community of the need to be specially vigilant and careful when making license-free exports to named entities who had not, or not yet, been debarred, but who were deemed to be “high risk.” In 2008 exports to listed entities were made subject to license, but with flexibility on scope and terms. In 2009 the reach was extended to “in-country” transfers abroad. The “flexibility” has yielded a list that is largely like the ZTE sanction — reaching all items and with a presumption of license denial.

The author is neither a doubter of the need for trade controls and sanctions nor an apologist for companies that ignore or evade such controls — having spent part of his career working in this field in government. This experience produced respect for the professionalism and effectiveness with which violations can be discovered and dealt with. The experience included exposure to some foreign discomfort with the assertiveness of American extension of control jurisdiction — as well as appreciation of the growth in multilateral cooperation in using trade controls to achieve shared objectives. It would be a shame if the inspiration and leadership of the United States in such efforts must be tested through trying to explain and defend a blunderbuss shot and an inexplicable shortfall in due process when better weapons are at hand.

—By Cecil Hunt, Harris Wiltshire & Grannis LLP

Cecil Hunt is counsel in Harris, Wiltshire & Grannis’ Washington, D.C., office. He served as assistant general counsel for international trade and deputy chief counsel for export administration at U.S. Department of Commerce, as well as senior career lawyer for what is now the Commerce’s Bureau of Industry and Security, serving for extended periods as acting chief counsel. He also acted as counsel to the Overseas Private Investment Corporation.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

References

Export Administration Regulations 15 CFR parts 730-799

Authority for the Entity List 15 CFR sec. 44.11

The Entity List 15 CFR part 744 Supp. No. 4

List addition, modification or removal 15 CFR part 744 Supp. No. 5

“The Jurisdictional Reach of Export Controls”, 26 Columbia Journal of Transnational Law 19

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