Trade Malpractices - the ZTE case

In June 2018, Zhongxing Telecommunication Equipment Corporation (ZTE) announced that it had finally entered into a settlement with the US government regarding its conduct determined to be trade malpractices and non-compliance relating to US export controls and sanctions.

According to the announcement, ZTE agreed to a criminal and civil penalty of about US$1.3 billion in total (RMB8.5 billion).  Also, whether ZTE can be effectively discharged from further penalties depends on how ZTE complies with the settlement agreement and how results of the independent compliance regulation and audit on the company come out in the next 10 years.

A corporate compliance framework of international standards, which ZTE is required by the settlement agreement to build, will set an example for Chinese companies. ZTE has taken seven corrective measures related to compliance, which include a new CEO and management, a new compliance management committee, reorganization of its legal and compliance department, appointment of a US lawyer as its chief export compliance officer, improvement of its export control compliance manual, new automated tools and processes, and global export control training.

As a landmark event concerning compliance management, the ZTE case is expected to have a profound impact on the compliance management policies of Chinese companies. With extraordinary consequences that include a hefty penalty, officer accountability, institutional adjustment, and reconstruction of the work system, the case makes Chinese companies realize, for the first time, the strategic importance of compliance management.