Corporate criminal case against China’s ZTE takes an interesting turn

While an investigation by the U.S. Department of Justice found ZTE shipping goods illegally to Iran and its ally North Korea in violation of U.S. trade laws, which led to the company paying a record fine. The manner in which a U.S. court appointed a monitor, to ensure future compliance, has raised several concerns, including that of ethics, transparency and competence.

 

According to 4 people familiar with the matter at hand, the two consulting firms that the U.S. hired to police ZTE Corp’s compliance over U.S. trade sanctions have resigned.

As part of a guilty plea deal, China’s second-largest telecommunications company ZTE Corp had agreed to pay around $900 million in penalty last year, as well as open its books to a U.S. monitor.

ZTE was found guilty of shipping illegal goods to Iran, and its ally North Korea.

In June, Larkin Trade International and Guidepost Solutions were hired by the U.S. monitor in charge of the oversight regime, Texas lawyer James Stanton, to help assess the company’s compliance with U.S. export control and sanctions laws as well as reduce the risk of future misconducts, said sources who preferred the cover of anonymity since the matter is not public.

In August the two firms had differences with the monitor and clashed over approach to the job, said sources.

According to one source, Stanton had initially restricted the consultants’ access to ZTE’s documents and officials thus hindering their ability to help monitor the company.

Stanton did not respond requests for comment.

“We’re looking to be cooperative and have a successful monitorship,” said Matthew Bell, head of compliance at ZTE in the U.S.

According to a Reuters interview with more than half a dozen sources familiar with the matter at hand, the issue with monitoring of ZTE revolves around the manner U.S. District Judge Ed Kinkeade set up the policing program in March.

According to several sources familiar with the matter, before the plea deal was signed, Kinkeade took the unusual step of having the agreement rewritten and placed Stanton, a civil and personal injury lawyer, in charge of monitoring ZTE’s compliance with U.S. export controls.

U.S. District Judge Ed Kinkeade appointed Stanton despite the fact that he lacked experience in U.S. trade controls.

Furthermore, the order naming him was sealed which further hid additional details on the judgment.

Normally in a corporate criminal case, the Department of Justice, (DoJ) selects an independent monitor from candidates proposed by the company, and that is how the deal was originally structured.

However, for some unknown reason, the Justice Department and ZTE agreed to Kinkeade’s choice and agreed to the changes in the monitoring agreement, said sources.

A reason for this could be – the plea had already been negotiated and filed in the judge’s court and a temporary license issued to ZTE to obtain U.S. made goods, since its existing one was about to expire and was crucial to the company’s output.

According to John Hanson, president of the Virginia-based International Association of Independent Corporate Monitors, it was extremely rare for a judge to modify a major part of a plea agreement between a company and the government to select his own monitor.

Stanton will have to issue three reports, the first of which is scheduled for January 2018, on ZTE’s compliance with U.S. trade rules, which will help determine whether the company is liable for an additional fine of $300 million or worse, lose its access to the U.S. market.

The reports, crucial for Beijing and Washington, are set to last three years.

While the agreement permits ZTE to access the U.S. market, through which it accesses 25% to 30% of its components for its smartphone and networking gear, significantly, it is also part of a wider push by the U.S. to push China to cooperate in combating nuclear proliferation.

“With any monitorship involving a complex situation, inevitably there will be start-up problems but in my experience the issues work out in the long run,” said Kevin Wolf, a former Commerce Department official who worked on the ZTE case, who is now a lawyer in Washington D.C, on the first few months of a monitorship.

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