Compliance officers wondering whether the Trump Administration would still enforce egregious corporate misconduct with big fines, here’s one answer: the administration today whacked a Chinese telecom firm with nearly $900 million in fines and penalties for export control violations.
The firm is ZTE Corp., which pleaded guilty to re-exporting sensitive communications technology to Iran without proper licenses from the U.S. Office of Foreign Assets Control. In total, ZTE will pay $892 million in penalties, in an announcement made by Tuesday by newly minted Commerce Secretary Wilbur Ross.
For a while now, the message has been building that if companies self-report misconduct and cooperate with investigators, they’re likely to win significant concessions from the Trump Administration on penalties—but pervasive and egregious misconduct would still be punished severely. I had my doubts about that second part, and clearly, much of this investigation was completed during the Obama Administration.
Still, if Ross and Attorney General Jeff Sessions had wanted to pause and revisit the wisdom of this settlement, they could have done so. They did not. That says something.
Sessions singled out ZTE’s misconduct during the investigation as a one reason why the penalties were so steep. ZTE executives lied to prosecutors, outside counsel, and even their own internal investigations team, trying to cover up their misconduct. ZTE even resumed sending prohibited goods to Iran after the investigation was underway. On a certain aesthetic level, you have to admire behavior that shameless.
In addition to the $892 million in penalties, the company agreed to a compliance monitor for three years to oversee its export compliance program, and to cooperate fully with future investigation work. The Commerce Department’s Bureau of Industry and Security also suspended another $300 million in penalties, to be imposed if ZTE violates its settlement agreement with that agency.
According to court documents, ZTE engaged in a six-year scheme to acquire sensitive telecommunication equipment from U.S. manufacturers, repackage that gear with other ZTE equipment, and then sell the final product to Iranian customers under the ZTE label. The sales ran from 2010 into 2016, and involved roughly $32 million worth of U.S.-origin goods.
ZTE executives knew from the start that those sales violated the International Emergency Economic Powers Act. By 2011 the company had even formed a special team to devise new ways around the law. They recommended “isolation companies” that would do the dirty work, and supposedly protect ZTE itself from the export control risks.
Everything went public in 2012, after a Reuters article exposed the operation. ZTE briefly halted sales to Iran, but resumed them in 2013—and resumed the export-control misconduct in 2014, while investigators hither and yon were already looking into the matter.
The settlement itself is not a surprise. As early as November, rumors of a deal were swirling, and ZTE appointed a chief export compliance officer. (Matt Bell, formerly of Kellogg, Brown & Root, who also serves as chief corporate compliance officer for ZTE’s U.S. operations.)
Since Donald Trump’s election, compliance officers have heard many pronouncements from his law enforcement team that corporations don’t commit misconduct, people do. Therefore, prosecution should focus more on individual wrongdoers than corporations.
That’s generally true, and we should still expect to see many more instances of corporate misconduct settled with fewer charges and smaller fines—but it’s only generally true. Sometimes corporations do engage in elaborate, deliberate plans to break the law. ZTE’s misconduct fits that profile, and this is the result. ZTE’s annual revenue is only around $15 billion, so a fine of $892 million is going to hurt.
Compliance officers trying to interpret today’s sanction should revisit the principles of the FCPA Pilot Program. The program launched last year, and promised significant discounts on monetary policies if companies did three things: disclose the misconduct voluntarily; cooperate fully with investigators trying to identify responsible individuals; and mitigate their policies, procedures, and controls to ensure the misconduct doesn’t happen again.
ZTE failed on all three prongs of that test. Worst of all, it misled investigators during their investigation.
ZTE is the first big enforcement action under the Trump Administration, but by no means is it the last. I’m still waiting for final resolution in the long-running investigation into Walmart, and allegations that it violated the Foreign Corrupt Practices Act with business practices in Latin America and other parts of the world.
Walmart reports its 2016 earnings sometime around the end of this month. If a settlement is looming, it could well be disclosed then. If a settlement isn’t looming, we can still expect another update from Walmart in its annual report about what’s going on.
When we last left the Walmart saga (now in its fifth year) a few months ago, rumor was that prosecutors had offered to settle the case for $600 million in penalties. Walmart balked at that, and talks also stalled over concerns that Walmart might lose eligibility to participate in federal food stamp programs.
Lots of the original hysteria over possible bribery at Walmart has fizzled away. The company has done a remarkable job investing in better compliance, and spent more than $820 million on compliance since the FCPA allegations first surfaced in 2012.
If the Trump Administration wants to send another message about corporate misconduct, one that tells companies cooperation and remediation will be rewarded, a light touch with Walmart would do it.
Will we see one? Who knows. But ZTE alone is message enough for today.