FAQs on ZTE’s Compliance Settlement

The Commerce Department published its revised settlement with ZTE Corp. on Monday, giving us much more detail on this bizarro arrangement of U.S. regulators appointing an in-house compliance executive to the troubled Chinese telecom firm. The concept is intriguing, and the job could be the professional challenge of a lifetime — except for all those pesky details, including the ones this settlement still leaves unaddressed.

So without further delay, let’s ask and answer some FAQs about ZTE and the compliance settlement.

Q: I swear I read about this, but, um… what happened with ZTE again?

A: Keep up, people! First, the U.S. government hit ZTE with an $892 million regulatory fine in March 2017 for re-exporting sensitive communications equipment to Iran and North Korea. In March of this year, however, ZTE admitted to the Commerce Department that it had lied about disciplining employees as promised in the first settlement.

That led the Commerce Department in April to impose a ban on U.S. companies selling components to ZTE — which, in practical terms, was a death sentence for ZTE. President Trump then overruled the Commerce Department on May 13, naturally via Tweet:

This new settlement spells out what ZTE must do to stay in the good graces of U.S. regulators.

Q: So the part about the compliance officer?

A: The settlement calls for ZTE to hire a “special compliance coordinator,” who will be selected by the U.S. Bureau of Industry and Security. The “SCC” will have a term of 10 years, and report both to ZTE’s chief executive and board of directors; and to BIS. This person will “coordinate, monitor, assess, and report on” all compliance activities by ZTE. He or she will also have authority “to employ at ZTE’s expense as many assistants and other professional staff… as are reasonable.” The agreement mentions a minimum of six assistants.

Q: What will this SCC do, exactly?

A: According to the settlement, this person will “coordinate, monitor, assess, and report on” all compliance activities by ZTE relating to export controls and —

Q: Hold up: This person will oversee ZTE’s compliance with export control laws only?

A: That’s what the settlement suggests. The coordinating and monitoring will apply to “the terms of this agreement and the order, including without limitation but not limited to ZTE’s compliance program and all related policies, practices, procedures, and systems regarding all exports, re-exports, transfers (in-country) or other activities that are subject to the Act, the regulations, and the prevention, detection, and reporting of violations of U.S. export controls.”

The agreement makes no mention of compliance programs for, say, the Foreign Corrupt Practices Act. Of course the company is still subject to other U.S. laws. This settlement simply remains silent on what oversight, if any, the special compliance coordinator exercises over anything other than export control.

Q: Doesn’t ZTE already have a compliance officer anyway?

A: Yes and no. Its original global compliance chief, Cheng Gang, got fired in April once those misleading statements came to light. ZTE also has a chief compliance officer for its U.S. operations, Matt Bell, who serves double duty as parent company’s chief export compliance officer. He’s been on the job since October 2016 and his LinkedIn profile says he’s still there as of today.

Q: Back to the duties. What else is this special compliance coordinator supposed to do?

A: The purview of the job is pretty much what we said above: to coordinate, monitor, assess, and report on export control compliance at ZTE. The word “coordinate” is what gives me pause here.

For example, does that mean this person serves as the de facto chief compliance officer? Will he or she design compliance policies and procedures, or just ensure that someone else is doing that work? What if someone calls a whistleblower hotline to report an infraction — does the SCC investigate that? The agreement doesn’t say.

A separate section of the agreement does say that within six months, ZTE must have “implemented” a full export control compliance program, including to ZTE’s subsidiaries. (So at the least, compliance training and software vendors will have a field day with this order.) But that section about implementing an export control compliance program doesn’t mention the SCC.

Q: So this job sounds more like a compliance monitor than anything else.

A: That’s a valid point to raise. Gerry Zack, incoming president of the Society of Corporate Compliance & Ethics, made it on the FCPA Blog earlier this week.

Q: What about reporting to the boss?

A: The SCC will report to ZTE’s board and to BIS on the company’s compliance activities at least quarterly for first year, and at least semi-annually after that. BIS also reserves the right to demand more frequent reporting, should the agency and the SCC decide that’s a good idea.

Separately, ZTE must also perform nine specific audits related to export control issues. The agreement doesn’t specifically say the SCC will participate in or review those, but I can’t imagine he or she wouldn’t be involved in them somehow.

Q: You think this is really going to work?

A: The crucial question is who this person’s boss will truly be. A servant cannot have two masters, and right now that’s what the settlement describes.

On one hand, the settlement also requires ZTE to replace its entire board of directors and senior leadership. Good news, right? The SCC gets to work with a new set of leaders, and at least for now those people are likely to pay attention to the corporate governance and compliance issues that caused ZTE so much trouble.

Yet we don’t know who these new people will be (ZTE has 30 days to name them), or who selects them. And while the agreement says ZTE must report all Chinese government ownership or control in the company, I remain unconvinced that we will ever have a complete understanding of how Beijing influences ZTE behavior.

Meanwhile, we have crony capitalism at work here in the United States. Our regulatory process determined that ZTE should suffer a ban, and then President Trump overruled that determination as part of a bigger effort to squeeze trade concessions from China. Who’s to say Trump wouldn’t do something like that again? Not Trump, that’s for sure.

Imagine that you’re the compliance monitor for ZTE and you do report future misconduct to BIS. Are you prepared for Trump to undermine your standing by tweet some random morning? Are you prepared for him to bargain your job away as part of a larger deal? Are you prepared for Congress to impose the original export ban on ZTE again anyway, as may well happen? All those professional risks are very much in the cards for whoever takes this job.

It looks great on paper, that’s for sure. Just consider whether the professional challenges are worth accepting the whims of an ignorant and impulsive president. That’s going to be part of the job, too.

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