How to set up shell companies to sell to Iran, ZTE Edition: by Eva Dou in The Wall St Journal, Mar 8, 2016

The U.S. Commerce Department slapped Chinese telecommunications equipment and smartphone maker ZTE Corp. with export restrictions on Monday for allegedly exporting U.S.-made high-tech goods to Iran. Exhibit No. 1 in the U.S. agency case: company memos prepared by ZTE’s legal department that are a step-by-step guide for setting up shell companies to circumvent U.S. export controls.
One document – labeled “Top Secret Highly Confidential” – doesn’t mince words. It says that U.S. export controls are most strict for countries in the “Z Group” — a category which includes state sponsors of terrorism. “Currently, our company is conducting large amount of business in “Z” Group countries,” the document says.
According to that document, ZTE’s legal department recommended the company resolve this problem by trying to persuade clients to accept non-U.S. products and by setting up shell companies. ZTE’s lawyers laid out a detailed plan to set up a “detached business model,” complete with flow charts, the document shows.
“When our company launches business in the countries of the “Z” Group, [we will] avoid using the name of our company to directly sign contracts,” the document says. “Our company needs to avoid directly exporting products and providing services to [these] client(s), and increase the frequency of circulation of goods inside and outside of our country.”
At times the document tries not to mention those clients by name, using the English initials “YL” and “GB” in both the English and Chinese versions. But there are slip-ups. Next to “YL” on the flow chart is the name “Iran” (“YL” may be derived from the transliteration of the Mandarin name for Iran “Yilang”, while “GB” may come from “Guba,” Mandarin for Cuba).
A second document, a letter to ZTE’s leaders from the legal department, is more explicit, saying the company “does business with all five major embargoed countries — Iran, Sudan, North Korea, Syria and Cuba.” That document outlines a response plan to the export control risk, delegating tasks to different executives and committees.
After the Commerce Department announcement and release of the documents, ZTE said in a statement Tuesday that it complies with laws in all countries it operates and that it has been and will continue to cooperate with U.S. agencies to reach a resolution.
The timing of the U.S. move is unfortunate for ZTE. The U.S. is expected to lift sanctions on Iran early this year, and major U.S. companies including HP Inc. and General Electric Inc. have already begun actively exploring market entry.
ZTE also risks losing the major inroads it’s made into the U.S. It is one of the few Chinese brands that’s sold well in the U.S., ranking No. 4 in smartphone sales in the country.
Here are the complete documents released by the Commerce Department:
1. “Report Regarding Comprehensive Reorganization and the Standardization of the Company Export Control Related Matters”
2. “Proposal for Import and Export Control Risk Avoidance”
http://blogs.wsj.com/chinarealtime/2016/03/08/how-to-set-up-shell-companies-to-sell-to-iran-zte-edition/