ZTE - Secret Highlv Con?dentialt ZTE Corporation Document Submitted for Rati?cation (Review) Form Title of the Report Regarding Comprehensive Document type: Document submitted Reorganizatidn and Standardization of Red-head document 1] Company for rati?cation the Company Export Control Related system (review) Matters I Other document Attachment Report Regarding Comprehensive I Urgent document 1] Regular Reorganization and Standardization of document the Company Export Control Related Matters Drafted by Legal Draftsman - GUO, Date August 25, 201 1 Department ianj un Contact phone 13751 14798l Classi?cation: Department suggestion: For higher - authorities to I ratify [1 (dead 6 Ag List of people who can read, use the document (apply to secret and above documents): Director of Legal Department, company leaders A Synopsis of the document: As our overseas businesses have grown rapidly in recent years, so . export control risks. Following Director and Director instructions, our company ouldimmediately form a company?level export control project team to study, handle, and respond i031] company?s current export control risks. 7 A - Need counter-sign: Yes I No to documents that need counter-sign. '5 Agree Submit to higlienautl-Itbrities for approval Responsible department?s opinion ,1 [signature] . .825 For higher-authorities to I ratify read Agree 5 Signature] Company leader?s - opinion (Director - 8/26/ 1 1 QIU) . For peers to ratify read Company y> lead?er?s Agree TIAN, Wenguo [signature] opinion (D/irector . 201 1.8.27 TIAN) .. For higher-authorities to Dratify read CEO review/approval Agree Lirong [signature] 2/9/2011 All Rights reserved, No Spreading abroad without Permission of ZT Page 1 ZTE Top Secret Internal Use Only; Report Regarding Comprehensive Reorganization and Standardization of the Company Export Control Related Matters Dear company leaders, As our overseas businesses have grown rapidly in recent years, so have us. export control risks. Following Director TIAN and Director instructions, our company should immediately form a company-level export control project team to study, handle, and respond to our company?s current export control risks. 1. Brief Introduction to US. Export Control Regulations (1) Violations and Penalties According to US export control laws, our company must apply for reexport licenses when exporting controlled items to these ?ve major embargoed countries- Iran, Sudan, North Korean, Syria, and Cuba. If [the company] violates the US. export control laws, the penalties will be the following: (I) Company will be subject to a large amount of civil penalty; (2) High-level managers will face prison sentences in a criminal case; A (3) Company will be placed on the Blacklist and be banned from purchasing U.S. products directly 6r indLrectIy\for a period Vof'time. (11) Related Cases (I) On I, WU, Zhenzhou, Chairman of Chichuang [Chitron] Company in Shepzhen, was sentenced to 8 years in prison by the US. Court for illegally exporting US. defense goods and materials to China. [from same time, Chichuang was banned from export trading. - - (2) On 5/24/20] I, the US. Government placed three Chinese comp'a?es on thwacklist for exporting controlled equipment and technology to Iran. - I I. Current Situation (I) Our company?s previous export control crises (I) Incident of Dell servers?our seiy/ers in some projects with embargoed countries; in 2005 Dell found out and inquired intensively about it. (2) Incidents of cargo seizure in/Igl?ongvKong?nz?ZOOS, because our company violated Hong Kong export control laws (formulated based on US. laws), cargos were seized and con?scated and we were fined?by Hong Kong Customs different occasmns. The valuegffargos exceeded one million Renminbi and ?nes were around several hundreds of thousands of Hong Kori?gDollarsK/ (3) Incident Department of Commerce on-site inspection?in 2010, US. Department of Commerce came to our company/to??qonduct an OIL-site inspection on the management of US. procured items. Similar on?site inspections can be expected?Gn tilel future. (11) Risks incur/company?s Current projects I information is property of ZTE. No external dissemination> I All Rights reserved, No Spreading abroad without Permission of TE - Page I ZTE . - Top Secret Internal Use OnlyA Currently our company has ongoing projects in all ?ve major embargoed countries- Iran, Sudan, North Korea, Syria, and Cuba. All of these projects depend on U.S. procured items to some extent, so export control obstacles have arisen. (1) Sudan project(s): at the moment, our company brings in controlled-item suppliers to directly provide products to our customer(s). Our company employees carry small amount of controlled items through customs to evade export control, but there are still potential risks. Also, some suppliers stopped providing products after learning that our company reshipped to Sudan. (2) North Korea project(s): our company brings in a cooperating company. The cooperating company signs contracts with our customer(s) and provides products to them directly. At present, the cut-off is fairly effective. (3) Cuba project(s): Customer(s) ask our company to make a special promise- not to let U.S. export control cause problems in project execution. If the supplies are interrupted, our company will have to pay a huge amount of damages. (4) At present, the biggest risk is Iran?s on-going project(s). In June 2010, the UN passed a new round of sanctions against Iran. Even though the sanctions themselves did not target civilian-used communication industries, some impacts still occurred during implementation. More importantly, in 2010, the U.S. passed the ?Comprehensive 1ran Sanctions, Accountability and Divestment Act,? applying stronger sanctions against Iran. Risk controls implemented by foreign banks - made it more dif?cult for our company to ?nanceour company signed a four?parity project contract with Iran customer(s), adopting semi cut?off method, i.e. our company provides our self-manufactured equipments customer(s) and our company?s cooperating company provides sensitive U.S. procured items to'the the same project, F7 designated an independent company to directly sign two-party contracts with customeis); Since the capital credit and capability of our company?s cooperating company are weak, the project executiomis/niore dif?cult. Therefore, currently most of the Operations are actually done by ZTE Corporation; the risk cut-off is?not . ecti?v'e. Besides these five major embargoed countries, the export control problems have/also occurrel?d in projects with other . . . . . . . countries. For example, a U.S. supplier refused to prov1de needed software for an Ethio ia project, because Ethiopia, to some degree, is a U.S. embargoed country. Supply problems have also-occurred?inBirma due to export control. (111) Our Company?s other risks (1) ?Our company high-level managers are also the board of dire??ft?CEsQ?f our subsidiary company in the U.S. (U.S. subsidiary is governed by U.S. laws, facing even stricter regulations)rand?theyt vel to the U.S. frequently, Thus, there is a potential risk of being investigated. (2) Our company projects in the embargoed countries have?impacted not only our market breakthrough in the U.S. (in 2010, when our company placed a bid on a ect, the customer asked if our company had projects in the embargoed countries), but also our current market ln addition, the European market may also be affected (on the export control issue, the European Union acts in accordance with U.S. policy). (3) employees at 31613.3. esearc-hNCenters often travel between China and the U.S., carrying data. This already . .severely Violates thezlaw. [The company] needs to take preventative measures immediately, otherWise Will face the risk of being investigated atianytirhe. (4) Our corn?panyis reexporting, especially in the Iran project(s), can potentially putus at risk of being put on the Blacklist by the U.S. If on the Blacklist, our company may face the risk of losing the supply chain of U.S. products. (5) The U.S. government export control Blacklist (changing from time to time) contains hundreds of Chinese companies, research All Rights reserved, No Spreading abroad without Permission of TE Page 2 - Top Secret Internal Use OnlvA institutes, and universities, such as Beijing University of Aeronautics and Astronautics, Northwestern Polytechnical University, University of Electronic Science and Technology of China, etc. When our company collaborates with outside research institutes, we need to be careful and avoid product and technology transfer. (IV) Problems our company has exposed . Regarding US. export control matters, based on known information, the following problems currently exist in our company: (1) Company does not clearly assign a department in charge of export control matters, nor does it divide responsibilities among departments. There is no uni?ed management standard. Departments do not know each other?s situation; each handles issues in its own way. (2) Company product line and purchasing department do not organize equipment containing U.S. pr aggressively explore product substitution plans. 0A (3) Overseas marketing departments are not fully prepared at the beginning of a project and Egret t'akgthe consequences of violating US. export control laws seriously when making decisions on sales projects. There is procedure for inspection and approval. oducts; nor~ 0 they (5 (4) Currently our company still 'adopts- the preventative method for each pfoject in/d?igidually, our company has never issued a comprehensive response?plan. There is no dedicated crisis reSponse team; as\a resQlE/jthe response is slow when a problem occurs during project execution. (V) F7 current situation @7 I) Project A F7 found a big IT company serving as its agent to sign contract?for projects in embargoed countries. This cut-off company?s capital credit and capability are relatively strong company; it can cut off risks more effectively. In 2010, US. Representatives reported/to CongressQazb?out F7?s on-going projects in embargoed countries and this affected its project acquisitions in the US. In 2010, F7?s proposal to anqi-?Jire U.S. 3lleafl?ompany was opposed by the US. Government, citing the impact to US. national security. The review and approval of export control licenses were also involved in the acquisition. (2) Business structUre Control . Of?cer at HQ . . Export control attorn?y at Export attorney afjolm Export control attorney ?Exportcontrol. liaison US. subsidinary company Venture companies in the at other branches of?Cer in??feach department I US. and Europe . I All Rights reserved, No Spreading abroad without Permission of TE Page 3 Top Secret Internal Use Only? According to Cl information dug up by the Legal Department, F7 Headquarters'offered high salary to recruit a senior export control compliance specialist from Texas Instruments to be in charge of export control matters, and placed export control liaison of?cers in all of the departments involved. Besides its Headquarters, F7 also placed chief export control of?cers in its subsidiary companies. For instance, it hired a Chinese American attorney who is familiar with the related laws in the US, and previously, itsjoint venture company?with Symantec had an attorney specialized in export control. At present, F7 is still hiring attorneys specialized in export control and recruiting employees from European/American Chinese companies through recruiters. (The quoted annual salary is around 500,000 Renminbi.) Ill. The Response Plan In order to standardize the operation of the lran project(s) and other export projects, a project team shall be established to manage potential risks. The project team shall start workingoon. the following tasks and establish a company-level preventative plan. . (l Organize company current related work ?ow; establish a uni?ed work standard for export control matters; issue ?Export Control Management Plan?; clarify each department?s responsibilities, and_0ptimize internal procedurescompany export control committee to" handle export contm?l?m control of?cer: The export controlcommittee will review and~approv? (3) Production lines shall calculate and analyze the ratio of contielledi'items in company equipment and aggressively search for a subStitution plan for all controlliQdigms?fo resolve the export control problem from the source; tters?and appoint. a company export 5 projects to avoid potential risks; 0/ (4) Formulate a company-level prevent?iig?e plan; reform the current cooperating companies; increase the Operational capabilities of the cooperating companies; plan to set up new cut-off companies and contract-signing model; control project risks; (5) Strengthen internal regula?tigaining and implementation; raise risk awareness among employees, and follow through the uni?ed w?rk?standard.? - IV. Project Teak/?ngers, Milestone Schedule, and Reward System (I) Projep/t team members iCEI/r'iynlpany Export Control Management Project Team Members and Responsibilities No. Rol'e Responsibilities Name Department I Project Provide strategic support for the entire Wenguo; Company leaders Implementation project operation Weizhao Committee All Rights reserved, No Spreading abroad without Permission of TE Page 4 ZTE Top Secret Internal Use OnlyA Company Export Control Management Project Team Members and Responsibilities No. Role Responsibilities Name Department - 1. Formulate the project team?s entire work plan; 2. Manage team?s daily activities; 3. Set up project operation standards, 2 Project Manager acceptance standards and related GUO, Xiaoming Legal Department (PM) guidelines, as well as work module; . . 4. Report project progress; track problems; coordinate resources, and assess acceptance; Project Provide daily management support for Legal Department 3 Management the project team?s routine operation GUO, ianjun Manager (PMM) - Jianjun; Interpret related laws; formulate HU, Yongfeng; 0 company?level preventative plan; I TAN, Wenyong; I participate in dra?ing and revising TANG, iang; R?Legal Team in work standards WANG, Keyou; ?\Legalz ?epartment DU, in; XIE, Guohui; Yingh?u?a; GUO, Min; ?Yu; f? ,giu, 'leegyan; \f LIN, 4 Project Core Plan for cut-off companies; participate Yun; Business Members in drafting and revising w0rk standards Jie Development Department Responsible for related ??a?iai CHEN, Yan; Overseas Financ?e planning; participate in drafting and LOU, Qiang; Department revising wonk standards WANG, Yong; CAO, Guoqi - ?nancing SHAO, Weilin; Financing participate in dra?ing and DU, Lihui; Department \reyjsin?g work standards LIU, Chunhua project information Ll, Baoqiang; lran Representative and Competitor information; participate GUO, Liming; Office in drafting project resolution proposal WEN, Zhuoming . fCheck all of the export control projects; Xiaodong; Sales Management participate in drafting and revising XU, Lingyun Department work standards Establish new cut-off companies LIU, Hongjing Investment Management Department All Rights reserved, No Spreading abroad without Permission of TE Page 5 ZTE Top Secret Internal Use Only/A Company Export Control Management Project Team Members and Responsibilities No. Role Responsibilities 9 Name 1 Department Analyze and calculate U.S. product ratio Commercial and search for a substitution plan Members are not Technology decided at this time Dem, - I Product Line Plan export busineSses with cooperating TANG, Hongshun; Central Logistics companies; organize import/export license XIAO, Peng; Department application document procedure; WU, Xiaotang; participate in drafting and revising work ZHANG, Lei; standards WU, Peng; - PANG, Yongjie ,m I Organize supplier information; provide SONG, Youlu; Kan?gXUn Company unified company information to suppliers 7 YE, Feng Plan overseas transportation; participate in YAN, Dong; Overseas Logistics drafting and revising work standards Gu?anzhong; Department Zl?fA 0, Der: ing; Xiaofang; HU, Bo; HE, Meiliang; A . QU, Weiming Select suppliers; Bangipate?tdrafting . Three-integration and revising work/standards GUI, Guocal; Department FANG, Yuanli; ZHOU, Shuli Orgaiie?ize management procedures for WU, Changshui; Distribution controlled;goods and material; participate HAO, Caixia Department in dra?ing and revising work standards ?Pl/an procurement channels; participate in ZHENG, Yi; Purchasing ,drafting and revising work standards YANG, Shij un Department Maintain and provide ECCN codes WANG, Z_hijian; Material Planning WANG, Zeping; Technology ZHAO, Fengguo; Department ZHOU, Zhao Plan the response to on-site inspection Yashuang Supply Chain - Department Plan trans-shipping and receiving goods in CA0, Suzhu Hong Kong Hong Kong Subsidiary . Company Responsible for management matters CAO, Guoqi; Cooperating related to existing cut-off companies SUN, Wei companies 4 Project Other Members All Rights reserved, No Spreading abroad without Permission of - I Page 6 ZTE Top Secret Internal Use Only? (II) Project milestones Company Export Control Management Project Milestone Schedule No. Milestone ., 7 Output/Hand-Over Item Completion Department-in- Acceptance Time charge Standard Phase I i 4 I Initiation phase Complete initiation work? 2011?8-30 Legal Complete initiation Department r-work Project preparation Legal Department Successfully 1 and planning Project set-up report 201 1-8-25 completedtproject set-up Project team Project proposal, team Team establishment, 2 establishment and establishment, convene 2011-8-30 Legal Department (Dprojg?tstart-up start-up project initiation meeting Submit a resolution Iran Submit a PhaSe Iran project(s) proposal for problems in RepreSentative resolution renovation phase Iran project(s), start 2011-10-30 Of?ce, all units proposal, start implementing of the project . -implementing - - team Sort out the problems Problem summary report, Eli?anv/ Submit a problem 3 encountered during detail explanation of the 20 4739-106 liepgesentative summary report Iran project(s) execution problems :gftice execution A. Submit a resolution Submit a resolution proposal for problems in Each unit-of the Submit a resolution 4 . proposal for Iran Iran project(s), start 2011-10-30 project team is proposal project execution transforming,th cur? responsible for its problems cut?off cpi?an?ies own duties Complete organization of '_Complete the entire company?s procedure Phase Company internal procedures; draft All units of the organization, comprehensive and revise uni?ed work 2011-12-31' project team standard revision, reorganization standards; formulate . ?and avoidance phase preventative measures measures draw-up lOrganize current business Organize each procedures; Optimize Each unit of the Complete business 1 . . . . . adep'artpmentks related internal process; add prOject team is organization and i 5 buSiness p/rocedures; procedures related to 201 1-9-30 reSponsible for its process optimization optimizerinterna] license application, own duties process suppliers materials feedback etc. Analyze and calculate the Each product-line ratio of U.S./Chinese items Calculate ratio, 6 searches for overall in products from each 20] 1-10-30 Each product line submit a substitution substitution plan for product line. If it exceeds a plan U.S. procured certain ratio, then ?nd a - products substitution plan All Rights reserved, No Spreading abroad without Permission of TE Page 7 ZTE Top Secret Internal Use Only A Company Export Control Management Project Milestone Schedule 0. Milestone Output/Hand-Over Item Completion Department-in- Acceptance Time charge 7 Standard Formulate ?Export Control Each unit of the Issue ?Export Formulate the uni?ed Management Plan?; specify project team is Control 7 work standards each department?s duties 201 1-10-30 responsible for'its Management Plan? own duties Formulate ?Export Warehouse Issue ?Export 'Formulate related Controlled Goods and Department, Control 8 departments? work Materials Management 20] 1-10-30 Central Logistics Management Plan? standards Plan?, ?Export Control Department ?Export Control I License Application Licens/etApplication Regulations? Guide?\\ Formulate company-level Formulate company comprehensive risk 0 A comprehensive preventative plan; set up Each unit of the ?\Subngit a - 9 preventative plan for new cut-off companies; 201 1-1 1-31 project team cOmprehensive . . . . . export control direct specr?c work related responsibleior av01dance plan to controlled projects ?own duties Phase Execution?and Training and Each unit of the' Complete IV implementation implementation 2011?12-31 project team implementation, phase - - training Complete training of core 7 lntemal training and employees from internal Each unit of the Complete training, implementation business departments; project team is implementation 10 implement work standards/7 responsible for its and preventative measure? own duties (Ill) Project reward proposal should be a i This project (1) involves many company departn?fients; number of participating departments exceed 20; number of project participants exceed 702(2) has of work; is highly-specialized; involves risk prevention for several current big [ran projects; reorganizes logistics, procurement, marketing, and other procedures for the drganizes all of the products fromcompany product lines, (3) is innovative work for to dra? new management standards and set up new management procedures. To e/ncourage thezproject team members to successfully complete the project assignments, there their cont?buti'on after the project is completed. Company leaders, please advise! All Rights reserved, No Spreading abroad without Permission onTE Legal Department 08/25/201 1 wpfoject rewardrof 400,000 Renminbi which shall be distributed to the team members according to Page 8