ZTE to plead guilty to evading US sanctions on Iran, N.Korea

A Chinese national flag and two flags bearing the name of ZTE fly outside the ZTE R&D building in Shenzhen, China

A Chinese national flag and two flags bearing the name of ZTE fly outside the ZTE R&D building in Shenzhen, China

Published Mar 8, 2017

Share

New York - Chinese telecom

equipment maker ZTE has agreed to

plead guilty and pay nearly $900 million in a US sanctions

case, drawing a line under a damaging scandal that had

threatened its cut off its supply chain.

While the fine was larger than expected, ZTE, also a major

smartphone maker, reported robust underlying earnings for 2016

and was upbeat in estimates for the first quarter. That and the

resolution of the case helped its Hong Kong-listed shares surge

6 percent.

A five-year investigation found ZTE conspired to evade U.S.

embargoes by buying US components, incorporating them into ZTE

equipment and illegally shipping them to Iran.

In addition, it was charged in connection with 283 shipments

of telecommunications equipment to North Korea.

"ZTE Corporation not only violated export controls that keep

sensitive American technology out of the hands of hostile

regimes like Iran's, they lied ... about their illegal acts,"

US Attorney General Jeff Sessions said in a statement.

ZTE relies on US suppliers for 25 percent to 30 percent of

its components, many of which are key to its goods. It purchases

about $2.6 billion worth of components a year from U.S. firms,

according to a company spokesman. Qualcomm, Microsoft

and Intel are among its suppliers.

"ZTE acknowledges the mistakes it made, takes responsibility

for them, and remains committed to positive change in the

company," ZTE CEO Zhao Xianming said in a statement.

The company agreed to a seven-year suspended denial of

export privileges, which could be activated if there are further

violations, as well as three years of probation, a compliance

and ethics program, and a corporate monitor.

It also agreed to an additional penalty of $300 million that

will be suspended during the seven-year term on the condition

the company complies with requirements in the agreement.

When asked about the ZTE case, Chinese Foreign Minister Wang

Yi said relevant departments of the government would continue to

pay attention as to whether Chinese firms were receiving fair

treatment.

"The Chinese government consistently opposes foreign

governments putting unilateral sanctions on Chinese companies.

At the same time, we have always asked our companies to operate

legally abroad," he told a news conference without elaborating.

Tim O'Toole, a Washington D.C.-based lawyer with Miller &

Chevalier specialising in sanction cases, said US court

documents suggest ZTE's attempts to obstruct the investigation

were the main reason for a penalty significantly higher than in

similar cases.

"What seems really important to US regulators is whether a

company or individual after the investigation starts is seen to

continue to evade the sanctions and also obstruct the

investigation," he said.

The investigation, spearheaded by the US Department of

Commerce, followed reports by Reuters in 2012 that ZTE had

signed contracts to ship millions of dollars worth of hardware

and software from some of the best-known US technology

companies to Iran's largest telecoms carrier.

Last year, the Commerce Department released internal

documents showing senior ZTE executives instructing the company

to carry out a project for dodging export controls in Iran,

North Korea, Syria, Sudan and Cuba.

Read also:  Smartphones: China's ZTE plans sales push

ZTE has replaced executives allegedly involved, including

naming a new president.

The company said on Wednesday it slid to a preliminary net

loss of 2.36 billion yuan ($342 million) in 2016, its first loss

in four years, due to the settlement.

But without the fine, it would have logged 3.8 billion yuan

in profit, 18 percent higher than a year earlier. That was

better than expected, as was a preliminary estimate for the

first-quarter net profit rising between 21 and 31 percent, said

Cindy Lam, an analyst with UOB Kay Hian in Hong Kong.

The settlement includes a $661 million penalty to Commerce;

$430 million in combined criminal fines and forfeiture; and $101

million paid to the Treasury's Office of Foreign Assets Control

(OFAC). The action marks OFAC's largest-ever settlement with a

non-financial entity.

The Commerce Department will recommend ZTE be removed from a

list of entities that US firms cannot supply without a

license if it lives up to its deal and a court approves its

agreement with the Justice Department.

First placed on the list in March 2016, it has continued to

do business with US suppliers under a temporary general

license that has been extended several times, with the latest

reprieve expiring March 29.

The company's guilty pleas, which must be approved by a

judge, will take place in US District Court in Texas.

REUTERS

Related Topics: