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ZTE to pay up to $1.2bn for violating US sanctions

March 8, 2017

ZTE has agreed to plead guilty to criminal charges of violating US sanctions on North Korea and Iran and to pay up to $1.2bn in fines, the largest sanctions-busting penalty levied against a Chinese company by Washington.

The Chinese telecommunications group also admitted to obstructing a federal investigation as part of a settlement announced on Tuesday after more than a year of negotiations with the US government. Those talks accelerated after US officials seized the laptop of a ZTE lawyer as her husband tried to leave the US, resulting in a trove of documents that laid bare what officials called a brazen conspiracy to get around US sanctions. 

The investigation was begun under the Obama administration which placed the company on a list of banned entities in March 2016, effectively prohibiting US suppliers from conducting business with the world’s fourth-largest telecoms equipment supplier. But the administration of Donald Trump quickly seized on the case as an example of how it planned to get tough on China and others it accused of cheating on trade. 

“We are putting the world on notice: the games are over,” said Wilbur Ross, the billionaire investor who last week became Mr Trump’s commerce secretary. “Under President Trump’s leadership we will be aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers.” 

However a former administration official criticised the new administration over the outcome, saying it had settled for a lower amount than the Obama team had sought. “This was a case that was brought, prosecuted and negotiated by the Obama ​administration,” said the former official, adding the Obama team had sought a penalty of up to $1.4bn.

Shares in ZTE climbed more than 5 per cent on Wednesday morning in Hong Kong.

ZTE warned in a filing last month that it faced a hefty fine in the US. The terms of the deal, which must be approved by a court, call for immediate fines of $892m and a further $300m in penalties to be suspended for seven years as US officials monitor ZTE’s compliance with the deal.

“ZTE acknowledges the mistakes it made, takes responsibility for them and remains committed to positive change in the company,” Zhao Xianming, the company’s chairman and chief executive, said in a statement. 

The company on Wednesday reported a loss of Rmb2.35bn ($340m) for 2016, and said it would have recorded a net profit of Rmb3.83bn — an increase of 19.2 per cent on 2015’s profit of Rmb3.21bn — had it not made a provision for the US fine.

Mr Zhao was appointed last April as part of shake-up of ZTE’s management in the wake of the US charges. Under his leadership, the company said it had created a new compliance committee and appointed a US lawyer to monitor its compliance with global export controls. 

But according to US officials those moves came only after investigators, who spent five years looking into the company’s dealings with Iran and North Korea, seized the company lawyer’s laptop during a search prompted by a tip from a ZTE insider. 

Files on the computer, officials said, documented an “egregious” conspiracy that saw the company ship tens of millions of dollars in mobile phones and mobile phone chips containing restricted US technology to North Korea and similar cellular network equipment to Iran. 

Altogether, US officials said, ZTE had made hundreds of shipments to Iran and North Korea of products containing US parts that were restricted because of their potential military use. 

To do so, ZTE used specially established “isolation companies” to hide the use of restricted US-made components and left any mention of those parts off customs declaration forms. 

At one point, US officials said on Tuesday, the company had 13 employees assigned to a special unit ordered to “sanitise” internal communications to remove any potentially incriminating evidence. It also restarted shipments to Iran while it was being investigated and caused its own lawyers to unwittingly lie to US officials by denying any wrongdoing. 

“They should have known better,” Mr Ross said. 

ZTE over the past year has tried to use its US suppliers and the 130,000 people they employ as potential leverage, arguing it was too big a player in the global telecoms market for US companies not to be able to do business with it.

Via FT