US companies banned from selling components to ZTE for seven years

ZTE
REUTERS/Sergio Perez

WASHINGTON (Reuters) – The US Department of Commerce is banning American companies from selling components to leading Chinese telecom equipment maker ZTE for seven years for violating the terms of a sanctions violation case, US officials said on Monday.

The Chinese company, which sells smartphones in the United States, pleaded guilty last year in federal court in Texas for conspiring to violate U.S. sanctions by illegally shipping US goods and technology to Iran. It paid $890 million in fines and penalties, with an additional penalty of $300 million that could be imposed.

“If the company is not able to resolve it, they may very well be put out of business by this. Many banks and companies even outside the US are not going to want to deal with them,” said Eric Hirschhorn, a former US undersecretary of commerce who was heavily involved in the case.

As part of the agreement, Shenzhen-based ZTE Corp promised to dismiss four senior employees and discipline 35 others by either reducing their bonuses or reprimanding them, senior Commerce Department officials told Reuters. But the Chinese company admitted in March that while it had fired the four senior employees, it had not disciplined or reduced bonuses to the 35 others.

ZTE, whose Hong Kong and Shenzhen shares were suspended on Tuesday, said it was assessing the implications of the US decision and was communicating with “relevant parties.”

The Commerce Department order quoted a ZTE official’s letter admitting it “had not executed in full” some disciplinary measures and that there were “inaccuracies” in a 2017 letter. But, the Commerce order said, ZTE “argued that it would have been irrational for ZTE to knowingly or intentionally mislead the U.S. government in light of the seriousness of the suspended sanctions.”

Under terms of the ban, US companies cannot export prohibited goods, such as chipsets, directly to ZTE or via another country, beginning immediately.

Shares of big US ZTE suppliers fell on the Commerce ban. Acacia Communications Inc, which got 30% of its total 2017 revenue from ZTE, tumbled as much as 34.7% in early trade, hitting a near two-year low.

Shares of optical companies including Lumentum fell 6.8% and Finisar dropped 6%. Oclaro, which got 18% of its fiscal 2017 revenue from ZTE, lost 17.4%.

ZTE “provided information back to us basically admitting that they had made these false statements,” said a senior department official. “That was in response to the US asking for the information.”

“We can’t trust what they are telling us is truthful,” the official said. “And in international commerce, truth is pretty important.”

Meanwhile, Britain’s main cyber security agency said on Monday it has written to organizations in the UK’s telecommunications sector warning about using services or equipment from ZTE.

‘Devastating to the company’

Douglas Jacobson, an exports control lawyer who represents suppliers to ZTE, called the ban highly unusual and said it would severely affect the company.

“This will be devastating to the company, given their reliance on US products and software,” said Jacobson. “It’s certainly going to make it very difficult for them to produce and will have a potentially significant short and long-term negative impact on the company.”

“This is going to tank their stock,” Jacobson added.

ZTE has sold handset devices to US mobile carriers AT&T, T-Mobile US and Sprint. It has relied on US companies including Qualcomm, Microsoft and Intel for components.

The US action against ZTE is likely to further exacerbate current tensions between Washington and Beijing over trade.

The ban on supplying ZTE comes two months after two Republican senators introduced legislation to block the US government from buying or leasing telecommunications equipment from ZTE or its Chinese rival Huawei, citing concern the companies would use their access to spy on US officials.

“China does not play by our rules, and we must be vigilant against Chinese threats to both our economic security and national security,” said Republican Representative Robert Pittenger after the Commerce announcement. Pittenger is sponsoring legislation that would strengthen the US national security review process for foreign investments.

After the US placed export restrictions on ZTE in 2016 for Iran sanctions violations, the China’s Ministry of Commerce and Foreign Ministry criticized the decision.

A five-year federal investigation found last year that ZTE had conspired to evade US embargoes by buying US components, incorporating them into its equipment and illegally shipping them to Iran.

ZTE, which devised elaborate schemes to hide the illegal activity, agreed to plead guilty after the Commerce Department took actions that threatened to cut off its global supply chain.

The US government had allowed the company continued access to the US market under the 2017 agreement. American companies are estimated to provide 25% to 30% of the components used in ZTE’s equipment, which includes networking gear and smartphones.

The new restrictions stem from a Jan. 16 report by a US monitor appointed by a federal judge in Texas who accepted the guilty plea in March 2017. Although Commerce Department officials would not discuss the report, they said the department followed up in February.

The US government’s investigation into sanctions violations by ZTE followed reports by Reuters in 2012 that the company 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.

(By Steve Stecklow and Karen Freifeld; Reporting by Karen Freifeld in New York and Steve Stecklow in London; Editing by Jeffrey Benkoe)

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