Chinese telecom equipment maker ZTE Corp (中興) has agreed to plead guilty and pay nearly US$900 million in a US sanctions case, drawing a line under a damaging scandal that had threatened to cut off its supply chain.
While the fine was larger than expected, ZTE, also a major smartphone maker, reported robust underlying earnings for last year and was upbeat in estimates for the first quarter of this year. 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 US 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 US$2.6 billion worth of components each year from US firms, a company spokesman said.
Qualcomm Inc, Microsoft Corp and Intel Corp 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 (趙先明) 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 US$300 million that is to 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 Minister of Foreign Affairs Wang Yi (王毅) said relevant departments of the Chinese 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-based lawyer with Miller & Chevalier specializing 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 US dollars of hardware and software from some of the best-known US technology companies to Iran’s largest telecom.
Last year, the department released internal documents showing senior ZTE executives instructing the company to carry out a project to dodge export controls for Iran, North Korea, Syria, Sudan and Cuba.
ZTE has replaced executives allegedly involved, including naming a new president.
The company yesterday said it slid to a preliminary net loss of 2.36 billion yuan (US$341.8 million at the current exchange rate) for last year, its first loss in four years, due to the settlement.
However, without the fine, it would have logged 3.8 billion yuan in profit, 18 percent greater than a year earlier.
That was better than expected, as was a preliminary estimate for first-quarter net profit rising between 21 percent and 31 percent, UOB Kay Hian Holdings Ltd (大華繼顯控股) Hong Kong-based analyst Cindy Lam (林倩而) said.
The settlement consists of a US$661 million penalty to the commerce department; US$430 million in combined criminal fines and forfeiture; and US$101 million paid to the US Treasury’s Office of Foreign Assets Control, its largest-ever settlement with a nonfinancial entity.
The department would 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 US Department of Justice.
First placed on the list in March last year, 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 on March 29.
The company’s guilty pleas, which must be approved by a judge, are to take place in a US District Court in Texas.
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