China’s ZTE Expected to Plead Guilty Over Iran Sales

March 2, 2017, 5:26 PM UTC
People stand at ZTE's booth during Mobile World Congress in Barcelona
People stand at ZTE's booth during Mobile World Congress in Barcelona, Spain, February 27, 2017. REUTERS/Paul Hanna - RTS10M0P
Photograph by Paul Hanna —Reuters

Chinese telecom equipment maker ZTE is nearing an agreement to plead guilty to U.S. criminal charges and pay hundreds of millions of dollars in penalties over allegations it violated U.S. laws that restrict sale of U.S. technology to Iran, a person familiar with the matter said.

The company has not yet signed a deal with the Department of Commerce, the Department of Justice and the Department of Treasury, cautioned the person, who declined to speak on the record because the negotiations are not public.

Others noted that with a new U.S. administration prompting changes in personnel at government departments, a final deal may be delayed or even scuttled.

But ZTE is expected to plead guilty to conspiring to violate the International Emergency Economic Powers Act, among other charges, the source said, and pay penalties in the hundreds of millions.

A ZTE spokesman did not respond to requests for comment. Nor did a spokesman for the U.S. Department of Commerce. Spokesmen for the U.S. Department of Justice and U.S. Department of Treasury declined to comment.

An agreement would cap a year of uncertainty for the Shenzhen-based company, which was placed on a list of entities March 2016 that U.S. suppliers could not work with without a license. ZTE acted contrary to U.S. national security or foreign policy interests, the Commerce Department said at the time.

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One of the world’s biggest telecommunications gear makers and the No. 4 smartphone vendor in the United States, ZTE sells handset devices to U.S. mobile carriers AT&T, T-Mobile US and Sprint. It relies on U.S. companies including Qualcomm, Microsoft and Intel for components.

The listing could have severely disrupted the company’s supply chain, but the Commerce Department granted ZTE a temporary license so U.S. companies could continue to do business with the Chinese firm while it cooperated with the investigation.

The temporary license was extended several times, with the latest reprieve expiring on March 29.

The last extension, a ZTE spokesman told Reuters in an email last week, was “a sign of the progress” made.

ZTE was working with the U.S. government “toward permanent removal from the Entity List,” the company spokesman said at that time, and under new leadership was conducting business in a way that “meets and exceeds export compliance standards.”

The spokesman’s comments followed a Feb. 14 filing by ZTE to the Shenzhen Stock Exchange. The ZTE filing said it was negotiating with the U.S. Commerce, Treasury and Justice departments to conclude the investigation.

ZTE said that the outcome remained uncertain, but that it would likely have a material impact on its financials. ZTE has annual sales of more than $15 billion.

Scrutiny can mean comfort

The implications of a guilty plea are unclear. Experts said it can result in a denial order, which imposes a complete bar on the receipt of U.S. origin goods and technology. But, as part of a settlement, the order could be suspended for years.

Typically, the reputational taint of a guilty plea on U.S. suppliers or customers would be limited in duration, according to Washington attorney Douglas Jacobson, an export controls and sanctions expert.

“In fact, a company that has faced the type of scrutiny that ZTE has … actually gives U.S. suppliers and customers a greater degree of comfort that they will be a compliant company in the future,” said Jacobson, who represents some U.S. suppliers to ZTE.

The Commerce Department released alleged internal documents last year, showing senior ZTE executives instructing the company to carry out a project for dodging export controls in Iran, North Korea, Syria, Sudan and Cuba.

ZTE replaced the senior executives allegedly involved, including naming a new president, and also appointed a new, U.S.-based chief export compliance officer. The Shenzhen-based company has a U.S. subsidiary in Richardson, Texas.

A settlement also would likely include the imposition of a compliance monitor, experts have told Reuters.

The uncertainty has already weighed on ZTE’s business. In January, company sources told Reuters that the equipment maker was cutting about 3,000 jobs, or 5% of its 60,000 global workforce.

The Commerce Department investigation 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 America’s best-known technology companies to Iran’s largest telecoms carrier.

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