U.S. Commerce Secretary Wilbur Ross announced fines of over $1.4 billion against ZTE last week in an agreement that would allow the Chinese telecommunications giant to continue purchasing materials critical to its business from U.S. companies.
Under the terms of the agreement the company has agreed to pay $1 billion before the Commerce Department’s Bureau of Industry and Security removes it from its Denied Persons List. It also has to place an additional $400 million in suspended penalty money in escrow before being removed. The $1.4 billion is in addition to $892 million in penalties ZTE already paid to the U.S. government under the terms of a March 2017 agreement.
The company will also be required to hire a team of special compliance coordinators selected by BIS for a period of 10 years. Their function will be to monitor, in real-time, the company’s compliance with U.S. export laws. They will report directly to BIS officials. The entire board of directors and senior leadership for ZTE will also be replaced, along with those of a sister corporation. The two corporations are under the ZTE umbrella.
The denial of service order that was lifted can be activated again at any time by BIS for a 10-year probationary period under the agreement. Taken together, the penalties represent the most severe ever imposed by BIS.
“Today, BIS is imposing the largest penalty it has ever levied and requiring that ZTE adopt unprecedented compliance measures. We will closely monitor ZTE’s behavior. If they commit any further violations, we would again be able to deny them access to U.S. technology as well as collect the additional $400 million in escrow,” said Secretary Ross.
The first settlement with ZTE set a record for civil and criminal penalties in an export control case. This new settlement agreement sets another record, and brings the total penalties assessed on ZTE to $2.29 billion.”
The Trump administration had previously barred Zhongxing Telecommunications Equipment Corporation, of Shenzhen, China (ZTE) from doing business with American companies. That included San-Francisco-based microchip maker Qualcomm, a main supplier. The decision would have put ZTE out of business within weeks.
ZTE is a carrier-network and mobile-phone provider that employs roughly 75,000 worldwide and had revenues last year of approximately $17 billion. A shutdown of the company would have been an embarrassment for the Chinese government.
The company had become the source of some controversy as it had recently been labeled a national security threat by U.S. officials and had drawn the ire of senior U.S. military leaders for several reasons.
It was recently discovered ZTE had been selling their products to Iran, Syria and North Korea despite U.S. sanctions on those countries. The company blamed bureaucratic failures and said it disciplined the employees who authorized those sales. It was actually revealed that those employees had received bonuses for their actions.
There is also concern among U.S. national security officials that their products – specifically their mobile phones – could be used to spy on Americans, and American Military Service Members in particular. Earlier this month the Pentagon banned the sale of ZTE phones on U.S. military bases worldwide.
ZTE, which is backed the Chinese government, is also racing to develop the world’s first 5G wireless data network, a superfast network that powers all emerging technologies from self-driving cars to virtual reality. ZTE reaching that goal before the U.S. could mean that technology can be used to put U.S. firms out of business, undermining the U.S. economically as well as from a national security standpoint.
The President however, saw a deal on ZTE as necessary concession in his goal to get a broader trade deal with China accomplished, one that he says will be fairer to American companies and American workers.
Senior administration officials believe balancing keeping ZTE running as a goodwill-gesture to China while navigating the national security risks associated with the company, is a tightrope they can walk.
“We’re developing a matrix of things and while we haven’t come quite to a final decision yet, we think there may very well be an alternative that will be quite punitive to them, but really modify behavior,” Ross said last month before the deal was announced.
Photo by John Karakatsanis via Flickr