By Aruna Viswanatha, Eva Dou and Kate O'Keeffe
Çhinese telecommunications giant ZTE Corp. has agreed to pay $892 million in fines and plead guilty to violating U.S. sanctions on Iran and obstructing justice, ending a five-year probe that has raised trade tensions between the U.S. and China.
The penalties, among the largest ever in a sanctions case, were imposed on China's largest publicly traded telecom manufacturer for its involvement in a six-year-long conspiracy to acquire U.S. technology, incorporate them into ZTE equipment and ship the goods to Iran, U.S. officials said.
"The highest levels of management within the company approved the scheme" and the company "repeatedly lied to and misled federal investigators," said Mary McCord, who runs the Justice Department's national security division.
"ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company," said ZTE Chairman and CEO Zhao Xianming in a statement detailing changes the company has made to ensure compliance with U.S. regulations..
The investigation into ZTE — one of the few Chinese consumer brands to break into the U.S. market — had deeply alarmed Chinese policy makers. Following Apple Inc., Samsung Electronics Co. and LG Electronics Inc., ZTE is the fourth-largest smartphone vendor in the U.S. based on number of units sold.
The steep penalties — imposed by the Justice, Commerce and Treasury departments — will nearly wipe out the equivalent of the past two years of ZTE's net profits. And the company could be forced to pay an additional $300 million if it violates its pact with the Commerce Department.
In a Wednesday filing to the Hong Kong stock exchange, ZTE reported a net loss of 2.36 billion yuan ($342 million) in the year ended Dec. 31 and said that, had it not been for the provisions for U.S. penalties, its 2016 net profit would have risen 19% to 3.83 billion yuan.
Still, ZTE avoided a much more devastating outcome: prolonged trade sanctions blocking companies from exporting U.S. goods to it. Without the ability to get key components for its smartphones such as processors from U.S. company Qualcomm Inc., ZTE's ability to produce some of its major products could have been crippled in a matter of months, putting it at risk of bankruptcy.
It was the threat of enduring trade sanctions that eventually brought ZTE to the bargaining table after years of obstruction, said U.S. officials. In March 2016, the Commerce Department took a novel approach by placing the severe restrictions on ZTE — and its suppliers too, in effect — prompting the company to quickly begin cooperating with investigators, officials said.
The Commerce Department agreed to suspend the sanctions during settlement talks, and, as part of the agreement, will now move to fully remove them. The sanctions threat had another effect: it prompted China to accelerate efforts to reduce its dependence on U.S. technology and develop domestic alternatives, said Ye Tianchun, microelectronics director of the Chinese Academy of Sciences, a government think tank based in Beijing. "It's made us even more convinced that we have to develop our own technology," Mr. Ye said.
In this way, the ZTE investigation may have sped up a trend that has worried U.S. policy makers: China's efforts to close the high-tech gap with the U.S. with the help of tens of billions in subsidies and aggressive efforts to acquire overseas technology. U.S. lawmakers from both parties are mounting efforts to bolster the U.S. government's scrutiny of surging Chinese investment here.
But since ZTE obtains many components for its electronics from U.S. suppliers, a heavy blow to the Chinese firm would hurt U.S. businesses, a conundrum that China and trade experts warn the current administration will face in many sectors as it seeks to reduce the trade deficit.
ZTE has faced an uphill battle in Washington. In a 2012 investigative report, the House Intelligence Committee warned that ZTE posed national-security risks, and members of Congress have continued to send letters to U.S. officials blasting the company.
ZTE has rapidly increased its spending on lobbying in recent years, shelling out $3.3 million total from 2013 to 2016 compared with less than $500,000 in total over the four prior years, according to data from the Center for Responsive Politics, a nonpartisan Washington-based research group.
Following the settlement, Michael Wessel, a member of the US-China Economic and Security Review Commission, urged continued scrutiny of ZTE. "While the penalties may sound like a lot, ZTE will be able to resume business as usual," Mr. Wessel said. The commission, which provides recommendations to Congress, has been a longtime critic of Beijing.
The U.S. investigation into ZTE began in 2012 after Reuters reported on the firm's business with Iran. Prosecutors ultimately found that, in a scheme that ran from 2010 through 2016, ZTE conspired to evade the U.S. embargo against Iran to get contracts there worth hundreds of millions of dollars to install telecom networks requiring U.S. components.ZTE shipped $32 million in U.S.-origin items to Iran without a proper license, the Justice Department said.
ZTE also violated export regulations by shipping telecommunications equipment to North Korea, according to the Commerce Department.
The company lied to U.S. officials during the investigation, insisting it had stopped sending U.S. goods to Iran even though it continued to do so, according to court documents.
ZTE officials knew they were taking a major risk, according to a 2011 internal document posted earlier by the Commerce Department. One company official warned that the Iran work could "potentially put us at risk of being put on the Blacklist by the U.S.," according to the document. If that were to happen, the company could face "the risk of losing the supply chain of U.S. products," the document continued.
ZTE also hid data from a forensic accounting firm its lawyers had hired to review the transactions, prosecutors said, including by forming a 13-person team to "sanitize the databases" of information relating to its Iran business and using an auto-delete function to erase certain employees' emails on a daily basis.
As part of the settlement, ZTE agreed to a three-year period of corporate probation, requiring it to allow an independent monitor to report on its export compliance program, according to documents filed in a federal court in Texas. ZTE also must cooperate with any criminal investigation by U.S. law-enforcement authorities during the period, the papers said.
The company also had to fire four employees or allow them to resign, but no executives were criminally charged in connection with Tuesday's action, a law-enforcement official said.
A federal judge needs to approve the plea agreement before it is completed, and that court hearing is scheduled for later this month.
The financial penalties the U.S. levied on ZTE are around the same amount China's antitrust regulators fined Qualcomm for alleged abuse of monopoly power. The U.S. company was dinged $975 million in 2015.
Founded in 1985 as a state-owned telecom equipment manufacturer in China's southern Guangdong province, ZTE listed shares on the Shenzhen stock exchange in 1997 and also began trading on the Hong Kong Stock Exchange in 2004.
In recent years, it has branched into consumer electronics, becoming the only Chinese smartphone brand with substantial sales in the U.S. ZTE's U.S. smartphone market share in the fourth quarter was 11%, according to Counterpoint Research.
Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com and Eva Dou at firstname.lastname@example.org
(END) Dow Jones Newswires
March 07, 2017 19:09 ET (00:09 GMT)
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