ZTE to pay $1B penalty in deal with U.S. Commerce Department

The U.S. Commerce Department has struck a deal with China's ZTE, paving the way for the telecom giant to again do business with U.S. companies. Commerce Secretary Wilbur Ross said today that ZTE has agreed to pay the largest penalty ever levied by the department's Bureau of Industry and Security (BIS), and that the company will "adopt unprecedented compliance measures."

ZTE has agreed to a $1 billion penalty, in addition to $892 million it has already paid in penalties. In addition, the company will put $400 million into an escrow account, which the U.S. can access if it finds ZTE to be out of compliance with the agreement. The U.S. is maintaining its 10-year export ban on ZTE, but the ban is indefinitely suspended and is likely to remain suspended if ZTE complies with the U.S. trade laws.

The U.S. Commerce Department originally fined ZTE in 2017 after finding that the company had been "engaging in a multi-year conspiracy to supply, build, and operate telecommunications networks in Iran using U.S.-origin equipment in violation of the U.S. trade embargo, and committing hundreds of U.S. sanctions violations involving the shipment of telecommunications equipment to North Korea."

ZTE at the time said it would discipline the executives involved, but this year the Commerce Department learned that four of those people stayed at ZTE, and received bonuses. The U.S. responded to this information with a denial order which made it illegal for U.S. companies to do business with ZTE.

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The denial order put ZTE's future into jeopardy because it relies on U.S. components for so many of its products. Shortly after the order was announced, ZTE said  it had suspended major operations. At the same time, it continued to ask the U.S. government to lift the ban.

Some officials involved with the negotiations have said they were unrelated to the ongoing trade talks between the U.S. and China, but others have suggested that ZTE was a bargaining chip for the U.S. and that China could make other concessions now that ZTE has won a reprieve. Specifically, some observers are looking for China's Ministry of Commerce to finally approve Qualcomm's bid to purchase NXP. 

The new agreement also requires ZTE to replace its board of directors and senior leadership. In addition, the company is agreeing to retain a team of special compliance coordinators selected by U.S. regulators. These coordinators will report directly to the Commerce Department's Bureau of Industry and Security for 10 years. Their function will be to monitor on a real-time basis ZTE’s compliance with U.S. export control laws. Ross said this is the first time BIS has achieved such stringent compliance measures in any case. 

ZTE's return to the U.S. market is good news for several American companies. Qualcomm and Intel count ZTE as a customer, as do smaller component makers Oclaro and Acacia, both of which saw their stock prices drop sharply when the ZTE export ban was announced. For other U.S. companies, ZTE is a supplier. For example, Gogo Wireless uses ZTE equipment for its in-flight connectivity systems.