ZTE clears another hurdle with escrow agreement, ban still in place

US and ZTE sign escrow agreement; when ZTE completes US$400 million in an escrow account the ban on the company will be lifted

PUBLISHED : Thursday, 12 July, 2018, 2:10am
UPDATED : Thursday, 12 July, 2018, 5:29am

ZTE Corp has signed an agreement with the US that will allow the Chinese telecommunications company to deposit US$400 million in an escrow account, the final step required before the US Commerce Department lifts a crippling ban of nearly three months.

“Once ZTE has completed the $400 million escrow deposit,” the Commerce Department said in a statement on Wednesday, the agency will “issue a notice lifting the denial order.”

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The removal of the denial order, which the Commerce Department put in place to prevent ZTE from buying any crucial American electronics parts for seven years, will let ZTE resume operations by regaining access to US suppliers.

Multiple sources have said Commerce Department officials met with ZTE executives on Monday in Washington to work out the final details of the agreement. Rebecca Glover, director of public affairs for the agency, said no meetings between Commerce and ZTE took place.

ZTE has been in a months-long effort to resume operations after the US banned it in mid-April from buying American parts, penalising ZTE for violating US sanctions by selling products to Iran and North Korea.

The company shut down majority of its operations weeks after the ban was imposed. In a surprise turn of events, US President Donald Trump backed down from the harsh penalty and asked Commerce Secretary Wilbur Ross to come up with a deal to save ZTE, China’s second-largest telecoms equipment maker.

That action met with bipartisan resistance from US lawmakers, who urged Trump to reinstate the ban because of the national security threat they say ZTE poses to the US. The US House and Senate have each passed amendments to a defence bill that would undo Trump’s settlement. Trump has told the lawmakers not to undermine the deal because it was part of a broader negotiating strategy with China.

“The ZTE issue has received a lot of heat and light, but it would appear that the Senate will not hold onto” an amendment by lawmakers including Senator Marco Rubio aimed at keeping the ban intact, said Jeremy Zucker, a Washington-based partner at the law firm Dechert LLP.

ZTE meets with US officials to work out final details of compliance deal

The escrow agreement is part of a US$1.4 billion deal ZTE reached with the Commerce Department in June. It paid the US$1 billion fine to the US Treasury last month.

The escrow of US$400 million will be put aside to cover any future ZTE violations.

ZTE was fined in early 2017 for selling millions of dollars’ worth of hardware and software from US technology companies to Iran’s largest telecommunications carrier, and was later said to have sold products to North Korea.

The company paid a US$1 billion fine and agreed to penalise the workers involved. In April, the Commerce Department said the company failed to make good on its remedies and reimposed the ban.

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ZTE did not immediately respond to a request for comment.

The settlement also requires ZTE to replace its senior management team and put in place a compliance team appointed by the US.

“It looks increasingly likely that the ZTE deal is going to stick,” Zucker said. “There’s an open question whether tariffs and the trade war will bleed across into this, but it looks at this point like the deal will survive.”