ZTE expects to incur penalties in settlement of US export case

PUBLISHED : Tuesday, 14 February, 2017, 3:05pm
UPDATED : Tuesday, 14 February, 2017, 11:00pm

ZTE Corp, China’s largest-listed telecommunications equipment supplier, expects to incur penalties from its settlement with the United States over export restrictions for violating long-standing trade sanctions on Iran.

“The outcome of the settlement issues still remains uncertain, but will likely have a material impact on the financial conditions and operating results of the company,” ZTE chairman Zhao Xianming said in a regulatory filing on Tuesday.

Zhao reiterated that the Shenzhen-based company “has been actively cooperating and communicating with relevant US government departments in order to reach a conclusion of the investigation”, as disclosed in previous announcements dating back to March last year.

Shares of ZTE were up 5.42 per cent to HK$12.84 at the close of trading on Tuesday.

The Bureau of Industry and Security of the US Department of Commerce slapped ZTE with export restrictions on March 7, which barred suppliers from shipping any US-made equipment and parts to the Chinese company.

Suppliers of goods subject to the US export curbs are required to apply for a license to ship those items to ZTE.

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A “license review policy of presumption of denial shall apply” in this situation, ZTE said.

The US restrictions also cover subsidiaries Shenzhen ZTE Kangxun Telecommunications, ZTE Parsian and Beijing 8-Star International Co.

Paul Haswell, a partner at international law firm Pinsent Masons, told the South China Morning Post that the filing “suggests that the saga between ZTE and the US is coming to an end, but that the end result is likely to be a hefty financial penalty for the Chinese company”.

“We can expect that ZTE will be required to change its operating procedures to ensure there is no risk of it infringing trade compliance laws in the future,” Haswell said.

ZTE, however, has managed to weather the crisis brought by the export curbs through its active dialogue with US authorities.

On March 24, the bureau amended its initial ruling by creating a temporary general license so that the export restrictions on ZTE and subsidiary ZTE Kangxun Telecommunications would not apply until June 30.

That three-month reprieve was extended by the bureau on June 28, August 19 and on November 18. The latest extension is until February 27.

Zhao said ZTE is currently negotiating with three US agencies – the Commerce Department, the Department of Justice and the Department of Treasury – on the settlement issues, “the outcome of which is expected to result in penalties imposed on the company by relevant US government departments”.

ZTE can continue operating as normal, as Washington agency extends temporary license until Feb 27, filing says

The penalties will include a fine and other relevant liabilities under US laws, according to ZTE.

It added that announcements “of material development” based on the US case will be made “as soon as practicable”.

In April, ZTE conducted a sweeping senior management revamp that analysts said could help repair the company’s damaged reputation with Washington.

The management reshuffle saw veteran executive Zhao named as ZTE’s new chairman and president. Shi Lirong, who had been ZTE’s president since March 2010, took a non-executive director role in the company, while founder Hou Weigui retired from the chairman’s post that he had held since February 2004.

The US action in March stemmed from the Commerce Department’s probe of a 98.8 million (HK$814 million) contract between ZTE and the state-controlled Telecommunications Company of Iran for the supply of a powerful surveillance system.

That system, which was delivered to Iran in 2011, included hardware and software components from US technology firms such as Microsoft, Oracle, Cisco Systems, Dell and Symantec, according to a 2012 report on the product’s packing list.

The US imposed restrictions on trade with Iran from 1979, following the seizure of the American embassy in Tehran. Those are separate from international sanctions on Iran over its nuclear programme, which were lifted in January last year.