$1.2bn penalty from US pushes ZTE into heavy losses

Chinese equipment company ZTE has been pushed into heavy losses by the huge fine it has agreed to pay to US authorities after admitting smuggling hardware and software into Iran.

The company will pay the US a criminal and civil penalty of $892 million, plus another $300 million as a suspended sentence, a total of almost $1.2 billion.

This is 8% of ZTE’s annual revenue on the figures for 2016, released today. The company reported revenue of $14.6 billion, 1.04% up on 2015, but a total loss of $111 million,

Without the fine, which still needs final approval in the US courts, ZTE would have reported a year-on-year increase in total profit of 25.82%, and net profit up by 19.24%, said the company this morning.

“ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” said Zhao Xianming, who was appointed chairman and CEO following the scandal, which erupted in March 2016 when the US government revealed that the previous management had set up shadow companies through which to deliver kit to Iran.

These exports breached US law, as ZTE incorporated hardware and software from US companies such as Microsoft and Qualcomm. ZTE’s licences from those companies specifically banned re-export to countries subject to a US embargo, including Iran.

The US could have banned ZTE permanently from using any US-owned hardware and software, a move that would have crippled it as a maker of telecoms network equipment and handsets.

As it is, conditions will remain until the settlement has court approval and ZTE has officially pleaded guilty to the charges. The US Bureau of Industry and Security (BIS), part of the Department of Commerce, will then have to lift the sanctions.

It was the BIS that revealed the documents it had obtained about ZTE’s conspiracy. One was titled: “Report Regarding Comprehensive Reorganization and the Standardization of the Company Export Control Related Matters”; the other was: “Proposal for Import and Export Control Risk Avoidance”.

The first of these, dated August 2011, signed by then CEO Shi Lirong and three other executives, and marked “ZTE Confidential”, started: “As our overseas businesses have grown rapidly in recent years, so have US export control risks.” It continued: “Currently our company has ongoing projects in all five major embargoed countries, Iran, Sudan, North Korea, Syria and Cuba.”

The $300 million element of the fine is suspended for seven years “on the condition that the company complies with the requirements in the agreement with BIS and that ZTE will continue to work with an independent compliance monitor and auditor”. The $300 million will be lodged with the BIS, apparently for the full period until 2024.

Zhao said: “Instituting new compliance-focused procedures and making significant personnel changes has been a top priority for the company. We have learned many lessons from this experience and will continue on our path of becoming a model for export compliance and management excellence. We are committed to a new ZTE, compliant, healthy and trustworthy.”

Zhao replaced Shi as CEO but Shi remained with ZTE as a non-executive director until February 2017. His final departure, announced in February, was one of the conditions imposed by the US.

Zhao said: “We are grateful to all of our customers, partners, employees and stakeholders who have stood by us throughout this difficult time. With this agreement behind us and our compliance programme firmly established, we can confidently grow our business with suppliers, continue to provide innovative technology solutions to our partners, and execute our growth strategies as a new ZTE.”

One of the conditions that ZTE has had to carry out is the appointment of a US-based chief export compliance officer. Matt Bell, appointed in October 2016, is an anti-corruption specialist who was previously at Kellogg Brown & Root, an engineering company.

Bell, who will have global responsibility at ZTE, said: “We are creating a global team of experienced compliance professionals, and our compliance trainings have been strengthened and reinforced at every level of the company.”

He added: “Our global legal and compliance professionals will continue to work together to identify risk across the company and continually improve the effectiveness of our overall compliance programme.”

ZTE said it had implemented a software automation tool which screens shipments from ZTE for export control obligations.

“The system is used to determine which items are subject to the [US] Export Administration Regulations, provides embargo and restricted party screening on the transactions, and places shipments on hold that require detailed classification analysis, application of licence exceptions, or application of licences when necessary,” said the company.

“ZTE continues to make significant investments in automation to roll this out to its subsidiaries around the world.”

More details about the settlement, and the long-term impact on ZTE, are likely to emerge in the company’s annual report to shareholders, due on 23 March. The company is quoted on the Shenzhen and Hong Kong stock markets.

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