ZTE Pleads Guilty to Evading U.S. Iran Sanctions

On March 7, Chinese telecom giant ZTE plead guilty to incorporating U.S. components into equipment that it illegally shipped to Iran, in violation of U.S. sanctions.  ZTE was also charged with shipping sensitive telecommunications equipment to North Korea.  As part of the guilty plea, ZTE will pay a fine of nearly $1.2 billion and serve a seven-year suspended denial of export privileges (that would come into force only in the event of future violations).

The U.S. Commerce Department originally took a harsher stance on ZTE, placing export controls on the company (and its affiliates ZTE Kangxun Technologies, Beijing 8‑Star and ZTE Parsian) on March 8, 2016.  Just days later, however, on March 23, the U.S. Department of Commerce Bureau of Industry and Security (BIS) granted a temporary license suspending the sanctions.  Concerns about the repercussions on U.S. suppliers to ZTE were likely a factor in that decision.  ZTE purchases over $2.5 billion annually from U.S. firms.

While the company avoided the reinstatement of export controls, the fine itself was reportedly larger than expected – causing a $342 million overall corporate loss for 2016 (a year it had projected to see a $550 million profit).  Nevertheless, ZTE’s stock rallied 6% in Hong Kong on the news, in part, due to higher than expected earnings.  U.S. firms, however, are essential for ZTE’s global supply chain, accounting for 25–30% of the components used in its products, making the company’s compliance with export controls going forward a high-stakes prospect.  It is questionable if risk of the company failing to live up to its commitments is being adequately factored in by the markets.

This incident has brought to light not only a systematic approach to evading U.S. sanctions and export control regulations, but also the potential economic impact of punishing these acts (for both Chinese companies and their suppliers).  In this case, ZTE’s overall operations could have been severely impaired.  It is a reminder of the need for proper diligence into Chinese firms and the global footprints they cultivate.