U.S. Commerce Dept. finds ZTE violated export disciplinary agreement, bans U.S. component supply

The U.S. Department of Commerce announced today that it would ban U.S. companies from providing components to ZTE because the Chinese company failed to comply with the terms of a disciplinary agreement reached in March 2017 arising from U.S. export law violations. The ban, slated to last seven years, also prevents others from reselling U.S. components to ZTE. The action has a direct effect on optical component and subsystems vendors who had ZTE on their customer rosters.

In March 2016, the Department of Commerce slapped export restrictions on U.S. technology to ZTE under suspicion that the Chinese communications systems house had sold equipment to Iran and North Korea containing U.S. technology between January 2010 and early 2016 (later amended to April 2016). Such U.S. technology was banned from export to the two countries at the time (see "ZTE faces export sanctions from US Department of Commerce"). The company agreed in March 2017 to plead guilty to a series of related charges as part of a disciplinary agreement that would lift the technology supply ban (see "ZTE admits guilt, settles export squabble"). The agreement included $1.19 billion in fines, with $300 billion suspended as an inducement to adhere to the agreement's terms during a seven-year probationary period. Those terms included the promise that ZTE would take disciplinary actions against employees identified as participating in the illegal activity. The agreement also contained provisions for a seven-year ban on U.S. technology transfer to ZTE that also would be suspended as long as ZTE adhered to the agreement.

However, the Commerce Department has determined that, company assurances to the contrary expressed in letters dated November 30, 2016, and July 20, 2017, ZTE not only failed to discipline most of the employees identified as participating in the export scheme, but paid them bonuses as well. The information came to light in response to a letter sent by the department's Bureau of Industry and Security (BIS) on February 2, 2018, requesting a status report on the disciplinary actions called for in the agreement. ZTE is said to have issued letters of reprimand to some of the identified employees after receipt of the February 2 letter.

The letters of reprimand were issued too late for Commerce Department enforcers, particularly after they said ZTE told them the reprimands had been issued previously. "In sum, through those two letters, ZTE informed the U.S. Government that the company had taken or would take action against 39 employees and officials that ZTE identified as having a role in the violations that led to the criminal plea agreement and the settlement agreements with BIS and the U.S. Department of the Treasury's Office of Foreign Assets Control," reads an order released today and signed by Richard R. Majauskas, acting assistant secretary of commerce for export enforcement, on April 15, 2018.

"In fact, and as ZTE now admits, the letters of reprimand described in the November 30, 2016 letter were never issued until approximately a month after BIS's February 2, 2018 request for information, and all but one of the pertinent individuals identified in the November 30, 2016 or July 20, 2017 letters received his or her 2016 bonus," the order continues. "These false statements were not corrected by ZTE even in part until March 2018, more than 15 months from ZTE's November 30, 2016 letter, approximately a year from the Settlement Agreement (which ZTE executed on March 2, 2017) and the March 23, 2017 Order, and nearly eight months from the July 20, 2017 letter. During a conference call on March 6, 2018, ZTE indicated, via outside counsel, that it had made false statements in the November 30, 2016 and the July 20, 2017 letters."

The ban is to last until March 13, 2025, and covers the sale of U.S. technology to Zhongxing Telecommunications Equipment Corp. of Shenzhen and ZTE Kangxun Telecommunications Ltd. of Hi-New Shenzhen, China. The company has yet to comment on the ban publicly.

The ban is a blow to optical component and subsystem vendors who have supplied technology to ZTE. Acacia Communications and Oclaro (recently the subject of a merger agreement with Lumentum; see "Lumentum agrees to buy Oclaro for $1.8 billion") are two such companies, and both of their stocks have plummeted during trading today. As of 12:35 PM, Acacia's stock price had dropped 36.10% and Oclaro's stock was down 13.38%. The stock prices of other optical component and subsystems vendors also were trading down, although not to the same degree.

Acacia released a statement sayin that the company "is aware of the recent announcement that the U.S. Department of Commerce by order, effective immediately, is banning American companies from selling, exporting, or re-exporting components, software, and technology to Chinese telecom equipment maker ZTE Corporation as a result of ZTE's actions in connection with a previous settlement regarding sanctions violations. Acacia is taking steps to suspend affected transactions and is assessing the impact of these developments on Acacia."

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