ZTE must disclose Chinese government stake as part of new agreement

The Bureau of Industry and Security unit of the U.S. Department of Commerce yesterday unveiled the agreement that will lift the denial order placed upon ZTE. Among other demands, the agreement calls for ZTE to disclose within 90 days the amount of Chinese government ownership of the company, including public and private shares. Meanwhile, U.S. senators moved yesterday to block the deal. Nevertheless, ZTE announced that it has applied to resume trading of its shares June 13 on the Hong Kong Stock Exchange.

U.S. politicians have labeled use of ZTE technology a security risk due to their perception that the company is an agent for the Chinese government and, by extension, military (and they feel the same way about Huawei; see, for example, “U.S. House Intelligence Committee sees Huawei and ZTE as security threats”). ZTE has consistently denied such assertions. The Commerce Department has decided to use the new agreement to investigate the amount of influence the Chinese government might have on the company, with the threat of a 10-year ban on access to U.S. technology as an inducement for ZTE to be forthright.

Other salient points of the agreement include:

• ZTE must pay a $1 billion fine within 60 days. Within 90 days, it also must put $400 million in escrow in a U.S. bank for 10 years against future violations. Once the fine has been paid and the escrow account established, the BIS will lift the technology access ban.
• The company must replace its entire board of directors (as well as that of subsidiary ZTE Kangxun) within 30 days. It also must fire everyone with a title of senior vice president or above, as well as any executive or officer who participated in the activities that triggered the original disciplinary action or the current technology ban, within 30 days.
• Within 30 days of hiring a new board for itself and ZTE Kangxun, ZTE must create special audit/compliance committees of the two boards composed of at least three independent members of the new boards. At least one member of the committee must have “recent and relevant” compliance experience.
• BIS will select an independent special compliance coordinator (SCC) within 30 days to oversee and report on the company’s compliance with the agreement. ZTE will pay the SCC’s salary. The SCC will report to the CEO and board of directors of ZTE and to BIS. The SCC is to have unfettered access to all personnel, books, records, systems, documents, audits, reports, facilities, and technical information related to compliance with the agreement. The agreement calls for ZTE to also pay for at least six assistants and/or professional staff for the SCC. The SCC will make quarterly reports on ZTE’s compliance during the first year, and at least semi-annual reports during the succeeding nine years the agreement extends.
• ZTE will complete and submit nine audit reports detailing its compliance with U.S. export laws. The compliance report filed earlier this year under the previous agreement will count toward this total.
• The company must establish an export compliance program within six months, including a statement of corporate policy regarding compliance that will be distributed to all employees at least annually.
• ZTE will have to provide export law compliance training to its full employee roster as well as those of its subsidiaries and affiliates. Part of that training includes informing all employees as well as contractors and suppliers that transfer of U.S. technology to Cuba, Iran, North Korea, Syria, and Sudan is prohibited unless authorized by a relevant U.S. authority.
• Within four years, ZTE must hold two public symposia in China focused on its compliance with U.S. regulations, including information on best compliance practices for the benefit of fellow Chinese companies and their affiliates.
• Neither ZTE nor its employees or affiliates can make any statement denying the allegations contained in the agreement.

The BIS retains the right to reinstate the ban, this time for 10 years, if ZTE violates any part of the agreement.

In announcing its application to resume trading of its shares, ZTE said it plans to resume activities "as soon as practical" after the BIS lifts the denial order. It did not say how quickly it hopes to satisfy the financial aspects of the new agreement that would spark BIS to action. The ZTE statement was signed by Yin Yimin in his role as chairman of the board. Yimin is one of the executives that will be replaced as part of the new agreement.

The Senate responds

Shortly after the details of the agreement emerged, members of Congress moved to block enforcement of the agreement and leave the technology access ban in place. According to media reports, Senate leadership approved the addition of an amendment authored by Senators Tom Cotton (R-AR), Chris Van Hollen (D-MD), and Chuck Schumer (D-NY) to the in-process National Defense Authorization Act (NDAA) that would reinstate the ban. The amendment also would bar U.S. government agencies from purchasing products from ZTE and Huawei. The amendment was co-sponsored by Senators Marco Rubio (R-FL), Richard Blumenthal (D-CT), Susan Collins (R-ME), and Bill Nelson (D-FL).

The Senate begins debate on the full NDAA this week, say the reports. The House has finished work on its version of the bill, which doesn’t include the amendment. The two houses of Congress would have to reconcile their different versions before it would reach President Donald Trump for signature or veto.

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