ZTE faces export crackdown from US Commerce Dept over Iran project: report

ITEM: Starting Tuesday, the US Commerce Department will place export restrictions on ZTE for allegedly violating US export controls on Iran.

According to Reuters, a Commerce Department notice says that export license applications submitted by any tech company to supply US-made equipment to ZTE will be generally be rejected.

The restrictions are part of an ongoing investigation by the Commerce Department's Bureau of Industry and Security (BIS) – which oversees US sanctions against Cuba, Iran, North Korea, Sudan, and Syria – that began after a Reuters report in 2012 claimed that ZTE had supplied the Telecommunication Co of Iran (TCI), and a unit of its controlling consortium, with hardware and software from US technology companies, including Dell, IBM, Microsoft and Oracle. According to Reuters, the Commerce Department's investigation has focused on whether ZTE purchased US products via front companies and then shipped them to Iran, which would violate US sanctions. 

Reuters cites a 2011 document indicating that ZTE executives knew at that time it was at risk of violating US sanctions via its projects in Iran, North Korea, Syria, Sudan and Cuba, all of which “depend on U.S.-procured items to some extent”.

The same internal document warned that the company should take immediate steps to deal with this, Reuters reports:

The company "needs to take preventative measures immediately, otherwise will face the risk of being investigated anytime", the document states.

The document also states that ZTE's Iran project "can potentially put us at risk of being put on the Blacklist by the U.S.," and that such an eventuality could leave the company facing "the risk of losing the supply chain of U.S. products".

However, according to another internal document – this one undated – ZTE’s legal department allegedly considered a proposal to get around US export laws by using shell companies:

"The biggest advantage" of one method is that it will make it "harder for the U.S. government to trace it or investigate the real flow of the controlled commodities", the document states.

In its planned action against ZTE, the Commerce Department cites the proposal, stating that the company "planned and organized a scheme to establish, control and use a series of 'detached' companies to illicitly re-export controlled items to Iran in violation of U.S. export control laws".

NOTE: The Reuters report points out that it's unclear if ZTE ever implemented the proposal.

ZTE can appeal the decision, but hasn’t yet said what action it will take.

A ZTE spokesperson told that it has been “working with relevant U.S. government departments on investigations, maintaining constant communication with relevant departments” to resolve the issue.

In the meantime, “ZTE will continue with normal operations while conducting comprehensive assessments and will be actively communicating with stakeholders. As a responsible business, ZTE strives to ensure all operational activities adhere to international trade practices and the laws and regulations of host countries.”

ZTE also suspended trading of its shares on the Hong Kong Stock Exchange [PDF] on Monday “pending the release of an inside information announcement in respect of the United States Commerce Department’s proposal to implement export restrictions on the Company.”

The impact of the decision ultimately depends on just how much ZTE currently relies on US-made gear in its supply chain. Company documents cited by Reuters indicate ZTE depended quite heavily on US-made tech back in 2011-2012.

Jefferies analyst Cynthia Meng said the restrictions “will cause significant supply problems to ZTE," the report says.

It’s worth mentioning that last year’s deal between Iran, the US, China, France, Russia, the UK and Germany to lift sanctions in exchange for Iran curbing its nuclear program doesn’t cover US export regulations and restrictions for countries like Iran – those are still in place, according to BIS.

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