Exclusive: China's ZTE signed preliminary agreement to lift U.S. ban: sources

(Reuters) - ZTE Corp (000063.SZ) has signed an agreement in principle that would lift a U.S. Commerce Department ban on buying from U.S. suppliers, allowing China’s No. 2 telecommunications equipment maker to get back into business, according to sources familiar with the matter.

ZTE (0763.HK) ceased major operations since the seven-year ban was imposed on the company in April for breaking a 2017 agreement reached after it was caught illegally shipping goods to Iran and North Korea.

A Commerce Department spokesman said on Tuesday that “no definitive agreement has been signed by both parties.”

ZTE did not immediately respond to requests for comment.

The preliminary deal includes a $1 billion fine against ZTE plus $400 million in escrow to cover any future violations, sources said, adding that the terms were in line with Reuters reporting on the U.S. demands on Friday.

The sources requested anonymity because they were not authorized to publicly discuss the matter.

The Commerce Department plans to amend its 2017 settlement agreement and count the $361 million ZTE paid as a part of that, allowing the United States to claim a total penalty of as much as $1.7 billion, the sources said.

Over the weekend, ZTE signed the agreement drawn up by the United States, the sources said, but the amended settlement has not been signed.

ZTE’s survival has been a topic of discussion in high-level U.S.-China trade talks.

U.S. President Donald Trump planned to meet with his trade advisers on Tuesday to discuss China’s offer to import an extra $70 billion of American goods over a year as a way to defuse a potential trade war between the world’s two largest economies.

Trump tweeted last month that he told Commerce officials to find a way for ZTE to resume operations, later suggesting penalties of a $1.3 billion fine and changes to its board and top management.

As part of the deal, sources said, ZTE promised to replace its board and executive team in 30 days. It would also allow unfettered site visits to verify that U.S. components are being used as claimed by the company, and post calculations of U.S. parts in its products on a public website, they added.

ZTE’s resuscitation with U.S. help has met strong resistance in Congress, where both Democrats and Trump’s fellow Republicans have accused him of bowing to pressure from Beijing to help a company that has been labeled a threat to U.S. national security.

“By letting ZTE off the hook, the president who roared like a lion is governing like a lamb when it comes to China,” U.S. Senate Democratic leader Chuck Schumer said in a statement in response to Reuters’ report of the preliminary agreement. “Congress should move in a bipartisan fashion to block this deal right away.”

U.S. companies provide an estimated 25 to 30 percent of components in ZTE’s equipment, which includes smartphones and gear to build telecommunications networks.

The ban was imposed after ZTE failed to comply with an agreement with the Commerce Department in 2017, when it pleaded guilty in federal court in Texas to conspiring to evade U.S. embargoes by illegally shipping U.S. goods and technology to Iran. Shenzhen-based ZTE has a subsidiary in Richardson, Texas.

ZTE had agreed to dismiss four senior employees and discipline 35 others either by reducing their bonuses or reprimanding them, according to senior Commerce Department officials.

But the company admitted that while it had fired the four senior employees, it had made false statements about the others, the officials said.

The U.S. government launched an investigation into ZTE after Reuters reported in 2012 the company had signed contracts to ship hardware and software worth millions of dollars to Iran from some of the best-known U.S. technology companies. (reut.rs/2GbpCmO)

The probe found that ZTE had conspired to evade U.S. embargoes by buying U.S. components, incorporating them into ZTE equipment and illegally shipping them to Iran.

ZTE, which devised elaborate schemes to hide the illegal activity, agreed to plead guilty after the Commerce Department threatened to cut off its global supply chain. The company was allowed continued access to the U.S. market under the 2017 agreement.

As part of a new agreement, the sources said, ZTE will retain another compliance contractor in addition to the three-year court-appointed monitor imposed by the plea agreement.

The sources said ZTE also agreed to allow U.S. representatives to make site visits without coordinating with Chinese government officials, as required by a non-public agreement between the countries.

Last year, ZTE paid over $2.3 billion to U.S. suppliers, a senior ZTE official told Reuters last month.

The suppliers include Qualcomm Inc (QCOM.O), Broadcom Inc (AVGO.O) and Intel Corp (INTC.O), as well as smaller optical component makers Acacia Communications Inc (ACIA.O) and Oclaro Inc (OCLR.O).

Shares of Acacia and Oclaro extended their gains on Tuesday in heavy trading after news of the preliminary deal, ending up 1.7 percent and 1.8 percent, respectively.

Reporting by Karen Freifeld; additional reporting by Diane Bartz and Patricia Zengerle in Washington. Editing by Chris Sanders and Richard Chang

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