Author: Institute for Financial Supervision

Source: Cross-border financial supervision

Write in front

On April 2018, 4, the U.S. Department of Commerce announced the immediate resumption of sanctions and bans on ZTE (ORDER ACTIVATING SUSPENDED DENIAL ORDER ), ZTE will be prohibited from importing goods from the United States in any form. This means that the settlement agreement that ZTE pleaded guilty to and signed in March 2017 has failed. The US$3 million fine already paid is still not enough to settle the matter, and it may even have to pay a further US$8.92 million fine that was suspended. Even more frightening is that after being completely blocked by the United States, it will undoubtedly be a disaster for ZTE, which relies heavily on imported chips and other components from the United States.

It is difficult for people not to think that ZTE has suffered such severe sanctions at such a time. Does this mean that the Sino-US trade war will further escalate?

Picture: ORDER ACTIVATING SUSPENDED DENIAL ORDER

Outline of this article
XNUMX. Why was ZTE being sanctioned?XNUMX. What does sanctions include?

Third, reciprocity, will Qualcomm be the next one?

XNUMX. Why was ZTE being sanctioned?

There have been many reports on ZTE’s sanctions on the Internet, but most of the focus is on the outbreak of the Sino-US trade war, while the background and reasons for ZTE’s sanctions are rarely mentioned. Therefore, this article is more quoted and translated from official U.S. reports and domestic public information. As for the truth, it is left to the benevolent to see the benevolent and the wise.

In fact,The ZTE sanctions occurred much earlier than the Sino-US trade warIt has been nearly 2012 years since it was investigated by the United States in 6. Previously, in March 2017, ZTE finally pleaded guilty and signed a settlement agreement. ZTE was fined nearly US$3 million by US supervision for violating the US export control system, plus US$8.92 million as a "suspended execution". This is also the history of OFAC (US The Office of Foreign Assets Control of the US Department of the Treasury) issued the largest fines to non-financial institutions.

The following isThe story of ZTE's sanctions.

Source: public information,Financial Supervision Research Institutereference:

Caijing.com: Why did the United States sanction ZTE?

U Learning Online: China's science and technology should be self-reliance! ZTE pays US$8.9 million in fines to reach a settlement with the United States, once again a wake-up call for Chinese companies

2012

According to Reuters, in 2012, ZTE signed a contract to sell a batch of products equipped with software and hardware from US technology companies to Iran’s largest telecommunications operator Telecommunications Iran (TCI).

According to the US export restriction regulations, the US government prohibits the export of US-made technology products to Iran. ZTE's business is suspected of violating the US export ban on Iran. The ZTE sanctions incident was led by the US Department of Commerce. The focus of the investigation was whether ZTE purchased US products through front companies and then provided them to Iran, thereby violating the US export ban.

2016

Four years later, on March 2016, 3, the official website of the US Department of Commerce disclosed internal ZTE documents obtained by its investigators. The document shows that ZTE had projects in the five major embargo countries of Iran, Sudan, North Korea, Syria, and Cuba at that time, and these projects were all dependent on the US supply chain to a certain extent. The U.S. Department of Commerce took ZTE export restrictions on the grounds that ZTE "violated U.S. export restrictions." ZTE’s announcement stated that “learning that the US Department of Commerce intends to impose export restrictions on ZTE, the company is fully evaluating the possible impact of this incident on the company and actively communicating with all parties.”

In the early morning of March 2016, 3, the Ministry of Commerce of China expressed “strong dissatisfaction and resolute opposition” as always. “ZTE Corporation has been actively engaged in international operations and has carried out extensive trade and investment cooperation with hundreds of Contributed tens of thousands of jobs. The US's move will seriously affect the normal business activities of Chinese companies. China will continue to negotiate with the US on this issue." The Consulate General in New York also stated that “ZTE is subject to trade restrictions in the United States, and American technology suppliers have tasted the bitter fruit.” The implication is that the US’s move is hurting one thousand enemies and eight hundred for itself.

On March 2016, 3, the U.S. Department of Commerce stated that it will issue temporary licenses to ZTE and its subsidiaries to temporarily lift export restrictions on the two companies. The temporary permit is valid from March 21 to June 3. According to the Wall Street Journal, the reason for the suspension of sanctions is that the U.S. Department of Commerce reached a temporary agreement with ZTE, and one of the contents of the agreement is that all ZTE executives involved in violations must resign from management. The position of the layer.

On April 2016, 4, ZTE’s senior executives changed their blood. Three senior executives including the original CEO stepped down, and Zhao Xianming was appointed as the company’s chairman and CEO. "Global Times" reported that several ZTE executives gave up their own interests in exchange for the US Department of Commerce to lift export restrictions on ZTE.

After Zhao Xianming took office, he made reforms in the team and management mechanism, including appointing a US lawyer as the chief export compliance officer, improving the "Export Control Compliance Manual", and global export control training.

2017

On March 2017, 3, in just one year, Zhao Xianming led ZTE through the crisis like a ruin. After the reconciliation, Zhao Xianming also made a statement immediately, but it is completely different from the previous attitude of the Ministry of Commerce of China, which is neither humble nor overbearing. He said, "ZTE admits that it violates the relevant laws and regulations of the United States export control and is willing to bear corresponding responsibilities..." Zhao Xianming also Think that the settlement with the US government is a win-win situation.

As a result of this incident, ZTE pleaded guilty and was fined $8.92 million by three US agencies.Another 3 million USD has been suspended.

ZTE announced that

"The company has followed the U.S. export to the company regarding the U.S. Department of Commerce's Bureau of Industry and Security (hereinafter referred to as "BIS"), the U.S. Department of Justice (hereinafter referred to as "DOJ") and the U.S. Department of Treasury's Office of Overseas Asset Management (hereinafter referred to as "OFAC"). An agreement was reached on the investigation of control regulations and U.S. sanctions laws (hereinafter collectively referred to as "the agreement"). In view of the company's violation of U.S. export control laws and violations of relevant U.S. laws and regulations by providing information and other actions during the investigation, The company has agreed to plead guilty and pay a total of US$892,360,064 in fines. In addition, BIS has also imposed a suspended fine of US$3 million on the company, which will be exempted from payment after the company fulfills the requirements of the agreement with BIS during the seven-year suspension period .

The agreement between the company and OFAC will become effective upon signing. The agreement between the company and DOJ will take effect after being approved by the U.S. District Court for the Northern District of Texas (hereinafter referred to as the "court"). The court approved the agreement between the company and DOJ The agreement is a prerequisite for BIS to issue a settlement order. At the same time, after the agreement between the company and DOJ is approved by the court, the company pleads guilty, and the assistant secretary of BIS issues a settlement order, BIS will recommend that the company be removed from the entity list. "

For the punishment result,The Ministry of Commerce is also answering reporters' questionsMade a statement,

ask:The US Secretary of Commerce announced on the 7th that ZTE Corporation has admitted to violating US foreign trade control regulations and marketing its products to North Korea and Iran. ZTE will pay a fine of US$11 billion, which will be the highest fine so far in the US foreign trade control system. What's the response of the Ministry of Commerce?

答:We have noted that ZTE reached a settlement with the US government on issues related to US export controls. China has always firmly opposed the use of domestic laws by the US to impose sanctions on Chinese companies. The Chinese government has always required companies to pay attention to operating in compliance with laws and regulations when developing overseas markets. We hope that the US will proceed from safeguarding the overall situation of Sino-US economic and trade relations, properly handle this matter, and create a good atmosphere for the stable and healthy development of bilateral economic and trade relations. "

The translation is,

1. The acknowledgment of the punishment does not mean that you are justified;

2. We will strictly discipline our own companies;

3. Since the fine has been fined, the business will continue in the future.

At that time, the dust had settled on the fines, and domestic brokerages also said that this was a good profit, "the opportunity to build a position has come", so they were fined US$9 million, which directly caused ZTE's 2016 annual report to have a net profit of 38 billion. After the yuan renminbi turned into a huge loss of 23 billion yuan, the company’s stock price went like this. .

At that time, sporadic reports and announcements in China seemed to portray the punishment incident as a successful crisis public relations, and the reasons and amount of punishment were rarely mentioned.

2017/10, BIS published an investigation and analysis of ZTE, from which we can see the ins and outs of the entire case. In this report, BIS summarized five lessons for ZTE.

Reasons for punishment:

Key evidence is mastered

After years of investigation, an internal confidential document of ZTE Corporation in 2011 was picked up, "Report on the Comprehensive Rectification and Standardization of the Company’s Export Control-related Business", "Import and Export Control Risk Avoidance Program-Taking YL as an example ".

The following statements in these reports have become the key evidence.

"At present, the company’s biggest risk is the ongoing Iran business... At the end of 2010, our company signed a four-party agreement with Iranian customers and adopted a semi-isolated operation mode. For example, our company itself only provides Iranian customers Provide self-produced equipment, while sensitive products purchased from the United States are provided to customers by our company’s partners."

"Our company has signed many contracts with the Iranian company YL, and these contracts are currently being implemented. Originally, these contracts were signed by the four parties. However, in the process of implementation, they have not strictly followed the contractual mode of operation, but by ZTE Telecommunications assumed the rights and obligations under the contract and directly exported the controlled commodities to Iranian companies."

"When our company conducts business with the country's ZTE Corporation, we must avoid using our company's own name, and also avoid directly exporting products and providing services to these customers. This method of operation is called the partition mode."

"In the partition mode, 7S company purchases products from the United States and resells them to 8S company, 8S company exports the products to 10S company in Dubai, and finally 10S company re-exports to YL company and his customers... There is another operation. The 9S company established outside of China purchases American products and exports them to Dubai and resells them to YL from 10S..."

"Our company's re-export business, especially the business carried out in Iran, may cause the company to be blacklisted by the United States. Once it is blacklisted, our company may lose the supply chain of American products."

"Many of our company's technology and parts are provided by American suppliers... Once our company violates the relevant U.S. export control laws, the U.S. government may prohibit domestic suppliers from providing products to our company."

The above words are simply that ZTE has used many channel companies to export American products to Iranian companies through layer-by-layer transshipment.

Five lessons

Let’s look at the five lessons that BIS has summarized for ZTE.

Lesson one, don't lie

Don't lie

“2014年8月26日至2016年1月8日期间,中兴通讯代表在多次会议中向美国监管办案人员保证,公司已经在2012年3月停止了与伊朗的业务,因此不再违反美国的出口管制法律。”

"In order to achieve this goal, ZTE even misled and deceived the external consultants who represented the company in defense. Moreover, ZTE's executives also knew about it."

Don't cheat

"ZTE has also taken other circumvention measures. For example, in its transactions with Iran, Qatar was used as a code to replace the Iranian word, Iranian customers were removed from the sales system, and the company's LOGO was removed from all products, packaging, and documents. "

Lesson two, don’t destroy the evidence

"ZTE has meticulously planned a series of plans to prevent the U.S. government from obtaining evidence, such as deleting or hiding documents and information related to the investigation from external consultants. The plan even includes the establishment of a 13-person working group. It is a contract data mining team. The team destroyed all information related to Iran’s business from January to March 2016, and the team’s emails were deleted every night to avoid exposure."

Lesson three, don’t try to cover up crimes with confidentiality agreements

"Every member of the working group is required to sign a confidentiality agreement. This action is strictly prohibited from being exposed. Once the action is exposed, the team members need to compensate Company Z with 100 million yuan."

Lesson XNUMX: Don’t restart criminal activities during the investigation

"In November 2013, despite the opposition from ZTE’s legal department, the former CEO of ZTE held a high-level meeting and decided to restart the re-export business with Iran. ZTE’s Iranian headquarters was authorized to find third parties willing to do business with Iranian companies. , And are willing to sign a contract with ZTE separately to transfer the goods to Iran, and the price is well negotiated."

Lesson XNUMX: Don’t write organized violations as a company strategy.

"The "Report on the Comprehensive Rectification and Regulation of the Company’s Export Control-related Business" was drafted by the company’s legal department and was signed and approved by the company’s four senior executives on September 2011, 9, including the former CEO.”

"The report describes the risks of violating the U.S. export control laws... it discusses in detail the possible penalties for violations, such as high-level management being sentenced to jail, and companies being blacklisted will be prohibited from directly or indirectly purchasing products from the United States. It also cited some illegal cases of Chinese companies, which were blacklisted and senior officials were sentenced to years in prison."

“The report also proposed a response plan to further standardize the operation of Iran’s business in order to control risks. For example, a number of cross-departmental collaboration teams have been set up specifically for the embargo project... and even a bonus of 40 yuan has been set up to encourage The team members successfully completed the project..."

From the details released by BIS, we can see that the huge penalties imposed by the United States on ZTE are on the one hand because ZTE maliciously violated the US Export Control Act and adopted various anti-reconnaissance measures to evade supervision; on the other hand, more importantly, ZTE Falsification and deception were used to deliberately conceal the truth during the investigation to hinder the investigation.

2018

On April 4, the US Department of Commerce announced the immediate resumption of the sanctions and ban on ZTE. The main reasons mentioned in the ban are:Deception, misrepresentation, and repeated violations of U.S. law (Deception, False Statements, and Repeated Violations of US Law ) In the report, false statements were even mentioned (False Statements) Up to twenty times.

主要原因是中兴通讯在2016年11月30日和2017年7月20日的报告中作了虚假陈述。
In addition, it is worth noting that the report pointed out that on March 2018, 3, BIS had notified ZTE that the sanctions might be restarted, and on March 13, 2018, ZTE made a defense. However, we checked the official announcements of ZTE’s A shares and Hong Kong stocks. From March 3 until the release of the US sanctions report, ZTE did not disclose or announce the incident. Is this suspected of violating the information disclosure obligations of listed companies? Or does it mean that events with such a significant impact are not within the scope of disclosure?
"Administrative Measures for Information Disclosure of Listed Companies" (China Securities Regulatory Commission Order No. 40) Chapter IV Interim Report

Article XNUMX When a major event that may have a significant impact on the trading prices of listed company’s securities and derivatives thereon occurs, and investors have not learned about it, the listed company shall immediately disclose the cause, current status and possible impact of the event .

(The picture shows the stock price trend from 2018.3.14 till now, trading has been suspended today)
In its defense, ZTE Corporation admitted that it failed to effectively implement the plan in the report at the time, such as failing to implement disciplinary sanctions against the employees involved in the case, etc.: The 2016 bonus (30%-50%) was deducted within the scope permitted by Chinese law. , This part of the bonus will be deducted from the 2017 year-end bonus.
According to ZTE’s response, BIS reviewed the case data and brought up the past, and found that ZTE recognized 96 cases of evasion of supervision and 380 cases of violations of the US Export Control Act.

All in all, the main reason for the US Department of Commerce's reopening of ZTE is dishonesty. On the one hand, the rectification measures were not in place and were inconsistent with the requirements of the report at the time. On the other hand, the past incidents were revisited and the previous violations of ZTE were re-described. The violations were basically the same as those in the investigation report released in October 2017. So, is ZTE, which is still in the postponement of the observation period, is it because the Sino-US trade war has become a target? The author believes that it should have a lot to do. After all, in 10, he has accepted a high penalty of nearly US$2017 million and signed a settlement agreement. However, can ZTE, as a listed company, give a more reasonable explanation for the violations cited by the United States?

As of the publication time of this article (2018-4-17,18, 00:XNUMX), the replies of the Ministry of Commerce and ZTE are as follows:

XNUMX. What does sanctions include?

According to the requirements of the sanctions and bans, the sanctions imposed on ZTE Corporation are generally based on five points:

It is not only that ZTE and ZTE Kangxun are prohibited from importing from the United States, but all agencies and affiliates related to them are subject to control. This scope includes all related companies and personnel, even ZTE employees are no exception.

What are the sanctions?

1. ZTE cannot import directly from the United States

2. No one can help ZTE import indirectly from the United States

3. No one can import from the United States and resell it to ZTE

4. Even if ZTE successfully imported from the United States, no one can buy it, nor can it provide follow-up services such as installation and maintenance

It will last for nearly 7 years, until March 2025, 3.

Translation of Financial Supervision Institute:

首先,从本指令签发日起至2025年3月13日,对中兴通讯股份有限公司(最新的地址为:中国深圳南山科技工业园区科技南路中兴通讯广场)、中兴康讯(最新的地址为:中国深圳高新区科技南路中兴通讯大厦A座2/3层)进行制裁。

These two companies and their agents and affiliates, including related personnel, whether they are successors, transferors, directors, officers, employees, representatives or agents (hereinafter referred to as "sanctioned persons"), shall not directly Or indirectly participate in any transaction involving any commodity. They import or intend to import software or technology (hereinafter collectively referred to as the "project") from the United States, and any other activities they engage in are subject to the Export Control Act, including but not limited to:

A. Apply for, obtain or use any license, license exception or export control document;

B. Negotiations about ordering, buying, receiving, using, selling, delivering, storing, disposing, shipping, transportation, financing or providing services in other ways in any way, any transaction involving exports or items exported from the United States, Or engage in any other activities, are subject to these regulations;

C. Benefit from the above restricted transactions in any way.

Second, no one can directly or indirectly do any of the following:

A. Export or re-export any restricted items to the sanctioned person;

B. Any action that helps the sanctioned person obtain or attempt to obtain the ownership, possession or control of any item that has been or will be exported from the United States, including transaction-related financing or other support activities;

C. Take any action to obtain, promote or attempt to obtain any restricted items exported from the United States from the sanctioned person;

D. Obtaining any restricted items from the sanctioned person in the U.S. when knowing or having reason to know that the item will or will be exported from the U.S.;

E. Engaging in any related services when any restricted items owned, possessed or controlled by the sanctioned person have been or will be exported from the United States. For the purposes of this paragraph, service means installation, maintenance, repair, modification or testing.

Third, after issuing notices and soliciting opinions in accordance with Article 766.23 of the Regulations, any trade-related individual, enterprise, company or business organization conducts related trade or business with the sanctioned person through affiliation, ownership, control, or responsibilities. Services are also in accordance with the terms of this order.

Fourth, this order will be delivered to ZTE Corporation and will be published in the Federal Register.

This order takes effect immediately.

Third, reciprocity, will Qualcomm be next?

Previously, there were rumors that ZTE was punished by the United States may be due to retaliation by the United States, because in February 2015, Qualcomm was fined nearly RMB 2 billion by the National Development and Reform Commission for allegedly violating the Anti-Monopoly Law (approximately 60.88 at the exchange rate at the time). One hundred million U.S. dollars).

Only one year after Qualcomm punished, on March 2016, 3, the U.S. Department of Commerce announced the results of the investigation, citing ZTE’s “violation of U.S. export restrictions” as an excuse to impose export restrictions on ZTE, and finally The penalty amount is also nearly 7 million U.S. dollars (9 million).

Since China set a precedent, Europe and South Korea have followed suit. In 2017, the South Korean government also issued a fine of nearly US$9 million to Qualcomm. If Qualcomm admits the penalty, this will set the highest fine in South Korea’s antitrust history.

Since ZTE is also a major customer of Qualcomm, after ZTE is sanctioned, it will have a significant impact on the entire industry. The CICC report stated that the US Department of Commerce imposed an export authority prohibition order on ZTE. If a settlement cannot be reached within 1-2 months, it will affect the normal production and sales of communications equipment and mobile phones, as well as its current global and Chinese operations. Commercial network construction will bring certain impacts and may affect the advancement of 5G networks in the future. ZTE currently accounts for approximately 10% of the global telecommunications equipment market and approximately 30% of the Chinese telecommunications equipment market. ZTE has inventory of parts and components for January and February. If a settlement cannot be reached as soon as possible, related businesses will be affected.

In addition, according to Xinzhiyuan News, "Qualcomm is now preparing to reapply to Chinese regulators for the acquisition of NXP. At present, China is the only country that has not signed Qualcomm’s acquisition of NXP. The application may have six months to approve the transaction. ."

Reuters reports that Qualcomm is preparing to reapply to Chinese regulators to acquire NXP

So, here comes the question. At this point in time, can the hapless Qualcomm still be approved by China?