ZTE pays $400 million into escrow, BIS removes ZTE from denied persons list.

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ZTE Company Logo from Wikipedia/ZTE.com

This just in, ZTE has complied with the terms of their agreement and placed $400 million into escrow. As a result, the US Department of Commerce, Bureau of Industry Security has terminated the April 15, 2018 denial order and removed ZTE from the denied persons list. The full release from the US DOC, BIS website can be found here.

Here’s a listing of all previous ZTE posts on this blog:

ZTE and Commerce sign escrow agreement – denial ban is one step closer to being lifted.

ZTE Open for US Business – sort of and only until August 1, 2018.

ZTE deal is good to go – House bill does not include Senate language “undoing” ZTE deal.

ZTE pays $1 billion fine, $400k into escrow soon.

In-depth details of the ZTE deal.

Senate passes amendment to undo Trump’s ZTE deal.

Deal reached between the US and ZTE.

ZTE facing $1.7 billion penalty?

The real reason Trump is working to reverse the 7 year ZTE ban? To help U.S. companies!

CNBC reports the US and ZTE are working on alternatives to the denial order issued against ZTE back in April of this year.

ZTE estimated to lose $3.1 billion due to US sanctions (Bloomberg).

Deal reached to allow ZTE to purchase U.S. hardware and software?

ZTE may need to change management and board in order to access US suppliers.

ZTE report to the HKEX on the impact of the US denial order: “major operating activities of the Company have ceased”.

ZTE and Huawei banned for sale to US military personnel.

ZTE banned from purchasing US technology for 7 years.

 

 

 

ZTE and Commerce sign escrow agreement – denial ban is one step closer to being lifted.

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Earlier today, the U.S. Department of Commerce announced they had reached an escrow agreement with ZTE. As you are aware, in order to lift the denial ban put in place in April 2018 (and be authorized to purchase goods and services from US companies), ZTE must pay $1 billion dollar fine and place $400 million into an escrow account.

Commerce announced today an agreement was reached with ZTE. The next step is for ZTE to deposit the $400 million into the escrow account. Upon deposit, the Department of Commerce, Bureau of Industry and Security will lift the denial ban. According to the June 8, 2018 superseding order, ZTE has until September 8, 2018 to deposit the funds – based on today’s news it appears ZTE is on its way to lifting the denial ban.

If you are a supplier or ZTE vendor and have any questions about the denial ban, feel free to contact export compliance attorney, David Hsu at 832-896-6288 or by email at dhsu@givensjohnston.com.

Check out my other ZTE posts:

ZTE Open for US Business – sort of and only until August 1, 2018.

ZTE deal is good to go – House bill does not include Senate language “undoing” ZTE deal.

ZTE pays $1 billion fine, $400k into escrow soon.

In-depth details of the ZTE deal.

Senate passes amendment to undo Trump’s ZTE deal.

Deal reached between the US and ZTE

ZTE facing $1.7 billion penalty?

The real reason Trump is working to reverse the 7 year ZTE ban? To help U.S. companies!

CNBC reports the US and ZTE are working on alternatives to the denial order issued against ZTE back in April of this year.

ZTE estimated to lose $3.1 billion due to US sanctions (Bloomberg).

Deal reached to allow ZTE to purchase U.S. hardware and software?

 

ZTE Open for US Business – sort of and only until August 1, 2018.

According to the US Department of Commerce, Bureau of Industry and Security (BIS) website, ZTE has authorization by BIS for “Limited Service” from July 3rd – August 1st, 2018.

On July 3rd, BIS granted a limited authorization for all persons to engage in business with ZTE under the 4 following circumstances:

  1. Engagement with ZTE for all contracts entered into with ZTE before April 15, 2018.
  2. Engaging in the support, service, software updates and patches to ZTE phones.
  3. Disclosure to ZTE of information regarding security vulnerabilities in items owned, possessed or controlled by ZTE.
  4. Limited transfer of funds – can make or receive payments to and from ZTE if transactions are pursuant to this authorization.

The full text can be found here.

Any other transactions with ZTE are still subject to the denial order of April 15, 2018. The denial order is only lifted once ZTE pays the $400,000 into an escrow account. According to the superseding order that outlines the ZTE deal, ZTE has 90 days to pay the escrow funds (until September 6, 2018).

Check out my other ZTE-related blog posts:

ZTE deal is good to go – House bill does not include Senate language “undoing” ZTE deal.

In-depth details of the ZTE deal.

Senate passes amendment to undo Trump’s ZTE deal.

Deal reached between the US and ZTE.

ZTE facing $1.7 billion penalty?

The real reason Trump is working to reverse the 7 year ZTE ban? To help U.S. companies!

CNBC reports the US and ZTE are working on alternatives to the denial order issued against ZTE back in April of this year.

ZTE estimated to lose $3.1 billion due to US sanctions (Bloomberg).

Deal reached to allow ZTE to purchase U.S. hardware and software?

ZTE may need to change management and board in order to access US suppliers.

ZTE report to the HKEX on the impact of the US denial order: “major operating activities of the Company have ceased”.

ZTE and Huawei banned for sale to US military personnel.

ZTE banned from purchasing US technology for 7 years.

If you have any questions whether your company can start engaging with ZTE, call trade specialist David Hsu at 832-896-6288 or by email at dhsu@givensjohnston.com.

ZTE deal is good to go – House bill does not include Senate language “undoing” ZTE deal.

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Last Thursday, the US House of Representatives (“House”) passed its version of the defense appropriations bill, formally known as the the “John McCain National Defense Authorization Act for Fiscal Year 2019”, or “NDAA” for short.

The House bill passed on a 359-49 vote and authorized $675 billion in defense spending for next year. The final bill does include the Senate language prohibiting ZTE and Huawei from selling goods or services to the Pentagon.

More importantly, the final bill does not include Senate language that would have “undone” ZTE’s deal ($1 billion in fines, US government oversight, $400k in escrow, etc.) Despite bipartisan support in the Senate for amended language that would have prevented a deal with ZTE, the House did the right thing and removed this amendment from the final bill.

News of this final bill probably won’t make it to the news outlets, but this final bill is a win for President Trump and the administration – and will be the first time the US Government has had oversight of a large Chinese company.

With the ZTE deal saved and ZTE now eligible to buy hardware and software from US companies – companies such as Qualcomm, Lumentum, Oclaro, Broadcom, Intel, MACOM, Semtech, and other U.S.-based vendors in the ZTE supply chair are probably breathing a sigh of relief.

Check back for more ZTE news, if you have any questions about ZTE, trade or customs law, contact David Hsu at 832-896-6288 or by email at dhsu@givensjohnston.com.

In-depth details of the ZTE deal.

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By ZTE Corporation (Own work (vectorized)) [Public domain or Public domain], via Wikimedia Commons

Most media reports of the ZTE deal stop only mention the $1 billion dollar fine and $400,000 to be placed in escrow.

I thought this reporting was a little lacking in details, so I went ahead and read the details of the ZTE deal and summarized them below:

1. Pay $1,000,000,000.00 within 60 days of June 8, 2018.

2. Pay $400,000,000 to escrow within 90 days of June 8, 2018 to a US headquartered bank selected by ZTE and approved by BIS.
-10-years probationary period.
-$400,000,000 will be returned to ZTE after 10 years.
-Records maintained and retained in the US or fully accessible from the US.
-Comply with all other terms and committed no other violation.
-Comply with OFAC settlement agreement.
-If ZTE is found to be non-compliant, then the $400,000 goes to BIS.
3. ZTE has 30 days to retain and their expense an “special compliance coordinator” (SCC)
-The SCC will be in place for 10 years
-If there is a change to any SCC, the replacement must be made within 30 days
-ZTE can’t hire an SCC to join ZTE until 5 years after the agreement ends.
4. ZTE must complete 9 audit reports to show compliance with US export control.
-Independent compliance monitor performs the first 4 audits.
-SCC completes remaining 6 audits
5. All records must be stored-in or fully accessible from the US.
6. ZTE must allow the US Gov’t to verify adherence to their export control compliance program.
-ZTE needs to provide export compliance training to leadership, mgmt, employees.
-ZTE needs to provide BIS copies of training materials until January 1, 2021.
-Implement export compliance program within 6 months.
-Replace entire Board of Directors
-Terminate all current senior leadership of ZTE and ZTE Kangxun.
-30 days after replaceing BOD, ZTE needs to create audit/compliance committee.
-Within 90 days of order, ZTE needs to detail all Chinese government ownership and control of ZTE, including stock ownership.
-Within 180 days, ZTE needs to publish online the classification under the regulations, publish in English and Chinese.
-Within 4 years, ZTE needs to hold 2 public symposia in China regarding export control compliance.

7. Full and timely payment of civil penalties.

8. For 10 years, ZTE cannot participate in any transaction involving any item exported or to be exported from the US that is subject to the Regulations.

9. ZTE cannot export or re-export to or on behalf of a denied person.

10. Any one related to a denied person also subject to the order.

11. 10 year denial period suspended as long as ZTE pays the penalties. If ZTE violates terms, then a 10-year denial period from the date it is determined that ZTE has failed to comply.

12. ZTE cannot make a statement directly or indirectly denying allegations in the: proposed charging letter, the March 17th settlement agreement, the June 2018 agreement or the superseding order.
-ZTE needs to consult with BIS regarding any press releases

13. ZTE should fully cooperate with BIS, DOJ, OFAC regarding production of documents and witnesses.
-ZTE must be truthful in disclosures to BIS.
-ZTE must make available for interview deposition or testimony of employees current and former as needed.
-ZTE to notify BIS of any violations during the 10-year probationary period.
14. The ZTE order is to be made public.

PLEASE NOTE: The Senate added an amendment in the National Defense Authorization Act for Fiscal Year 2019 that would reverse the ZTE deal if passed. The amendment passed the Senate on Friday the 15th and is now in the House.

My thoughts: I don’t believe the Senators supporting the amendment to the NDAA have read the entire settlement with ZTE. My guess is the Senators only read the “$1 billion” dollar fine.

The US/ZTE deal is good for several reasons:
1. This deal keeps ZTE in business.
2. If ZTE is in business, US companies that supply to ZTE will benefit (Qualcomm, Google, etc).
3. This agreement is the FIRST (and likely the LAST time that the US Government will have any oversight of a Chinese company. I don’t think the Senators understand how unusual this is. Oversight by the US government of a large Chinese company will never happen again.
4. This deal allows the US to ensure no export controlled technology is sent by ZTE to a denied country for the next 10 years.

 

Senate passes amendment to undo Trump’s ZTE deal.

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ZTE logo, credit: Wikipedia

As has been widely reported, the Senate passed “H.R. 5515: National Defense Authorization Act for Fiscal Year 2019” with an amendment that would undo Trump’s ZTE deal. The full text of the bill can be found here.

The actual amendment is included in Section 6702 of the bill. A copy and paste of only Section 6702 can be found at the bottom of the post. The amendment would reinstate the ZTE ban. As you are aware, the US Department of Commerce issued a denial order in April of this year banning ZTE from buying software and hardware from any US supplies for 7-years. Without access to Qualcomm chips, google Android software and other US components, ZTE would be effectively out of business. Evidence of this has also been reflected in ZTE’s stock price – which has already declined by 23% following yesterday’s passage of the Senate bill with the ZTE amendment.

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Tom Cotton official Senate photo and author of ZTE amendment

It has been reported that Trump will meet with legislators on Wednesday, June 20th to work out a deal removing this language. As the Senate bill moves to reconciliation in the House, it will be an important meeting as Trump will be able to make a deal with Republican lawmakers prior to reconciliation taking place. As the committee members involved in reconciliation are chose from Republican leadership in the House and Senate, Trump is hoping a deal can be made to remove the amendment.

In the meantime, we will have to just wait and see. A denial order against ZTE only hurts US companies that supply chips, components and software to one of the largest phone manufacturers in the world. Additionally, the ZTE deal allows US oversight of a Chinese-based telecommunications company – this would never happen if ZTE closes and opens up as a new company.

If you have any questions how this may impact your business or any questions regarding export compliance, contact David Hsu at 832-896-6288 or by email at dhsu@givensjohnston.com.

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For your reference, below is the amendment reinstating ZTE’s ban (if approved):

SEC. 6702. PROHIBITION ON MODIFICATION OF CIVIL PENALTIES UNDER EXPORT CONTROL AND SANCTIONS LAWS AND PROHIBITION ON CERTAIN TELECOMMUNICATIONS EQUIPMENT.

(a) Prohibition On Modification Of Penalties.—

(1) IN GENERAL.—Notwithstanding any other provision of law, no Federal official may modify any penalty, including a penalty imposed pursuant to a denial order, implemented by the Government of the United States with respect to a Chinese telecommunications company pursuant to a determination that the company has violated an export control or sanctions law of the United States until the date that is 30 days after the President certifies to the appropriate congressional committees that the company—

(A) has not, for a period of one year, conducted activities in violation of the laws of the United States; and

(B) is fully cooperating with investigations into the activities of the company conducted by the Government of the United States, if any.

(2) REINSTATEMENT OF PENALTIES OR SUSPENDED ORDER.—

(A) IN GENERAL.—If, before the date of the enactment of this Act, any penalty imposed pursuant to the order of the Acting Assistant Secretary of Commerce for Export Enforcement entitled “Order Activating Suspended Denial Order Relating to Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd.” (83 Fed. Reg. 17644), and dated April 15, 2018, is reduced or eliminated, or that order is suspended, on such date of enactment, that penalty shall be reinstated to the penalty in place before such reduction or elimination, or that order shall be reinstated, as the case may be.

(B) ADDITIONAL MODIFICATIONS.—Any modification to a penalty imposed pursuant to the order described in subparagraph (A) on or after the date of the enactment of this Act shall be subject to the requirements of paragraph (1).

Deal reached between the US and ZTE.

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Credit: Courtesy of ZTE Corporation

The US will end the ban on ZTE buying American software and hardware.

The terms of the deal require:
1. $1 billion penalty;
2. $400 million in escrow to be forfeited in the event of future export violations during the 10-year probationary period;
3. Compliance team in ZTE that will report to the company’s new chairman;
4. ZTE must change board and management team in 30 days.

Various online articles covering the US/ZTE deal ask what the US gets out of the ZTE deal.

None of the news sources mention that this deal saves ZTE and will lead to business for US suppliers of components and software to ZTE:

-Acacia Communications Inc
-Oclaro,
-Lumentum Holdings,
-FiberHome
-NeoPhotonics Corp
-Inphi Corp
-Finisar Corp
-Analog Devices Inc
-Xilinx Inc
-Qualcomm
-Qorvo Inc.
-Alphabet Inc

If you or anyone you know has questions about the ZTE deal or export compliance questions, feel free to contact experienced trade attorney, David Hsu at 832-896-6288 or by email at dhsu@givensjohnston.com.

ZTE facing $1.7 billion penalty?

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Reuters reports the Trump administration may seek a penalty up to $1.7 billion from ZTE. In addition to the hefty fine, the U.S. Department of Commerce is also seeking unrestricted access to sites to verify US components are being used as claimed by ZTE.

As previously mentioned on this blog, ZTE is banned from purchasing from US hardware and software suppliers for 7 years due to violating U.S. export controls. This ban would severely limit ZTE’s ability to make phones as US companies provide 25-30% of the components in ZTE equipment, with ZTE paying over $2.3 billion to US suppliers.

As the penalty can change anytime – check back for more updates.

 

 

CNBC reports the US and ZTE are working on alternatives to the denial order issued against ZTE back in April of this year.

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Current Commerce Secretary Wilbur Ross told CNBC today that the US may consider other measures, such as placing compliance officers at ZTE. The compliance officers would report back to the Department of Commerce.

Background:
The Department of Commerce banned ZTE from purchasing hardware and software from U.S. manufacturers because ZTE was found to sell American parts to Iran and North Korea. The Commerce department prohibits the sale of US goods to North Korea, Sudan, Syria, Iran and Cuba. ZTE is most commonly known in the US for their smart phones but ZTE also manufactures telecomunications equipment.

Check back here for the latest news as they develop.

And if you have any export controls or export compliance issues – contact David Hsu at 832-896-6288 or by email at dhsu@givensjohnston.com.

ZTE estimated to lose $3.1 billion due to US sanctions (Bloomberg).

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Bloomberg news reported that China’s ZTE Corp is estimated to lose at least 20 billion yuan ($3.1 billion) due to Washington’s ban on U.S. firms hardware and software. The Bloomberg article cited unnamed sources.

Bloomberg also reports that ZTE is hopeful that the United States and China will be able to reach a deal that would remove the ban and has a plan in place allowing the telecoms firm to “swing idled factories into action within hours” of the ban being officially lifted.