U.S. Bans Exports to ZTE Crippling Company’s Ability to Make Devices

NEWS ANALYSIS: The Department of Commerce has announced an immediate ban on exports of electronic components, to Chinese communications equipment giant ZTE after violating U.S. trade sanctions.

ZTE Export Ban

Citing a long and continuing pattern of deception, cover-ups and evidence tampering as well as the failure to follow the provisions of a 2017 settlement agreement, U.S. Secretary of Commerce Wilbur Ross announced that he has allowed a previously imposed seven-year suspension of export privileges to go into effect. 

The U.S. had agreed to not to enforce the export ban as part of the settlement in which ZTE forfeited $1.19 billion and agreed to penalize employees involved in a series of illegal activities. The settlement was in response to the findings of an investigation that revealed that ZTE had been shipping electronic equipment, including cell phones and network infrastructure equipment to Iran and North Korea. 

The investigation also revealed that ZTE had lied about disciplinary actions involving personnel who have been involved in the sanctioned activity, including saying it had dismissed personnel who had actually resigned or otherwise left the company years earlier. 

The department also said that ZTE actually rewarded the employees involved in violating U.S. trade bans by giving them large bonuses rather than reprimands or financial penalties. Secretary Ross said ZTE had made false statements before and during the investigation of their activities, had obstructed justice and had delivered false and misleading representations of the company’s activities. 

The Commerce Department Denial Order also reversed the suspension of $300 million that was part of a $661 million civil penalty for its activities. The penalty was in addition to the seven-year denial of export privileges. 

In the Denial Order, Acting Assistant Secretary of Commerce for Export Enforcement Richard Majauskas stated that the level of deception on the part of ZTE was significant. 

“In issuing the March 13, 2018 notice letter to ZTE, and in considering ZTE's response, 1 have taken into account the course of ZTE's dealings with the U.S. Government during BJS's multi-year investigation, which demonstrate a pattern of deception, false statements, and repeated violations,” Majauskas wrote. 

“I note the multiple false and misleading statements made to the U.S. Government during its investigation of ZTE's violations of the Regulations, and the behavior and actions of ZTE since then. ZTE's July 20, 2017 letter is brimming with false statements in violation of§ 764.2(g) of the Regulations, and is the latest in a pattern of the company making untruthful statements to the U.S. Government and only admitting to its culpability when compelled by circumstances to do so,” Majauskas’ letter said. 

The immediate action by the Commerce Department are in response to ZTE’s apparent lies about its agreement to punish employees who were instrumental in violating sanctions by business with Iran and North Korea. In addition to the phones it’s known for in the US, ZTE makes network infrastructure equipment for carriers, cloud operations and long distance data transmission. 

The equipment ZTE sells to carriers is the subject of a proposed action by the FCC to deny funding from the Universal Service Fund to U.S. carriers that use ZTE equipment as well as equipment from Huawei. The inability to export components from the U.S. to build its carrier and cloud equipment would seriously impact ZTE as well. 

In response to eWEEK’s request for comment on the Commerce Department’s action, ZTE's U.S.-based public relations agency said it hadn’t received any comment from the company to share with news media. 

The U.S. isn’t the only place where ZTE is in trouble. The UK’s National Cyber Security Centre, which is part of intelligence agency GCHQ, is warning that nation’s telecommunications sector to avoid ZTE equipment. 

“NCSC assess that the national security risks arising from the use of ZTE equipment or services within the context of the existing UK telecommunications infrastructure cannot be mitigated,” wrote NCSC Technical Director Dr. Ian Levy. 

In the U.S., government agencies are already prohibited from using equipment made by ZTE as well as by Huawei due to the risk of back doors and other cyber-threats being built into the firmware of the devices. 

Now that it has imposed the export ban, the only other enforcement action the U.S. government can take include arresting and prosecuting company principals in U.S. courts for violating federal export laws, and prohibiting the import of any ZTE equipment. Those steps may be problematic, if only because ZTE USA is a separate organization and may not have had a role in the sanctioned activities. 

On the other hand, it’s possible that the government can prohibit the import of any ZTE equipment, but it may be saving that option if further actions are warranted. 

At this point, any carriers in the U.S. that are still using ZTE gear should probably find replacements. It’s unclear if mobile phone operators are in any trouble for selling ZTE phones, but since the mobile device manufacturer can’t export components such as Qualcomm modem chips that are necessary to make those phones work, ZTE may not be able to make phones anyway. 

ZTE is appears to be in an untenable position as an international purveyor of communications equipment. While the Chinese government may authorize or even require ZTE to sell communications equipment to its trading partners Iran and North Korea, it may find itself locked out of large portions of the global market for doing so.

Wayne Rash

Wayne Rash

Wayne Rash is a freelance writer and editor with a 35 year history covering technology. He’s a frequent speaker on business, technology issues and enterprise computing. He covers Washington and...