US hits China's ZTE with $1 billion penalty in deal to end crippling sanctions, Commerce Secretary Ross says

Key Points
  • Commerce Secretary Wilbur Ross says the U.S. has struck a deal with Chinese telecom giant ZTE to end crippling American sanctions.
  • The department says the deal includes a $1 billion penalty against ZTE and a U.S.-chosen compliance team to be embedded at the company.
  • The deal also requires ZTE to change its board of directors and executive team within 30 days.
US Commerce secretary: US reaches 'definitive agreement' with ZTE

The U.S. has struck a deal with Chinese telecom giant ZTE to end crippling American sanctions, Commerce Secretary Wilbur Ross told CNBC on Thursday.

The department said the deal includes a $1 billion penalty against ZTE and a U.S.-chosen compliance team.

"We are literally embedding a compliance department of our choosing into the company to monitor it going forward. They will pay for those people, but the people will report to the new chairman," Ross said in a "Squawk Box" interview.

ZTE's latest brush with U.S. regulators came after the company's business dealings with Iran and North Korea violated U.S. trade agreements. ZTE paid $1.19 billion in fines for those violations, but the dispute didn't end there. The Commerce Department then alleged that ZTE misled regulators and failed to discipline the employees responsible for the sanction breach.

The settlement deal includes $400 million in escrow to cover any future violations as well as requiring ZTE to change its board of directors and executive team in 30 days.

"If they do violate it again, in addition to the billion dollars they are paying us up front, we had them put $400 million in escrow. The total deal is $1.4 billion. That money will be forfeited if they violate anything ... and we still retain the power to shut them down again," Ross said.

"This is a pretty strict settlement," he added. "The strictest and largest settlement fine that has ever been brought by the Commerce Department against any violator of export controls."

"This should serve as a very good deterrent not only for them but for other potential bad actors," he added.

In response to the announced deal, Senate Minority Leader Chuck Schumer said Thursday in a statement, "When it comes to China, despite [Trump's] tough talk, this deal with ZTE proves the president just shoots blanks."

Last month, Ross told CNBC the U.S. was looking at alternatives to the crippling sanctions threatening the survival of ZTE. In April, Washington banned ZTE from purchasing parts from U.S. companies, including Qualcomm, Corning and Google.

Treasury Secretary Steven Mnuchin has said that the enforcement of the ban wasn't meant to put the company out of business, and that any changes being considered would support U.S. national security. But skeptics worried that ZTE's destruction could mar an already delicate relationship between the U.S. and China.

ZTE, in addition to smartphones, has been a large manufacturer of telecommunications equipment that allows large carriers to operate their wireless and data networks. It was China's first state-owned telecom equipment maker to go public. It is listed on the Shenzhen and Hong Kong stock exchanges.

Despite decades of prominence, ZTE has since fallen from its 2012 spot as the world's fourth-largest smartphone maker, struggling amid new competition.

Under President Donald Trump's administration, ZTE's status as a Chinese multinational has also put it in the fray of a larger trade dispute between the U.S. and China. Trump has vowed to rebalance the power in America's trade relationship with China, and both nations have proposed tit-for-tat trade taxes.

Ross was in Beijing over the weekend for high-level trade talks with China. The White House has been insisting on fundamental changes in ties between the world's two biggest economic powers.

Ross said Thursday that "for the first time" the U.S. is pushing back on all fronts, including intellectual property rights and technology transfers.

"Prior administrations had been real patsies for the Chinese and other countries. They've never really pushed back," he said.

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