On March 23, 2022, ZTE issued an announcement to the public, saying that "the Company received a court judgment ruling not to revoke ZTE's probation without attaching any penalties, and confirmed that the term of office of the Ombudsman will end on march 22, 2022."
After the news was announced, ZTE stocks that resumed trading in the afternoon opened sharply higher in Hong Kong and mainland stock markets, especially Hong Kong stocks once rose by more than 50%; the media also followed up on this report, believing that the expiration of the probation period, especially the departure of the inspector, was conducive to the future development of ZTE; but some media also published articles saying that "with the end of the probation period, ZTE has completely shaken off the shadow of US sanctions", which is inevitably unobjective and misleading the market.
Referring to ZTE's official announcements over the years, the court judgment is a hearing on the follow-up enforcement of the settlement agreement reached by ZTE and the U.S. Department of Justice on March 7, 2017. That year, ZTE reached a series of settlements with the U.S. Department of Commerce's Bureau of Industry and Security (BIS), the U.S. Department of Justice (DOJ), and the U.S. Treasury Department's Office of Foreign Asset Management (OFAC) for "the company violated U.S. export control laws and violated relevant U.S. laws and regulations by providing information and other conduct during the investigation."
In the settlement agreement between ZTE and the U.S. Department of Justice, in addition to paying a $430 million criminal fine and forfeiture, a three-year probation period was set, and it was agreed that an independent compliance supervisor (ombudsman) approved by the U.S. government during the monitoring period would oversee ZTE's compliance with U.S. export control laws and compliance with its obligations under the agreement and issue an annual report. The three-year probation period was supposed to expire in 2020, but the U.S. District Court for the Northern District of Texas also issued an order in October of that year to extend the probationary period to March 22, 2022, as the U.S. Department of Commerce's Bureau of Industry and Security (BIS) signed a new replacement agreement with ZTE in June 2018 to increase the penalty.
However, just as the term of office of the U.S. government-appointed ombudsman was about to expire, the U.S. District Court for the Northern District of Texas issued a trial order to ZTE, saying that because its former employee Yu Jianjun was involved in a conspiracy to commit visa fraud, it needed to hear whether to revoke ZTE's probation. After ZTE issued the relevant announcement on March 4, the investment market reacted violently, because it was worried that the US government would once again extend the supervision period of ZTE, and the stock price fell sharply.
Fortunately, ZTE actively responded to the lawsuit and actively took all practical countermeasures under the legal framework, and finally won the support of the US court, obtained a favorable judgment, and ended the supervision period as scheduled. On the other hand, this also proves that ZTE's effectiveness of "building a world-class compliance enterprise and comprehensively carrying out the construction of a compliance system" has been recognized by the US side, and the investment market is considered to be a false alarm, so the stock price has rebounded in retaliation.
However, if it is believed that the "tight curse" imposed by the United States on ZTE has finally been lifted, and ZTE has completely shaken off the shadow of US sanctions, it is undoubtedly an exaggeration of the facts, because the settlement agreement between ZTE and the US Department of Justice (DOJ) is only lifted as scheduled, which hurt ZTE the most, and the tightest control of ZTE is its new alternative agreement with the Bureau of Industry and Security (BIS) of the US Department of Commerce in June 2018. It's far from over.
Under the new replacement agreement approved by the U.S. Department of Commerce's Bureau of Industry and Security (BIS) on June 8, 2018, ZTE was forced to accept a new rejection order for a period of 10 years from June 8, 2018, in addition to an additional $1 billion civil penalty and a change of board and management within 3 months: if ZTE has any breach of its obligations under the settlement agreement during the 10-year monitoring period, the new rejection order that has been suspended may be activated. ZTE will be re-subject to the U.S. Department of Commerce's export embargo sanctions, while the additional $400 million suspended fine it paid to U.S. bank custody accounts will expire immediately.
In addition, during the 10-year monitoring period from June 8, 2018 to June 8, 2028, ZTE is required to appoint, at its own expense, an independent Special Compliance Coordinator to coordinate, monitor, evaluate, and report on ZTE and its affiliates' compliance with the U.S. Export Control Act, regulations, and new alternative agreements, who reports equally to ZTE's President, Board of Directors, and the U.S. Department of Commerce's Bureau of Industry and Security (BIS).
That is to say, although the U.S. Department of Justice's surveillance period for ZTE has ended, and the ombudsman stationed there has left to lift the tightening curse, the new 10-year rejection order of the U.S. Department of Commerce's Bureau of Industry and Security (BIS) is still like the "Sword of Damocles" hanging over ZTE's head, and because BIS is directly responsible for the development of the control list of U.S. export entities, its lethality is even greater, and the independent special compliance coordinator who reports to BIS on an equal footing. ZTE will also be stationed until June 8, 2028, always performing the task of monitoring and evaluating ZTE, and to a certain extent, holding the power of life and death of ZTE.
Of course, since the replacement of the board of directors and management of ZTE in 2018, its current leadership team has been "committed to building a world-class compliance enterprise, adhering to compliance as the cornerstone of strategic development and the bottom line of operation", and the completion of the us Department of Justice's supervision period as scheduled has proved the effectiveness of its comprehensive construction of the compliance system. At the same time, under the leadership of the current leadership team, ZTE has also made great progress in its operating performance with the help of the domestic market opportunity to accelerate the construction of 5G networks, and the latest financial report shows that its operating income in 2021 reached 114.5 billion yuan, achieving a net profit of 6.81 billion yuan, both of which hit a record high.
Therefore, ZTE said in the announcement that it is full of confidence in the effective operation of the compliance management system, then the investment market is full of expectations for it to continue to improve the compliance management until 2028 to completely lift the supervision period of the US Department of Commerce, with the beautiful performance report of 2021, the good performance of ZTE's stock price in the Hong Kong stock market and A-share market also has a more long-term outlook.