TELECOMS: Huawei in US Hot Seat Over Iran Sales?

Bottom line: Huawei is likely to be found guilty of selling products to Iran in violation of US sanctions, and could be fined up to $2 billion but won’t face additional punishment.

When word first emerged four years ago that telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063) was being investigated for selling American equipment to Iran in violation of US sanctions, other reports also indicated that crosstown rival Huawei was also being probed over the same matter. Huawei’s name later disappeared from the headlines, though it was never really clear if the company had been cleared of suspicion in the matter. Now it appears the company may still be under investigation, meaning it could potentially be slapped with a fine even bigger than the nearly $1 billion levied on ZTE.

This particular story is one that I actually saw coming, though I never got any insider information confirming my hunch. The ZTE story has consumed most of the big headlines over the last year, beginning from February 2016. That was when Washington determined the company had indeed violated US sanctions aimed at punishing Iran for its nuclear program.

ZTE was about to get slapped with potentially crippling punishment, when it got a last-minute reprieve from Washington in exchange for continued cooperation into the investigation. I found that particular twist a bit surprising, since Washington had already reached its verdict on the matter. Instead, I speculated that investigators were perhaps seeking ZTE’s help to figure out if perhaps Huawei had used similar tactics to circumvent sanctions.

Now the latest reports appear to be confirming that view, with word that an unnamed company is being investigated for violations similar to those committed by ZTE. (English article) The reports say the U.S. Commerce Department has posted a document on its website from ZTE, in which the company describes similar violations by another unnamed company that is only identified as F7.

Following the disclosure of that document, a group of lawmakers have called for a thorough investigation and unmasking of the company that may have also violated US sanctions against Iran. Huawei had no comment on the matter. But reports 4 years ago did indicate that the telecoms equipment giant was being investigated on the matter at that time. (previous post)

The fact of the matter is that Huawei and ZTE today are far different creatures than the companies that were being probed for actions that occurred 5 or 6 years ago. At that time both companies were still relative newcomers to the global market, and conducted business in line with practices widely used in China’s corporate sector. Such practices include rampant theft of trade secrets, and use of backdoors and other tricks to avoid rules like the US sanctions aimed at punishing Iran for its nuclear development program.

Cleaning Up Their Acts

Since then both companies have significantly cleaned up their acts, which was probably a major reason why the US decided to ease its punishment on ZTE. The Commerce Department had originally said it would ban the export of all US-made products to ZTE, in what would have been a crippling blow that cut the Chinese company off from some of its most important suppliers. In the end the company got off with a $900 million fine, which was heavy but also a far better outcome than the original punishment.

Now it’s clear that what I speculated before was indeed the case, and that ZTE was helping the Commerce Department in its concurrent investigation of whether others used similar tricks to circumvent US sanctions. Obviously we can’t say for sure whether Huawei is the culprit, but the case does seem relatively strong since the pair are close rivals and often butt heads on the global stage.

If all of that is true, it could just be a matter of time before Huawei is unmasked as the perpetrator and subjected to similar punishment. It does seem significant that the Commerce Department has posted the ZTE letter on its site, which seems to be a signal that something could be coming soon.

In this case it’s also interesting that if the perpetrator is Huawei, it could have fewer bargaining chips to use for a settlement similar to ZTE’s. That’s because its cooperation isn’t really necessary for any further investigation, though perhaps it could offer some insight on tricks that other Chinese companies use to circumvent international sanctions. At the end of the day, I suspect that Huawei will be found guilty of similar violations and probably be hit with an even larger fine, perhaps up to $2 billion. But I also think that both sides will be keen to put the matter in the past, and things will quietly end there.