The ban on sales by American companies to ZTE, China's largest-listed telecommunications equipment manufacturer, is punishment following the charges that the equipment maker allegedly made false statements during an investigation into sales of its equipment to Iran.
As part of the agreement, Shenzhen-based ZTE promised to dismiss four senior employees and discipline 35 others by either reducing their bonuses or reprimanding them, senior US officials told Reuters.
"In March 2017, ZTE agreed to a combined civil and criminal penalty and forfeiture of $1.19 billion after illegally shipping telecommunications equipment to Iran and North Korea, making false statements, and obstructing justice including through preventing disclosure to and affirmatively misleading the USA government", claimed the Department of Commerce in a statement. The US Department of Commerce also banned the export of software which means its devices may not come with Google Play services or receive updates. As part of the agreement, ZTE said it would dismiss four members of senior staff to discipline 35 more.
The West warned telecoms operators not to use ZTE equipment because its state ownership raised security fears.
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The ban is a blow to the face to many US companies that supply ZTE with components, including Qualcomm Corp., Lumentum Holdings Inc. and Finisar Corp., all of whose shares dropped after the announcement.
The Chinese firm also agreed to pay $890 million in fines and penalties, with an additional penalty of $300 million that could be imposed.
It also comes amid heightened tensions between the US and China, which are now engaged in a tit-for-tat exchange of possible tariffs.
In a statement, the company said "ZTE is aware of the denial order activated by the United States Department of Commerce".
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The company has set up a crisis management group in response to the ban, said a ZTE source, declining to be identified as the information was confidential.
The U.S. action could be catastrophic for ZTE since American companies are estimated to provide 25 percent to 30 percent of the components used in ZTE's equipment, which includes smartphones and gear to build telecommunications networks.
USA firms are also likely to get caught in the crossfire, with the fallout set to hit Qualcomm Inc, which provides the lion's share of chips inside ZTE smartphones. ZTE has purchased chips from Qualcomm Inc.
As reported by the Financial Times, the National Cyber Security Centre advised the UK's telecoms businesses on Monday not to work with the Shenzhen-based company because it would have a "long term negative effect on the security of the UK". Oclaro Inc, which got 18 percent of its fiscal 2017 revenue from ZTE, lost 14 percent.
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Shares of Finisar Corp. ZTE already sells both its branded and white-label smartphones via mobile carriers AT&T and Verizon in the US.