The Huawei Dilemma: Insecurity and Mistrust

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The Huawei Dilemma: Insecurity and Mistrust

Telecommunications networks are a strategic asset, and a vulnerable one.

The Huawei Dilemma: Insecurity and Mistrust
Credit: (AP photo/Andy Wong)

On a fall day in 2012, Charles Ding, Huawei’s chief representative in the United States, made his way to Capitol Hill. While most of Washington was consumed with the recent attacks in Benghazi, Libya, and the death of U.S. Ambassador J. Christopher Stevens, within the Capitol complex, Congressional investigators were zeroing in on another issue. Ding stepped into the wood-paneled hearing room, HVC-210, before the U.S. House Permanent Select Committee on Intelligence, which was seeking to complete its report following a nearly yearlong national security investigation into Huawei and its compatriot company, ZTE.

He met a hostile audience. Congressman C.A. Dutch Ruppersberger (D-MD), as ranking member, immediately raised suspicions about Huawei’s country of origin, China, “a country known to aggressively conducts [sic] cyber espionage. And add to that…the fear that China, a communist country, could compel these companies to provide it information or worse yet spy on Americans using this equipment.” After experiencing a series of evasive responses, Chairman Mike Rogers (R-MI) expressed frustration: “We hope that this hearing finally gives us the opportunity to get fulsome answers and resolve these doubts about your companies.”

With U.S. enforcement actions mounting against Huawei, including the most recent criminal indictment of Huwaei and Chief Financial Officer Wanzhou Meng on January 28, 2019, it seems these fears and doubts have only grown and festered; and with a critical March 1 deadline in U.S.-Chinese negotiations steadily approaching, fulsome answers on complex issues of technology, trade, and modern warfare may be in short supply.

But before moving forward, we need to look backward. Ever since its release, the Intelligence Committee’s 2012 report has shaped the policy narrative in Washington and beyond. However, as current events rapidly unfold, details of the investigation and its findings may be forgotten or otherwise overlooked. One lesson is obvious: If Washington and Beijing are to reach a near-term rapprochement, they will have to overcome the mutually reinforcing challenges of insecurity and mistrust.

Investigating the Threat

The vulnerability of telecommunication networks poses a major threat to the ongoing operations of modern American life. The goal of the Intelligence Committee’s investigation was to measure the potential security risk posed by China’s top two telecommunications companies, Huawei and ZTE, and to assess whether the U.S. government was “properly positioned” to understand and respond to that threat. Lawmakers were determined to explore the threat presented by the potential loss of control over U.S. “critical infrastructure”; the interdependent system of electric power grids; banking and finance systems; natural gas, oil, and water systems; and rail and shipping channels – each of which depend on computerized control systems. Additionally, the Intelligence Committee was concerned with Chinese motivations and their capacity to maliciously modify or steal information from government and corporate entities in order to gain access to expensive and time-consuming research and development that would advance China’s economic position on the world stage.

Because of its growth in global market power and alleged ties to a regime representing the most sophisticated espionage threat to the United States, Huawei was a prime target.  The Intelligence Committee weighed cyber- and human-enabled espionage tactics, such as efforts to insert malicious hardware or software implants into Chinese-manufactured telecommunications components and systems marketed to the U.S. Beyond the initial supply chain, Huawei also engages in management services, which could enable ongoing authorized access for malicious activity under the guise of legitimate assistance. The report cites, for example, the scenario where Chinese intelligence services recruit working-level technicians or managers to disrupt America’s critical infrastructure.

Interestingly, Huawei volunteered for the inquiry. In February 2011, in an open letter to the U.S. government, Huawei called for a “formal investigation” of the company following action by the Committee on Foreign Investment in the United States (CFIUS) to block Huawei’s acquisition of 3Leaf, a U.S. server technology company. The Intelligence Committee began its work in November of the same year.  In addition to the aforementioned open hearing in September 2012, Congressional investigators conducted extensive interviews with company and government officials, numerous document requests, and inspections of company facilities and factories in Shenzhen. In May of 2012, Ranking Member Ruppersberger led a delegation of Intelligence Committee members to Hong Kong to meet with corporate officials of ZTE and Huawei, including Ren Zhengfei, the founder and President of Huawei.

In the end, members of the Intelligence Committee were frustrated with the lack of cooperation and candor in response to their inquiries. The committee’s report lists a multitude of complaints about the “obstructionist” behavior of Huawei and ZTE. In sum: “Given the companies’ repeated failure to answer key questions thoroughly and clearly, or support those answers with credible internal evidence, the national-security concerns about their operations have not been ameliorated.” Congressional investigators were particularly piqued that Huawei failed to provide documented information about its corporate structure, history, ownership, operations, financial arrangements, or management. The company asserted both verbally and in writing that it could not provide internal documentation that was not first approved by the Chinese government. According to the Intelligence Committee, the fact that Chinese companies believe that their internal documentation or information remains a “state secret” only heightened concerns about Chinese government control over these firms and their operations.

Insecurity and Mistrust

The scope of the 2012 Congressional investigation provides a roadmap of themes and policies currently being pursued by the Trump administration. More specifically, the Intelligence Committee was guided by the following questions:

  • What are the companies’ histories and management structures, including any initial ties to the Chinese government, military, or the Communist Party of China?
  • How and to what extent does the Chinese government or the Communist Party of China exert control or influence over the decisions, operations, and strategy of Huawei and ZTE?
  • Are Huawei and ZTE treated as national champions or otherwise given unfair or special advantages or financial incentives by the Chinese government?
  • What is the presence of each company in the United States market, and how much does the parent company in Shenzhen influence its operations in the United States?
  • Do the companies comply with legal obligations, including those protecting intellectual property rights and international sanctions regimes (such as those with respect to Iran)?

The findings to these lines of inquiry proved troubling to the Intelligence Committee. The probe examined Huawei’s and ZTE’s ties to the Chinese state, including support by the Chinese government and connections to the Communist Party of China, and their work done on behalf of the Chinese military and intelligence services. For instance, Congressional investigators were concerned with the background of Mr. Ren, Huawei’s founder, who had links to the 3PLA – China’s signals intelligence division – and the Communist Party, such as serving as a member to the 12th National Congress. They did not find credible claims or evidence that the company was, in fact, an employee-owned and controlled enterprise or had an independent board of directors.

Instead, the Intelligence Committee found that the Chinese government and Communist Party exerted influence over and supported Huawei as a “national champion.” For example, Huawei admitted that an internal Party Committee existing within the company, consistent with Chinese law, but refused to discuss or describe the role, membership, or impact of this group on corporate decision-making.  Huawei’s failure to provide further detailed information explaining how it is formally regulated, controlled, or otherwise managed by the Chinese government undermined, in the view of Congressional investigators, the company’s repeated assertions that it is not inappropriately influenced by the Chinese government.

Huawei also refused to provide answers to direct questions about its financing and connections with Chinese state banks, nor did it provide internal documentation or auditable financial records to evaluate its claims that any financing arrangements comply with standard practice and international trade agreements. In support, Congressional investigators cited the earlier finding of the U.S.-China Economic and Security Review Commission that enterprises like Huawei rely on generous state-backed financing to make an investment project in a new market viable. To the detriment of U.S. competitors, financial subsidies from the Chinese government can enable its national champions to penetrate markets by offering products below the costs of production.

Additionally, the Intelligence Committee found that Huawei exhibited a “pattern of reckless disregard” for the intellectual property rights of U.S. companies. Congressional investigators cited Huawei’s settlement in civil litigation with Cisco, in which Huawei agreed to remove certain products from the marketplace due to violations of Cisco’s intellectual property rights. Whistleblowers – former employees of Huawei – also offered testimony that the company deliberately used the patented material of other firms. In the judgment of the Intelligence Committee, these issues with intellectual property rights raised broader concerns of Huawei’s compliance with U.S. laws in general.

Most notably, the Intelligence Committee found that Huawei failed to provide evidence to support its claims that the company complies with all international sanctions or U.S. export laws, in particular in relation to Iran sanctions. Huawei would not answer detailed questions about its operations in Iran or other sanctioned countries, and otherwise refused to provide any documents, like details of its internal compliance program, to ensure adherence to U.S. Iran sanctions. Following closure of its investigation, the Intelligence Committee referred criminal allegations stemming from its investigation to the Justice Department and other executive branch agencies.

Expanding Fallout

It is without coincidence, then, that the Justice Department recently issued a 13-count criminal indictment against the world’s largest telecommunications equipment manufacturer for alleged violations of America’s Iran sanctions, among other charges. The indictment supports the U.S. government’s extradition request to Canada for Huawei’s CFO Wanzhou Meng, which I covered in these pages earlier. The allegations involve a conspiracy to defraud U.S. banks and evade Iran sanctions through the use of Skycom, an unofficial Huawei affiliate in Iran, with which Ms. Meng had a direct and substantial role.

This action was just the latest in a series of setbacks to Huawei that build upon the 2012 Congressional report. U.S. President Donald J. Trump is reportedly considering an executive order that would bar U.S. companies from using telecommunications equipment made by Huawei and ZTE. This move would be in addition to legislation signed by Trump banning the U.S. government from doing the same. Both actions are consistent with recommendations stemming from the Congressional investigation.

The Intelligence Committee allegations against Huawei are also reflected in the basis of the Trump administration’s tariffs against China, such as the finding from the U.S. Trade Representative that the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information. The 2012 Congressional report recommended that executive branch investigate the unfair trade practices of the Chinese telecommunications sector, paying particular attention to China’s continued financial support for key companies. Similar to Congressional investigators’ focus on the Cisco case, the Justice Department has relied on civil litigation, this time between T-Mobile and Huawei, to support criminal charges that the Chinese company stole trade secrets related to a phone-testing robot.

The fallout for Huawei has continued to expand across the globe. On January 11, 2019, Polish counterintelligence officials announced the arrest of Huawei’s local sales director on allegations of spying for China, along with a Polish citizen who worked for Orange, a European cellular carrier, and who was once a senior manager in a Polish intelligence agency. European telecommunications providers like Orange have announced plans to exclude Huawei technology from their 5G systems. In addition to the United States, Australia, New Zealand and Japan have now banned government use of Huawei technology in 5G networks.

In response to the U.S. criminal prosecution of Huawei, the Chinese foreign ministry reportedly issued a statement complaining that U.S. authorities had “mobilized state power to blacken” some Chinese companies “in an attempt to strangle fair and just operations.” Beijing vowed to “firmly defend” Chinese companies from such actions, which were the result of “strong political motivation and political manipulation.”

The Huawei Dilemma

With warm words recently exchanged in Washington, following the latest round of high-level trade negotiations, there are signals that the near-term truce between U.S. and China may extend past March 1. However, the case of Huawei represents a longer term structural problem in contemporary international relations.

States have prepared themselves for the security threats posed by traditional factors such as the material resources underlying hard power and the limits of geography, like calculations involved in the so-called “Malacca dilemma.” However, in our modern networked world of interdependence – of satellites, servers, and smart phones – telecommunications have become a strategic asset par excellence. It is the backbone of our modern life and global trade. Looking forward, the combination of 5G technology and artificial intelligence holds the potential for transformative change.

At the same time, telecommunications networks are vulnerable to myriad forms of malicious intrusion that are continuously evolving – prey to the grey weapons of modern warfare. International trade increases the exposure. Governments and commercial actors across the globe are beginning to wrestle with this economic and national security threat.

Overcoming the resulting insecurity, as noted by the Intelligence Committee back in 2012, is achieved through developing a “sufficient level of trust” with the technology providers, whether equipment manufacturers or network managers. For America, that trust is ultimately found in its operating system, a free market led by private enterprise, and hardware, a constitutional democracy. But China, which comes from a separate tradition, is wired differently. For the world’s two most powerful countries – integral trade partners, competitors for technological innovation, principal great power contestants – this presents an unwieldy geopolitical challenge to overcome.

How will we solve this “Huawei dilemma”? The answer, undoubtedly, lies in the future.

Roncevert Ganan Almond is a partner at The Wicks Group, based in Washington, D.C. He has advised the U.S.-China Economic and Security Review Commission on issues concerning international law and written extensively on maritime disputes in the Asia-Pacific. The views expressed here are strictly his own.