Intelligence Leaders Warn Businesses: Hang Up on Chinese Telecoms

Leaders of the House Intelligence Committee have arrived at the conclusion that doing business with two Chinese telecom giants is far too risky to national security and advised U.S. companies to find other vendors.

In addition, Chairman Mike Rogers (R-Mich.) and Ranking Member Dutch Ruppersberger (D-Md.) recommended that U.S. government systems keep out any parts made by Huawei or ZTE.

“Many people asked why — why this report, why these two companies, and why did we initiate the investigation,” Rogers said at a Capitol Hill press conference today unveiling the 60-page report. “And it started over a year ago when we started looking at the new threat that has been prolific in the last few years from the Chinese government when it comes to cyber espionage, human espionage, and something really unprecedented in history that a nation-state investing billions of dollars in its military and intelligence services to target specifically intellectual property of American businesses, western businesses, Asian businesses, taking that information back, and repurposing it to artificially compete in a world market.”

Huawei is the second-largest supplier of mobile telecommunications infrastructure equipment in the world; corporate partners include Motorola, T-Mobile, and Cox Communications with items such as modems and cable boxes. It also owns 51 percent stake in a joint venture with Symantec, and bid for a Sprint contract in 2010.

ZTE Corporation, founded as a state-owned enterprise with ties to China’s aerospace ministry, is the world’s fourth-largest manufacturer of mobile phones. Its Score mobile phone can easily be accessed remotely, sparking concern about handset security. In 2010, the company sold Iran’s state-owned telecommunications company equipment for spying on phone and online communications.

In March, the Australian government, on advice of its national security service, decided to keep Huawei out of the bidding process to work on its national broadband network. The United Kingdom felt the need to come up with a third-party validation system in an attempt to mitigate the risks posed to personal information and government data.

The companies have been trying to dig a deeper foothold in the U.S., expanding operations and getting “into the infrastructure backbone of the United States.”

“The amount of data and allegations that we processed has been shocking,” Rogers said. “…The investigation concluded that the risks associated with these companies’ providing equipment and services to U.S. critical infrastructure undermines the core U.S. national security interest.”

The chairman’s message to the private sector? “The investigation concluded that the risks associated with these companies’ providing equipment and services to U.S. critical infrastructure undermines the core U.S. national security interest.”

“Numerous” Huawei employees came forward to the committee investigators and revealed “several potential criminal violations” by company officials that will be referred to the executive branch for investigation, including allegations of immigration violations, bribery and corruption, and copyright infringement.

“Neither company credibly answered how it would operate free of Chinese national interests. They could not deny their historic and current ties to the Chinese state. They could not deny the pervasive influence of China’s national interest in affairs of purportedly private sector firms,” Rogers said.

“Huawei and ZTE are Chinese companies headquartered in China, a communist country where they must follow Chinese laws,” Ruppersberger said. “We already know the Chinese are aggressively hacking into our nation’s networks, threatening our critical infrastructure, and stealing millions of dollars worth of trade secrets and other sensitive information from American companies.”

The Maryland Dem noted that the investigation went to China to meet officials face to face and probe the companies on their home turf.

“I had conversations, as I said, when I went to China. My comment basically was: You want to do business in the United States, you tell your Chinese government to stop hacking our companies in the United States of America,” Ruppersberger said. “That’s what needs to be done.”

Both companies reacted angrily to the report.

“We had hoped to ensure that the investigation would be fact-based and objective in its review of our business activities and the global issue of cyber-security,” Huawei said in a statement. “…However, despite our best effort, the Committee appears to have been committed to a predetermined outcome.”

“The report released by the Committee today employs many rumors and speculations to prove non-existent accusations. …We have to suspect that the only purpose of such a report is to impede competition and obstruct Chinese ICT companies from entering the US market.”

Huawei, founded by a former officer in the People’s Liberation Army, maintained that it’s “no different from any start-up enterprises in Silicon Valley.”

“ZTE has set an unprecedented standard for cooperation by any Chinese company with a congressional investigation,” said a statement from the other company under scrutiny. “Since April 2012, ZTE has presented the Committee with facts that demonstrate ZTE is China’s most independent, transparent, globally focused publicly traded company.”

Rogers and Ruppersberger’s bipartisan initiative aside, the Democratic National Committee jumped on the story in a campaign-flavored tweet: “House GOP warns about risks of doing business with a Chinese tech firm that once partnered with Bain Capital.”

The Bush administration, citing national security concerns, rejected 2007 and 2008 attempts by a team of Bain and Huawei to take electronics manufacturer 3Com private.

Huawei and its espionage risk were the subject of a 60 Minutes segment last night, providing the perfect frame for the release of today’s committee report.

“The United States should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies,” the Intelligence report noted.

The report also recommended that the Committee on Foreign Investments in the United States block acquisitions, takeovers, or mergers involving Huawei and ZTE “given the threat to U.S. national security interests.”

It also said this should not be the end of the probes: “Committees of jurisdiction within the U.S. Congress and enforcement agencies within the Executive Branch should investigate the unfair trade practices of the Chinese telecommunications sector, paying particular attention to China’s continued financial support for key companies.”

“Committees of jurisdiction in the U.S. Congress should consider potential legislation to better address the risk posed by telecommunications companies with nation-state ties or otherwise not clearly trusted to build critical infrastructure. Such legislation could include increasing information sharing among private sector entities, and an expanded role for the CFIUS process to include purchasing agreements.”

Rogers mentioned that the Judiciary and Energy and Commerce committees could take up such bills.

Ruppersberger put in a plug for the cybersecurity bill, which stalled in the Senate over GOP objections but may be enacted through executive order.

Rogers, a former FBI agent, said the committee will be transferring some information validated by his staff to the bureau tomorrow — and hinted at scandal to come.

“As a young agent, I wish somebody would have handed me this case, I’ll tell you that,” he said. “It’s serious enough that rose to the level of enough to be mentioned in this particular report. It was an American case. It was a case — a clear case of bribery in order to get a contract here in the United States.”

Both committee leaders denied that there was any campaign angle in releasing the report when they did.

“This is a bipartisan investigation. We both announced this investigation. We both had a Republican and Democrat investigator. There was no ounce of this — there was — there’s not a bit of light between Dutch and I on this investigation or our investigators,” Rogers said.

“The bottom line is that we don’t want Huawei and ZTE, especially if they are connected to the Chinese government with the camel’s nose in the tent,” Ruppersberger said.

The only mention of China from the White House today was criticism of Mitt Romney for his “striking,” in the words of traveling campaign press secretary Jen Psaki, China-lite foreign policy speech at the Virginia Military Institute today.

“We do not take these recommendations lightly,” Ruppersberger stressed. “This is not trade protectionism masquerading as national security.”