Canada Telecom Rule Changes Threaten National Security

Canada’s plan to allow foreign companies such as VimpelCom Ltd. (VIP) to increase their stakes in the country’s telecommunications providers poses a “considerable risk” to national security, Public Safety Canada warned.

“The security and intelligence community is of the view that lessening or removing restrictions from the Telecommunications Act, without implementing mitigation measures, would pose a considerable risk to public safety and national security,” Daniel Lavoie, a senior official with Public Safety, said in a letter to Industry Canada.

The letter, which was marked “secret” and dated Feb. 25, 2011, was obtained by Bloomberg News under Canada’s freedom-of- information law.

Industry Minister Christian Paradis announced plans last month to allow foreigners to own as much as 100 percent of telecom operators with less than 10 percent of market share by revenue.

The new rules, designed to increase investment and competition in the sector, pave the way for the likes of Amsterdam-based VimpelCom, which operates in Russia and Algeria, to increase its stake in Wind Mobile, a Toronto-based carrier that began operating in 2009.

Spy Agency

Wind has sought a relaxation of the foreign ownership restrictions and is one of four new carriers fighting to break the dominance of Canada’s wireless sector, more than 90 percent of which is controlled by Rogers Communications Inc. (RCI/B), BCE Inc. (BCE) and Telus Corp. (T)

While Wind is the only new entrant backed by a foreign carrier, it isn’t the only one funded with foreign capital. Public Mobile, a Toronto-based carrier that began service in 2010 in Ontario has received financing from U.S. investors, including Columbia Capital, Charles River Ventures, M/C Venture Partners and Rho Ventures LLC. Mobilicity, another new entrant based in Toronto, has among its backers New York-based Quadrangle Group LLC, a private-equity firm that invests in media and telecommunications companies and has more than $3 billion in assets.

Public Safety works closely with Canada’s spy agency, the Canadian Security Intelligence Service, known by its acronym CSIS. CSIS and the Royal Canadian Mounted Police, the country’s national police force, report to Canada’s legislature through Vic Toews, the public-safety minister.

‘Safe and Secure’

“A thriving telecommunications industry must be a safe and secure one,” Public Safety spokeswoman Josee Picard said in an e-mail responding to questions about the letter. The department is working with Industry Canada to “ensure that any risks to Canada’s telecommunications sector are identified and addressed,” she said.

All telecommunications carriers “will continue to be subject to Canadian laws, including those enacted to protect public safety and national security,” Industry Canada spokesman Michel Cimpaye said in an e-mail.

Carriers are also subject to the Investment Canada Act, a federal law under which the government reviews foreign takeovers valued at more than C$330 million ($333 million) in assets, he added. The government can review acquisitions on national- security grounds under the act.

“Industry Canada and Public Safety Canada continuously work together to ensure that Canada’s telecommunications sector remains secure,” Cimpaye said.

‘Intelligence Priorities’

Allowing more foreign ownership may hinder the ability of authorities to follow “intelligence priorities” set by the cabinet of Prime Minister Stephen Harper, adds the letter.

Canada is the latest country to express concerns about the involvement of foreign companies in the telecom sector. The U.S. in October barred China’s Huawei Technologies Co. from bidding for work on a national emergency network. Australia last month banned Huawei, China’s biggest maker of telecom equipment, from contracts to build a national broadband network being developed by the government.

Nortel Networks Corp. (NRTLQ), the Canadian telecom-equipment maker that filed for bankruptcy protection in 2009, approached the RCMP over concerns it was the target of Chinese hackers in 2004, the Wall Street Journal reported in February, citing a former Nortel executive Brian Shields.

Security Review

Foreign investors can currently own as much as 46.7 percent in combined direct and indirect stakes in Canadian carriers. The industry ministry said in June 2010 it was considering three options including increasing the direct ownership threshhold to 49 percent, allowing full ownership of telecom providers with less than 10 percent market share, or removing the telecom restrictions completely.

The proposals prompted the Clerk of the Privy Council, the nation’s top public servant, to order a security review of the implications, according to the letter.

It was written by Public Safety official Lavoie and addressed to Industry Canada Assistant Deputy Minister Helen McDonald. Parts of the letter have been withheld under security provisions of Canada’s freedom-of-information law.

Lavoie was associate assistant deputy minister in the department’s emergency management and national security branch, and has since moved to the RCMP, Public Safety spokeswoman Jessica Slack said.

Public Safety conducted the review in consultation with CSIS and its other portfolio agencies, as well as the country’s defense department.

While Public Safety recognizes the “economic advantages of a prosperous Canadian telecommunications industry,” changes to the country’s system could impact “the integrity of Canada’s telecommunications sector and ultimately national security,” Lavoie said.

“Telecommunications systems are the backbone of all critical infrastructure systems in Canada” and are a key component of the government’s national strategy to protect such infrastructure, Lavoie added.

To contact the reporters on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net; Andrew Mayeda in Ottawa at amayeda@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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