Huawei, ZTE Provide Opening for China Spying, Report Says

Huawei Technologies Co. and ZTE Corp. (763), China’s two largest phone-equipment makers, provide opportunities for Chinese intelligence services to tamper with U.S. telecommunications networks for spying, according to a congressional report released today.

The House intelligence committee report said the companies failed to cooperate with a yearlong investigation and to adequately explain their U.S. business interests and relationship with the Chinese government.

“Huawei and ZTE seek to expand in the United States, but as a result of our investigation, we do not have the confidence that these two companies with their ties to the Chinese government can be trusted with infrastructure of such critical importance,” the committee’s chairman, Michigan Republican Mike Rogers, said.

The U.S. government should block acquisitions or mergers by Huawei and ZTE, the report said. Government agencies and contractors shouldn’t use equipment from the companies, and U.S. intelligence agencies should “remain vigilant and focused on this threat,” the report recommended.

The House investigation found credible reports of illegal behavior by Huawei, including immigration violations, bribery and corruption, based on statements from current and former employees, according to the report. Allegations will be referred to federal agencies including the Homeland Security and the Justice departments, according to the report, which didn’t provide full details or identify the accusers.

‘Political Distraction’

The committee will forward information on a “clear case of bribery in order to get a contract here in the United States” to the Federal Bureau of Investigation, probably tomorrow, Rogers said at a U.S. Capitol news conference today with the panel’s top Democrat, Maryland Representative C.A. “Dutch” Ruppersberger.

Huawei, in a statement today, said the report “employs many rumors and speculations to prove non-existent accusations.” The committee pre-determined the outcome of its investigation, the company said.

“The quality, the integrity of our products are world proven,” William Plummer, a Washington-based spokesman for the company, said in an interview after the committee members spoke. “It is a political distraction, it is a dangerous thing, to suggest that you can solve these vulnerabilities by embargoing a company. It’s a false sense of security. It ignores the fact that this is a global industry.”

‘State Influence’

Dai Shu, a ZTE spokesman, called it “noteworthy” that “after a yearlong investigation, the committee rests its conclusions on a finding that ZTE may not be ‘free of state influence.’” That standard “would apply to any company operating in China,” Dai said in an e-mailed statement.

Almost all telecommunications-infrastructure equipment sold in the U.S., by any company, contains Chinese-made components, Dai said. “ZTE recommends that the committee’s investigation be extended to include every company making equipment in China,” including Western companies that use equipment made by Chinese joint-venture partners and suppliers, Dai said.

ZTE shares fell 6 percent to HK$12.60 at the close of Hong Kong trading, the biggest decline since Aug. 27. The stock has lost 48 percent this year, compared with a 13 percent gain for the benchmark Hang Seng Index.

Rogers and Ruppersberger announced the probe of the Chinese companies last November, citing concerns about hacking into U.S. systems and theft of intellectual property. U.S. counterintelligence officials called China the world’s biggest perpetrator of economic espionage in a report last year, saying the theft of sensitive data is accelerating and jeopardizing an estimated $398 billion in U.S. research spending.

Odd Behavior

“Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services,” the report says.

The committee received reports that routing equipment supplied by Huawei to U.S. customers “acted oddly,” Rogers said. He cited a process known as beaconing, which he said involves unauthorized processing and sending of information. One example would be a router that turns on in the middle of the night and sends large packets of data to China, he said.

Huawei first learned of the beaconing allegation at a House intelligence committee hearing last month, and it’s unclear what the committee is referring to, Plummer said in an interview.

Military Ties

The U.S. Congress should end its prejudice against Chinese companies and do more to promote trade, Hong Lei, a Foreign Ministry spokesman, said at a briefing in Beijing today.

“Chinese telecommunications companies have conducted their international operations based on market-economy principles,” Hong said. “Their investments in the U.S. reflect the mutual benefits brought about by U.S.-China trade relations.”

Internal Huawei documents supplied by a former employee showed the company provides “special network services” to an entity the former employee believes is a cyber-warfare unit within the Chinese army, according to the House report. The documents appear authentic and suggest Huawei officials weren’t forthcoming about research and development on the military’s behalf, the report says.

The report describes a series of meetings between the panel’s members and representatives of the two companies.

Ruppersberger and Representative Michele Bachmann, a Minnesota Republican, were among those who met in Hong Kong last May with Ren Zhengfei, Huawei’s founder and chief executive officer. Ren founded Huawei in 1987 after leaving the Chinese army, and his military ties have been a focus of attention by U.S. lawmakers.

Market Roadblocks

Executives for Huawei and ZTE, both based in Shenzhen, China, denied links to Chinese espionage at the intelligence committee hearing last month, saying they aren’t controlled by China’s government. The companies said they favor independent audits of technology vendors’ hardware and software as a way to ensure that devices and networks are secure.

The report’s conclusions may create more U.S. roadblocks for the Chinese companies in the U.S. market.

Huawei has backed away from business deals after U.S. objections, dropping a bid with Bain Capital Partners LLC to buy computer-equipment maker 3Com Corp. in 2008, and unwinding the purchase of patents from a computer-services company, 3Leaf Systems Inc., last year. The U.S. Commerce Department last year barred Huawei from participating in a nationwide emergency network, citing security concerns.

The U.S. Committee on Foreign Investment in the U.S., an interagency panel that reviews acquisitions of domestic companies by non-U.S. entities, should block acquisitions involving Huawei and ZTE because of security threats, the intelligence committee report says.

To contact the reporter on this story: Eric Engleman in Washington at eengleman1@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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Huawei's Washington-based spokesman William Plummer, said today in Washington,“It is a political distraction, it is a dangerous thing, to suggest that you can solve these vulnerabilities by embargoing a company. It’s a false sense of security. It ignores the fact that this is a global industry.” Close

Huawei's Washington-based spokesman William Plummer, said today in Washington,“It is a political distraction, it is a... Read More

Photographer: Jay Mallin/Bloomberg

U.S. Representative Mike Rogers, Republican from Michigan and chairman of the House Intelligence Committee, listens during a news conference in Washington, D.C., on Monday. Close

U.S. Representative Mike Rogers, Republican from Michigan and chairman of the House Intelligence Committee, listens... Read More

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