Huawei CFO loses first legal battle in extradition case

Huawei CFO Wanzhou Meng, the daughter of Ren Zhengfei, has lost her first legal battle in Canada and will now have to face an extradition case.

This story had been lost in the throng of news over the last few months, but it will almost certainly start to attract international interest once again. Not only is this a landmark legal case to set precedent, it will act as fuel to be tossed on the embers of the burning US-China relationship.

“For the reasons I will give, I find that the allegations depend on the effects of US sanctions,” a ruling from Honourable Associate Chief Justice Heather Holmes of the Supreme Court of British Columbia stated. “However, I conclude that those effects may play a part in the determination of whether double criminality is established.

“For that reason, Ms Meng’s application will be dismissed.”

Although this is a loss for Meng and Huawei, this is only the first stage. The next court case will be to decide whether Meng can be extradited to the US.

Once arrested and the prospect of extradition to the US to face sanction violation charges emerged on the horizon, Meng’s legal team filed objections to the process on the grounds of ‘Double Criminality’. This is a rule in extradition cases which states that an individual can only be extradited if the law in questions exists in both countries.

The team claimed that as Meng allegedly broke US sanctions against Iran, not Canadian sanctions, Double Criminality could not be satisfied. However, the Supreme Court has confirmed there are relevant laws in Canada, therefore Meng is eligible for extradition.

“Huawei is disappointed in the ruling by the Supreme Court of British Columbia, we have repeatedly expressed confidence in Ms Meng’s innocence,” a Huawei statement reads. “Huawei continues to stand with Ms Meng in her pursuit for justice and freedom.

“We expect the Canadian judicial system will ultimately prove Ms Meng’s innocence. Ms Meng’s lawyers will continue to work tirelessly to see justice is served.”

Meng was originally arrested in December 2018 while in Vancouver airport on layover to China. Canada made the arrest at the request of the US, with the US claiming Meng knowingly violated an embargo against Iran and misled US banks in 2013 by not making connections to Hong Kong firm Skycom, which works with Iranian parties, known.

While this is another sign of US aggression towards Huawei, the Chinese Government is bound to get involved sooner rather than later in protection of one of its domestic champions. Tensions between the two global superpowers could once again be ratcheted up a level, and it would be no surprise to see additional tariffs or corporate exclusions introduced as a result.

The political conflict will continue in the background, but for Huawei CFO Wanzhou Meng, attention will turn to the extradition case. Cynics will suggest that as soon as Meng crosses the border to the US it is game over, so enough money will have to be thrown at the Canadian extradition case if Meng is to return to China in the foreseeable future, if ever.

US charges Huawei with a litany of crimes

The US Department of Justice has hit Chinese telecoms vendor Huawei with a 23-count indictment, covering allegations ranging from bank fraud to theft of trade secrets.

This dramatic move is the culmination of a process that was publicly initiated when Huawei’s CFO Meng Wanzhou was arrested in Canada at the behest of the US in early December 2018. It was soon revealed that the reason for the arrest was suspected fraud related to attempts to conceal business being done with Iranian companies in violation of US trade sanctions.

The Iran stuff constitutes the majority of the charges filed in New York against Huawei, Meng and its alleged unofficial Iranian affiliate company Skycom. Specifically they are charged with bank fraud and conspiracy to commit bank fraud, wire fraud and conspiracy to commit wire fraud.

In addition Huawei and Skycom are accused of violations of the International Emergency Economic Powers Act (IEEPA) and conspiracy to violate IEEPA, and conspiracy to commit money laundering. On top of that Huawei and Huawei USA are charged with conspiracy to obstruct justice related to the grand jury investigation in the Eastern District of New York.

It seems a bit redundant to come up with a separate charge of conspiracy to do the crime you’re also accusing someone of doing, but there you go. Maybe conspiracy is the consolation prize if you fail to make the main charge stick.

Bank fraud is fairly self-explanatory; it concerns attempts to commit fraud to a bank. Wire fraud seems to be an archaic way of describing fraud committed by electronic means. The IEEPA is the process through which the US was able to impose the trade sanctions on Iran. Money laundering concerns financial transaction with proceeds that were generated from certain criminal activities, among which some or all of the above presumably are.

But that’s not all. In a separate rap sheet the DoJ announced ten additional charges filed against Huawei Device Co and Huawei Device Co USA. They consist of theft of trade secrets conspiracy, attempted theft of trade secrets, seven counts of wire fraud, and one count of obstruction of justice.

According to the accusation Huawei started trying to steal information about a T-Mobile US phone-testing robot called ‘Tappy’ in 2012. This allegedly included violation of NDAs,. Taking illicit photos of it and even nicking bits of it so they could do a bit of good old fashioned reverse engineering back in China. Apparently TMUS caught them in the act and Huawei claimed it was down to ‘rogue actors’ rather than a corporate thing. The US reckons it has evidence to the contrary.

“As charged in the indictment, Huawei and its Chief Financial Officer broke U.S. law and have engaged in a fraudulent financial scheme that is detrimental to the security of the United States,” said Secretary Kirstjen Nielsen of the U.S. Department of Homeland Security. “They willfully conducted millions of dollars in transactions that were in direct violation of the Iranian Transactions and Sanctions Regulations, and such behaviour will not be tolerated.”

“The charges unsealed today clearly allege that Huawei intentionally conspired to steal the intellectual property of an American company in an attempt to undermine the free and fair global marketplace,” said FBI Director Christopher Wray. “To the detriment of American ingenuity, Huawei continually disregarded the laws of the United States in the hopes of gaining an unfair economic advantage.”

A bunch more officials got to make statements on how out of order Huawei has been, which you can see in the video below. Huawei, unsurprisingly, doesn’t see things in quite the same way. It gave Telecoms.com the following statement.

“We are disappointed to learn of the charges brought against the company today. After Ms. Meng’s arrest, the company sought an opportunity to discuss the Eastern District of New York investigation with the Justice Department, but the request was rejected without explanation.

“The allegations in the Western District of Washington trade secret indictment were already the subject of a civil suit that was settled by the parties after a Seattle jury found neither damages nor wilful and malicious conduct on the trade secret claim.

“The company denies that it or its subsidiary or affiliate have committed any of the asserted violations of U.S. law set forth in each of the indictments, is not aware of any wrongdoing by Ms. Meng, and believes the U.S. courts will ultimately reach the same conclusion.”

That remains to be seen, but at least the process is likely to be public and transparent. The Chinese state reckons this is just an extension of US President Trump’s trade war with China. Uncharacteristically the Donald has yet to tweet on the matter but even if he does it will presumably be to echo the DoJ position. He is apparently meeting Chinese trade officials tomorrow, so that should be an interesting chat.

The US isn’t playing around here. By charging Huawei with most known crimes short of cattle rustling it’s demonstrating an unflinching determination to defend itself regardless of (or perhaps encouraged by) the political implications. It’s not yet clear what the consequences of guilty verdicts would be but the US is seeking Meng’s extradition and she would presumably do some time.

ZTE nearly got driven out of business by the US for violating its Iranian trade sanctions. It follows therefore that the US would apply a similar level of punishment to Huawei if it found it guilty of committing the same acts. Huawei is a much bigger company and is working hard to minimize its reliance on US suppliers, but it would surely at least be severely diminished by such an outcome.

 

Our supply chain won’t tread the ZTE path – Huawei CEO

One of the biggest stories of the year, and one of the major catalysts of the US/China trade war, was ZTE’s brush with extinction, but Huawei thinks it’s robust enough to withstand the US economic dirty-bomb.

During the Summer, ZTE was caught violating US trade sanctions with Iran and subsequently was banned from using any US products or IP within its supply chain. The move from the US almost destroyed ZTE, with the company ceasing operations for a couple of weeks, but Huawei’s Rotating CEO doesn’t think his firm would be under the same risk.

“We all know the ICT industry highly depends on a global supply chain,” said Hu. “And Huawei is no exception. Today we have 13,000 suppliers in our supply chain. Companies coming from Japan, US, Europe, China and many other countries in the regions. Take this year for example, our annual procurement spend would be 70 billion dollars.”

With CFO Meng Wanzhou currently on bail in Canada, Huawei is facing questions it probably doesn’t want to answer. The connection with Skycom looks to be much closer than some US financial institutions were led to believe, suggesting Huawei has been violating US trade sanctions with Iran. Should the US take the same action as it did with ZTE earlier in the year, Huawei could face the same ban on US exports.

The issue with ZTE was its dependence on the US for its supply chain. Huawei will also have the US feature prominently through its own supply chain, but Hu is confident it would stand up to any potential punishment dished out by the US.

“We take a diversified supply strategy,” said Hu. “That means we have a multi-sourcing strategy.

“We look at multiple choices in terms of technology solutions, and we also have multi-location supply networks. At the same time, since we’re working together with hundreds of telecom operators in the world, and also, we are serving a significant number of enterprise customers, so we look at the full lifecycle support that is needed and build up our stock of spare parts and components to ensure support across the product lifecycle.”

The company is also working to produce its own alternatives to some technologies which might not be able to be replicated elsewhere. A prime example of this is the Android mobile operating system.

As it stands, should the US impose a ban on Huawei its smartphones and wearable devices would be relegated to the role of doorstop. With this in mind, Huawei is attempting to create its own mobile operating system. It will probably be no-where as good as what the Android OS can offer, others such as Samsung have tried and failed, but it is certainly better than nothing.

Being banned from using US components and IP would certainly be a negative for Huawei, and it certainly isn’t a scenario which is out of the question, but Huawei seems to be in a better position than the suspect ZTE.

ZTE seems to be doomed. Who’s next?

ZTE employs 75,000 people and sold $17 billion of gear last year, but seems to have been wiped out with one stroke of a US regulatory pen. That’s scary.

We were among the apparent majority of the telecoms industry that perhaps didn’t fully acknowledge the implications of the US slapping an export ban on ZTE. Of course it was bad, and who could help but be moved by ZTE’s existential angst and pleas for mercy, but these things usually sort themselves out in the end don’t they?

Not this time, apparently. Earlier this week ZTE took the extraordinary step of announcing it had ceased is major operating activities thanks to not being able to score any US components, upon which both its networking and smartphone businesses are heavily dependent. This is an incredibly dramatic development for such a large and established company and it has sent shockwaves through the industry.

To get a more of a sense of the implications we spoke to CEO of telecoms consultancy Northstream, Bengt Nordstrom. “This week’s news confirmed what many people already suspected, that if the ban isn’t lifted then it’s game over,” he said. “The most likely scenario for me is still that the ban will be modified after negotiations, but ZTE is still very vulnerable.”

This seems hard to argue with. All ZTE commercial partners are currently frenziedly reviewing their options and looking for alternative suppliers. All operators we have spoken to have been quick to either stress they don’t use ZTE kit or have more than one supplier.

“ZTE is just one of a number of suppliers that Orange works with, including Huawei, Ericsson, Nokia and Cisco, amongst others,” an Orange spokesperson told us. “Today, Orange uses ZTE equipment mainly in its service platforms in Africa and for our FTTH deployment in Spain. We are in the process of assessing the US ban decision with regards to ZTE. The Group has always maintained a strategy of partnering with a number of providers so that we have alternative suppliers at all times. We do not envisage any impact on equipment parts currently.”

Nordstrom thinks one of the effects this will have on the broader telecoms industry is that any operators who only use a single supplier, regardless of who it is, will give that strategy some pretty urgent review. “All operators need to consider at least a dual operator strategy,” he said.

The elephant in the room here, at least as far as we’re concerned, is Huawei. The Chinese giant is not currently subject to anything like the punitive measure ZTE is, although the US continues to ban it as a public sector supplier there and it’s severely curtailed in the US devices market too. Furthermore the US has reportedly started looking into the same kind of sanction-flouting activity that eventually landed ZTE in its current predicament.

We’re not aware of any evidence that Huawei has done anything that could draw the ire of US agencies, but we have to wonder whether the broader industry might be a bit spooked by what has happened to ZTE and whether Huawei might get swept up in the escalating trade aggro between the US and China. At the very least if some operators that are wholly dependent on Huawei decide to hedge their bets with another kit vendor that would surely be a negative for Huawei.

Even if ZTE somehow wins an appeal against this ban, or if US/China horse-trading results in a significant downgrade of the measures, the damage appears to have been done. Commercial partners currently looking for alternative aren’t going to suddenly stop and who would want to take the risk of things suddenly changing for the worse once more anyway?

The US government under President Trump (who, let’s not forget, placed the economic threat posed by China at the forefront of his election campaign) has demonstrated that it’s willing to wreck even the largest companies if it’s not happy with them. If it can happen to ZTE then, surely, it could happen to any company. That must be an unsettling thought for anyone in the telecoms industry contemplating major deals right now.