Paulson hands off merger review

Treasury Secretary Henry M. Paulson will recuse himself from a government review of the merger between 3Com and a Chinese company because of his past relationship with an investment firm involved in the deal.

“Secretary Paulson would not have any involvement in a CFIUS review of this transaction,” said Treasury spokeswoman Brookly McLaughlin of the review by Treasury’s Committee on Foreign Investments in the United States.

The committee’s review of the 3Com merger with Huawei Technology is set to begin soon, Bush administration officials say.

Mr. Paulson is a former chairman and chief executive officer of the investment firm Goldman Sachs, which is advising 3Com on the $2.2 billion merger with Bain Capital Partners and Huawei. The Treasury secretary is chairman of the 12-agency committee, but the conflict-of-interest concerns have prompted his duties for 3Com-Huawei to be shifted to Deputy Treasury Secretary Robert M. Kimmitt.

The CFIUS review of whether the merger would jeopardize U.S. national security is expected to be a critical test of recent congressional reforms of the agency in the aftermath of its handling of the Dubai Ports World deal. The committee approved the company”s purchase of facilities at six U.S. ports, but the deal was later canceled under pressure from Congress over concerns that terrorists might infiltrate U.S. ports through the Persian Gulf state company.

Defense and intelligence officials said the deal will face new scrutiny under the reforms.

For the first time, the business-oriented panel will include a counterintelligence review that will look into whether the merger would boost Chinese intelligence-gathering and other covert operations, such as China’s military computer warfare operations. 3Com makes computer network intrusion detection systems and has sold them to the Pentagon, the Army, and U.S. intelligence and security agencies.

A U.S. counterintelligence unit designated for CFIUS reviews was set up recently by Joel F. Brenner, the national counterintelligence executive who oversees FBI, CIA and other U.S. counterspy work.

On Wednesday, Bain said it will voluntarily submit the merger to CFIUS, as several senior Republicans in Congress have called for a formal review based on concerns over Chinese economic espionage and computer hacking against the Pentagon.

According to Treasury Department officials, a new post-Dubai law designed to improve the CFIUS review process will go into effect Oct. 24, but, Miss McLaughlin said, “We are making every effort in the meantime to run the process in a manner that is consistent with the intent of the new law.”

But some current and former government officials are still dubious about how tough the review will be.

John R. Bolton, a former State Department nonproliferation official and former ambassador to the United Nations, said the CFIUS process had been ineffective because State Department economic officials, not national-security officials, played the lead role.

“There appears to be a breakdown across a whole range of agencies here that tells us we have a review system that is in trouble,” Mr. Bolton said.

The Pentagon unit in charge of CFIUS issues is the Defense Technology Security Administration (DTSA). The agency failed to alert senior Pentagon officials to the Dubai port deal, and it is not expected to take a tough stance on 3Com-Huawei. One defense official called DTSA “dysfunctional” and suffering from weak management.

Former Pentagon official Frank Gaffney said Treasury itself should not be put in charge of such national-security reviews because its mission is to promote the flow of foreign capital and investment.

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