A federal interagency group on foreign investment wants China's Huawei telecommunications company to cut ties with a U.S. technology firm, highlighting growing fears about the security of foreign-supplied goods used in vital U.S. infrastructure, the nation's senior intelligence official told Congress Wednesday.
"What this highlights is the importance of understanding supply chains," James R. Clapper, director of national intelligence, said at a Senate hearing. He called the question of who was making vital information technology and communications equipment an example of "the two-edged sword of globalization" that makes U.S. companies dependent on foreign suppliers, "particularly in the telecommunications business where there's been a collapsing of these large companies as they've merged."
Mr. Clapper declined to comment directly on the case of Shenzhen, China-based Huawei Technologies Co., which he said was "a matter of some litigation within the government."
Earlier this week, the Treasury Department-led Committee on Foreign Investment in the United States (CFIUS), following a review, asked Huawei to sell patents and other assets it had bought from California-based computer technology startup 3Leaf, Inc. The seven-agency committee — Mr. Clapper is a nonvoting member — investigates the national security implications of purchases by foreign firms in the United States.
Treasury officials said Wednesday they were constrained by law from commenting. But in a move observers say is highly unusual, Huawei publicly announced this week it would decline to follow the committee's advice, saying instead it would let the the issue go all the way to President Obama, who now has 15 days to either order the sale or reject the committee's recommendation.
"It was one stupid move after another," said a former CFIUS official of the Huawei decision.
Huawei spokesmen in the United States did not return phone or e-mail messages requesting comment. But in a statement issued to the media earlier this week, the company said it had "great respect for and trusts the fairness and the impartiality of the U.S. government and American due process."
The former official said CFIUS launched the latest review after officials discovered that the profile of a 3Leaf executive on the social network site LinkedIn indicated he was now working for Huawei.
Upon investigation, they discovered the Chinese company — which CFIUS in 2008 blocked from buying the U.S. telecom giant 3Com — had purchased cloud-computing patents and other assets from 3Leaf and hired many of its workers, but had not bought the firm outright, a move that would have automatically triggered a review by CFIUS.
"It looks as if they got caught trying to sneak it through," the former official said. He added that the committee would have offered Huawei a clear choice earlier this week.
"The entire committee is unanimous in recommending to the president that he should order this sale. If that happens it will be a huge public embarrassment to you. We are offering you the chance to unwind this voluntarily," he said officials would have told the company.
"It is very foolish to turn down an offer of that sort," he said.
At the hearing, Sen. Olympia J. Snowe, Republican of Maine, asked Mr. Clapper whether the CFIUS process needed reform, citing the case of a Maine company she did not name that had been approached by the FBI after making a deal with Huawei.
"These companies don't have any direction. They don't have, really, the benefit until its too late of any information," she complained.
U.S. concerns about Huawei go back several years, and focus on the opacity of its books and ownership structure and the links of founder and Chief Executive Officer Ren Zhengfei, a former military officer, to the Chinese People's Liberation Army.
The PLA has a "multifaceted role as an important customer, as well as Huawei's political patron and research and development partner," according to a 2005 analysis by the Rand Corp. think tank.
Although a multibillion-dollar enterprise, the company is privately held. It says on its website that more than 90 percent of its shares are owned by employees through a special union run by elected representatives of the work force.
David M. Webb, a retired investment banker in Hong Kong who is now an independent consultant on corporate governance issues, has called the ownership structure "completely opaque."
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