A U.S. intelligence report for the first time links China's largest telecommunications company to Beijing's KGB-like intelligence service and says the company recently received nearly a quarter-billion dollars from the Chinese government.
The disclosures are a setback for Huawei Technologies Co. Ltd.'s efforts to break into the U.S. telecommunications market. The company has been blocked from doing so three times by the U.S. government because of concerns about its links to the Chinese government.
The report by the CIA-based Open Source Center states that Huawei's chairwoman, Sun Yafang, worked for the Ministry of State Security (MSS) Communications Department before joining the company.
The report on Huawei's board members states that Ms. Sun used her connections at MSS to help Huawei through "financial difficulties" when the company was founded in 1987.
Based in part on Chinese media reports and Huawei's website, the report reveals that the Beijing government paid Huawei $228.2 million for research and development during the past three years.
Huawei's links to the Chinese military have been disclosed previously. The Open Source Center (OSC) report provides the first details of its links to Chinese intelligence, which U.S. officials have said has been engaged in a massive effort to acquire secrets and economic intelligence from government and private-sector computer networks around the world.
According to U.S. officials, senior Chinese government officials in recent months have pressed the Obama administration to allow Huawei to buy into the U.S. telecommunications market.
Bill Plummer, a spokesman for Huawei's U.S. subsidiary, declined to comment on the report because the company has not seen it. But he said Ms. Sun's biography published in the company's most recent annual report "accurately describes her work experience."
"Huawei only sells commercial-grade solutions, and our sales to the Chinese government account for less than 1 percent of our total sales," Mr. Plummer said.
The co-presidents of Huawei USA stated in a letter to The Washington Times last year that, despite U.S. government allegations, Huawei is an "employee-owned" company, and China's government and military do not hold any shares or control the company.
However, the Pentagon's latest annual report on the Chinese military said China's industry, including Huawei, is closely integrated with the military. "Information technology companies in particular, including Huawei, Datang and Zhongxing, maintain close ties to the PLA [People's Liberation Army]," the report says.
The new OSC report, dated Oct. 5, says Chinese media reported that Huawei's senior leaders have "connections" to the PLA.
Ms. Sun "used her 'connections' at the Ministry of State Security to help Huawei through financial difficulties 'at critical moments' when the company was founded in 1987," the report says, quoting an item by the pro-Beijing Hong Kong broadcaster Phoenix Satellite Television.
The OSC report states that Huawei's 2010 annual report failed to mention that Ms. Sun, considered the most trusted aide to Huawei founder Ren Zhengfei, has ties to MSS, fueling suspicions of "potential close links between Huawei and the Chinese government."
Mr. Ren was identified in the report as having worked for China's military from 1974 to 1983 in the engineering corps. The report says that Mr. Ren is purportedly China's most influential business leader "who seldom mentions his military background in public."
In April, a publication sponsored by China's State Council newspaper reported that Huawei received $36.8 million and $63.2 million in 2009 and 2010, respectively, from the government for "domestic development, innovation, and research."
The company also received $48.2 million and $80 million in 2009 and 2010 for "completing certain research projects."
The report contradicts past statements by Huawei officials that the company receives little or no government subsidies and instead relies on profits from its annual $28 billion in revenue for investments.
Michelle K. Van Cleave, the former national counterintelligence executive and a senior counterspy policymaker, said China continues to view the United States as its main strategic enemy and is expanding aggressive intelligence operations here.
"Big companies like Huawei are business giants, but they're also stalking horses for Chinese intelligence," Ms. Van Cleave said. "They can provide both cover and entree for intelligence operations."
China's agents are targeting sensitive U.S. technologies through lawful purchase, theft and guile, including acquisitions and investments, she said.
"Two years ago, [Britain's domestic intelligence service] MI-5 warned that equipment installed by Huawei in British Telecom's networks could be used to disrupt critical services like power and transportation," Ms. Van Cleave said. "The same could be true here if we don't watch our backs."
Kenneth deGraffenreid, former deputy national counterintelligence director, said China's strategic-technology acquisition efforts are similar to those used by the Soviet Union during the Cold War.
"But unlike the Soviets, the Chinese use companies that appear on the surface not related to the government, but they are," Mr. deGraffenreid said. "All these Chinese companies are part of state ministries, MSS or [military intelligence], and have interlocking structures and personnel."
Mr. deGraffenreid said the U.S. government needs greater efforts to prevent strategic losses to China, including tighter technology controls and better counterspy activities.
According to a classified May 25, 2007, State Department cable, made public by the anti-secrecy website WikiLeaks, the sister of Chinese Rear Adm. Liu Zhuoming "was involved in arms sales to foreign countries through Huawei and other military or quasi-military companies on whose boards she sat."
Currently, there are no women named Liu on the Huawei board, according to the OSC report.
A 2009 State Department cable from Beijing stated that Huawei planned to double its U.S. workforce that year. The company, headquartered in Shenzen, China, planned to have facilities in 10 U.S. cities.
Huawei USA's first headquarters office was in Plano, Texas. Other Huawei locations in the U.S. include Chicago, Dallas, Denver, Philadelphia, San Diego and Seattle, as well as Santa Clara, Calif.; Walnut Creek, Calif.; San Antonio; and New Jersey.
The company also has set up joint research labs with Microsoft Corp., Hewlett-Packard Co., Qualcomm, Texas Instruments Inc. and Infineon Technologies, the July 2009 cable said.
A June 2009 cable quoted Huawei Vice President Tang Xinbing as saying a deal to buy the U.S. telecommunications company 3Com in 2008 was withdrawn because the Treasury Department-led Committee on Foreign Investment in the United States was expected to block the sale.
As a result, Huawei increased its lobbying efforts in Washington in an attempt to dispel what Mr. Tang said was the mistaken impression that Huawei is owned by the Chinese military, the cable said.
A September 2009 cable quoted Chinese Vice Minister of Finance Zhu Guangyao as saying that the blocking of the Huawei-3Com merger "roiled" Chinese leaders.
Mr. Ren is quoted in a March 21, 2008, cable from the U.S. Consulate in Guangzhou as denying the company had close ties to the military or government.
According to Mr. Ren, if Huawei had military and government connections, "it would be in the real estate industry, where it could make quick, easy money."
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