- The Washington Times - Friday, October 5, 2007

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.

“It cannot objectively examine, let alone play a leading role, in national security-related transactions, especially those of tremendous strategic significance as this deal,” he said.

Since the Dubai case, the number of CFIUS reviews has increased sharply. The committee looked at 65 foreign deals in 2005 and more than 100 in 2006. It is expected to review more than 140 cases of foreign mergers and acquisitions this year, according to the Treasury officials.

Once a filing is made, CFIUS conducts a 30-day review that allows all members to conduct internal analysis of the proposed deal. If agencies oppose the deal during the 30-day period, an additional 45-day review will take place, and in some cases, the president will make a final determination for the committee. The panel approves 90 percent of the cases it reviews, government officials said.

Currently, 3Com’s executive team includes Shusheng Zheng, a former Huawei board member who headed a 3Com-Huawei joint venture called H3C. The joint venture ended last year after 3Com bought out the Chinese company’s share. The counterintelligence review is expected to examine whether Mr. Zheng has links to the Chinese military or intelligence services, the officials said.

State-financed Huawei has close ties to China’s military and, in the past, has been accused of engaging in economic espionage against Japan’s Fujitsu and of patent infringement by Lucent Technologies. Huawei also has been linked to illegal high-technology exports to Saddam Hussein’s Iraq and to the supply of telecommunications equipment to Taliban-ruled Afghanistan.

According to a 2005 Rand Corp. report, Huawei was founded in 1988 by Ren Zhengfei, former director of the Chinese military’s general staff information engineering academy, the unit in charge of telecommunications research.

“Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner,” the report stated. “Both the government and the military tout Huawei as a national champion, and the company is currently China’s largest, fastest-growing, and most impressive telecommunications-equipment manufacturer.”

Mr. Gaffney, a vocal critic of Mr. Paulson’s ties to China, said he welcomed the secretary’s recusal.

“He is the Armand Hammer of China,” Mr. Gaffney said, referring to an industrialist who had business ties with the Soviet Union and later became a notorious Kremlin apologist.

Mr. Paulson has mounted an aggressive trade promotion effort with China, traveling there frequently and meeting senior officials. In one meeting with Chinese officials, Mr. Paulson included a Goldman Sachs executive in the delegation.

According to a senior administration official, “the Chinese were confused and didn’t know whether they were talking to the Treasury secretary or to Goldman Sachs.”

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