Previously I have written a lot about Ericsson being investigated over suspected terrorist payments in Iran, but Huawei’s Iranian activities have more recently attracted attention. Headlines such as
Huawei CFO’s U.S. bank fraud charges to be dismissed
Huawei CFO Meng Wanzhou cleared of fraud charges in US
may have given the impression that Meng Wanzhou (pictured) did nothing wrong. But this being one of my articles, you have already guessed the situation is not that simple.
Misleading headlines or misleading statements?
The story starts at the end of 2012, when various news organizations reported that a Hong Kong company, Skycom Tech. Co. Ltd., had offered ‘embargoed’ US computer equipment for sale in Iran. Sales like this would be a violation of US export controls. The reports also claimed that Skycom had close ties with Huawei. In a statement to Reuters, Huawei said Skycom was one of its major local partners in Iran. Huawei also told Reuters that:
Huawei’s business in Iran is in full compliance with all applicable laws and regulations including those of the U.N., U.S. and E.U. This commitment has been carried out and followed strictly by our company. Further, we also require our partners to follow the same commitment and strictly abide by the relevant laws and regulations.
In January 2013, Reuters reported that Huawei CFO, Meng Wanzhou, was a Director of Skycom between February 2008 and April 2009, and also identified other connections between Skycom’s directors and Huawei. After these articles were published, financial institutions that provided banking services to Huawei became concerned that it may not be fully compliant with ‘all applicable laws and regulations’ and asked for clarification on the press reports.
To address the media allegations, Meng Wanzhou met with an HSBC executive responsible for operations in Asia Pacific. During the meeting, Meng delivered a presentation written in Chinese, which was translated into English by an interpreter. In her presentation, Meng stated, amongst other things:
- Huawei’s relationship with Skycom was “normal business co-operation”
- Skycom was a “business partner of Huawei,” and a “third party Huawei works with” in Iran
- Huawei “was once a shareholder of Skycom” but had “sold all its shares in Skycom”
- Huawei “operates in Iran in strict compliance with applicable laws, regulations and sanctions” and that “there has been no violation of export control regulations” by “Huawei or any third party Huawei works with”
At no point during or after the meeting did Meng retract or amend any of those statements. Nor did Huawei’s Treasurer, who also attended the same meeting with HSBC. Meng went on to supply the bank executive with an English language version of her presentation which confirmed the statements she had made during the meeting. Based on the information received, the bank continued its relationship with Huawei, as did the other financial institutions.
Then things got serious
US investigations determined that Meng’s statements were untrue. Skycom was not a business partner; Huawei controlled Skycom, and Skycom employees were really Huawei employees. Also, Huawei had not sold its Skycom shares to another entity. Huawei had merely transferred Skycom from one Huawei-controlled entity to another. Finally, Huawei, via Skycom, conducted approximately USD100mn worth of US dollar transactions, some of which related to its work in Iran. This was a violation of US law. The transactions included USD7.5mn for Iran-based contractors sourced via a UK recruitment company. The US stated that, whilst acting as Huawei CFO, Meng:
…made multiple material misrepresentations to a senior executive of a financial institution regarding Huawei’s business operations in Iran in an effort to preserve Huawei’s banking relationship with the financial institution. The truth about Huawei’s business in Iran, which Meng concealed, would have been important to the financial institution’s decision to continue its banking relationship with Huawei.
The investigation ultimately led to the issue of an arrest warrant for Meng and she was detained at Vancouver Airport in December 2018. Her legal battle strained relations between China, the United States and Canada, especially after China detained two Canadians following Meng’s arrest. Both Meng and Huawei were indicted and, after three years of Canadian house arrest whilst the US extradition case played out, on 24 September 2021, Meng Wanzhou entered into a deferred prosecution agreement (DPA) with the US Department of Justice (DoJ) and was arraigned on charges of conspiracy to commit bank fraud and conspiracy to commit wire fraud, bank fraud and wire fraud. Meng entered a plea of not guilty.
The DPA ended the extradition case in Canada and Meng landed to a hero’s welcome back home in Shenzhen, China, on 27 September. The two Canadians who had supposedly been arrested on unrelated charges were released and arrived home the same day.
Who said what?
The DoJ press release referred to maintaining the safety and security of the US financial system and the need for companies to provide financial institutions with truthful information about their business operations.
Meng Wanzhou, CFO of Huawei Technologies, admitted today that she failed to tell the truth about Huawei’s operations in Iran, and as a result the financial institution continued to do business with Huawei in violation of US law.
In China, the People’s Daily described Meng’s homecoming as a major victory of the Chinese people and called her case an act of “political persecution” by the US to “crack down on China’s high-tech enterprises” and disrupt the country’s progress. State media reports highlighted that Meng had pleaded not guilty, but failed to mention the DPA, or her admission that she misrepresented Huawei’s relationship with Skycom. And they forgot to mention that two Canadians were released the same day.
Headlines suggesting Meng Wanzhou has been ‘cleared’ only exist because the DPA deferred Meng’s prosecution for four years from the date of her arrest in Canada. It included a requirement that she must not commit any federal, state, or local crime and, if she complied with all conditions, the DoJ would dismiss both the indictment and related charges against her. So, recently, when those four years reached their conclusion, prosecution actions were dismissed. The fact the prosecution was dismissed does not mean Meng was ‘cleared’; she had already admitted making misleading statements, as you can see for yourself.
Once is unfortunate, twice is a coincidence…
Based on the information available, it is clear that Meng handled the truth carelessly. This particular expression is borrowed from a judge who used it to describe witness testimony; it is a fabulously indirect way of calling the witness a liar without actually using that word. Huawei cannot save face by claiming this misrepresentation was personal, as opposed to corporate, because:
- Meng is the daughter of Huawei’s founder and Deputy Chair of the Board in addition to being the company’s CFO;
- Huawei’s Treasurer attended the same meeting HSBC meeting where he also participated in the same deception.
I don’t have first-hand knowledge of how Huawei does business, but around the time of the so-called misrepresentation I had an interesting discussion with someone who did. That person was one of a number who were engaged in international investigations on behalf of Huawei. I learned that Huawei’s priority was to identify the persons responsible and recover the losses. Any Huawei thief or fraudster who confessed and repaid the proceeds of their crime was allowed to remain in their job; those who didn’t were returned to China. In the previous year, there had been 130 investigations, of which 119 suspects agreed to ‘confess and repay’, and therefore remained in their jobs.
In 2012, CNBC’s 60 Minutes team put Huawei under the microscope. They interviewed Jim Lewis, who had monitored Huawei as part of his roles at the US State Department and Commerce Department.
Interviewer: How did [Huawei] get so big, and so cheap, so quickly?
Jim Lewis: Two answers, first, steady, extensive support from the Chinese government – if you’re willing to funnel hundreds of millions, maybe even billions of dollars to a company, they’re going to be able to grow. The second reason is industrial espionage, and Huawei was famous in its developing years for taking other people’s technology.
Interviewer: You mean steal it?
Jim Lewis: I guess, yes, technically, it would be theft.
It would be naïve to rely only on the word of one ex-US Government employee, who may still be pushing the party line. Many people in telecoms know these stories, but where is the evidence to back them up?
One rumour was that Huawei copied one of Cisco’s routers, right down to the chassis, operating system and the spelling mistakes in the manuals. 60 Minutes put that claim on worldwide television so everyone knew. Cisco sued Huawei alleging it had used stolen Cisco technology to develop a line-up of routers and switches; the case was settled out of court. In 2004, Cisco dropped a patent infringement lawsuit when Huawei agreed to modify its product lines, in particular, the command line interface, user manuals, help screens and portions of its source code. This is straightforward evidence of intellectual property theft.
Motorola also made a claim against Huawei, alleging that Huawei recruited Motorola employees to steal company secrets. Motorola initially sued five of its former workers for sharing trade secrets and later alleged that a Motorola engineer shared information about a Motorola transceiver and other technology with Huawei’s founder, Ren Zhengfei. Motorola claimed that a string of emails tagged ‘Motorola Confidential Proprietary’ showed that Huawei and its officers knew they were receiving stolen Motorola trade secrets and confidential information. Huawei said the lawsuit was groundless, but settled it out of court. This may be circumstantial, but it weighs against Huawei. You can see the 60 minutes feature on YouTube here.
Hanlon’s Razor says you should never attribute to malice that which is adequately explained by stupidity. As an investigator familiar with Hanlon’s Razor I must acknowledge that it is sometimes difficult to know whether actions are deliberate or not. The most helpful response is another adage:
Once is unfortunate. Twice is a coincidence. Three times, you’re guilty.
For me, that third strike was provided many years ago by a trusted industry colleague who told me that bribery had also been successful with respect to Ericsson, where Huawei was reportedly paying people on Ericsson’s production line to smuggle out its products. My informant had seen the smuggled Ericsson products being dissected and photographed in Huawei’s offices.
Questions about Huawei compliance
As discussed, Huawei has faced a number of historical allegations, including:
- theft of competitors’ intellectual property, including by its founder
- bribery of competitors’ staff
- deceptive business relationships, i.e. with its banks
- failing to remove internal fraudsters
I’d love to see more detail on the 119 fraudsters that Huawei allowed to remain in the business. At that rate, Huawei has now retained 1,200 criminals in its employ since I first learned that information. If being caught is not really a deterrent to crime then there will be repeat offenders. Do all Huawei employees get repeated opportunities to ‘confess and repay’, or do they eventually get shipped to China along with those ‘non-compliant’ first-time offenders?
Back to the present, and the compliance statements on Huawei’s website look much like those made by any other multinational. Huawei is obviously keen to promote the idea that it is serious about compliance’ because the word appears 100 times in its 2021 Annual Report. To give that some context, ‘investigation’ is only mentioned twice in that report, whilst ‘fraud’ appears three times, though only when they are disclosing indictments issued against Huawei by the DoJ. The report also contains the following worthy statements:
We conduct business with integrity, adhere to standard business ethics, and observe applicable laws and regulations in the countries and regions where we operate.
Huawei values and works hard to create a culture of integrity, and requires all employees to comply with its Business Conduct Guidelines.
Does Huawei really have a compliance culture, or is it just making the right noises? Please ask yourself two questions:
- What action would a multinational with integrity take when dealing with a CFO who publicly admitted to deceiving a major global bank?
- What action did Huawei actually take?
To return to where we started, the US indictments against Huawei have not been dismissed. The next round of legal sparring will begin in February 2023.