More Than a Trade War: What the Huawei Arrest and Investigation Means to Your Business

ONPOINT / A legal update from Dechert’s International Trade Group
December 2018

More Than a Trade War: What the Huawei Arrest and Investigation Means to Your Business

On December 1, 2018, acting at the request of the United States, Canadian authorities arrested a senior officer of Huawei Technologies Co. (“Huawei”), the Chinese telecommunications equipment and consumer electronics device manufacturer. The arrest is the most recent escalation in the relationship between the United States and Huawei and in U.S.-Chinese relations. The new arrest goes beyond prior concerns that Huawei products may be used by the Chinese government to collect information on users. Now, the U.S. government is alleging fraud in the diversion of products to Iran, in violation of U.S. economic sanctions programs. According to public reporting, the U.S. Department of Justice (“DOJ”) commenced a criminal investigation into Huawei’s potential violation of U.S. sanctions in early 2017. This investigation impacts Huawei’s business partners, including U.S. and non-U.S. financial institutions as well as participants in Huawei’s supply chain.Beyond the impact of what could be a wide-reaching investigation, this recent development signals an escalation in the trade war between the U.S. and China, with particular focus on Huawei.

  • Huawei has struggled to access global markets, as the U.S., Australia, Japan and New Zealand have prohibited public procurement of the company’s products. While those governments have cited security concerns, the procurement bans arise against the backdrop of the economic struggle for dominance in the telecom market. With the emergence of super-fast fifth generation (“5G”) mobile phone networks, telecoms will have to make critical decisions about whose network infrastructure to buy, thus designing particular suppliers into their systems.
  • The U.S. and China also are engaged in a high-profile trade standoff, with both sides imposing escalating tariffs. The Trump Administration recently announced a 90-day tariff cease-fire (expiring March 1, 2019), during which a planned tariff increase has been suspended while the U.S. and China negotiate to end the tariffs. However, in light of the Huawei arrest, there is concern about whether the cease-fire can be sustained.
  • The U.S. government already exercises heightened scrutiny of Chinese investment into U.S. businesses through the CFIUS process, and with recent CFIUS reform giving the U.S. government broader discretion, investors that have any potential, even indirect, link to Huawei (or other Chinese telecom connections) will face even greater scrutiny now in the CFIUS review process.
  • Finally, given the precedent of mutual escalation in the trade war, U.S. companies should be prepared for retaliation by the Chinese government, including possible arrests of senior officers of U.S. companies travelling in China.

Ultimately, this latest development with Huawei plays into the broader political dispute for economic leadership in the world. How the Huawei investigation proceeds may be determined by how it fits into the resolution of larger economic disputes between the U.S. and China.

Latest Allegations against Huawei

Wanzhou Meng, Huawei’s Chief Financial Officer, and daughter of the company’s founder, was arrested in Canada and is facing extradition to the United States. U.S. authorities reportedly allege that between 2007 and 2014, Huawei operated Skycom Tech (“Skycom”), a Hong Kong company, as an unofficial subsidiary. During that time, Huawei is alleged to have used Skycom to provide U.S.-origin items to the Iranian market, in violation of U.S. economic sanctions and export controls.News of the Huawei-Skycom connection was reported in 2013.1 At that time, Skycom was alleged to have offered, on Huawei’s behalf, U.S.-origin IT equipment to telecommunications providers in Iran. Following news reports, certain of Huawei’s banking partners inquired about the potential connection between Huawei and Skycom. The U.S. alleges Ms. Meng made fraudulent statements to HSBC that there was no link between Huawei and Skycom, and that Huawei’s transactions processed through the bank were compliant with applicable sanctions law. HSBC reportedly relied on those statements to continue processing transactions. HSBC reportedly became aware thereafter of transactions that drew suspicion of diversion and shared information with U.S. prosecutors about the apparent connection between Huawei and Skycom.2 HSBC recently announced that it is not under investigation in connection with Huawei’s alleged violations.

Next Steps

With cooperation from HSBC (and perhaps other financial institutions), the U.S. government already has significant information about the parties involved in Huawei’s operations. Accordingly, companies that directly or indirectly supply products and technology to Huawei, and financial institutions that process financial transactions for Huawei, should assess their internal records to determine their potential legal and commercial exposure. As the U.S. demonstrated in its settlement agreement with PayPal arising out of sanctions violations, liability can arise when previously segregated information is aggregated, and the aggregated information gives rise to a claim that a company knew or had reason to know of a violation. And as the recent investigation of Huawei’s competitor, ZTE, demonstrated, major customers can disappear in a hurry.As the U.S. government moves to build its case against Huawei, and Ms. Meng individually, the recent investigation into ZTE may prove instructive. During the ZTE investigation, the U.S. government issued subpoenas to companies throughout the ZTE supply chain. Companies that sell to or partner with Huawei should take the opportunity now to assess their potential legal exposure. It should be noted in this regard that U.S. enforcement authorities welcome voluntary disclosures of violations of U.S. economic sanctions and export controls, offering significant mitigation of potential penalties as an incentive. At the same time, voluntary disclosure credit is not available if a potential violation is disclosed in response to a subpoena or other U.S. government investigation.In addition to legal liability, companies should evaluate how their commercial operations could be impacted if Huawei is made subject to export restrictions. When ZTE was placed on the Commerce Department’s Denied Party List, global companies were prohibited from providing ZTE with any U.S.-origin goods or technology. Before any equivalent action may be taken against Huawei, companies should assess if they are providing Huawei with any goods or technology subject to U.S. export controls and sanctions, bearing in mind the U.S. government’s de minimis rule. (Pursuant to this rule, the U.S. government asserts export control jurisdiction over certain foreign-made commodities and technology that include or incorporate a specified percentage of U.S.-origin items or technology.)Should the U.S. impose export restrictions on Huawei, specific areas that may be impacted include:

  • Supply of U.S.-origin parts and components, including foreign items that incorporate a specified percentage of U.S.-origin items or technology;
  • Return and repair agreements;
  • Continuation or renewal of IP licensing agreements; and
  • Provision of software updates or patches.

Conclusion

The U.S. government is investigating Huawei’s compliance with U.S. sanctions and export control regulations. The investigation likely will encompass Huawei’s supply chain and partner financial institutions. Impacted companies should consider conducting internal assessments now – before they are contacted by the U.S. government – to gauge their legal and commercial exposure. Identification of any violations and implementation of corrective actions before a government inquiry, with or without an accompanying disclosure, can help to mitigate potential government enforcement.

How Dechert Can Help

Dechert frequently assists clients in internal risk assessments, internal investigations and the defense of economic sanctions and export controls matters. When appropriate, Dechert assists with disclosures to enforcement authorities and settlements. For further information or assistance, please contact the authors.

Footnotes:
1) Steve Stecklow, Reuters, Exclusive: Huawei CFO linked to firm that offered HP gear to Iran (Jan. 31, 2013), available at: https://www.reuters.com/article/us-huawei-skycom/exclusive-huawei-cfo-linked-to-firm-that-offered-hp-gear-to-iran-idUSBRE90U0CC20130131

2) Rachel Louise Ensign, The Wall Street Journal, HSBC Monitor Flagged Suspicious Huawei Transactions to Prosecutors (Dec. 6, 2018), available at https://www.wsj.com/articles/hsbc-monitor-flagged-suspicious-huawei-transactions-to-prosecutors-1544122717

The update was authored by:
F. Amanda DeBusk
Partner, Washington, D.C.
T: +1 202 261 3452
amanda.debusk@dechert.com
Jeremy Zucker
Partner, Washington, D.C.
T: +1 202 261 3322
jeremy.zucker@dechert.com
Melissa L. Duffy
Partner, Washington, D.C.
T: +1 202 261 3388
melissa.duffy@dechert.com
Sean Kane
Counsel, Washington, D.C.
T: +1 202 261 3407
sean.kane@dechert.com
Darshak S. Dholakia
Associate, Washington, D.C.
T: +1 202 261 3467
darshak.dholakia@dechert.com
Michael A. Grant
Associate, Washington, D.C.
T: +1 202 261 3337
michael.grant@dechert.com