U.S. tensions with China have escalated in the wake of the unsealing of multiple indictments against Chinese telecommunications company Huawei Technologies Co. Ltd., associated entities, and its chief financial officer, Meng Wanzhou.
In separate indictments, the U.S. charged Huawei with circumvention of U.S. sanctions against Iran and with stealing trade secrets of T-Mobile.
Taken together, the indictments paint a picture of Huawei as a deeply corrupt criminal enterprise whose disregard for U.S. law was driven by those in the very upper echelons of management. The cases may well be the death knell for Huawei in the U.S. and are the latest evidence that the U.S. is focusing on criminal enforcement efforts in China.
The indictment alleging violations of U.S. sanctions against Iran is a strong statement by the U.S. Department of Justice that the U.S. is committed to protecting the U.S. banking system from misuse by those abroad. In particular, the government’s decision to charge Huawei with bank fraud is notable.
No-Loss Bank Fraud Theory and Banks’ Profits
The government has alleged that Huawei defrauded multiple banks by lying about its business in Iran, causing those financial institutions to process Iran-related U.S. dollar payments that the banks otherwise would have rejected.
Although the banks involved in processing the payments could theoretically have liability for unwittingly processing such payments, there is no suggestion that the government intends to pursue the banks. It appears that none of the banks that were allegedly defrauded actually suffered any monetary losses from their involvement with Huawei. Quite the contrary, the banks likely profited from their business with Huawei.
The utilization of this no-loss bank fraud theory in a sanctions prosecution is unusual and may be a sign of things to come. The bank fraud statute could be a valuable tool for prosecutors investigating sanctions cases due to its 10-year statute of limitations in contrast to the five-year statute of limitations that applies to violations of the substantive sanctions laws.
Use of a no-loss bank fraud theory makes the statute even more potent by allowing prosecutors to more broadly target foreign entities that dupe U.S. banks into processing elicit payments.
The indictment also reveals that the government utilized border searches as one of its investigative methods in developing the case.
The indictment quotes from an apparently deleted document that was allegedly on Meng’s cell phone or laptop when she traveled to the U.S. in 2014. Although not explicitly addressed in the indictment, based on the context of the reference to the deleted document, it appears that Meng’s electronic device was copied while clearing customs at the border.
Since the arrest of Meng in Canada in late 2018, foreign executives have raised concerns about traveling to the U.S. The apparent copying of Meng’s device at the border is a reminder that these executives and their companies need to worry about more than the unlikely possibility of arrest while traveling.
Given the limited constitutional protections at the U.S. border, companies should be cognizant of data privacy and security concerns and should assume that any electronic device that is brought to the U.S. may be subject to search. Had Meng traveled to the U.S. with clean devices, she would have given U.S. authorities one less source of evidence to use against her.
Theft of Trade Secrets
In a separate indictment, the U.S. has also alleged that Huawei engaged in a coordinated, years-long effort to steal trade secrets from T-Mobile. Although theft of U.S. trade secrets by some Chinese companies is a well-known problem, Huawei’s alleged corporate espionage is notable for the sheer audacity of the scheme.
The government alleges that Huawei engaged in an enterprise-wide effort to steal from T-Mobile. The company allegedly had a bounty system in place that rewarded employees who successfully stole sensitive information from Huawei’s competitor with bonuses for their efforts.
The government has alleged that trade secret theft was essentially an established part of Huawei’s business plan and a major part of its efforts to keep pace with competitors.
The Future of Huawei and U.S.–China Relations
Lawyers and business executives alike will no doubt watch the progress of the Huawei cases closely in the weeks and months to come. While the outcome remains to be seen, it is certainly clear that Huawei’s prospects for any business in the U.S. in the future are bleak.
It seems likely that the U.S. government will use these cases to completely exclude Huawei from the U.S. market. This could take many forms, from a ban on Huawei imports into the U.S. to the more extreme step of designating Huawei as a Specially Designated National.
Given the U.S. government’s long history of concerns that Huawei may be a vehicle for espionage by the Chinese government, drastic U.S. action against Huawei in the wake of these indictments seems likely.
More broadly, the Huawei indictments are a sign that the U.S. government is backing up its rhetoric on China. Although it is unlikely that there will be an immediate wave of U.S. criminal prosecutions of Chinese companies given the time-intensive efforts necessary to develop such cases, the indictments against Huawei certainly signal that U.S. authorities are devoting resources to pursuing criminal conduct by Chinese companies. These efforts are likely to further inflame tensions between the U.S. and China as the ongoing trade war continues to escalate.
Brian Frey is a partner with Alston & Bird and member of the White Collar, Government & Internal Investigations team. A former federal prosecutor for the Department of Justice, Frey focuses his practice on representing financial institutions, major corporations and individuals in white collar investigations involving a range of criminal and civil laws.
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