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U.S.-CHINA TECH WAR

Huawei, Questions About Chinese Government Ownership, and the Foreign Agents Registration Act*

Author: Hdeel Abdelhady

The United States has adopted a whole-of-government approach to counter China’s “economic aggression” or “economic espionage,” umbrella terms that encompass a range of conduct including IP theft, forced technology transfer, academic espionage, and influence operations in the United States. The whole-of-government approach illustrates that the most strategically significant and complex confrontation between the United States and China is not the “trade war.” Rather, the race to dominate future technologies like artificial intelligence and 5G underpins the most complex legal and policy issues between the two nations.

Reflecting concerns about the means by which China accesses and uses U.S.-origin technology, the whole-of-government approach is a coordinated strategy that harnesses the political, policy, and legal resources of the United States government to curb and control over China’s access to U.S. technology, through lawful and illicit means employed by state or private actors. These measures include: restrictions on Chinese investment in U.S. technology; exclusions of Chinese state-owned and private firms from U.S. government and private supply chains (including through outright bans on Chinese companies and export controls); IP theft and economic espionage prosecutions; and, countering Chinese influence in the United States such as by requiring registration under the Foreign Agents Registration Act by parties acting or believed to be acting on behalf of the Chinese government.[2]

Huawei: Allegations of Chinese Government Ownership or Control, Supply Chain Exclusion, and the Foreign Agents Registration Act

The U.S.-China tech war, and the United States’ whole-of-government strategy, has put Chinese technology companies under the hot light of U.S. legal and political scrutiny. Companies like Huawei and ZTE, relative unknowns in the United States until recently, have found themselves on the wrong side of U.S. law enforcement. ZTE was hit with criminal and civil penalties for sanctions and export controls violations. And Huawei faces a range of U.S. legal actions. Among other legal troubles, Huawei’s CFO was arrested in Canada at the United States’ request in connection with U.S. sanctions, bank fraud, and other charges (Huawei Device USA and Huawei’s Iranian subsidiary are also named defendants); a Huawei entity has been indicted for trade secret theft offenses, wire fraud, and obstruction of justice; and, Huawei was banned from the federal government supply chain in 2019,.

Additionally, Huawei, which describes itself as an employee-owned private company, remains the subject of accusations that it is a Chinese government owned, controlled, or influenced company. The allegations about Huawei’s links to the Chinese government have existed for many years, but in the current environment have taken on greater political and legal significance in the United States and, to a lesser extent, in other countries.

Enacted in August 2018, the National Defense Authorization Act for Fiscal Year 2019 (NDAA) contains provisions that exclude Huawei’s telecommunications equipment and services directly from the federal government supply chain and indirectly from private supply chains (by prohibiting federal funding for Huawei equipment and services and their use by federal government contractors). The exclusion is significant, as federal government business opportunities are, directly and indirectly, important for telecommunications equipment and services providers in the United States. Reflecting this, in March Huawei—specifically two Huawei entities, Huawei Technologies USA, Inc. and Huawei Technologies Co., Ltd.—sued the U.S. government in federal court, challenging the NDAA exclusion provisions as, inter alia, unconstitutional bills of attainder and deprivations of due process.

Critical to Huawei’s legal positions is its contention that the U.S. Government (specifically Congress, in relation to the lawsuit) has falsely and without due adjudication by the courts or proper determination by the Executive branch adjudged Huawei an entity owned, controlled, or unduly influenced by the Chinese government. In its complaint, Huawei challenges this characterization and describes the Huawei corporate structure as privately owned and controlled, as follows:

Huawei Technologies USA, Inc. (“Huawei USA”), is a corporation organized under Texas . . . Huawei Technologies Co., Ltd. (“Huawei Technologies”) . . . is a limited liability company organized in Shenzhen, Guangdong Province . . . Huawei USA and Huawei Technologies are wholly-owned subsidiaries of Huawei Investment & Holding Co. Ltd. (“Huawei Investment”), and are therefore affiliates. In addition . . . Huawei USA is an indirect subsidiary of . . . Huawei Technologies. Huawei Investment is a private company wholly owned by its employees. Its direct shareholders are an employee-stock-ownership plan named the Union of Huawei Investment & Holding Co., Ltd., and the founder of Huawei, Mr. Ren Zhengfei. The Union of Huawei Investment & Holding Co., Ltd. involved more than 97,000 employees as of February 2019. Mr. Ren’s investment accounted at that time for only approximately 1.14% of Huawei Investment’s total share capital.[3]

In addition to its lawsuit, the Huawei plaintiffs have engaged (belatedly) U.S. firms to engage in public relations, policy, and other work on their behalf in the United States. Because the Huawei plaintiffs are non-U.S. persons or U.S. persons with certain foreign links, the U.S. firms representing the Huawei entities have registered as foreign agents under the Foreign Agents Registration Act (FARA), a law that generally requires persons acting in certain capacities on behalf of a “foreign principal” to register as “foreign agents” by submitting a “registration statement” with the Attorney General.[4]

FARA registration statements, and exhibits and supplements thereto, are submitted on government forms that contain questions and execution (under penalty of perjury) fields that track the FARA statute’s objectives and requirements. Among the disclosures that filers must make in completing FARA filings are whether the relevant foreign principal is a foreign government or political party or owned, controlled, supervised, financed, or directed by a foreign government, political party, or other foreign principal. Where a foreign principal is not associated with a foreign government or political party within the parameters of FARA, filers must state who “owns and controls” the foreign principal.

In the Huawei FARA filing made by the agent of Huawei Technologies Co., Ltd. (“Huawei Ltd”),[5] the U.S. agent, after indicating that the Huawei Ltd is not foreign government or political party controlled, financed, or directed, states, as to Huawei Ltd’s ownership and control that: “It is our understanding that [Huawei Ltd] is a private, employee-owned company. That understanding and our responses [to the related FARA form question] are based on publicly available information. We have requested, but have not obtained, confirmation of this information from Huawei” (emphasis added).

The hedging language—the reliance on publicly available information and indication that Huawei has not confirmed its status with its agent[6]–is understandable (from a legal perspective), but is nevertheless curious given that the FARA filing was made on March 20, 2019, after the Huawei plaintiffs filed their lawsuit asserting (as excerpted above) that Huawei is a privately-owned company.

That Huawei’s agent was not able to “obtain confirmation” from Huawei Ltd as to its ownership and control, where such information was provided in a legally mandated, publicly accessible FARA filing made with the Department of Justice—the same government agency that administers and enforces FARA, obtained the above-noted indictments of Huawei and its CFO, and likely is or will be involved in defending (if not leading the defense of) the U.S. government agencies and officials named as defendants in the Huawei plaintiffs’ lawsuit—seems to feed, rather than stave off, speculation as to Huawei’s Chinese government ties. Moreover, the uncertain (and seemingly, for the agent, prophylactic) FARA filing language—for which, to be clear, there can be a number of explanations—does not comport with the legal and factual positions taken by Huawei in its lawsuit.

Takeaways

Viewed in isolation, the uncertain language used by Huawei Ltd’s agent is eye-catching and open to self-validating interpretations by parties having differing views as to whether Huawei is owned, controlled, or unduly influenced by the Chinese government. When viewed in the context of the U.S.-China tech war, the United States’ whole-of-government strategy to counter China’s technological ambitions and access to U.S. technology, and the specific legal and policy measures directed at Huawei and other Chinese technology companies, the non-committal language of Huawei Ltd’s agent—and more so the agent’s statement that Huawei Ltd did not confirm information about its ownership and control—yields noteworthy takeaways. Among them are the following.

FARA Filings, Strategic Considerations

  • FARA Filing Standards. FARA requires filers to provide—in registration statements and supplements and exhibits thereto—complete and true statements of material facts. The filing of Huawei Ltd’s agent raises an interesting question of whether an agent, by relying on “publicly available” information, satisfies an agent’s disclosure obligations with respect to the ownership and control of a foreign principal. Under FARA, the filing of a registration statement or supplement neither constitutes “full compliance” nor “indicate[s] that the Attorney General [e., the Department of Justice] has in any way passed upon the merits of such” filings.[7]
  • Deficiencies, Due Diligence Obligations of Agents (Unclear). FARA filers should not assume that, simply by filing, they will be deemed to be in “full compliance” with FARA’s requirements. And, filers should take note that “full compliance” may not be achieved by stating that a filer has relied on publicly available information while also indicating that they have not confirmed material information with a foreign principal. Such statements—which may raise, rather than answer, questions—may give rise to clarifying or remedial disclosure requirements, and may disrupt the agent’s ability to lawfully act on the foreign principal’s behalf where a deficiency is not timely remediated. FARA’s enforcement provisions authorize the Department of Justice to require remediation of filing deficiencies. Moreover, the provisions deem it unlawful for an agent to represent a foreign principal if deficiencies are not cured (by remedial filing) within 10 days after receiving a Notice of Deficiency from the Department of Justice.[8]
  • Strategic Considerations for Agents of Foreign Principals. Agents representing foreign principals who, like Huawei, are in the public spotlight (for undesirable reasons) and in positions where public statements or disclosures have relevance to separate litigation, law, or policy matters involving a foreign principal should consider taking additional steps to ensure not only that FARA disclosures are complete and accurate (as is expected in the ordinary course), but are also presented in a way that does not run counter to the legal and/or public positions of the foreign agent (such as Huawei’s assertions in litigation against the U.S. government that it is privately owned and controlled).

Whole-of-Government Strategy to Counter China, FARA, and Other Law

Agents of Chinese principals in particular should take note of the context surrounding Chinese entities in the United States, more particularly Chinese principals that might be known or potential targets of the whole-of-government strategy to counter China’s “economic aggression” or “economic espionage.” As stated above, FARA is one of several U.S. laws that are being deployed (separately and in coordination) to counter Chinese entities’ activities in the United States. While this use of FARA appears to be aimed at foreign influence activities, agents of Chinese foreign principals and foreign principals themselves should be aware that FARA filings concerning Chinese parties of interest to U.S. officials may garner greater scrutiny or generate follow-on consequences, such as when the contents of such statements or disclosures relate directly to other pending matters (like litigation in the case of Huawei).

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NOTES

[*] Excerpted and adapted from MassPoint PLLC, U.S.-CHINA TECH WAR: The United States’ Whole-of-Government Approach to China is a Force Multiplier, April 2019. To request a copy of this publication, please write to info@masspointpllc.com.

[2] This goes beyond FARA practice as generally understood currently and would encompass entities like the Confucius Institute and, potentially, China’s Thousand Talents program.

[3] Huawei’s corporate disclosure statement, filed in its lawsuit pursuant to Federal Rule of Civil Procedure 7.1. states that:

Huawei Technologies USA, Inc.’s direct parent corporation is Huawei Technologies Cooperatief U.A. (Netherlands). Huawei Technologies Cooperatief U.A.’s parent corporations are Huawei Technologies Co., Ltd. (China) and Hua Ying Management Co., Ltd. (Hong Kong, China). The parent corporation of both Huawei Technologies Co., Ltd. and Hua Ying Management Co., Ltd. is Huawei Investment & Holding Co., Ltd. (China). Huawei Investment & Holding Co., Ltd. has no parent corporation, and no publicly held corporation owns 10% or more of its stock . . . Huawei Technologies Co., Ltd.’s direct parent corporation is Huawei Investment & Holding Co., Ltd. (China). Huawei Investment & Holding Co., Ltd. has no parent corporation, and no publicly held corporation owns 10% or more of its stock.

[4] Foreign Agents Registration Act, 22 U.S.C. §§ 611, 612.

[5] The particular filing of interest here is a completed Exhibit A to the agent’s registration statement (the standard form Exhibit A is available here).

[6] An agent of a foreign principal filing under FARA is subject to prosecution for, inter alia, the “willful false statement of a material fact . . . or the willful omission of a material fact required to be stated therein or the willful omission of a material fact or copy of a material document necessary to make the statements made in a registration statement and supplements thereto . . . not misleading.” 22 U.S.C. § 612(d).

[7] Id.

[8] Id. at §618(g) and 28 C.F.R. § 5.801. As stated in a prior MassPoint publication: “the language of FARA is plain, but its meaning is elusive.” It is not entirely clear what standards of due diligence apply to agents of foreign principals in verifying information about foreign principals (including whether reliance on publicly available information is sufficient). The Department of Justice’s FARA Registration Unit has fairly recently posted FARA advisory opinions to its website, but questions remain as to the law’s mechanics and scope.

Post Author: MassPoint PLLC

MassPoint PLLC is a boutique law and strategy firm that works with diverse clients to meet legal, strategy, and risk management needs in a globalized, complex world.