Tar­get of Chi­nese takeover did re­search for Ot­tawa

The Globe and Mail (Prairie Edition) - - NEWS - STEVEN CHASE

The Mon­treal high-tech firm at the cen­tre of a for­eign takeover by a Chi­nese in­vestor that trig­gered na­tional se­cu­rity con­cerns in Ot­tawa once par­tic­i­pated in a re­search project with a Cana­dian spy agency and has sold equip­ment to the Depart­ment of Na­tional De­fence.

The Trudeau govern­ment re­cently can­celled a Harper cabi­net or­der for Hong Kong-based O-Net Com­mu­ni­ca­tions to aban­don its takeover of Mon­tre­al­based ITF Tech­nolo­gies. The Con­ser­va­tives de­cided the ITF deal could be “in­ju­ri­ous to na­tional se­cu­rity” and tried to un­wind it shortly be­fore they lost power.

The Lib­er­als have launched a “fresh re­view” of the trans­ac­tion. In­no­va­tion Min­is­ter Navdeep Bains’s of­fice has de­clined to ex­plain why, and re­ferred all ques­tions to his depart­ment, which said it could not com­ment for rea­sons of na­tional se­cu­rity and com­mer­cial con­fi­den­tial­ity.

The de­ci­sion was made in Novem­ber, 2016, just weeks af­ter Mr. Trudeau vis­ited China and then hosted Chi­nese Pre­mier Li Ke­qiang on a visit to Canada.

ITF Tech­nolo­gies, for­merly Aven­sys, is a leader in “fi­bre-laser” tech­nol­ogy that is used in telecom­mu­ni­ca­tions, data com­mu­ni­ca­tions and in­dus­trial ap­pli­ca­tions. Its web­site in­di­cates some of its prod­ucts have mil­i­tary ap­pli­ca­tions, but does not elab­o­rate.

Prime Min­is­ter Justin Trudeau has made deep­en­ing trade re­la­tions with China, in­clud­ing a free-trade deal, key for­eign-pol­icy ob­jec­tives and the Lib­er­als are also loos­en­ing re­stric­tions on out­side in­vest­ment. In Novem­ber, Ot­tawa an­nounced it would raise the thresh­old for au­to­matic re­views of for­eign takeovers to $1-bil­lion two years ahead of sched­ule.

China, fac­ing an un­cer­tain econ­omy, is at­tempt­ing to keep its com­pa­nies’ in­vest­ments at home.

Nei­ther for­mer Con­ser­va­tive govern­ment of­fi­cials nor the Lib­eral govern­ment will elab­o­rate on why the Tories or­dered O-Net to aban­don its pur­chase of ITF Tech­nolo­gies in July, 2015.

How­ever, records show ITF has col­lab­o­rated in cut­ting-edge univer­sity-level re­search on the science be­hind mak­ing mes­sages more re­sis­tant to hack­ing – with af­fil­i­ated part­ners that in­cluded Canada’s eaves­drop­ping spy agency, the Com­mu­ni­ca­tions Se­cu­rity Es­tab­lish­ment, as well as the Na­tional Re­search Coun­cil, Ot­tawa’s chief re­search arm, and the Depart­ment of Na­tional De­fence.

A re­view of pho­tonic in­dus­try re­search be­tween 2005 and 2009 shows CSE, the NRC and DND were af­fil­i­ates, along with ITF, in a project that uses quan­tum cryp­tog­ra­phy to make ad­vances in a field where ex­perts try to pro­duce coded mes­sages that are dif­fi­cult or im­pos­si­ble to crack. The re­search project con­cerned “ab­so­lutely se­cure op­ti­cal fi­bre net­works us­ing quan­tum cryp­tog­ra­phy.”

A CSE spokesman said the or­ga­ni­za­tion could not im­me­di­ately an­swer ques­tions about the project be­cause it needed more time to re­search the mat­ter.

Chi­nese govern­ment ownership may be part of what wor­ried the Con­ser­va­tives when they were in govern­ment. A cor­po­ra­tion pre­sen­ta­tion pre­pared by O-Net in 2015 sug­gests that more than 25 per cent of its shares are owned by a com­pany that is a sub­sidiary of Chi­nese sta­te­owned China Elec­tron­ics Cor­po­ra­tion.

“Even a mi­nor­ity con­trol by the Chi­nese govern­ment has to be con­sid­ered as Bei­jing-con­trolled and any Cana­dian com­pa­nies they might buy would be un­der their con­trol,” Con­ser­va­tive for­eign af­fairs critic Peter Kent said in an in­ter­view on Thurs­day.

Mr. Kent said ITF’s tech­nol­ogy has mil­i­tary ap­pli­ca­tions and to al­low a com­pany with a di­rect line to Bei­jing to ac­quire it is symp­to­matic of a “mis­guided rush to give the Chi­nese al­most any­thing they ask for in the pur­suit of trade.”

When it was still named Aven­sys, the com­pany sold more than $246,500 worth of high-tech equip­ment to the Depart­ment of Na­tional De­fence, which also has a re­search arm, be­tween 2005 and 2013. The NRC, through the In­dus­trial Re­search As­sis­tance Pro­gram, has also pro­vided ITF with up to $169,500 for re­search and devel­op­ment.

Canada’s al­lies are com­ing un­der more pres­sure at home to close the door to ac­qui­si­tions in which the buyer is a state-owned en­ter­prise in China. The U.S.-China Eco­nomic and Se­cu­rity Re­view Com­mis­sion, a body set up to re­view the na­tional se­cu­rity im­pli­ca­tions of trade with Bei­jing, has urged Congress to bar ac­qui­si­tions by Chi­nese sta­te­owned firms.

O-Net, which chal­lenged the Harper cabi­net or­der to di­vest it­self of ITF, ar­gued in court the deal is not a risk for Canada. “ITF … does not own any tech­nolo­gies that could be trans­ferred to O-Net Com­mu­ni­ca­tions that are not read­ily avail­able in the mar­ket­place,” the com­pany said in a court fil­ing.

It said it ac­quired the ITF as­sets through an auc­tion af­ter the bank­ruptcy of its pre­vi­ous owner.

“There were no Cana­dian in­vestors or in­vestors from any­where in North Amer­ica that were will­ing to in­vest in ITF.”

Brief­ing notes pre­pared for cabi­net mem­ber Chrys­tia Free­land when she was trade min­is­ter show the Lib­er­als are acutely aware of Bei­jing’s un­hap­pi­ness over the way Cana­dian au­thor­i­ties treat Chi­nese firms at­tempt­ing takeovers.

“China has voiced con­cern over the ex­is­tence of na­tional se­cu­rity re­view pro­vi­sions and their opac­ity un­der the In­vest­ment Canada Act, sug­gest­ing that China is un­fairly tar­geted,” the 2015 brief­ing book said.

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