National security probe of Huawei set furor in motion
It was a message federal authorities had grown accustomed to hearing: Global bank HSBC belatedly realized it had been processing financial transactions that might have run afoul of U.S. law.
HSBC had repeatedly been penalized for helping clients launder money. Now, though, there was a different problem. From 2009 to 2014, HSBC helped Chinese telecommunications giant Huawei move money in Iran, in breach of U.S. sanctions. This time, the bank said, it had a good excuse: Huawei, and one of its top executives, tricked HSBC into handling the business.
This month, the matter exploded into an international incident that shook global financial markets and threatened to deepen tensions between the U.S. and Chinese governments.
Meng Wanzhou, Huawei’s chief financial officer and a daughter of the company’s founder, was arrested in Vancouver, British Columbia, by Canadian authorities who were acting at the behest of U.S. prosecutors.
The details of the criminal charges against Meng, filed under seal, remain murky. But court filings in Canada and interviews with people familiar with the Huawei investigation show that the events leading to her arrest were set in motion years ago.
They grew out of an Obama administration national security investigation into Chinese companies — including Huawei — that act as extensions of the country’s government, according to the people familiar with the investigation.
The focus only recently shifted to whether Huawei, and specifically Meng, deceived HSBC and other banks to get them to keep facilitating business in Iran. Former federal prosecutors said pursuing Meng, 46, for alleged bank fraud proved to be a better line of attack than trying to build a case on national security grounds.
U.S. national security experts believe China has bolstered its economy — now the world’s second largest — by stealing corporate, academic and military secrets. Among the concerns is that Chinese telecommunications equipment could be used to spy on U.S. citizens. The top U.S. intelligence agencies told senators this year that Americans should not buy Huawei products.
But criminally charging Huawei or its executives for espionage or other security crimes was not likely to be simple. Former federal prosecutors said doing so often risked exposing the sources of confidential information. As a result, they said, prosecutors often look to bring more conventional cases involving crimes such as bank fraud. Think of it as the Al Capone strategy: Prosecutors went after the notorious gangster by charging him with tax evasion.
That is where HSBC came in.
Since at least 2009, Huawei had been a client of the bank. In 2013, a report by Reuters revealed that Huawei, through a subsidiary called Skycom, had been secretly doing business in Iran — a country subject to stringent international sanctions.
HSBC asked Huawei if the Reuters report was true. It was a big concern for the bank, because the previous year federal prosecutors had accused it of willfully failing to stop money laundering by customers, including in countries like Iran. To settle that investigation, HSBC had paid a $1.9 billion fine, entered into a deferred prosecution agreement and agreed to have a court-supervised monitor installed inside the bank.
While U.S. companies are legally restricted from doing business with people and institutions in countries under U.S. sanctions, nothing stops Huawei from doing so. But if an international bank like HSBC moves money through the United States on its way to or from Iran, that potentially violates U.S. law.
Huawei sent Meng — a daughter of Huawei’s founder, Ren Zhengfei — to try to assuage HSBC’s concerns. In August 2013, she gave a PowerPoint presentation to HSBC officials in which she denied that Huawei was connected to Skycom..
While Meng’s presentation was in Chinese, Huawei later sent an English version to the bank. “HSBC has been working with Huawei for a long time and has a deep understanding of Huawei’s history of growth around the world,” the presentation said. “We have been and will continue to be transparent.”
By 2014, the bank had unwittingly cleared more than $100 million in transactions with Skycom in Iran, according to federal prosecutors.
In 2015, HSBC appeared to have a change of heart. The bank’s reputational risk committee met in New York on April 15 and decided not to do business with Huawei’s U.S. subsidiary.