Edward Tessen Tanaka
Jul 19, 2012

FBI investigates ZTE for selling to Iran

Remember those classic movies from Hollywood -- we all have a favorite -- in which two diametrically opposed groups coming from different backgrounds and perspectives start a rocky relationship but, by the end of the story, come together as one?

Well, this article isn't one of those stories.

As a matter of fact, the relationship between the United States of America and the People's Republic of China, in particular as related to matters of national security, is more like the Bill Murray cult classic "Groundhog Day," where the central characters find themselves doomed to keep living the same day (over and over) until they realize the shortcomings of their personal flaws. The movie, which provided a lot of laughs, had a fairy tale ending. The real story provides a lot of tears -- and they aren't from laughter -- and has an ending that even Hollywood couldn't imagine.

Recently I wrote about the concept of "dual-use," which means that a device can have both military and commercial applications. Many companies, in particular those that innovate through research and development, are often delighted when they develop a product with numerous applications because it increases the marketability and therefore the sales of the technology. However, the United States -- in particular the Department of Commerce -- will ultimately designate some of these technologies to be of critical importance to national security and thus they can not be sold to countries that are designed a potential threats.

Shi Lirong is the president of ZTE, the world's fifth largest telecommunication equipment maker. November 17, 2011. ZTE Corp, the world's No.5 telecommunications equipment maker,While on paper this strategy sounds feasible, in reality -- due to politics, economics and nationalism -- it is highly problematic. Take for example the recent issues between the US Department of Commerce and ZTE Corp. of China. ZTE is the second largest telecommunications equipment company in China and the fourth in the world. The company is currently being investigated by the FBI for selling more than $120 million in prohibited technologies to Iran. These illegal transactions occurred in 2011 and included technology from such companies as Microsoft, Oracle, Cisco and Dell. According to an attorney, who is also an employee of the US subsidiary of ZTE in Texas, the company has gone to great lengths to cover up the crime and utilizes numerous shell companies domestically to make it difficult to track their actions. This same attorney, who was interviewed by the FBI, has firmly stated he would not be involved in such illegal activities and is essentially cooperating as a whistle blower.

So, to summarize ZTE is a Chinese owned company that happens to operate subsidiaries in the United States. As it turns out they operate much like the Mob -- with both legal and illegal intentions -- and were ordered not to sell specific technologies (by the US Department of Commerce) to Iran. ZTE got greedy (not surprising), got caught (surprising) and is now being snitched out by a US Citizen -- who also happens to be their corporate counsel -- while they are trying to hide the crime from the FBI. Except that the cat is already out of the bag and many of the most revealing and damning documents were recently published on the website "The Naked Gun" (presumably by a patriotic US citizen who also happens to work for ZTE Corp), including a shipping list of the hardware sent to Iran. So it turns out the paradigm of moral virtue in this story is a lawyer.

Interestingly, one of the issues driving this investigation is that the United States is afraid that such equipment (and software) can be modified to include difficult-to-detect back doors which in turn can be accessed by unauthorized third parties. These commercial technologies can be used for the surveillance of mobile, landline, data and Internet based communications.

The Chinese, of course, find US fears to be highly hypocritical because the United States government has been doing the same thing both domestically and internationally with telecommunications equipment exported to both allied and non-allied countries since the early 1980s. The successors of AT&T, initially Regional Bell Operating Companies like Bell Atlantic and later companies like Verizon, have always maintained close relationships with US intelligence organizations (much to the detriment of civil liberties). Unfortunately, this is a two way street and not only limited to the telecommunications arena. Take for instance the 2002 incident in which Chinese intelligence officials discovered more than 20 listening devices installed in a brand new Boeing 767 they had purchased from the United States in 2000.

These issues, while not completely new, are garnering a considerable amount of attention from Congress. The US House of Representatives' Intelligence Committee has initiated its own investigations into ZTE Corp. and another very well known Chinese company called Huawei. Both companies are suspected of using front companies in the United States and Europe to gain access to prohibited technologies. The Chinese, while directly denying such operations exist, have also made use of a rather ingenious defense mechanism by accusing the United States of engaging in economic protectionist policies in order to prevent their domestic companies from bidding on high dollar defense and infrastructure projects.

According to detractors, this isn't about national security, but about the United States' inability to follow its own rules when it comes to the power and efficiencies of free markets. This perspective is neither totally true nor false as many of the supporters of such trade restrictions in the name of "the greater good" are defense contractors, labor unions and other domestic special interest groups. So, while the FBI chases enemies of the state -- who happen to be doing business within the state and also employing citizens of that state -- other countries who happen to be US allies continue to violate such agreements.A People's Liberation Army Air Force officer looks on as Jian-10 fighter jets wait to take off at Yangcun Air Force base.

Take the development of the Chengdu J-10, also known in the West as the "Vigorous Dragon." This multi-role fighter was developed by the Chinese with considerable assistance from Israel. This relationship - denied by Israel - included engineers from the Russian Siberian Aeronautical Research Institute who were also involved in the development of the J-10. These engineers acknowledged that considerable foreign (US developed) technology was integrated into the design.

Candidly, this isn't surprising, but it makes a complex situation even more difficult to manage. The US answer, in many cases, has been to forbid the purchase of certain companies by the Chinese, but how does this strategy work when other companies - which are headquartered in countries that are allied with the United States - elect to pursue their own agendas? It is also interesting to note that Nokia Siemens Networks, an alliance between Nokia and Siemens, was also found to be facilitating questionable technology transfers with Iran and voluntarily elected to discontinue such practices.

The future of Chinese ownership in US companies (and vice versa) is an unpaved road full of hazards and risk. The United States - unrealistically - wants foreign partners to invest in critical technologies without the promise of a full technology transfer occurring. The Chinese don't want to pay market price for any particular technology, especially if it can be acquired for free or at a substantially reduced cost through state-sponsored espionage. This is also an unrealistic perspective. However, while both countries work toward developing an acceptable equilibrium point, a lot of small- and medium-sized companies are going to become causalities of this silent intellectual property war. While this isn't the world we would like it to be, it happens to be the world we live in. US and Chinese relations, as related to intellectual property and national security, are a lot like poker. And as a preacher once observed, "The only problem with poker is everyone playing is a liar."