Leak of foreign merger deal raises hackles



By Victoria McGrane

A leaked report on the review of a merger deal between 3Com Corp. and a partnership involving the Chinese company Huawei has stoked tensions of the sort lawmakers hoped to avoid when they redesigned the panel in charge of weighing foreign acquisitions.

The 3Com deal is in the midst of a national security review by the Committee on Foreign Investment in the United States, or CFIUS, a multi-agency panel that weighs the risks of proposed foreign acquisitions. Congress revamped the CFIUS process this year in part because the business community warned that politicization of foreign business deals would drive foreign investors away, and eventually hurt the U.S. economy.

A classified assessment by the U.S. Director of National Intelligence labeled the 3Com deal a threat to national security, according to a Nov. 30 story in the Washington Times. Some critics have accused Huawei, China’s largest computer-networking equipment supplier, of having ties to the Chinese army.

On Dec. 11, House Financial Services Chairman Barney Frank (D-Mass.) and Rep. Carolyn Maloney (D-N.Y.) sent a letter to President Bush blasting the release of the intelligence findings to the Times.

In an interview with Politico, Frank called the Bush administration “hypocritical” for leaking classified intelligence information related to the pending deal between electronics manufacturer 3Com and a partnership between Bain Capital and China’s Huawei Technologies. Key administration officials have widely criticized other national-security-related leaks.

“I did think it was important to call them on their hypocrisy and to try and discourage” future leaks related to administration reviews of business deals, said Frank, who expects only a pro forma reply from the White House.

The lawmakers also hoped the letter would give the Treasury Department ammunition with which to quash the leaks, said a House Democratic aide. Treasury chairs the CFIUS panel.

The 3Com leak has rattled the international business community, which fought hard to ensure proprietary business information remained secure under new CFIUS rules Congress passed earlier this year. 3Com shares fell following the leak, showing that investors are nervous the deal will be blocked.

If the CFIUS process fails to protect such information during ongoing reviews, or allows pending cases to become political footballs, foreign investors will shy away from pursuing deals on U.S. soil, business leaders have argued.

“Congress worked hard, in a bipartisan way, to develop a CFIUS process that protects sensitive commercial information and prevents reviews from becoming politicized,” said Taylor Griffin, spokesman for the Financial Services Forum. “Concern that sensitive details of a pending transaction may be inappropriately disclosed during the CFIUS process could become a de facto barrier to foreign investment that would hurt the U.S. economy, cost jobs and undermine opportunities for U.S. businesses abroad.”

The intelligence leak helped perpetuate the kind of political controversy the new rules were designed to avoid. The day the Washington Times story came out, Rep. Ileana Ros-Lehtinen of Florida, the ranking Republican on the House Foreign Affairs Committee, issued a press release urging CFIUS to reject the proposed 3Com-Huawei merger, citing the intelligence leaked to that paper.

“Many of us are alarmed about the prospect that 3Com will become little more than a captive vendor for Huawei and, by implication, the People’s Liberation Army,” Ros-Lehtinen said in the release.

Of course, the deal was controversial before the intelligence leaks. Bain voluntarily submitted its proposed merger for CFIUS review to quell concerns raised by accusations the Chinese company has engaged in illegal behavior. Ros-Lehtinen and several other GOP lawmakers introduced a resolution in October stating that CFIUS should block the 3Com deal.

Critics worry that the merger would enable the Chinese military, via Huawei, to obtain computer warfare capabilities from 3Com, which provides network security equipment to the Pentagon and other federal agencies.

Congressional critics of the 3Com deal do not think every foreign investment is a threat to American sovereignty, a House GOP aide stressed. “That would miss the point of the concerns that many people have raised about investments that have national security implications. An investment by Huawei, a Chinese company with shadowy ties to the Chinese military, investing in an American company that has DOD contracts does not sit well with many people, and it shouldn’t.”

“The United States welcomes foreign investment and we should continue to welcome foreign investment, and, indeed, we need foreign investment with burgeoning trade deficits and budget deficits,” the GOP aide said.

Frank and Maloney’s response to the leak appeared to hearten some in the business community.

“This letter shows that congressional leaders with jurisdiction over CFIUS are vested in making sure the process works as they intended it,” said Todd Malan, president and CEO of the Organization for International Investment, a trade association representing foreign-owned U.S. subsidiaries.

“Confidentially is one of the core principles of” the new CFIUS law, he said.

The changes made by the law still must be finalized by an executive order from President Bush. And here again there have been leaks from unidentified administration officials to the Washington Times, which has reported details of a draft executive order and a feud between Treasury and members of the intelligence community over implementation of the CFIUS law.

Taken in the context of these stories detailing how authority should be handed out under the new rules, some Capitol Hill insiders think the leaks are coming from disgruntled sources within intelligence agencies.

“There’s somebody in one of the law enforcement agencies who is politicizing this for their own purposes. We don’t think that’s very helpful,” said a House Democratic aide.

It is administration policy not to comment on ongoing CFIUS reviews. A Treasury spokeswoman declined to comment on the leaks or the wrangling over the executive order. Maloney summoned Treasury officials to her office following leaks regarding the executive order and was reassured that the new CFIUS law will be implemented as Congress intended.

There’s no firm word yet on when the final executive order will come, but some on the Hill think that will help settle the continued uncertainty these leaks have stirred up about the CFIUS process.

In their letter, Frank and Maloney warned that leaks in what’s supposed to be a confidential review process damages its integrity and will ultimately scare off foreign investment in the U.S.

“You can’t have leaks like this; it’s bad for business,” Frank told Politico in an interview Wednesday. But he said that beyond registering his displeasure, there’s nothing else he can do.

White House spokesman Tony Fratto said on Dec. 14 that he did not have knowledge of the Frank-Maloney letter but said the administration takes any CFIUS-related leaks seriously.

“We are very upset anytime we hear about a leak in anything having to do with the CFIUS review process,” both because it has to do with national security and because releasing such information is unfair to the companies involved, Fratto said.

The controversy is just the latest chapter in the saga of the shadowy CFIUS body.

The Treasury Department chairs the CFIUS panel, which is made up of 12 agencies including the departments of Defense, Justice and Homeland Security. The body is charged with weighing the security implications of proposed foreign acquisitions.

CFIUS got a facelift at the end of the 109th Congress thanks to the Dubai Ports World fiasco. CFIUS approved the sale of U.S. port operations to the Dubai government-controlled company. News of the approval caught lawmakers by surprise and the outcry that followed scuttled the deal.

After tempers cooled, lawmakers revamped the CFIUS process in a bid to both strengthen national security scrutiny and ensure deals would not become politicized like the DP World one had.

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