Yesterday, a bipartisan group of senators wrote to the heads of the House and Senate Armed Services Committees to urge the continued ban of Chinese phone maker Zhongxing Telecommunications Equipment Corporation (ZTE). The telecom giant was suspended from doing business with the U.S. in April for violating U.S. trade sanctions with Iran.
The letter was prompted by an agreement between ZTE and the Dept. of Commerce earlier this week that would pave the way for ZTE to resume their business with U.S. companies. This has sparked concern among Sens. Marco Rubio (R-FL), Chris Van Hollen (D-MD), Tom Cotton (R-AR), Mark Warner (D-VA), Roy Blunt (R-MO), and Bill Nelson (D-FL).
ZTE, Infosec, and Chinese Cyber Espionage
ZTE and fellow Chinese telecom company Huawei have both been security concerns by lawmakers, military, and intelligence officials. As companies like Amazon, Apple, Ebay and others have seen, Chinese companies are notorious for violating intellectual property rights. One way they do this is through joint ventures. ClearanceJobs has written before that joint ventures are often a condition of American companies doing business with China. “For those not familiar with the concept…a joint venture is an arrangement wherein two companies agree to form a third company, sharing the risk and reward. Often, it involves the sharing of technology.” Through these joint ventures, Chinese companies are able to take the intellectual property of their partners and create counterfeits.
Not only do these joint ventures cause financial damage to the American economy, they pose a serious security risk. With China’s communist government, the barrier between government and industry is essentially non-existent. Information in the hands of a Chinese company is also in the hands of the Chinese government.
ZTE’s Violation of Trade Sanctions
The authors of yesterday’s letter protesting the deal with ZTE have long rung the warning bell against Chinese cyber espionage. There has been continued warning – both from senators on the Intelligence Committee and from members of the IC – that ZTE and fellow Chinese telecom Huawei represent critical threats to U.S. information security.
Investigation into ZTE first began in 2012 following a Reuters report that the company had agreed to ship millions worth of U.S. tech to Iran. This was in clear violation of U.S. sanctions against Iran; the company plead guilty to this charge. They were then fined and tasked with changing the company’s board and instituting strategies for external oversight.
In April, the company had not met these requirements successfully. As a consequence, the Administration blocked sales to ZTE by U.S. chip manufacturer Qualcomm. Just a few days later, Singaporean company Broadcom’s attempts to takeover Qualcomm were also blocked. In May, out of concern for military security, the Pentagon banned ZTE and Huawei phones from being sold at military installations. These moves created a significant blow to the company and created a stress point between Washington and Beijing.
Blocking ZTE through Defense Spending
ZTE has felt the financial pressure and made a deal with the Department of Commerce on Wednesday. In order to resume business, ZTE has already paid $1B in penalties to the agency. They will only be permitted to do business once they’ve placed $400M in an escrow account; if ZTE violates the terms again, they will forfeit the $400M.
However, this penalty is not stiff enough for many lawmakers on both sides of the aisle. As members of the Senate Select Committee on Intelligence, Warner, Rubio, Cotton, and Blunt have heard testimonies from the FBI, the NSA, ODNI, and CIA warning of the danger posed by Chinese cell phones. Their letter reads:
“…our nation’s six top intelligence leaders testified before the Senate Intelligence Committee in February 2018 about their concern that ZTE, Huawei, and other Chinese state-directed telecommunications companies are beholden to the Chinese government and Communist Party, which provides the capacity for espionage and intellectual property theft, and therefore poses clear threats to the national security, people, and economy of the United States.”
The letter urges leaders of both the House and Senate Armed services committees to reinstate the bans through the 2019 National Defense Authorization Act (NDAA). While the Senate’s version of the bill already includes this stipulation, the House version does not.
If the best indicator of future behavior is past behavior, there’s little reason to be optimistic about ZTE keeping its word. It is also worth noting that – while Russia still leads the pack in most all-time cases of espionage against the U.S. – China is nipping at its heels at #2. Iran, ZTE’s former business partner, is #3. Those are facts which cannot be reasonably ignored.