Intelligence report hits China deal

By Bill Gertz - U.S. intelligence agencies informed a Treasury Department-led review committee recently that a merger between 3Com and a Chinese company would threaten U.S. national security, The Washington Times has learned.

Bush administration intelligence officials said the Office of the Director of National Intelligence (DNI) recently submitted a required threat assessment to the Committee on Foreign Investment in the United States, known as CFIUS, which is conducting a 30-day investigation of the proposed deal between 3Com and China's Huawei Technologies.

The assessment, which is classified, described the deal as posing a "threat" to U.S. national security, according to officials familiar with the document.

"The deal is in trouble," said one official, who noted that pro-business officials who in the past dismissed critics of the deal are now worried the merger will be blocked because of the assessment.

The proposed $2.2 billion merger was announced quietly in October, with 3Com stating that the main purchaser would be the international investment firm Bain Capital Partners — an apparent bid to play down the role of Huawei, China's main producer of computer network equipment and an international supplier.

Reports in The Times about Huawei's past illicit activities — including bribery, economic espionage and violating U.N. sanctions — led Bain to voluntarily submit the deal to the Treasury Department for review.

3Com manufactures computer network intrusion-prevention equipment used by the Pentagon and U.S. government agencies. Intelligence officials are concerned that the technology China would gain from 3Com will boost the Chinese military's computer warfare capabilities.

Asked about the assessment, DNI spokesman Ross Feinstein said, "In accordance with the statute, the intelligence community prepares threat assessments for the CFIUS process, but we do not comment on these assessments."

A Treasury spokeswoman also declined to comment.

Under legislation passed in the aftermath of last year's failed Dubai Ports World deal, involving a bid by a United Arab Emirates company to manage operations at six U.S. ports, Treasury Department rules permit deals to be approved with "mitigation agreements" that set conditions for foreign acquisitions.

CFIUS has 30 days to conduct its first investigation of the deal, and a second, 45-day inquiry could follow.

The proposed deal has generated opposition from congressional Republicans.

A group of House Republicans introduced a resolution in October calling on the Bush administration to block the deal.

The resolution stated that evidence shows that "the proposed transaction involving Huawei threatens the national security of the United States and should not be approved by the Committee on Foreign Investment in the United States."

Huawei has been accused of a range of illegal activities, including bribes related to cellular telephone contracts in post-Saddam Hussein Iraq, and of violating U.N. sanctions against Iraq by building a fiber-optic network that was used to link Iraqi air defenses, at a time when U.S. warplanes were patrolling the country.

Huawei also was linked to industrial espionage against Cisco Systems and Japan's Fujitsu several years ago, the officials said.

Huawei also constructed a telephone system in Kabul for Afghanistan's extremist Taliban government, which was ousted in October 2001.

White House spokesmen have opposed national-security critics of the 3Com-Huawei deal and have said CFIUS should be permitted to conduct its review without political interference.

Tony Fratto, one of the spokesmen, said last month that the CFIUS review would be "thorough and diligent."

John J. Tkacik Jr., a Heritage Foundation specialist on China, recently said that Huawei is closely linked to the Chinese military and that China probably already has gained valuable 3Com secrets from a joint venture called HC3, which ended last year after 3Com purchased the Huawei stake.