CAUGHT IN THE CROSSFIRE

Canada has found itself, reluctantly, in the midst of a major diplomatic row with China.  Acting in accordance with its extradition treaty obligations, Canada arrested Huawei CFO Meng Wanzhou as she was connecting to another flight at Vancouver Airport.  After 11 days in detention, she has received bail, but not before, in a remarkable coincidence, Michael Kovrig, a Canadian citizen and former diplomat and current Senior Advisor to an international NGO, has disappeared in Beijing.  Chinese officials have not confirmed his arrest but have cryptically observed that the NGO for which he works is not registered in China and therefore any activity on its behalf would be illegal.

So what is this all about?  It seems that the US Justice Department has determined that HSBC cleared transactions through the US banking system that included proceeds from sales of cell phones to Iranian interests in contravention of the recently re-imposed US trade sanctions.  That the US takes this sort of breach seriously is evidenced (sort of) by the severe economic sanctions placed upon another Chinese technology company, ZTE, in the context of similar activity a year ago.  I say sort of because in the end ZTE was rescued from extinction by President Trump in the context of a softening of Chinese positions in the still-ongoing trade war with the US.

So what do HSBC’s breaches have to do with Meng Wanzhou?  It sounds like the transactions that gave rise to the breach by HSBC were conducted by Skycom, a Hong Kong-based entity doing business with Iranian interests.  Meng Wanzhou was at one time on the board of Skycom, but not at the time of the impugned sales transactions.  However, it is alleged that Meng Wanzhou made representations to HSBC and other banks operating in the US that Huawei was not related to Skycom, and it is these fraudulent representations that give rise to the extradition request from the US.  As a strictly factual matter, things look bad for Meng Wanzhou; journalists have already discovered that Skycom’s registered office shares an address with Huawei’s Hong Kong office and that Skycom’s e-mail addresses are on Huawei’s internet domain.

Now the fact that these two damning facts were so quickly discoverable by mere journalists suggest that whatever deception Meng Wanzhou may have subjected HSBC to, they might in fact be guilty of a certain laxity in their own independent due diligence.  Furthermore, it is hard to understand how the reality of Huawei’s effective ownership of Skycom could have excused any alleged breach by HSBC in clearing transactions effected in breach of the US sanctions on Iran.  One could even speculate that the far more practically relevant fact underlying Meng Wanzhou’s arrest is not these alleged misrepresentations or her role as CFO of Huawei, but rather the fact that she is the daughter of Ren Zhengfei, the founder of Huawei with a history as replete with achievements within the Communist Party and Chinese military as it is with business triumphs.

But never mind that for now.  The US has until January 9th to clear up these gaps in support of their extradition demand.  In the meantime, Meng Wanzhou will suffer in one or both of her Vancouver mansions with the indignity of an electronic ankle bracelet while President Trump presses whatever leverage he can out of this affront in the context of his increasingly fraught trade negotiations with Chinese President Xi Jinping.  Smart money says the resolution of the trade dispute will be happily concluded by January 9th, Meng Wanzhou will have a pleasant holiday in her one-time home city of Vancouver and will in the New Year return to China and to Huawei with nothing more than a little ankle chafing.

Let’s hope the whole experience is as transparent, pleasant and quickly resolved for Mr Kovrig.  Somehow I doubt it will be.

Merry Christmas!

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