Huawei’s Meng Snagged Due to US Bank Sanctions

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The arrest of Huawei CFO Meng Wanzhou produced a market meltdown in the morning, with the Dow down over 700 points, with stock retracing to only small losses for the major indices by the end of the session. However, the US extradition request, which presumably will lead to her being prosecuted, will continue to be a flashpoint between the US and China.

Some tidbits:

US bank sanctions caught Huawei in their dragnet. Even though the Wall Street Journal and other reported that Meng’s executive and board roles in 2007 through 2009 with a Huawei operation that did business with Iran was one of the areas the Department of Justice had looked into. But a South China Morning Post was leaked an internal Huawei memo from October 29 where Meng and her father, founder Ren Zhengfei, were discussing costs of compliance and setting limits on them. Key section:

Meng spoke of the different types of external regulatory compliance, dividing them into “red” and “yellow” lines. She did not specify any markets when describing the different scenarios…

“Of course, beyond the yellow and red lines, there may still be another scenario, and that is where the external rules are clear-cut and there’s no contention, but the company is totally unable to comply with in actual operations. In such cases, after a reasonable decision-making process, one may accept the risk of temporary non-compliance,” she said….

“We must not bind ourselves up just because the US is attacking us,” Ren said in response to a question. “If our hands and feet are bound, then we will not be able to continue producing, then what’s the point of compliance?”

“The US has very strict compliance policies, but American companies are used to it,” Ren said. “Nobody dares to flout the law, it has become a habit, and they can still achieve high speeds. Our company has not yet formed this habit, that is why communication costs are too high.”

That looks like a smoking gun. And if that is already in the public domain, what else is out there?

Now one might ask, how could the US establish that Huawei was violating US sanctions on Iran? It appears that the US has more current evidence that that of the subsidiary mentioned above. From the Financial Times:

The US justice department has been conducting an investigation for at least two years into whether Huawei breached sanctions against Iran and has requested information on the company from its bankers, according to people familiar with the investigation. 

A federally appointed monitor working inside HSBC, the UK-based bank, also flagged concerns that Huawei was breaching US sanctions on Iran, one person said, although the lender was also co-operating with federal prosecutors of its own accord. 

Between 2012 and 2017, HSBC operated under the supervision of Exiger, a London-based financial risk consultancy, which was appointed by US authorities to monitor the bank’s financial crime controls. The arrangement was put in place after HSBC was charged with breaching US sanctions on Iran and failing to stop Mexican drug cartels from laundering money, as part of a deal that saw the bank avoid prosecution. 

The justice department has concluded that HSBC’s controls were not at fault, and the lender is being treated as a witness or victim to any offence by Huawei. “HSBC is not under investigation and is co-operating with the Department of Justice,” said one person familiar with the matter. HSBC declined to comment. 

The arrest does appear to be opportunistic. The US had a sealed indictment against Meng (and one wonders who else at Huawei), so it is credible, as the press reported today, that her arrest in Canada for extradition was opportunistic. I hope Jerry Denim or other experts on airline operations will pipe up as to how the US would have been able to identify when she might be in countries that had extradition treaties with the US and could be relied on to cooperate (as in it’s altogether too easy to feign incompetence and let the target get away). Since executives are more likely to be no-shows on flights than mere mortals due to last minute changes in plans, even if the US somehow had a head’s up on her travel plans (but how?) they wouldn’t know for sure until they had the flight manifest.

Moreover, John Bolton is the sort who’d love to collect a high profile scalp like the arrest of Meng, so it’s credible that he would find a way to go ahead whether or not the China trade negotiation team was on board.

Meng has her bail hearing in Vancouver today, so we will probably learn more about the expected process and timetable.

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