This is the second in a series
Meng Wanzhou, CFO of Huawei and daughter of Huawei founder Ren Zhengfei, is currently in her third year under house arrest in Vancouver, British Columbia, Canada, fighting extradition to the U.S. to face charges of bank fraud relating to alleged violations of U.S. sanctions against Iran. She is there in part because of two separate and independent events: first, criminal violations of U.S. export control rules by a Chinese competitor, and second due to pressure from U.S. prosecutors on a global bank with which Huawei had done business for 20 years, which was trying to avoid criminal penalties for its own prior serious violations of U.S. sanctions laws. Each of these circumstances help illustrate how external events and forces can trigger increased liability exposure for third parties, in this case Huawei in its corporate capacity and Ms. Meng in her personal capacity.
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Tracing the Origins of the Case Against Huawei CFO Meng Wanzhou: How Global Banks Extend the Reach of U.S. Extraterritorial Jurisdiction, Directly and Indirectly Impacting the Global Expansion of Chinese Companies
ZTE Export Controls Violations Put Spotlight Back on Huawei
Zhongxing Telecommunications Equipment Corporation, better known by the acronym ZTE, is China’s second largest telecommunications equipment supplier. It has had a long history of problems with U.S. regulators with respect to violations of U.S. export control rules, having been the subject of investigations by the Office of Foreign Assets Control (OFAC) in 2010 and 2012 in respect of sales to Iran and North Korea.
In March of 2016, after investigations disclosed renewed sales of U.S.-sourced technology to Iran and North Korea, multiple ZTE entities[i] were added to the Entity List maintained by the Bureau of Industry and Security (BIS) under the U.S. Department of Commerce. This meant that the ZTE entities were deemed to be involved in activities that threaten the national security or foreign policy interests of the U.S. (such as the sale of U.S.-sourced dual-use technology to countries subject to sanctions) and that exports of certain sensitive technologies to the ZTE entities so listed would be subject to license restrictions. Since such licenses would be strictly limited, this amounted to a blanket ban on ZTE’s access to U.S.-sourced technology, effectively threatening to shutter ZTE’s operations. (As will be discussed in part three, this was only a prelude to a continuing saga of corporate near-death experiences for ZTE, which will factor into our analysis later as well.)
As part of that case, U.S. officials released internal ZTE documents [ii]in which ZTE executives had described the use of intermediary “isolation companies” to conceal ZTE’s role in the transactions. According to the internal ZTE documents, this scheme was modelled after a rival company code-named “F7,” which U.S. officials determined was a reference to Huawei, prompting further investigation into Huawei’s activities in Cuba, Iran, North Korea, Sudan and Syria.
Without these serious violations by ZTE, the attention of U.S. prosecutors may not have been directed at this time to Huawei’s alleged misconduct, but having been tipped off by the ZTE documents, U.S. officials found a new avenue to pursue their investigation of Huawei, namely through HSBC.
HSBC Conducts Internal Huawei Probe in Order to Preserve DPA
A few months after ZTE had been added to the Entity List, in September 2016 federal prosecutors in the U.S. reportedly were considering bringing new criminal charges[i] against HSBC relating to conduct on its foreign exchange desk. If this new case went forward, it could constitute a breach of the Deferred Prosecution Agreement (DPA) that HSBC signed in December of 2012, which would subject the bank to severe penalties.
As recounted in part one of this series, HSBC had been charged with the systemic failure to screen and report OFAC-prohibited transactions from Iran, Cuba, Sudan, Libya and Burma. Due to the egregious nature of the conduct, HSBC paid approximately US$1.9 billion in penalties, replaced its top management and had to agree to appoint an independent monitor to supervise improvements to its compliance management systems. If HSBC was found to be in breach of the DPA, then it would be subject to criminal prosecution for all of these prior bad acts in addition to the new charges.
In order to preserve the DPA, and presumably under direct pressure from U.S. prosecutors to do so, HSBC conducted a further probe[i] of Huawei’s transactions in Iran and its relationship with Skycom. The bank’s internal probe turned up the PowerPoint presentation prepared by Ms. Meng in the fateful meeting in the private room in the back of a Hong Kong restaurant in August 2013 (see part one in this series). HSBC internal investigators reportedly conducted more than 100 interviews, reviewed nearly 300,000 emails and analyzed years of financial transactions. According to press reports, the internal probe found evidence that Huawei had continued to control Skycom indirectly through intermediary holding companies which received funding support from Huawei.
The bank’s findings were turned over to the U.S. Department of Justice (DOJ) in a series of presentations in 2017. Based on the results of the HSBC probe, U.S. federal prosecutors allege that Ms. Meng’s PowerPoint presentation contained “numerous misrepresentations” constituting bank fraud, which forms a core part of the DOJ’s case against Ms. Meng.
As a legal and practical matter, HSBC had no choice but to cooperate in the DOJ’s investigation of Huawei. Failure to do so would have constituted a breach of the terms of the DPA, but by cooperating in the probe HSBC ultimately was able to secure the dismissal of all charges under the DPA at the end of the five-year term in December 2017.
It is worth underscoring that this further probe was conducted by HSBC three years after the original meeting in Hong Kong. During that intervening period, there would have been no indication to Huawei that anything was amiss. In fact, Huawei reportedly had received no warnings[ii] or other indications of alleged issues of non-compliance from U.S. authorities over this period even though it had been in regular communication with the U.S> Department of Commerce on related technical compliance matters.
Thus, it is possible to draw a straight line from the inclusion of ZTE on the Entity List through to the potential additional criminal misconduct on the part of HSBC which threatened the validity of the DPA and on finally to the case against Huawei and Meng Wanzhou. The compliance risks arose not just at the time of the original communications with HSBC, but as the result of these additional factors outside of the control of Huawei and Ms. Meng.
The Arrest of Meng Wanzhou
After the bank provided the results of its probe to U.S. prosecutors, Ms. Meng and Huawei were charged with various counts of bank fraud, wire fraud, violation of U.S. sanctions against Iran, related conspiracy charges as well as obstruction of justice, and she was arrested in the Vancouver International Airport on December 1, 2018 as she changed planes en route to Mexico from Hong Kong.
This was not the first time Ms. Meng had been stopped but was part of a consistent pattern of, as characterized by Ms. Meng’s lawyers, systematic harassment of Huawei executives through threats and intimidation. In court filings, counsel for Ms. Meng described multiple instances in which Huawei executives were stopped at U.S. ports of entry and their laptops and other devices seized and searched. Ms. Meng had been subjected to similar treatment in early 2014 upon arrival at JFK International Airport, when she had been detained by U.S. customs officials. Her electronic devices were temporarily seized and searched. She was allowed to enter the U.S. and reportedly was told that the stop related only to a review of her visa.
Counsel for Ms. Meng allege further abuses of process in connection with her arrest in Vancouver. Upon arrival of the flight in Vancouver, Ms. Meng and a companion were identified, referred to “secondary” screening and escorted to the secondary inspection area. She was not told that she was under arrest or that an arrest warrant had been issued. She also was not advised of her rights under Canada’s Charter of Rights and Freedoms (the Charter). Ms. Meng asked why she had been referred to secondary screening, but no response was provided.
During this time, Canadian Border Services Agency (CBSA) officers conducted a thorough search of her baggage, questioned her extensively and compelled her to provide the passcodes to her electronic devices. She was interrogated about Huawei’s business operations around the world generally and in Iran specifically. Canadian law enforcement officials reportedly were in communication with their U.S. counterparts during the period of her initial detention to seek directions as to what actions to take. More than two and a half hours after she was initially detained, she was informed for the first time that she was under arrest and advised of her right to counsel.
U.S. authorities reportedly had attempted to persuade nine other countries to arrest Ms. Meng and hold her for extradition before Canadian officials finally agreed to cooperate. Remarkably, she had travelled through Canada [i] in early October 2018, which was after the warrant for her arrest had been issued and only two months prior to her ultimate arrest. Canadian officials proceeded with unusual caution in this case. Handwritten notes of an internal CBSA meeting prior to Meng’s detention and arrest, CBSA officers were not to suggest that the Canadian Royal Mounted Police (RCMP) were involved.
Hearings conducted in late 2020 shed even more light on the circumstances surrounding her arrest. The most dramatic development was the refusal of retired RCMP Staff Sergeant Ben Chang to appear to testify in the case. Sergeant Chang reputedly had been in communication with the FBI during the time of Ms. Meng’s detention and later formal arrest. Further reports indicate that Sergeant Chang, who took a position with a casino in Macau following his retirement from the RCMP in 2019, had retained legal counsel in connection with the enquiry. Moreover, there was conflicting testimony as to whether Roslyn MacVicar, the Pacific regional director general of the CBSA at the time of Meng’s arrest, had directed CBSA officers not to create additional file records in Ms. Meng’s case so as to avoid potential public disclosure under Canada’s Access to Information and Privacy laws. In her testimony, Ms. MacVicar denied the claims, but this was contradicted by statements from two subordinates, and the final agreed statement of the facts read out at the conclusion of this phase of the proceedings by John Gibb-Carsley, the Canadian government lawyer in the case, appeared to acknowledge that Ms. MacVicar had in fact given such an instruction.
To critics, this smacked of a cover-up and suggests that Ms. Meng’s initial detention by CBSA officers may have been part of a coordinated effort to secure evidence that would otherwise be inaccessible to law enforcement. Along these same lines, in court filings Ms. Meng’s counsel asserted that the initial detention, searches and interrogations were pursuant to a “ruse” or “gimmick” constituting a covert criminal investigation intended to deprive her of her rights under the Charter. (Related claims of abuse of process will be discussed further in part three in this series.)
Political interference as a means to promote “fundamental justice”
In China the case is seen as an example of selective application by the U.S. and other Western countries of the concept of the rule of law. Even some Canadian legal experts have called on the Canadian Justice Minister to intervene in the case in order to reinforce international perceptions of Canada as a country that adheres to the rule of law.
In a formal legal opinion reportedly submitted to the Minister of Justice in June of last year, Toronto lawyer Brian Greenspan, who is well-versed in Canadian extradition law, citing what he termed to be a “weak and speculative” case against Ms. Meng, argued that there are “compelling reasons” for the Justice Minister to intervene now and not wait until the current process is completed as would typically be the case (as will be discussed further below).
The purpose, Mr. Greenspan wrote[i], of such an intervention would be “to preserve, if not enhance, Canada’s long-standing commitment both to comity and our adherence to principles of fundamental justice in the international arena.”
Mr. Greenspan’s legal opinion was sought by former federal justice minister Allan Rock, who noted that an extradition proceeding “has a political aspect to it and the minister of justice controls the process under the Extradition Act. He can turn it on. He can turn it off.” According to former Minister Rock, the Prime Minister would be entirely within his rights to speak with the Justice Minister about the case. (More on how this fits into the overall theme of political interference will be discussed below and in part three of this series.)
The hearings conducted in late 2020 on the abuse of process claims relating to Ms. Meng’s arrest will have only reinforced such views on the part of those supporting such a course of intervention. However, this also presents conundrum for the critics as political interference is by its nature anathema to the rule of law, yet this is the tightrope that many serious commentators are taking, so the position cannot be dismissed lightly.
Additional Political and Diplomatic Dimensions of the Arrest of Ms. Meng
The arrest of Ms. Meng ignited a firestorm of controversy around the globe and has contributed to the downward spiral of diplomatic relations between China and both the U.S. and Canada. Moreover, as more than one leading Canadian legal expert has noted, the issues surrounding her case are complex and involve layers of criminal law, administration of justice, administrative law, government discretion and ultimately diplomacy.
The interplay of these multifaceted elements quickly came to the fore when on December 11, 2018, just ten days after her arrest, in an interview with Reuters[i], President Trump stated that he would be willing to intervene in the case if he determined that would help in the ongoing U.S.-China trade negotiations and promote the national security interests of the U.S.
A few weeks later, the Canadian ambassador to China, John McCallum, stoked further controversy when he stated[ii] that Ms. Meng had a potentially “strong defense” in the pending extradition case, highlighting three possible arguments: “One, political involvement by comments from Donald Trump in her case. Two, there’s an extraterritorial aspect to her case. And three, there’s the issue of Iran sanctions which are involved in her case, and Canada does not sign on to these Iran sanctions.”
He added that it would “not be a happy outcome” if the Canadian judge ordered Ms. Meng’s commitment for extradition as that would certainly result in a long-drawn-out series of appeals which would only continue to inflict damage to the Sino-Canadian relationship. He subsequently added that it would be “great” for Canada if the U.S. dropped its extradition request for Ms. Meng, and further indicated that any deal between the U.S. and China should include the release of Michael Kovrig and Michael Spavor, two Canadians detained by China after Ms. Meng’s arrest.
Although several top extradition law experts in Canada agreed with his assessment of the case, Ambassador McCallum’s statements were clearly inconsistent with the Canadian government’s official position that the arrest of Ms. Meng was not influenced by political considerations and that Canadian officials were simply following established legal principles and procedures in detaining her at the request of the U.S. government.
Ambassador McCallum attempted to walk back his statements, but his initial candor proved to be too controversial and generated an outcry among the Canadian administration’s political opponents. As a result, he was asked by Prime Minister Trudeau to resign, marking the first time in Canada’s history that an ambassador had effectively been fired.
The Pending Extradition Proceedings Involving Ms. Meng
Notwithstanding the resulting political fallout, the ambassador’s comments were in fact remarkably prescient, and the lawyers for Ms. Meng have followed the same script quite closely. We will trace these defenses in this article and in part three to follow, but we first outline the nature of the pending extradition proceedings to provide a foundation for the further analysis to come.
It is important to note that an extradition hearing is not a trial, and the threshold test for surrendering the accused to the requesting state is quite low. The court in the extradition proceeding does not rule on the guilt or innocence of the accused, and in fact in the extradition hearing the facts as charged by the requesting state are assumed to be true, similar to a motion to dismiss. Accordingly, the court simply assesses whether the facts as charged would be “sufficient to commit the person for trial in Canada” if the conduct had occurred there. The focus of the proceeding thus is on the process to ensure the fairness of the procedures in protecting the rights of the accused.
The court makes its ruling on the extradition request following a “committal hearing,” after which the matter is handed to the Minister of Justice to make the final order whether the individual is to be “surrendered” to the requesting state. Most extradition requests ultimately are granted, and in many cases the defendant will voluntarily agree to be extradited in order to be able to proceed more quickly to trial on the merits where he or she can present full range of defenses.
As Ambassador McCallum noted, the extradition process can be quite lengthy if vigorously contested each step along the way. In this case, the committal hearing is currently slated for April or May 2021, in order to allow sufficient time for the parties to present arguments on various procedural defenses (to be discussed below and in part three). If the court orders Ms. Meng to be committed for extradition to U.S. authorities, that decision can be appealed to the Court of Appeals in the first instance and then to the Supreme Court.
As noted by former federal justice minister Allan Rock cited above, the final decision rests with the Canadian Justice Minister, who typically takes up the matter after all appeals have been exhausted; however, even that order is subject to appeal under limited circumstances.
If Ms. Meng’s defense team takes advantage of all rights to appeal, then the process in this case could easily drag on for three to four years or even longer. (As a point of reference, the extradition of Karlheinz Schreiber, which also had a significant political dimension, took ten years, from 1999 to 2009.) During the entire period, Ms. Meng would continue to be subject to house arrest in Canada.
The Threshold Issue of “Double Criminality”
The request for extradition lists only one charge, the alleged bank fraud relating to the August 2013 meeting with HSBC in Hong Kong, and accordingly, the Record of the Case (ROC) submitted by U.S. prosecutors sets out facts relating only to that single charge. Counsel for Ms. Meng have raised numerous challenges to the extradition request, most of which will be addressed in part three in this series.
We address below the last (but perhaps the most fundamental) issue raised by Ambassador McCallum in his ill-fated comments to the press about the case, where he suggested that extradition would be inappropriate in this case because a core element of the charges against Ms. Meng involved alleged violations of U.S. sanctions against Iran while Canada had no similar sanctions regime in place then or now. This relates to the threshold issue of “double criminality” under both Canadian and international extradition jurisprudence which, stated simply, is that if the alleged conduct is not a crime under Canadian law, then extradition will not be granted. It is a question of reciprocity and fundamental justice. As portended in Ambassador McCallum’s comments, this in fact was a critical first line of defense presented by Ms. Meng’s lawyers in the proceedings. The position put forward by counsel was straight-forward. If the August 2013 meeting between Ms. Meng and HSBC representatives had occurred in Canada and not Hong Kong, and even if the PowerPoint presentation contained material misrepresentations about Huawei’s relationship with Iran-based Skycom as alleged, she could not have been charged with any crime in Canada since the heart of the matter related to Iran sanctions imposed by the U.S. that had no counterpart under Canadian law.
In a ruling issued on May 27, 2020, the Supreme Court of British Columbia rejected the “double criminality” argument put forward by Ms. Meng’s lawyers, finding that the “essence” or “legal character” of the alleged conduct would substantially align with conduct constituting a criminal offence in Canada, sufficient to support a ruling that the element of “double criminality” was satisfied in this case. In her ruling, Justice Heather Holmes concluded that the underlying offense of fraud was broad in scope and could encompass a very wide range of conduct.
While some U.S. white collar criminal law experts familiar with extradition proceedings generally viewed the conclusion reached by Justice Holmes on the “double criminality” issue to be a “slam dunk,” others took issue with the ruling. Lisa Silver, Associate Professor at the University of Calgary Faculty of Law, who writes regularly on criminal law issues, noted in a lengthy blog post [i]that, even if the court correctly interpreted the “double criminality” rule as a technical matter, there were additional foundational principles under the Charter guaranteeing the rights of the accused which had not been adequately addressed by the court.
Under applicable case law, the key to extradition, she wrote, is the “careful balancing” of the broader purposes of extradition with the rights of the individual, which place “important limits on when extradition can be ordered.” She made particular note of several factors that may suggest that the proper balance was not achieved in this case: Ms. Meng was only changing planes in Vancouver with no plans to stop in Canada; the allegations seemed stale; and it came at the same time as the U.S. was trying to convince Canada not to include Huawei in the bidding process for 5G mobile networks in the U.S. and Canada.
Had Ms. Meng prevailed on the “double criminality” argument, it would have brought an end to the extradition proceedings. On the other hand, Justice Holmes’ ruling on the “double criminality” issue permits the process to continue but does not directly determine the final extradition decision, which ultimately is solely within the province of the Minister of Justice.
A New Twist on the U.S. Side: No Sanctions No Case?
Following the court’s decision on the “double criminality” issue, the U.S. has experienced a contentious election and transition from the Trump administration to the new Biden administration. As projected, President Biden has now taken steps to reinstitute the Iran nuclear deal, and in connection therewith has once again removed the sanctions on Iran.
This presents an intriguing new wrinkle in the complexion of the case against Huawei and Ms. Meng. Will a prosecution which is based on violations of Iran sanctions, which were first imposed in the Carter years and then dismantled under Obama, then reimposed by Trump, and now removed again under the incoming Biden administration, remain as important to the DOJ under Biden, particularly in the context of the broader US-China relationship?
This is not the same as the “double criminality” issue under extradition law and practice, but it is a parallel consideration as a matter of prosecutorial discretion. Whether the exercise of such prosecutorial discretion will remain the same under the Biden administration may prove to be an important indication of the level of independence of U.S. prosecutors in this case.
The Next Line of Defense
This brings us to the next line of defense raised by Ms. Meng’s lawyers, which as projected by Ambassador McCallum in his original public comments, includes the spectre of political influence by then President Trump, threatening to undermine the integrity of the proceedings.
The transition from the Trump- administration to the new Biden administration again introduces a new set of dynamics to the assessment of the potential impact of this issue. Specifically, the question is whether allegations of threats of political interference by President Trump remain pertinent now that he is out of office. Or to put a finer point on the question, with so many observers (as with former Justice Minister Rock, cited above) calling for a political resolution, whether it is actually possible to bring this case against Meng Wanzhou to a conclusion without taking geopolitical issues into consideration.
These and other related issues will be addressed in part three of this series.
To be continued