Topics:   Business Ethics,Compliance,Risk Management

Topics:   Business Ethics,Compliance,Risk Management

December 19, 2018

Lessons for Directors from the Cross-Border Arrest of a Chinese CFO

December 19, 2018

On December 1, Meng Wanzhou, the chief financial officer (CFO) of Chinese telecommunications giant, Huawei Technologies, was arrested by Canadian authorities at the request of the United States. Meng is reportedly accused of fraud and conspiracy to defraud U.S. financial institutions regarding U.S. sanctions on Iran. Huawei maintains that it has complied with all laws where it operates, including U.S. export controls and sanctions laws, and Chinese authorities are expected to dispute the U.S.’s long-arm jurisdiction over one of its citizens. Just one day after the arrest, President Donald Trump floated the idea that the current tariff freeze between China and the United States could be extended to allow for continued negotiations, and the following day, President Trump and China’s President Xi Jinping agreed to a 90-day truce in the trade war. 

Meng’s arrest was nothing short of shocking, as we don’t normally see C-Suite executives arrested by foreign jurisdictions; we don’t normally see such an arrest occurring the same day the presidents of the two applicable countries are meeting and discussing trade issues; and we don’t normally see allegations that international high-profile executives conspired to commit fraud in connection with U.S. sanctions laws.   

As for the basis of Meng’s arrest, prosecutors allege that she used Hong Kong-based telecommunications equipment seller Skycom Tech Co.Ltd. to evade the United States’ overarching sanctions against Iran between 2009 and 2014.  Skycom allegedly sold equipment to several telecommunications companies in Iran, including an attempted sale of American made computer equipment to an Iranian mobile operator. Skycom is allegedly a subsidiary under the control of Huawei.

Although there may be a political component to these particular circumstances as President Trump reportedly stated that he would intervene in the U.S. Justice Department’s case against Meng if it would serve national security interests or help achieve a trade deal with China, these circumstances highlight potential pitfalls inherent with cross-border transactions as well as recent trends in enforcement that directors of companies should be aware of.

  1. There is a heightened focus on cross-border cooperation. Meng was arrested by Canada at the request of the United States while she was en route from Hong Kong toMexico. Meng had reportedly been avoiding the United States for months and was arrested as she was changing planes in Vancouver. The enforcement arm of the United States is as long as the extradition treaties it has with other countries allow—and those treaties are numerous. While the U.S. government must still have a basis in law to enforce its regulations on foreign actors, simply avoiding the country will not be an effective way to avoid enforcement as long as other countries are willing to assist the U.S. with that enforcement—as Canada has done here. It remains to be seen how countries like China will react to this long-arm jurisdiction and how this will affect directors and officers of U.S. companies.
  2. There is a heightened focus on individual liability for company actions. Over the last few years, the U.S. Department of Justice has made announcements demonstrating its intention to focus on individual liability in the corporate context. In this instance, Meng was arrested for her conduct as a top executive at Huawei and as a director of Skycom. She is accused of fraud and conspiracy to commit fraud in connection with U.S. sanctions laws. It is still unclear what the full scope of the allegations will be but at this early stage, they appear to be based in part on statements that Meng made to financial institutions about the relationship between the two companies. This demonstrates the Justice Department’s stated focus on individual liability and the importance of properly vetting statements that will be made by top-level executives and directors of companies to third parties. The use of fraud charges to enforce sanctions laws also demonstrates the range of laws the United States has at its disposal to pursue individuals and companies whom it believes to be engaged in wrongdoing. The arrest of Meng as a method for potentially punishing her employer also demonstrates the creativity the U.S. government is willing to employ to achieve the goal of enforcing its laws abroad.
  3. There is an increased focus on Chinese companies (and companies doing business with Chinese companies). The current administration has increased its rhetoric and enforcement efforts involving China because of its stated view that China engages in unfair trade practices to the detriment of the United States. The arrest of Meng as a strike against Huawei appears to be indicative of the administration’s view that the United States can “win” a trade war against China. In addition to targeting individual actors for corporate actions, the United States clearly intends to enforce the tariffs it has imposed, even on Chinese companies. The administration has strengthened its review of Chinese investment in U.S. technology companies, banned U.S. government use of Huawei and ZTE technology (resulting in an effective ban of such products on companies who contract with the U.S.government), encouraged Americans not to buy Huawei phones because of concerns over espionage, and overseen major penalties against Huawei’s competitor, Chinese technology company ZTE, for violating U.S. sanctions laws.
  4. Political changes sometimes have direct effects on individual and director liability. The United States and China recently have been engaged in a trade war. This summer, each country imposed tariffs on the other, to the detriment of both American and Chinese industries, and in some instances, the stock market. Most recently, immediately following Meng’s arrest, the stock market again dropped, with Hong Kong, Tokyo, Shanghai, and U.S. stock futures all falling. Some reports indicate that Meng’s arrest was the Administration’s attempt to gain another bargaining chip in the evolving trade war. Huawei’s significant connection to the Chinese government—Meng’s father, Huawei’s founder, was a former engineer in China’s People’s Liberation Army—may have contributed to the decision to pursue an enforcement action against her individually. 
  5. Companies must understand the evolving trade and sanctions laws. Effective November 5, 2018, the United States re-imposed sanctions on Iran that had previously been lifted in 2015 under the Joint Comprehensive Plan of Action on Iran’s nuclear program. The measure puts back into place secondary sanctions on non-U.S. entities that continue to engage in certain Iran-related transactions.In addition to the primary sanctions on Iran, which broadly prohibit most commercial activity between the United States and Iran, the United States also imposes secondary sanctions on non-U.S. entities (and individuals) who do certain business in Iran. Trade and sanctions laws can be complex and ever-changing, but the U.S. government expects domestic and foreign companies and their directors and officers to understand and abide by them.

As leaders of American companies wade into a risky future, corporate directors and management should work closely with trusted partners to better understand the growing risks inherent in cross-border business.

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