The release of Meng Wanzhou, CFO of Huawei and daughter of Ren Zhengfei the founder, has caused a big wave of brouhaha in China and also among the overseas Chinese. Most are celebrating the victory of the country and have attributed it to the party leadership. Ms. Meng had claimed the same, “Without this strong motherland, I wouldn’t have my freedom today.”
I would argue that Beijing is the real loser in the case. But before making further comments, let’s first consider the legal aspects of the charge against Ms. Meng, although most people understandably focused on the geopolitics of the case.
The Legal Foundation of the Case Against Meng & Huawei
I did not pay much attention before to the case because I have not seen meaningful legal discussions, which should have come first, not the political aspect or not only the geo-politics. After Meng’s release, I searched online and found this piece by a legal scholar from University of Oxford on August 10, 2021, days before Ms. Meng’s release. The author, Natalie Mrockova, concluded that “there is a reason to believe that the fraud charges against Ms. Meng and Huawei are, indeed, hard to prove.”
Let’s follow the author by quickly looking back at the history of the case. Ms. Meng “was arrested in December 2018 at the Vancouver International Airport following the US request for her extradition to the US to face charges of bank fraud. The US alleges that Ms. Meng misled Huawei’s bank HSBC about her firm’s business dealings with Iran. Such action would put HSBC in breach of the US sanctions against Iran. The extradition hearing was halted pending the examination of documents from recently concluded dispute of HSBC and Huawei in Hong Kong (the two parties settled out of court in April 2021).”
More specifically, “Canadian prosecutor’s case for extradition rests heavily on the claim that Ms. Meng committed fraud when she allegedly lied to HSBC about Huawei’s relationship with SkyCom, a fully-owned subsidiary which had dealings with Iran in contravention of the US sanctions. The Canadian prosecutor argued that – following the publication of a newspaper article which suggested that SkyCom attempted to sell US computer equipment to Iran’s main telecom provider and that SkyCom had close links with Huawei – Ms. Meng told HSBC that Huawei no longer held controlling stake in SkyCom and that she had resigned from SkyCom’s board of directors. The prosecutor alleged that HSBC relied on Ms. Meng’s statements when deciding to co-lend USD 1.5 billion to Huawei in July 2015 in contravention of the US sanctions.”
Ms. Mrockova then told us that the most important reasoning for a fraud case: “Legally speaking, fraud can only be established if the prosecutor can show, on balance of probabilities, that both the subject and the objective elements of the crime have been satisfied.” She pointed out that in this case it is the “objective element involves showing that the false statement by the accused caused the losses” that can be called into question. The reason has everything to do with the other party in the case, the HSBC of Hong Kong.
According to Mrockova, “If it is true that HSBC knew about the link between SkyCom and Huawei, then it cannot be said that Ms. Meng’s statements caused the losses (i.e. the liability for breaching the US ban) and fraud could not be established. As such, HSBC’s actual knowledge of the relationship between SkyCom and Huawei is very important.”
In her opinion, HSBC is unlikely to be in the dark about this billion dollar transaction: “When a bank onboards and works with a major client, it has to conduct due diligence to understand the nature of the business, its legal and operational structures, the risks involved, and the client as a whole. The KYC (‘know your customer’) principle is an underlying standard that is common in banks and other professional organisations (for example law firms). The way this usually works is that a banker or a lawyer identifies and collects information from the client. The information is then handed over to the in-house compliance team who do their own checks: this may include internet searches, emails with other offices and associates to establish whether anyone in the organisation has any relevant prior knowledge, to check for conflicts of interest, etc. Confirmation is then given whether the bank or the law firm can proceed in assisting the client in question. When there is a flag, this is usually dealt with by the in-house lawyers or an external advisor. Typically, such issues are raised with senior members of the organisation and a decision is made at the senior level following a careful risk assessment and cost-benefit analysis. As such, banks do not solely rely on documents and statements provided by the client – especially in large deals.”
Mrockova calls the key US/Canada evidence or reasoning into question: “(T)he US claims that only junior employees of HSBC knew about Huawei’s connections with SkyCom. Given the media attention about the possible link between SkyCom and Huawei raised at the time and given the usual procedures and checks undertaken by banks when dealing with large clients, it is unlikely that HSBC did not know – or at the very least seriously suspect – that SkyCom and Huawei were linked.” This sounds reasonable to me.
Not only suspicion but real evidence in favor of Ms. Meng: “Ms. Meng’s lawyers now claim that the bank’s internal emails – shared with them in April following the settlement between HSBC and Huawei in Hong Kong – clearly show that senior managers were aware of the connection. Ms. Meng’s lawyers tried to get the emails admitted as new evidence in the extradition case but failed. The court decided to exclude the new evidence. If admitted, regardless of the reasons and decisions for exclusivity, the new evidence could have significantly affected the outcome of the case, most likely in favour of Ms. Meng and Huawei.”
Separating the Geopolitics & Fraud
Mrockova did not skip the geopolitics. In her words, “The dispute has to be considered and understood in its proper political context. Although the Canadian prosecutor and the US keep insisting that the core issue is Ms. Meng’s fraud, it is difficult to separate this issue from the question of the US sanctions on Iran.”
In light of this, Mrockova came to the conclusion: “If Ms. Meng did mislead HSBC and HSBC can show that they really did no know about SkyCom’s connection to Huawei, they would not be in breach of the US sanctions – but Ms. Meng and Huawei would be liable for fraud. If, on the other hand, HSBC did know that Huawei controlled SkyCom which was dealing with Iran then HSBC would be liable for breaching the US sanctions – and Ms. Meng and Huawei would not be liable for fraud.”
A good and interesting point I would say. Let me try to unpack her logic here by considering two scenarios based on whether HSBC knew (or not knew) about Huawei’s controlling over SkyCom.
Scenario #1: Ms. Meng indeed knowingly misled HSBC, and the latter never did its own due diligence to find out the ties between Huawei and SkyCom. In that case, Ms. Meng was guilty of bank fraud as charged, as she provided material misinformation to HSBC, and HSBC was just a lousy bank failing to do its job, although still not guilty for breaching the US sanction.
Using the logic of both subjective and objective elements for bank fraud, one can argue that Ms. Meng has satisfied both conditions. Subjectively she had the motive to cheat in order to get the loan from HSBC, and objectively she did cause the loss of the bank and the US, exactly because the bank’s ignorance and laziness to do its own job independently.
As Mrockova correctly points out, Scenario #1 is highly unlikely because even the media learned — and published — about the SkyCom dealing with Iran, and also about the Huawei control of SkyCom. It’s like shouting to the ears of HSBC executives, making it simply impossible for HSBC to ignore, no matter how lousy a bank it is.
This means we must focus on the other scenario.
Scenario #2: HSBC did actually know that Huawei owned and controlled SkyCom but chose to proceed with the loan to Huawei. This means HSBC — not Ms. Meng — would be guilty of violating the US sanction against Iran, while Ms. Meng would be off the hook for both charges. Why so? Because again the objective element of fraud asks that the prosecutors must show or prove, beyond reasonable doubt, that the false statement provided by Ms. Meng actually caused the losses. If HSBC knew that SkyCom was a part of Huawei — with or without Ms. Meng stating that, then the prosecutors (from both the US and Canada) would have a hard time to prove, again beyond reasonable doubt, that Ms. Meng materially caused either fraud or the violation of US sanction against Iran.
This means the Meng Wanzhou case has been on a shaky legal ground from the very beginning, but especially after the claimed discovery, by Ms. Meng’s lawyer, of the internal email showing the executives of HSBC knew the controlling relationship all along.
This opens up interesting questions, such as who won and who lost? Why would the US prosecutor target Ms. Meng and let go HSBC? What other alternative outcome would there be?
My Own Readings of the Case
To understand why the US has targeted Ms. Meng — and more importantly, Huawei — alone but not HSBC, we must keep in mind that the U.S. attorneys as the federal prosecutors are always a political appointment by the president. Furthermore, as this legal note tells us, “The U.S. attorney general, who is the chief law enforcement officer in the United States and the head of the Department of Justice, has supervisory responsibility over U.S. attorneys.” It is safe to say that prosecutors wear two hats: They are the legal experts, but they are also a part of administration.
This is not saying that the US prosecutors are biased and entirely politically motivated but does say that they will consider many factors — including geopolitical or national security factors — in deciding whether and to whom to place charges against. After all, the final line of duty for judicial independence rests on the shoulders of the courts and judges. The prosecutors merely bring charges, cases and defendants to the attention of the court of law, which means they do have more freedom in picking and choosing cases and defendants to work on. If the defendants believe the prosecutors are biased, they can always fight in the court, which can be one of the most efficient ways to achieve justice.
Regarding winning and losing, I would say the US is the clear winner in this entire affair. It succeeded in turning a weak legal case into a statement of facts attached to the DPA (Deferred Prosecution Agreement).
It is not that the US has not made compromise with Ms. Meng and her legal team. According to this Wikipedia article, “On 18 September 2021, The Globe and Mail, citing Canadian sources, reported that the U.S. Department of Justice had a talk with Huawei and the lawyers representing Meng and had offered to end the extradition request and criminal proceedings if Meng pleaded ‘guilty’ to the charges and paid a large fine.” If that is true, then we know from reading the DPA that Ms. Meng did not plead guilty nor paid a large fine.
But those two “wins” for Ms. Meng might have been small bargain chips for the US prosecutor, as the DPA has been otherwise in strong favor of them. It states that Ms. Meng “has reviewed the fact described in the Statement of Facts” and admitted that “all of the facts in the Statement of Facts are true and accurate to the best of her information and belief.” The DPA further stated rather preemptively that Ms. Meng “stipulated to the admissibility of the Statement of Facts,” “in any proceedings against her, including any trial, guilty plea or sentencing proceeding, and will not contradict anything in the Statements of Facts at any such proceedings.”
Sure enough, US DOJ had a press release after the DPA and vowed to “prepare for trial against Huawei, and we look forward to proving our case against the company in court.” It seems the DPA has opened the flood gate for more charges later, just the thing the US prosecutors really wanted perhaps for a long time.
Still, the DPA does not put the US prosecutor in any stronger legal position than before, as it fails to show that Ms. Meng’s misleading statements during the meeting with HSBC executives had undoubtedly and singlehandedly caused the loss from the bank fraud.
Yes, the DPA did tell us that in response to media exposure of the SkyCom deal and its direct ties with Huawei, HSBC made formal inquiries and received untruthful responses from Ms. Meng and Huawei. But inquiries to Huawei alone hardly qualify as due diligence. If HSBC stopped short in making its own independent investigation above and beyond its Huawei inquiries, it is essentially saying that “We trust Huawei completely and will take its CFO statement as objective evidence.”
The simple fact remains that a bank cannot transfer or shift its financial risks to its client and then blame the latter for its loss. In other words, the flow of money in this case was from HSBC to Huawei, not the other way around. HSBC — not Huawei — should accept the risks involved in this transaction.
Is it possible that the DPA appear anyway different from the way it is now? I would argue the current Statement of Facts is true and accurate but incomplete. The statement should allow both sides to say what each of them think important. It should not be a one sided document as it is now. Instead, Ms. Meng and her legal team should present their own version of facts, including that HSBC executives knew the true controlling relationship between Huawei and SkyCom but chose to proceed with the loan. Doing so would add important pieces of puzzle to the true and whole picture and helps explain why Ms. Meng had pleaded not guilty.
A Bloomberg report also provided details about how the HSBC had its share of responsibility in violating the US sanction against Iran. The report cited Ms. Meng Wanzhou’s lawyer as saying that “HSBC’s relationship manager on the Huawei account, who cannot be named because of a court-ordered publication ban, ‘couldn’t be doing his job and not know about the relationship’ between Huawei and Skycom, Addario said. ‘He’s far more than a gopher. He’s the actual conduit of information between the two institutions.’”
But if Mrockova was right that “in late June Ms. Meng’s lawyers relied on much of the new evidence– most importantly HSBC emails that they suggest shed light on the extent of knowledge that HSBC had of the true relationship of SkyCom and Huawei” then it makes no sense for Ms. Meng to stay silent this time. Perhaps she is sick and tired of the legal drama and wants to end all of it once and for all. But I suspect she or her legal team had a bit of miscalculation that prevented them from taking advantage of the legal bargain. In the end, the US prosecutors were able to walk away with a statement of facts that is completely in their favor — something they may not get from the court, had the trial started.
The Case of “Two Michaels”
While Huawei may have suffered a small legal blow from the Meng Wanzhou case, Beijing has lost more. In fact, Beijing is the real loser in the Meng Wanzhou case, and it only has itself to blame for making an impression of conducting a “hostage diplomacy.”
Look at what happened: Right after Ms. Meng was released, the “two Michaels” of Canada were put on the flight home. Beijing did not even try to cover the non-independence of its court system and instead wanted to send a clear message to the world: Never meddle with China without facing consequences —and expect rewards if you do otherwise.
Beijing did owe a valid explanation to the world, considering that at least one of the “two Michaels” has already been sentenced in China and therefore, legally a “foreign national prisoner” in China. They were also arrested on spying charges, which according to this article, is considered a crime in both the U.S and China, and presumably in Canada, that fits in the extradition treaties.
It is not that Beijing has been completely silent. The Chinese Ministry of Foreign Affairs in a press conference has made it clear that Chinese government has obtained “iron solid mountain of evidence” 铁证如山that the two Michaels indeed were guilty as charged. Beijing also consistently denied any link between the Canadian case and that of Meng Wanzhou and Huawai.
If there were a competition for “The worst international communicator,” China would deserve the title hands down.
After the Meng Wanzhou saga, who in the world would believe the rhetoric of “no link” between the cases of Ms. Meng and the Canadians? Furthermore, who would take Beijing seriously next time when it accuses any foreigners of espionage? Finally, who could find a better example of the “arrogance of power” of the party that pays no attention to the dignity of the legal system?
We have reasons to believe permanent damages have been done to the mainland laws and courts. It may take years or decades to fix it! This is yet another example that China is “penny smart and pound foolish” even at the cost of jeopardizing its legal integrity in front of the world.
But what can we say? Xi Jinping only cares about party leadership of everything, including the judicial system. “Rule of law” is not what he wants, only “Rule of the party”. Therefore, Beijing also gets what it wants in the end.