Recent regulatory actions appear to place the Federal Communications Commission (FCC or “Commission”) at the spearhead of an increasing “whole-of-government” effort to address the risks of Chinese investment in U.S. telecommunications networks, technology and critical data.
On April 24, 2020, the FCC unanimously issued Orders to Show Cause against four state-related Chinese telecommunications companies: China Telecom (Americas) Corporation</strong>; China Unicom (Americas) Operations Ltd.</strong>; and Pacific Networks Corp. and its wholly owned subsidiary, ComNet (USA) LLC. The Commission directed that within 30 days, the companies show why their U.S. operating authorities should not be revoked (China Telecom Americas is the U.S. subsidiary of a state-owned Chinese company; Pacific Networks is a wholesale reseller of voice and data to U.S. operators; ComNet offers global SIM card, termination and calling card services). FCC Chairman Ajit Pai cited concerns regarding “national security and law enforcement risks” as the basis for the Commission’s orders.
This is far from the first FCC action against a Chinese telecommunications company on that basis; on May 9, 2019, the Commission unanimously denied the Section 214 (international operating license) of China Mobile USA, finding that its Chinese state ownership resulted in an unacceptable national security risk. 34 FCC Rcd 3361 (4).
However, it does represent the first official interaction involving a new government entity with the acronym-resistant title, “Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector (“Committee”).” Dubbed by some as “CFIUS (Committee on Foreign Investment in the United States) for Telecoms,” the Committee (established by President Trump’s Executive Order on April 4, 2020) in fact formalizes a long-standing ad hoc interagency process known less formally as “Team Telecom,” which reviews foreign investments in the U.S. telecommunications industry. The Committee includes representatives of the Commerce, Treasury, Defense, Homeland Security and Justice Departments. It may also include the head of any other executive department or agency, or White House official the President deems appropriate in a given case. The Executive Order gives the Committee jurisdiction to review both existing licenses and new applications. In addition, the Executive Order directs the involvement of the Director of National Intelligence, who must (among other things), provide an Intelligence Community threat assessment on a matter within 30 days of the Committee’s request.
Such time limits are a novel attribute of the new Team Telecom’s mandate; while under the previous ad hoc process, Team Telecom referrals (notably the China Mobile review) have sometimes taken years to get to the FCC.
The Executive Order imposes a 120-day period for the Committee to make its initial reviews and recommendations, with an additional 90 days if a secondary review is warranted.
In this instance, that was unnecessary. The new entity, chaired by the Attorney General, lost no time; just days after inception, the entity sent a letter on April 7, 2020, recommending and requesting that the FCC urgently consider revoking the licenses of China Telecom Americas. The Commission promptly took matters further by including the other companies in the Orders to Show Cause.
The concern regarding Chinese investment in this sector centers on (1) the risks seen in Chinese state ownership and exploitation of its companies’ positions to collect (or reroute) critical information and gain access to telecommunications technologies; and (2) the so-called Chinese “intelligence law” which, while not perfectly understood, is broadly believed to obligate private Chinese companies to provide, upon demand, whatever information they collect – or to which they have access – to Chinese state security.1
In responding to the FCC’s Order, these concerns pose particular challenges for the subject companies. In a “show cause” proceeding, the burden is on the incumbents to show why these concerns do not or should not apply. It’s not easy to envision how that burden can be met here. For one thing, the simple fact of China Telecom Americas’ state ownership is unlikely to change. As to mitigation agreements regarding reducing the risk involving the “intelligence law,” none of the other companies appear to be in a position to alter or selectively avoid compliance with Chinese law. Additionally, based on the record, assurances on this point are unlikely to be accepted. In his letter seeking action against China Telecom Americas dated April 7, 2020, the Attorney General specifically referred to the company “failing to honor” the terms of its Letter of Assurance to the FCC regarding transparency and data security in its 2007 licensing proceeding.
Concern about these companies is evidently bipartisan. Back on September 16, 2019, the FCC received a letter co-signed by Senators Charles (Chuck) Schumer (D-NY) and Thomas (Tom) Cotton (R-AR) – a notable event in itself – asking the Commission to consider a proceeding reviewing the licenses of China Telecom Americas and China Unicom. Congressional support seems likely for any revocations the FCC might order in this case.
These FCC Orders, and the formalization of Team Telecom, come on the heels of other recent administration action. As described in an earlier Alert, President Trump recently ordered the unwinding of a Chinese company’s (Beijing Shiji Information Technology Co. Ltd.) acquisition of a U.S. hotel guest-management software company (StayNTouch, Inc.) after CFIUS review. This came under new regulations specifically governing foreign investment in U.S. companies collecting or maintaining “sensitive personal data” of U.S. citizens (31 CFR Sec. 800.241). While the regulations are not by their terms Chinese-specific, the recent Order follows a series of (pre-regulations) CFIUS-ordered divestitures of Chinese investments in U.S. data-collecting enterprises (e.g., in June 2019 regarding Beijing Kunlun Wanwei Technology Co., Ltd. and U.S. dating application, Grindr).
Taken together, these actions and new regulations clearly indicate a crystallizing consensus at the highest levels of the administration that, no matter the financial benefits, Chinese-backed investment in certain areas constitutes an unacceptable national security (broadly defined to include intelligence, intellectual property, economic interests, and exploitable personal information) risk. Moreover, with telecommunications and network access now seen as the focus of that risk, the FCC finds itself central to U.S. steps to confront it.
This may have an impact on merger and acquisition strategies going forward. Because of the close correlation of data access with telecommunications networks, it’s very possible that a proposed acquisition or investment could face both CFIUS and Team Telecom/FCC scrutiny. The timelines, legal efforts and expense – and potential mitigation options involved in such reviews – should be built into the planning and legal guidance for such transactions.
Conclusion
As the U.S. emerges from the current pandemic-induced slowdown, American telecommunications companies will likely seek new capital and distribution alliances, and at possibly distressed price levels, might well present an attractive value for prospective foreign investment. From the foregoing, however, it’s clear that such companies and investors will need to recognize the heightened regulatory hurdles for any such deal for capital from, or strategic relationships involving, a Chinese source (particularly state-connected).
Investors should be prepared to accept that pursuing such opportunities will entail – now as a matter of deliberate U.S. policy – extensive, expensive and protracted regulatory review, with lengthening odds against success. Borrowing a phrase from the trade compliance world, for now there appears a “presumption of denial” – with the path to overcoming such a presumption seeming ever-steeper.
Additional Assistance
For further assistance, please contact James Kevin Wholey or the Phillips Lytle attorney with whom you have a relationship.
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