DOJ hooked a whale with arrest of Huawei CFO

On Saturday, Sabrina Meng Wanzhou, chief financial officer (CFO) of the Chinese telecom giant Huawei was detained by Canadian authorities at the Vancouver airport. An extradition request has been issued by the United States Department of Justice for her transfer to authorities in the United States.

In response to the news of Meng’s arrest, financial markets reacted swiftly with the Dow Jones Industrial Index dropping 800 points and then staging a comeback later in the day.

{mosads}The detention of Meng Wanzhou is not a minor event. In essence, the Justice Department just hooked a whale. Sabrina Meng Wanzhou is the daughter of Huawei’s founder, Ren Zhengfei. Ren is a member of Communist Party royalty, friend of President Xi Jinping and National Congress appointee.

Huawei is heralded as one of China’s “national champions,” a globally recognized leader in the manufacture of sophisticated telecom switchgear and equipment that drives the internet. Huawei is one of only a few globally recognized Chinese brands and a source of inspiration and pride among the Chinese people.

What makes this incident unusual is that you have the CFO of a Chinese company being arrested for the alleged wrongdoing of a corporation. Customarily, the corporate format offers its officers and employees “limited liability.”

Wrongdoing liability is placed instead on the corporate entity, and individuals who work for the corporation are offered the protection of the corporate shield. Sealed indictments have been issued that specifically name Meng.

This indicates that the authorities have evidence that Meng is in violation of a criminal statute. The matter facing Meng is very serious, and a team of high-powered attorneys will most certainly represent her.

The charge

Reports from news media suggest Huawei has violated U.S. trade sanctions imposed on Iran. This revelation is not new but part of an ongoing investigation conducted by the U.S. Department of Commerce and the investigative arm of the U.S. Treasury.

The case against Huawei is further supported by an alert issued by HSBC’s compliance office to the U.S. Justice Department of unusual money transfers by Huawei in connection to its dealings with Iran. 

Impact on U.S.–China trade negotiations

Earlier this week, a soft breakthrough was achieved when President Trump and President Xi agreed to call a truce and bring both sides back to the negotiating table. President Trump declared that China tariffs would not be escalated to 25 percent on Jan. 1, and a 90-day timeline has been placed on the negotiations. 

The detention of Meng Wanzhou rattled global financial markets. Markets interpreted the event as being a dire threat to the upcoming trade negotiations between China and the United States. There are two ways of looking at the impact of the Huawei incident:

If the arrest of Meng and indictment of Huawei are linked to the trade negotiations, then this will inject greater difficulty in reaching a negotiated settlement. If the Huawei incident is a separate or discrete event that is independent of the events that transpired at the Group of 20 summit then markets should breath a sigh of relief.

The governmental response by China has been swift in calling for Meng Wanzhou’s release. Behind the scenes, diplomatic dialog is going to be kicked into high gear to gain greater understanding as to the charges being brought forward and to secure the release of Meng.

At this point, I would urge caution and not overreact. Meng will be treated with velvet gloves while in custody, and she will be accorded due process throughout the proceedings.

I believe China will not allow this to get in the way of a negotiated settlement or allow this to derail the upcoming trade negotiations. There is too much at stake for both China and the United States.

To get a better read on this, keep an eye on what’s happening in China in reaction to the Huawei arrest. The detention of Meng has explosive potential in igniting anti-American sentiment within China.

{mossecondads}If Chinese state-controlled media runs the arrest as the front-page story, you can expect that doing so will whip up nationalist activism and anti-American sentiment. The power of the crowd can be turned on like a light switch.

If China’s authorities place this issue above the upcoming trade negotiations, you can expect crowds to take to the streets. If that happens, then Starbucks and McDonald’s better start buying some plywood, as their stores will be mobbed by angry crowds.

Alternatively, if Chinese media buries this story and doesn’t make much of it then one can assume China will treat this as a separate event and not allow it to disrupt trade negotiations. Calm on the streets will be an indicator as to whether or not the Huawei incident will be a deal-breaker as the trade negotiations move forward.

Arthur Dong is a professor at Georgetown University’s McDonough School of Business. He specializes in legal and business engagements between China and the United States.