The national security dimensions of global economic and financial (E&F) relations are more apparent in our highly interdependent world than ever before. Our newsletter aims to illustrate instances of this phenomenon not only in the Czech Republic but to all EU member states and NATO allied countries. An integral part of this effort will be updates about the latest developments in strengthening investment screening mechanisms and other regulatory initiatives.

On February 14, EU lawmakers overwhelmingly backed a far-reaching framework to coordinate scrutiny of foreign investments. The vote was 500 in favour, 49 against and 56 abstaining.
In November 2018 the European Parliament, the Council and the Commission reached a political agreement on the screening framework. 
In September 2017, the European Parliament proposed regulation for developing an EU-level mechanism for screening Foreign Direct Investment activity in the EU by non-member countries, with specific reference to concerns about Chinese investment undermining European security. The proposal acknowledges that it will be built on the existing review mechanisms already in place in 14 member countries and will not affect EU countries´ ability to adopt any new mechanisms or to remain without such mechanisms.  

Under the proposed regulation, member state governments retain final say in screening incoming FDI, but the Commission will also have a say on projects of Union interest (research - Horizon 202, space - Galileo, energy - TEN-E). In addition, the regulation includes a cooperation mechanism that can be activated when a specific FDI in one or several member states may affect the security or public order of another.

The screening mechanism would see greater scrutiny in any cases in which investment is determined to involve “critical infrastructure, critical technologies”, and cases where the “foreign investor is controlled by the government of a third country” (i.e. State-Owned Enterprises).

Chinese FDI in the EU fell 70% year-on-year from 2017 to 2018, although the number of investments actually blocked by national investment screening bodies remained unchanged at just seven in each year. This suggests the drop-off may have occurred due to a combination of uncertainty about the EU investment climate and other factors such as the general slowdown in the Chinese economy last year. Whether or not the number of blocked transactions will increase under new EU legislation and what the overall effect on investment volumes in the EU will be is yet to be seen.

On December 17, 2018 the Czech National Cyber and Information Security Agency (NÚKIB) published a warning against the use of both hardware and software produced by the Chinese telecommunications entities Huawei and ZTE. It emphasized that the “main issue is a legal and political environment of People's Republic of China [...] China's laws, among other things, require private companies residing in China to cooperate with intelligence services, therefore introducing them into the key state systems might present a threat,” said Agency Director Dusan Navratil.

Under the law on cybersecurity (effective since 2015), a NÚKIB warning does not constitute an outright ban but requires some 160 public and private operators of critical infrastructure, which are essential to the functioning of the state (including power plants, telecommunications companies, and water supply) to conduct an analysis of risks and take “appropriate action”. The Ministry of Health has already suggested that they won't allow either Huawei or ZTE products within its IT infrastructure. The Ministry of Defence has ordered its employees to remove the AirWatch app from mobile phones made by Huawei.    

All these allegations have been denied by the Czech branch of Huawei, which has demanded that evidence be presented in support of these claims. Based on a letter addressed to PM Babiš and NÚKIB, by February 14, 2019,  Huawei demands cancellation or modification of the warning, otherwise Huawei is prepared to take the case to court or international arbitration. It argues that as a result of the warning the company suffered reputational harm and faces many obstacles. It was, for example, excluded from a public tender to build a tax portal. It was reported that it may demand up to 40 billion crowns.

On December 24, 2018, the Chinese Ambassador met informally with PM Babiš (at the ambassador´s request). Following the meeting, the Chinese Embassy released a statement suggesting that PM Babiš had changed his mind on the security warnings. This step was sharply criticised by PM Babiš, provoking a strong reaction, with PM Babiš himself saying the Embassy had “lied”.

On January 10 2019, the Czech President Miloš Zeman dismissed NÚKIB´s warning, adding that that these claims “seriously affected the economic interests of the Czech Republic”, because Czech companies operating in China may become the target of Chinese retaliation. According to the head of state, this mainly concerns Czech automobile company Škoda Auto and Home Credit (owned by Petr Kellner, the richest man in the Czech Republic), which provides consumer loans.

On January 28, 2019 the United States Department of Justice has indicted the Chinese electronics and telecommunications firm Huawei on multiple counts, including “theft of trade secrets conspiracy, attempted theft of trade secrets, seven counts of wire fraud, and one count of obstruction of justice”. According to FBI Director Christopher Wray, “the charges clearly allege that Huawei intentionally conspired to steal the intellectual property of an American company in an attempt to undermine the free and fair global marketplace.”

According to the indictment, in 2012 Huawei began a concerted effort to steal information on a T-mobile phone-testing robot dubbed “Tappy”. As part of the investigation, the FBI obtained an email revealing that in July 2013, Huawei offered bonuses to employees based on the value of information they stole from other companies around the world.

The company has been legally barred from contracting with the American military and federal government since the passage into legislation of the Fiscal Year 2019 Defense Authorization Act in August of last year. The US government is now putting pressure on EU members and other allies to avoid dealings with Huawei that might pose a risk to their national security, including 5G network development.

A 2018 report by the United Kingdom’s Huawei Cyber security Evaluation Centre Oversight Board found cause for concern, stating that “Huawei’s processes continue to fall short of industry good practice” and that the “lack of progress in remediating these is disappointing”. In addition it claims that “identification of shortcomings in Huawei´s engineering processes have exposed new risks in the UK telecommunication networks”.

In early December, Alex Younger, head of the UK´s foreign intelligence service, said that “we need to decide the extent to which we are going to be comfortable with Chinese ownership of these technologies”. Moreover, it reported that a formal government decision on whether or not the company is to face a ban from British 5G network development is expected to be made in March of this year.