A leaked report on the review of a merger deal between 3Com Corp. and a partnership involving the Chinese company Huawei has stoked tensions of the sort lawmakers hoped to avoid when they redesigned the panel in charge of weighing foreign acquisitions.

The 3Com deal is in the midst of a national security review by the Committee on Foreign Investment in the United States, or CFIUS, a multi-agency panel that weighs the risks of proposed foreign acquisitions. Congress revamped the CFIUS process this year in part because the business community warned that politicization of foreign business deals would drive foreign investors away, and eventually hurt the U.S. economy.

A classified assessment by the U.S. Director of National Intelligence labeled the 3Com deal a threat to national security, according to a Nov. 30 story in the Washington Times. Some critics have accused Huawei, China’s largest computer-networking equipment supplier, of having ties to the Chinese army.

On Dec. 11, House Financial Services Chairman Barney Frank (D-Mass.) and Rep. Carolyn Maloney (D-N.Y.) sent a letter to President Bush blasting the release of the intelligence findings to the Times.

In an interview with Politico, Frank called the Bush administration “hypocritical” for leaking classified intelligence information related to the pending deal between electronics manufacturer 3Com and a partnership between Bain Capital and China’s Huawei Technologies. Key administration officials have widely criticized other national-security-related leaks.

“I did think it was important to call them on their hypocrisy and to try and discourage” future leaks related to administration reviews of business deals, said Frank, who expects only a pro forma reply from the White House.

The lawmakers also hoped the letter would give the Treasury Department ammunition with which to quash the leaks, said a House Democratic aide. Treasury chairs the CFIUS panel.

The 3Com leak has rattled the international business community, which fought hard to ensure proprietary business information remained secure under new CFIUS rules Congress passed earlier this year. 3Com shares fell following the leak, showing that investors are nervous the deal will be blocked.

If the CFIUS process fails to protect such information during ongoing reviews, or allows pending cases to become political footballs, foreign investors will shy away from pursuing deals on U.S. soil, business leaders have argued.

“Congress worked hard, in a bipartisan way, to develop a CFIUS process that protects sensitive commercial information and prevents reviews from becoming politicized,” said Taylor Griffin, spokesman for the Financial Services Forum. “Concern that sensitive details of a pending transaction may be inappropriately disclosed during the CFIUS process could become a de facto barrier to foreign investment that would hurt the U.S. economy, cost jobs and undermine opportunities for U.S. businesses abroad.”

The intelligence leak helped perpetuate the kind of political controversy the new rules were designed to avoid. The day the Washington Times story came out, Rep. Ileana Ros-Lehtinen of Florida, the ranking Republican on the House Foreign Affairs Committee, issued a press release urging CFIUS to reject the proposed 3Com-Huawei merger, citing the intelligence leaked to that paper.

“Many of us are alarmed about the prospect that 3Com will become little more than a captive vendor for Huawei and, by implication, the People’s Liberation Army,” Ros-Lehtinen said in the release.

Of course, the deal was controversial before the intelligence leaks. Bain voluntarily submitted its proposed merger for CFIUS review to quell concerns raised by accusations the Chinese company has engaged in illegal behavior. Ros-Lehtinen and several other GOP lawmakers introduced a resolution in October stating that CFIUS should block the 3Com deal.

Critics worry that the merger would enable the Chinese military, via Huawei, to obtain computer warfare capabilities from 3Com, which provides network security equipment to the Pentagon and other federal agencies.

Congressional critics of the 3Com deal do not think every foreign investment is a threat to American sovereignty, a House GOP aide stressed. “That would miss the point of the concerns that many people have raised about investments that have national security implications. An investment by Huawei, a Chinese company with shadowy ties to the Chinese military, investing in an American company that has DOD contracts does not sit well with many people, and it shouldn’t.”

“The United States welcomes foreign investment and we should continue to welcome foreign investment, and, indeed, we need foreign investment with burgeoning trade deficits and budget deficits,” the GOP aide said.

Frank and Maloney’s response to the leak appeared to hearten some in the business community.

“This letter shows that congressional leaders with jurisdiction over CFIUS are vested in making sure the process works as they intended it,” said Todd Malan, president and CEO of the Organization for International Investment, a trade association representing foreign-owned U.S. subsidiaries.

“Confidentially is one of the core principles of” the new CFIUS law, he said.

The changes made by the law still must be finalized by an executive order from President Bush. And here again there have been leaks from unidentified administration officials to the Washington Times, which has reported details of a draft executive order and a feud between Treasury and members of the intelligence community over implementation of the CFIUS law.

Taken in the context of these stories detailing how authority should be handed out under the new rules, some Capitol Hill insiders think the leaks are coming from disgruntled sources within intelligence agencies.

“There’s somebody in one of the law enforcement agencies who is politicizing this for their own purposes. We don’t think that’s very helpful,” said a House Democratic aide.

It is administration policy not to comment on ongoing CFIUS reviews. A Treasury spokeswoman declined to comment on the leaks or the wrangling over the executive order. Maloney summoned Treasury officials to her office following leaks regarding the executive order and was reassured that the new CFIUS law will be implemented as Congress intended.

There’s no firm word yet on when the final executive order will come, but some on the Hill think that will help settle the continued uncertainty these leaks have stirred up about the CFIUS process.

In their letter, Frank and Maloney warned that leaks in what’s supposed to be a confidential review process damages its integrity and will ultimately scare off foreign investment in the U.S.

“You can’t have leaks like this; it’s bad for business,” Frank told Politico in an interview Wednesday. But he said that beyond registering his displeasure, there’s nothing else he can do.

White House spokesman Tony Fratto said on Dec. 14 that he did not have knowledge of the Frank-Maloney letter but said the administration takes any CFIUS-related leaks seriously.

“We are very upset anytime we hear about a leak in anything having to do with the CFIUS review process,” both because it has to do with national security and because releasing such information is unfair to the companies involved, Fratto said.

The controversy is just the latest chapter in the saga of the shadowy CFIUS body.

The Treasury Department chairs the CFIUS panel, which is made up of 12 agencies including the departments of Defense, Justice and Homeland Security. The body is charged with weighing the security implications of proposed foreign acquisitions.

CFIUS got a facelift at the end of the 109th Congress thanks to the Dubai Ports World fiasco. CFIUS approved the sale of U.S. port operations to the Dubai government-controlled company. News of the approval caught lawmakers by surprise and the outcry that followed scuttled the deal.

After tempers cooled, lawmakers revamped the CFIUS process in a bid to both strengthen national security scrutiny and ensure deals would not become politicized like the DP World one had.

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Washington, DC—A faxed letter sent by the Chinese Consulate in order to undermine support for a musical show here in the U.S. has drawn sharp rebukes from members of Congress and leaders of human rights organizations. One recipient of the Consulate fax, the Mayor of Ft. Lauderdale, has reaffirmed his support for the show with a proclamation.

New York State Assemblyman Michael Benjamin first publicly revealed the existence of this letter in an email statement to The Epoch Times on Dec. 20 denouncing it. He received his copy one week before the opening night of Holiday Wonders, a show produced by New Tang Dynasty Television and the Divine Performing Arts company that features traditional Chinese song and dance along with Western acts.

The letter mentions prominently the "rapid progress" of U.S.-China relations, the strengthening of U.S.-China trade, and "sincere gratitude" for efforts in promoting U.S.-China friendship and cooperation before asking that support not be given to the Holiday Wonders or the Chinese New Year Spectacular (a performance of traditional Chinese music and dance also produced by NTDTV and the Divine Performing Arts).

The letter also uses the extreme and slanderous language typical of Chinese regime propaganda in describing NTDTV, the Holiday Wonders, the Chinese New Year Spectacular , and the meditation practice of Falun Gong.

'Unconscionable'

Congressman Dana Rohrabacher of California stated, "The Chinese regime has again demonstrated that it is not content with just repressing the Chinese people at home, but abroad as well.

"For the Chinese government to reach into the U.S to further its suppression of the Chinese people is unconscionable and should not escape the attention and condemnation of the American people."

Congressman Rohrabacher is a senior member of the Foreign Affairs Committee. He serves as ranking Republican of the Subcommittee on International Organizations, Human Rights and Oversight and as a member of the Subcommittee on Asia, the Pacific, and the Global Environment.

Congresswoman Ileana Ros-Lehtinen, ranking member of the House Foreign Affairs committee, also voiced her concerns.

She said in an email, "I am deeply concerned about reports of Chinese regime interference in the cultural activities of American citizens within the U.S. It would not surprise me given this regime's record of violating the rights and civil liberties of its people.

"If true, the regime must be held accountable for infringing upon the Constitutional protections of freedom of speech and expression of our citizens. I shudder to think what will greet visitors next summer as they gather for the Olympics in Beijing."

Praise for Falun Gong

The Consulate's letter asserts that NTDTV is affiliated with Falun Gong.

When asked about this, Ms. Carrie Hung, the network's spokesperson, stated that NTDTV is an independent not-for-profit Chinese-language t.v. network with whom the Chinese regime has tried repeatedly to interfere.

Michael Horowitz, Director of the Hudson Institute's Project for Civil Justice Reform and Project for International Religious Liberty, chose in a phone interview to comment on the letter's discussion of Falun Gong.

"Falun Gong practitioners are the people China can least intimidate in the whole world. The dictatorships tremble before groups that their power cannot intimidate. The Falun Gong stands for something very powerful not for themselves, but for everybody.

"This just proves that Falun Gong practitioners are making history. When the story of the 21st century is written, and China would have moved to democracy away from dictatorship, the Falun Gong community will have a place of honor. And the reaction to this Christmas show is a proof of that."

Intellectual Extortion

Suzanne Scholtes, President of the Defense Forum Foundation, described the Consulate's letter as "outrageous."

She said, "I hope this will turn out more people. The Chinese government is a repressing regime. It is attacking Falun Gong for everything it is guilty of."

Speaking of the word "anti-humanity" used in the Chinese consulate letter, Scholtes said "The Chinese regime is anti-humanity. It doesn't even allow people to express their beliefs."

She praised Mr. Benjamin's action of publicizing this letter and resisting coercion. "The New York lawmaker did the right thing."

Dr. Keith Roderick, the Washington Representative of Christian Solidarity International was also outraged by the letter.

He said,"The Chinese Consulate General's attempt to dissuade New York public officials from supporting the presentations of Holiday Wonders and a Chinese New Year Spectacular is clumsy.

"In letters sent on December 11, New York Consulate greets the officials with a wish for a Merry Christmas. Unfortunately, Christians in China, such as Weihan Shi, 37, a Christian bookstore owner who was arrested for his religious activity by Public Security Police in Beijing in November would find that greeting lacking in sincerity."

He continued, "The letter is a brutish attempt to stifle freedom of conscience for the Chinese people not only in China, but even the West."

According to Dr. Roderick, equating support for the Holiday Wonders in New York with undermining China-US relations amounts to intellectual extortion.

Mayor Undaunted

Mayor Jim Naugle of Fort Lauderdale received a letter similar to that denounced by Assemblyman Benjamin. This did not stop him from issuing a proclamation naming Dec. 27 as " Holiday Wonders Day " for Fort Lauderdale. The Holiday Wonders performs in Fort Lauderdale that night.

NTDTV staff member Ms. Shuqin Xia bumped into the Mayor when she went to his office to pick up a copy of his proclamation. The mayor told her the letter was "quite inappropriate."

The Mayor has also confirmed he will attend a reception held before the Fort Lauderdale show. It seems the Consulate's letter has not diminished at all his support for the show his proclamation states is "synonymous with Chinese classical dance and traditional dance of China."

Jenny Jing in Washington, D.C. contributed to this report.

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Over the past year, China and Middle Eastern petro-states have spent billions of dollars purchasing stakes in some of America’s most prominent financial houses and high-tech firms. The reaction from the usually rambunctious Congress: muted to outright enthusiasm. There have been scattered complaints, but the response stands in stark contrast to the furor that arose in 2006 over the Dubai Ports World deal.

Absence of an uproar is no accident. The strategy of the countries and their political advisers has been deliberately calculated to soften the ground on Capitol Hill ahead of the purchases. Even the structures of the deals themselves appear to have been carefully designed not to set off regulatory red flags.

From the congressional schmoozing standpoint, the approach has been twofold: Allow no surprises, and let the domestic company do the talking.

According to lobbyists and congressmen, over the past several months, U.S. executives and their handlers have been visiting with members and staff to shore up support before the deals become public. Among the minefields they are navigating are economic anxiety, anti-immigrant sentiment and populist electioneering.

The strategy is paying off.

One of those briefed before the announcement that the Abu Dhabi Investment Authority was going to purchase $7.5 billion worth of Citigroup stock was Sen. Charles Schumer (D-N.Y.). Schumer led the outcry against the Dubai Ports deal, but he called the Citigroup purchase “a good thing” after a briefing by a company executive. His reasoning: It doesn’t raise the same national security concerns and provides needed investment.

“Openness is always a good thing. One of the worst aspects of the Dubai Ports deal was that it wasn’t vetted. That’s what led to most of the problems,” Schumer said in an e-mail.

Other recent deals have included multibillion-dollar investments by China in Bear Stearns and the private equity group Blackstone and by Abu Dhabi in the politically connected takeover firm The Carlyle Group.

“If they want to send us money, that’s not a problem,” House Financial Services Committee Chairman Barney Frank (D-Mass.) told Politico. “I don’t think we should get into an ‘everything foreign is bad’ situation. This is the flip side of American capital being sent overseas.”

The recent spate of investments is expected to signal a trend as rapidly growing China and Middle East countries flush with oil profits take advantage of the fallen dollar. Sovereign wealth funds, as the countries’ investment vehicles are known, are estimated to wield $2.5 trillion in assets. That could grow to $17.5 trillion in the next decade, according to a Morgan Stanley report.

In fact, say budget hawks from both sides of the aisle, the escalating investment by foreign countries in crucial domestic assets stems in part from U.S. policy decisions on everything from energy to the Iraq war. “We burned the oil, we paid for it with pieces of paper, people want to use those pieces of paper in this economy. I don’t see how we have any complaints. At some point, those IOUs will have to be redeemed,” said Brookings Institution scholar Martin Mayer.

“My children and your children are going to spend part of their lives working for foreigners, because we have placed a lot of assets in foreign hands,” he added.

Labor leaders are sounding alarms about pension funds invested in firms with a growing foreign presence, particularly in Persian Gulf states. The Service Employees International Union points to a 2006 State Department Human Rights report on the United Arab Emirates that described sex discrimination, human trafficking and labor exploitation. For some lawmakers, the fact that money is coming from foreign governments, as opposed to independent companies, has raised concerns.

“Sovereign wealth funds are inherently different than private investments. Government-owned entities may have interests that will take precedence over profit maximization,” said Sen. Evan Bayh (D-Ind.), who chaired a hearing on the issue in the Senate Banking Committee several weeks ago.

“Why should we assume that other nations are driven purely by financial interests when we are not?”

Sen. Richard Shelby (R-Ala.), the ranking minority member, expressed concern about the lack of disclosure from foreign-government-controlled funds. “If we let this continue to grow, we will not be in control of our own economic destiny as we have been in the past,” said Shelby.

Overseas investors are well-aware of U.S. fear of foreign takeovers, which sparked a backlash two decades ago with the purchase of prestigious properties such as Rockefeller Center and Columbia Pictures.

That explains why many of the recent high-profile purchases, although in the billions of dollars, do not give the countries controlling stakes.

The Citibank purchase gives Abu Dhabi 4.9 percent of the company — meaning it slips under the threshold that would trigger an in-depth review of the transaction by government regulators.

The deal that has sparked the most controversy is the proposed purchase of electronics manufacturer 3Com by a partnership that includes Huawei Technologies, a Chinese firm with alleged links to the country’s military.

It is the subject of an in-depth investigation by the Committee on Foreign Investment in the Treasury Department.

The company partnering in the deal with China is Bain Capital Partners, a firm once run by Mitt Romney, former Massachusetts governor and current GOP presidential primary contender.

Romney received more than $7 million from his holdings in the firm last year, according to financial disclosure forms.

In a statement to Politico, a Bain Capital spokesman said the firm believed that the government would find that “the company will be firmly controlled by an American firm, have only a small minority foreign shareholder, and that the deal presents no risks to national security.”

Bain Capital has engaged the politically potent firm of Akin Gump Strauss Hauer & Feld to help smooth the way for the deal.

The firm has 11 lobbyists registered to work on the issue, including Hal Shapiro, a former White House economic adviser; Josh Tzuker, a former senior aide to House Commerce Committee Chairman John Dingell (D-Mich.); and former congressman Vic Fazio (D-Calif.).

The deal has drawn the ire of senior Republicans on the House Foreign Affairs Committee, including Reps. Ileana Ros-Lehtinen of Florida, Dan Burton of Indiana and Dana Rohrabacher of California.

They have introduced a resolution calling for the administration to block the acquisition on national security grounds.

“U.S. regulators ought to reject the proposed buyout of 3Com by one of the least transparent companies operating in China, a firm with shadowy ties to Chinese army and intelligence services,” Ros-Lehtinen said in a statement last week.

Chinese officials warned that too many trade barriers could deter investment. “We hope U.S. policies and regulations do not become barriers for Chinese investors,” Zhang Xiaoqiang, a senior government economic planner, told China Daily.

Some Republicans, though, are embracing the influx of foreign capital.

Ryan Ellis, director of tax policy for Americans for Tax Reform, a leading conservative advocacy group, said, “The general protectionist streak comes out most among Sunbelt conservative House Republicans. They’re freaked out by the rest of the world. They are not for a free flow of capital across borders. They have a Fortress America mindset.”

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