Huawei chief financial officer Meng Wanzhou leaves her Vancouver home to attend a British Columbia Supreme Court hearing on March 22, 2021. Photo: AFP / Don MacKinnon

In an aggressive line of questioning directed at Canadian government lawyers, the judge in the extradition case of Huawei chief financial officer Meng Wanzhou in Vancouver appeared to strike at the very heart of the US government’s underlying theory, characterizing the case as “unusual,” and challenging the assertion from government lawyers that the charges clearly fall within the “four corners of the law.” 

At the same time, the comments of Associate Chief Justice Heather Holmes of the British Columbia Supreme Court, who presides over the extradition proceedings, put the spotlight squarely on HSBC, the purported target of the alleged bank fraud in this case, openly questioning whether the bank should be considered a “victim or accomplice.”  

The judge’s comments came last week in the hearings to determine whether Meng will be handed over US authorities to stand trial in New York. Meng was arrested in December 2018 while transiting through Vancouver International Airport en route to Mexico from Hong Kong. She has remains under house arrest while she fights extradition to the US.  

The case has triggered outrage in China, and when less than two weeks after her arrest, China detained two Canadians, Michael Spavor and Michael Kovrig, relations between the two countries soured further. Spavor was found guilty of spying last week and sentenced to 11 years in prison. Kovrig remains in custody. 

US prosecutors have charged Meng with bank fraud arising out of alleged misstatements in a PowerPoint presentation provided to HSBC officials in a meeting in a private room in a Hong Kong restaurant in August 2013. The indictment issued by the US Department of Justice (DOJ) alleges that Meng misled HSBC about the true relationship between Huawei and Skycom, which did business in Iran.  

Specifically, US prosecutors allege that Meng obscured the fact that Skycom, which was previously a direct subsidiary of Huawei, was in fact still under the de facto indirect control of Huawei through an intermediary holding company, Canicula. 

According to the lawyers from the office of the Attorney General of Canada (AGC), representing the interests of the US as the requesting state in this case, this placed HSBC at risk of violating US sanctions against Iran in connection with the processing of restricted US dollar payments for the entities.  

No harm no foul?

While the extradition proceedings do not address the question of Meng’s guilt or innocence, the judge must still assess whether the charges raised by US prosecutors satisfy the elements of the alleged criminal offense. Key elements of fraud include knowingly making deceitful statements on the part of the perpetrator, and detrimental reliance by the victim.  

Canadian government lawyers framed the case as being about “lying to a bank in order to get banking services to flow as before,” which is “not an unusual thing.” Justice Holmes pushed back against the AGC’s characterization, describing the case against Meng as highly “unusual,” noting that the record of the case suggests that HSBC had suffered “no actual harm,” even though a period of several years had passed after the meeting in Hong Kong.  

Holmes further observed that this was a case in which “the alleged victim – a large institution – appears to have had a number of people who had all the facts.” She also questioned “whether it’s reasonable to assume that an international bank would rely on an assurance from one person about compliance by other companies not under Huawei’s direct control.”

The judge also cast doubt on the core basis for the charges against Meng, namely the relationship between Huawei and Skycom, questioning the significance of the “distinction between a partner and a de facto subsidiary if both are doing business in Iran.” 

As Holmes further noted, “The PowerPoint seems to say Skycom is a business partner, Huawei is concerned that Skycom complies and will terminate cooperation whenever they’re found to be in the wrong.”

What did HSBC know, and when?

The judge’s focus on the role of HSBC as victim or accomplice may have come as a surprise to some observers in light of her ruling last month that evidence proffered by Meng’s counsel, consisting of internal HSBC documents relating to the bank’s internal review of the Huawei-Skycom relationship, would not be considered as part of the extradition proceedings.   

Huawei and Meng had obtained the internal HSBC documents as part of a settlement of a legal action brought against the bank in Hong Kong, pursuant to which Huawei and Meng were contractually bound not to voluntarily disclose the documents publicly. However, the Canadian court in June rejected a request by Meng for a publication ban, resulting in the evidence being made public.  

Since the internal HSBC documents tend to undercut key parts of the US prosecutors’ narrative of the case, Meng and Huawei presumably are not displeased that the evidence is now in the public domain even if it is not to be formally considered as part of the pending extradition case.  

Moreover, from the questions posed by Justice Holmes in last week’s hearings, it appears that the factual background set out in the internal HSBC documents may still have indirectly influenced her preliminary assessment of the case. 

At a minimum, the HSBC evidence buttresses many of the points she raised in last week’s hearings, particularly in respect of whether the bank could reasonably have relied solely, or even principally, on Meng’s PowerPoint presentation when it was clear that the bank had extensive independent knowledge of the actual background facts.

The now-public internal HSBC e-mails and documents persuasively reinforce the judge’s tentative position on this point. 

The August 2013 Hong Kong meeting was held to address concerns on the part of the bank arising from two Reuters articles published in December 2012 and January 2013 suggesting that Huawei had uncomfortably close ties with Skycom, which was engaged in business activities in Iran that may have violated US secondary sanctions against the Iranian regime.

At the time, HSBC was on high alert to possible sanctions-compliance issues, having signed a deferred prosecution agreement (DPA) with the DOJ in early December 2012, just weeks before the first Reuters article was published. 

Under the DPA, HSBC admitted to its own egregious violations of US sanctions laws over a period of many years, paid nearly US$2 billion in fines and forfeitures, and fired several senior managers at the bank’s global headquarters. Moreover, an independent compliance monitor was put in place within the bank, which reported directly to the US government.

Consequently, the Reuters articles raised potential serious red flags, and HSBC managers immediately set in motion a series of internal investigations and reviews, both pre- and post-dating the meeting with Meng in the Hong Kong restaurant in August 2013.  

HSBC investigations of Huawei and Skycom

None of this internal review occurred in a vacuum – by this point, HSBC had been providing banking services for Huawei’s expanding global operations for roughly 15 years, and Huawei reportedly was one of the 20 largest customers for HSBC’s Global Liquidity and Cash Management Department. 

According to the newly disclosed evidence, Skycom and Canicula both had long maintained accounts with HSBC, and the bank included them in the overall Huawei master group for internal reporting and tracking purposes.

HSBC would have already conducted full “know your customer” (KYC) and anti-money-laundering (AML) due diligence on every member of the group with which it had dealings. As required under applicable laws, after the Reuters articles were published, HSBC conducted further due diligence to update the relevant KYC information.  

Within a very short time, the bank was able to confirm that Skycom’s principal business was in Iran, that Skycom had been incorporated in 1998, that it was 100% owned by Canicula and its sole director was a Huawei employee, and that Skycom and Huawei shared the same address.  Internal HSBC e-mails also referred to Skycom as a “Huawei affiliate.” 

Moreover, the bank promptly contacted Huawei to arrange for the Skycom and Canicula accounts to be closed, which was another implicit acknowledgment by the bank of Huawei’s de facto control over those entities.  

HSBC conducted its first risk committee review of this matter on May 14, 2013, when a meeting of the Global Banking and Markets, Asia Pacific Global Banking and Management Committee (the “Reputation Risk Committee”) was held. 

Based on the updated KYC reports, the internal team stated that they were “satisfied that sufficient consideration had been given to sanctions,” and the Reputation Risk Committee approved proceeding with the then pending $1.5 billion syndicated loan, for which HSBC was acting as the lead bank.

All of the foregoing internal review process predated the meeting in the Hong Kong restaurant at which the Huawei delegation presented the original Chinese-language version of the PowerPoint. 

An English version of the PowerPoint was provided to HSBC by Huawei a few weeks later, and was circulated to relevant HSBC managers, including members of the Global Risk Committee and Client Selection Committees. In one internal e-mail, an HSBC manager expressed his satisfaction with the description of Huawei’s trade compliance efforts as set out in the PowerPoint.  

Thereafter, three further risk reviews were held by HSBC in respect of these matters: a November 28, 2013, meeting of the Asia Pacific Client Selection Committee (the “Client Selection Committee”); a further meeting of the Reputational Risk Committee held on March 18, 2014; and a March 31, 2014, meeting of the Global Risk Resolution Committee (the “Global Risk Committee”). 

The information presented at each review was substantially the same, and the outcome of each was also the same – the bank at all levels determined that the reputational risk associated with the continued relationship with Huawei was acceptable.  

Thus, based on HSBC’s own internal documents, when the bank decided to maintain its banking relationship with Huawei, it had more than sufficient independent information in hand to have a clear picture of the Huawei-Skycom relationship. 

As such, as Justice Holmes suggested in the hearings held last week, it strains credulity that HSBC acted solely or perhaps even principally in reliance on the PowerPoint presentation.  

HSBC: victim or accomplice?

In the hearings last week, Holmes requested that the AGC clarify the US position as to whether HSBC is a victim, as suggested by the bank fraud allegations, or an accomplice, based on the implication that the DOJ could have, but did not, prosecute HSBC for processing restricted payments in violation of US sanctions rules. The bank, she noted, cannot be both victim and accomplice.

The AGC preliminarily indicated that the bank did have some potential criminal liability exposure given the Iran connection, and the theory is that “the relevant authorities could have gone the other way” and targeted HSBC.  

Indeed, HSBC was in a highly vulnerable position in late 2016 when the DOJ demanded that the bank conduct a further internal probe into Huawei’s dealings in Iran, but the bank’s problems were not connected to any Huawei or Skycom Iranian payments, but rather were the result of unrelated allegations of criminal violations on the part of the bank’s forex trading desk.  

If that case had gone forward, it could have threatened the bank’s DPA, in which case the bank would be subject to even more severe penalties.

Consequently, as a legal and practical matter, HSBC had no choice but to cooperate in the DOJ’s investigation of Huawei, and because the bank cooperated, the DOJ waived all potential charges against HSBC, including for possible KYC breaches, and elected instead to prosecute only Huawei entities and Meng Wanzhou for bank fraud based on information that appears to have already been known to or available to the bank at the time of the original risk reviews.  

However, HSBC has not escaped unscathed. For its role in the DOJ’s investigation of Huawei, the bank has been pilloried in the Chinese media. 

Remarkably, echoing the language used by Justice Holmes in last week’s hearings, the China Daily also previously referred to HSBC as an “accomplice.” But in this context, the bank was seen as aiding and abetting the DOJ in what is seen in China as a politicized prosecution.  

While in the words of Justice Holmes, HSBC may not have suffered any damages as the result of the alleged misstatements by Meng in the PowerPoint, given the torrent of negative press in China, HSBC’s business has suffered significant damage in its historical home market of China because it sacrificed its long-term relationship with one of its top global customers on the altar of US sanctions laws compliance.  

Under threat of prosecution and revocation of the DPA for its own bad acts, the bank’s decision to prioritize sanctions compliance was understandable in light of the high risk of extraordinarily severe penalties in the US, potentially including being barred from access to US dollar clearance through the US banking system, which would be akin to a corporate death penalty. 

But given the fallout from its involuntary role in the Huawei case, the bank’s road to recovery in the China market will likely be long and arduous.

The prospects for Meng, on the other hand, received a definite boost based on the judge’s comments last week. However, the bar is high, and successful challenges to extradition requests are rare, so we shall see if Justice Holmes was tipping her hand or only playing devil’s advocate.

Robert Lewis is a lawyer based in Beijing. He was admitted to practice in California in 1985. He has worked in prominent US, UK and Chinese law firms in China for nearly 30 years. He is currently senior international consultant with Chance Bridge Partners, as well as co-founder and senior expert of docQbot. He is also the author of the book The Rules of the Game of Global M&A: Why So Many Chinese Outbound Deals Fail. He is fluent in spoken Mandarin and written Chinese.