Chinese Telecom Company Challenges Order to Divest Its Canadian Investment

The telecom company China Mobile International (CMI) has filed a legal challenge to a Canadian government order, issued on the basis of national security concerns, that it sell off or wind down its Canadian investments. Government reviews based on security concerns tend to be highly confidential, with little information available to the public. However, the CMI legal brief provides a good overview of how the review proceeded. This piece summarizes the events so far, based on CMI's notice of application for judicial review filed in Canadian federal court in Toronto on September 7.

CMI and its Canadian operation

As explained in the application for judicial review, China Mobile is "a Chinese state-owned company that provides mobile communication services, including voice, data, text messaging, roaming, network, among others." China Mobile International (UK) Limited (“CMI UK”) is a subsidiary of China Mobile International Limited (“CMIL”), a wholly-owned indirect subsidiary of China Mobile that is mainly responsible for the operation of China Mobile’s international business. CMI Canada is a wholly-owned subsidiary of CMI UK, and is incorporated under the laws of British Columbia.

CMI Canada was established in 2015. This was the “investment” that was at issue here pursuant to the provisions of the Investment Canada Act. On July 28, 2015, CMI Canada applied for a license "for the provision of basic international telecommunications services [BITS] by the Canada Radio-Television and Telecommunications Commission." This license was issued on September 25, 2015. The BITS License is in force until June 30, 2025 and authorizes CMI Canada "to carry telecommunications traffic between Canada and any other country."

In addition to data and business support services provided to CMIL, CMI Canada provides "mobile communication services, including pre-paid call plans." However, it "does not itself own or operate any telecommunications network facilities." Instead, CMI Canada "has partnered with Telus Communications Inc. for the provision of wireless services to be delivered through the Telus network." CMI Canada "simply distributes to its customers, primarily customers with a connection to both China and Canada, as Telus’s representative, services and products already offered by Telus."

Canada's national security review

The Investment Canada Act requires that non-Canadians notify “an investment to establish a new Canadian business,” but CMI did not do this in 2015. As explained in CMI’s application for judicial review, on October 13, 2020, CMI Canada notified the Canadian Minister of Innovation, Science and Industry of its establishment as a new Canadian business, "having inadvertently not notified the Minister of the establishment of the business at the time of CMI Canada’s incorporation in 2015 but having obtained the BITS License for the provision of its services, and operated without issue since then."

Over the next several months, the Canadian Ministry requested information from CMI Canada. CMI Canada responded to these requests, with a significant amount of information provided on January 26, 2021.

On January 28, 2021, the Canadian Minister notified CMI Canada that an order for review on national security grounds of the investment had been made, and provided a summary of the concerns:

As [CMI-UK] is a state-owned enterprise ultimately controlled by the Chinese state, this investment could result in the Canadian business being leveraged by the Investor’s ultimate controller for non-commercial purposes, such as the compromise of critical infrastructure and foreign interference, to the detriment of Canada’s national security.

After additional rounds of questions and a meeting, on August 9, 2021, the Minister sent a copy of the Canadian Governor in Council’s Decision "directing China Mobile to either divest itself entirely of or wind up the Canadian business" within 90 days after the day on which the Governor in Council’s Order was made.

CMI's legal claims

In response to this Order, CMI argued that "[t]hroughout this process, at each stage of the review, the Minister and/or the Governor in Council erred in law and/or acted in a manner that was contrary to law, resulting in an unreasonable decision." More specifically, it argued as follows.

The Minister erred in his review

CMI argued that the Minister failed to meet the statutory threshold required to refer the decision to the Governor in Council. Section 25.3(6) of the Investment Canada Act provides that the Minister shall refer the investment under review to the Governor in Council only if: "(i) The Minister is satisfied that the investment would be injurious to national security, or (ii) On the basis of the information available, the Minister is not able to determine whether the investment would be injurious to national security." Here, however, CMI argued, the Minister's findings, as indicated in the Order, rely on a standard using "may" rather than "would."

In addition, CMI argued, "[t]he Minister could not reasonably have concluded, based on the information available to him, that the investment would be injurious to national security." In this regard, it said that "[n]othing in the detailed responses provided by CMI Canada – by letters to the Minister dated December 15, 2020, January 26, 2021, March 24, 2021, and June 17, 2021 – could lead to the conclusion that, as stated in the Summary of Concerns, the Investment could result in the Canadian business being leveraged by the Chinese state for non-commercial purposes, such as the compromise of critical infrastructure and foreign interference, or that, as stated in the Order, China Mobile and its subsidiaries and affiliates may disrupt or compromise Canadian critical telecommunications infrastructure or gain access to highly sensitive telecommunications data and personal information that could be used for non-commercial purposes such as military applications or espionage."

And finally, CMI referred to "irrelevant considerations and breach of natural justice," contending that "the Minister ordered the review only two (2) days following communication by CMI Canada of its detailed responses to the Minister’s [requests for information]," and that "given the current political socio-economic climate and the general biases against Chinese state-owned companies, and considering the lack of evidence to support his findings, it is clear that the Minister arrived at this decision, in part, for reasons unrelated to the establishment of this five-year-old company and national security." The same "can be said about the decision to refer the Investment to the Governor in Council, as nothing in CMIC’s responses indicates that its activities would be injurious to national security."

The Governor in Council erred in its conclusions

With regard to the Governor in Council's Order, CMI raised the "may" vs. "would" issue referred to above; it argued that "the Decision which demands that China Mobile exit the country is wholly disproportionate to the finding that the investment may be injurious"; and it contended that "it is clear from the current political socio-economic climate and the general biases against Chinese state owned companies, along with the lack of evidence to support the Decision, that the Governor in Council arrived at his decision, in part, for reasons unrelated to the establishment of the Canadian business and national security."

Remedy requested

On this basis, CMI asked for, inter alia:

1. An Order setting aside the Governor in Council's Decision;

2. In the alternative, an Order setting aside the Decision, and remitting the issue back to the Minister and Governor Council to re-determine the matter;

3. A stay of the Decision pending the outcome of this application and any appeals.

Similar issues raised in the United States

Issues related to China Mobile and security have previously been raised in the United States. In response to China Mobile USA’s application to provide telecommunications services between the United States and foreign destinations, the Federal Communications Commission found that “due to a number of factors related to China Mobile USA’s ownership and control by the Chinese government, grant of the application would raise substantial and serious national security and law enforcement risks that cannot be addressed through a mitigation agreement.” Therefore, it denied the application.

In addition, China Mobile is on the Non-SDN Chinese Military-Industrial Complex Companies List maintained by the Office of Foreign Assets Control at the U.S. Department of Treasury.