25 August 2000
Source: US national newspaper, August 24, 2000, pp. A1, A8.
By NEIL KING JR. And DAVID S. CLOUD Staff Reporters
WASHINGTON -- Foreign telecommunications companies doing deals in the U.S. expect scrutiny from federal antitrust enforcers and telecom regulators. But lately they've had to confront a new potential deal-buster: Special Agent Alan McDonald of the Federal Bureau of Investigation.
When TMI Communications Inc. wanted to sell satellite-phone service to U.S. subscribers, the Canadian company sought permission from the Federal Communications Commission. The FCC was preparing to approve the plan last year when lawyers and agents led by Mr. McDonald showed up to voice the FBI's objections-delaying the approval of the deal by a year. "It was something we never expected," says Laurier Boisvert, TMI's chief executive officer.
The FBI feared it would have no legal or practical way to wiretap a phone service operated entirely outside the U.S. After months of negotiations, TMI agreed last fall to install a call-switching station in New England through which it would route all its U.S. traffic. The whole process, says Mr. Boisvert, was "like pulling hen's teeth," and cost nearly $3 million.
Since a 1996 law deregulated the U.S. telecom business, Mr. McDonald and the FBI have elbowed their way into nearly every big deal involving foreign and U.S. telecom companies. Their mission: preserve the FBI's decades-old snooping capacity and safeguard the country from foreign spies. Now, an agency known for chasing mobsters and dueling with drug cartels is playing spoiler in the global telecom business.
More Interceptions
As the industry has grown in recent years, so too has electronic surveillance by federal authorities. State and federal courts approved 2,236 so-called intercepts last year, up from 1,309 a decade ago. Today's drug smugglers and terrorists have more ways than ever to communicate, including satellite phones, pagers and e-mail. Such services are now being offered by companies in Great Britain, Canada, Japan and other foreign nations, complicating the task of surveillance.
The FBI's worries go beyond chasing criminals. The agency also fears that foreigners could use control of phone networks in the U.S. to eavesdrop on business conversations and steal trade secrets. FBI officials also worry that foreign companies might work on behalf of their own countries' intelligence services, using U.S. networks to funnel information back home.
Increasing Risk
"Back in the good old days, with AT&T, we had one-stop shopping," says Patrick Kelly, the FBI's deputy general counsel. "Now things are becoming increasingly risky to us, as the points of contacts are spread out in an increasingly global world. "
So the FBI has thrust itself into a string of transactions, from British Telecom's failed bid to buy MCI Communications Corp. in 1996 to Verizon Communications Inc.'s joint venture this year with Britain's Vodafone PLC. Deutsche Telekom AG's recent $50 billion offer for VoiceStream Wireless Corp. of Bellevue, Wash., is sure to draw close FBI scrutiny thanks to the German government's large stake in Deutsche Telekom. Lately, the FBI extended its regulatory reach to the Internet, holding up Nippon Telegraph & Telephone Corp.'s $5.5 billion offer to acquire U.S. Internet Web-hosting company Verio Inc. until the Japanese buyer agreed to strict national-security safeguards.
The agency hasn't killed any deals. But some executives complain that the FBI's virtual veto power forces companies into concessions -- such as locating switching systems in the U.S. -- that don't make business sense. FBI demands also have varied from deal to deal, adding more ambiguity to the regulatory process. Also, with communications technology changing so rapidly and blurring international borders, the FBI's role is likely to become more difficult to maintain and more controversial over time.
A Pound of Flesh
It's a "case-by-case extortion where the FBI tries to extract whatever pound of flesh it can from each company that comes along," says James Dempsey, a telecom specialist at the Center for Democracy and Technology, a Washington privacy group. FCC Commissioner Harold Furchtgott-Roth agrees. "You talk to [FCC] staff and they all hate what the FBI's doing, but publicly no one will say a word," he says.
When the U.S. was preparing to open its telecom market in the mid-1990s, the FCC, an independent agency, promised "deference to the views of the executive branch" on national-security concerns. Since then, when the FBI wants to attach conditions to foreign deals, the FCC delays its approval until the FBI and companies agree on safeguards.
The FBI says it's using the regulatory process to perform a valuable national service. Each time a U.S. communications company comes under foreign control, a new security threat is born, the agency says. Each threat must be handled carefully, even if it means delays in approval of the deals. FBI Director Louis Freeh began warning Congress of such threats in 1995, before such mergers were possible.
Enter the Bulldog
British Telecom and MCI learned about the FBI's expanding role in a three-page memorandum that arrived at the FCC several weeks after the companies announced merger plans in 1996. The FBI memo raised concerns about "the potential for a foreign-based carrier to surreptitiously conduct electronic surveillance monitoring of U.S. persons and companies." Attached to the memo was the business card of Mr. McDonald, a 25-year FBI veteran whose title is special counsel for electronic surveillance.
Since the early 1990s, the 52-year-old agent's job has been to make sure the FBI's covert surveillance capabilities aren't diminished by changes such as the shift from copper wires to fiber optics. He's a lawyer with a .38-caliber sidearm, but he tries not to carry it during attorney meetings. People who have dealt with him say he's a bulldog.
"He's a true believer in maintaining what he sees as the bureau's ability to monitor information, and every position he takes flows from that," says David Banisar, a lawyer with the Electronic Privacy Information Center, a Washington privacy group. Speaking at a conference in Montreal in 1997, Mr. McDonald cautioned that the "extreme" agenda of privacy advocates threatened to "handcuff" law-enforcement agencies. In negotiations he has warned company lawyers that, if they don't succumb to FBI demands, they could be responsible for the next terrorist bombing or kidnapping.
Teams of FBI and Justice Department officials are involved in vetting the deals. But it's Mr. McDonald, a former field agent who handled organized crime and drug cases, Who focused the FBI's attention on this issue and who has often taken the lead in negotiations. He's suited to the role because "he's been on the street, he's done wiretaps, and he knows how hard it is to do investigations," says assistant FBI director John Collingwood.
In the proposed BT-MCI merger, which collapsed when WorldCom Inc. made a better offer for MCI, the companies were astounded by the FBI's implying that one of America's closest allies, Britain, would try to use BT for espionage. BT for years had laid higb-capacity cable at Menwith Hill, the U.S. National Security Agency's electronic monitoring station in rural England, and MCI had more than 20 contracts with the U.S. Defense Department.
But FCC officials made it clear that the deal wouldn't win approval so long as there were national-security objections. So the companies started negotiating with a team of Pentagon and FBI experts, including Mr. McDonald. The talks lasted five months.
The Pentagon worried that MCI's network operating center in North Carolina, which was designated for high-priority military traffic during war, might be moved overseas. The companies promised to leave the center there, and that, more or less, was enough to satisfy the Pentagon.
Satisfying Mr. McDonald proved much tougher. For one thing, the FBI wanted to bar all non-U.S. citizens from handling the companies' billing and call information. Mr. McDonald said he worried that a foreign intelligence service might approach these employees. The FBI didn't consider British intelligence a threat, he explained, but the agency wanted to set a precedent for dealings with less trusted allies.
Yet MCI already employed noncitizens with access to sensitive records. Promising to hire only U.S. citizens, the companies argued, would violate U.S. equal-employment laws. When Mr. McDonald wouldn't budge, the companies appealed to higher-ranking officials at the FBI and the Justice Department. Eventually, he dropped the idea, but "it took us weeks to finally get that idea off the table," fumes one of the lawyers for the companies.
When a 10-page list of conditions was agreed upon in May 1997, the FBI had scaled back other proposals. For example, the companies agreed to give the agency 14 days for background checks on employees with access to wiretaps, not the three months the FBI wanted. But what remained testified to the agency's newfound clout: The companies promised to keep all equipment for domestic traffic in the U.S., so the FBI would have wiretapping access.
Vodafone heard from the FBI in March of 1999, two months after the British cellular company had announced plans to merge with AirTouch Comm uni cations of San Francisco. In a small conference room at AirTouch's Washington office, Mr. McDonald briskly laid out for the companies' lawyers what they came to call "the five fears." "It was so Old World, it just made my jaw drop," says Pamela Riley, a lawyer for AirTouch.
Trustworthy Personnel
First, all facilities handling U.S. traffic had to remain in the U.S. Next, all record-keeping facilities would also be based in the U.S. Third, the FBI wanted a guarantee that Vodafone would hire only "trustworthy personnel" to monitor the network and handle wiretap requests. Vodafone also had to promise that no wiretap information would filter back to any foreign government. And, finally, the FBI had to be satisfied that Vodafone wouldn't use the,U.S. network for economic espionage.
Vodafone found that last item, in particular, "absurd," Ms. Riley says. Mr. McDonald had raised the possibility that the company would eavesdrop on Silicon Valley calls and then feed information to high-tech companies in Britain. "Competitors are competitors," Ms. Riley says. "Are British companies really that different from U.S. ones? But for the FBI, Vodafone's national allegiance was automatically suspect."
Other demands cropped up as negotiations continued. For instance, the FBI wanted Vodafone to train FBI agents on new technology that came along. "We said, 'Wait a minute, how can we do that when technology is changing every day? We'd be running a school,' " Ms. Riley says. The deal closed in June 1999 after the company signed an agreement that promised, among other things, never to share wiretap information with foreign governments.
The, FBI, which has longstanding relationships with domestic carriers, says it is trying to build the same kind of cooperative relationships with foreign companies. McDonald says negotiations are cordial. "We're just trying to say, 'Yes, but let's make sure that no one is harmed here with what you plan to do.' "
By the time the Vodafone deal closed, TMI was deep into its own struggle with the FBI. The satellite-phone company, which is owned by Canadian telecorn giant BCE Inc., had applied for a FCC license in March 1998, shortly after the WorldTrade Organization ratified an agreement to open up the world's tetecom market.
"For us, the U.S. was the perfect market to move into after Canada," says TMI CFO Mr. Boisvert. "That there would be any U.S. national secucity concerns had never crossed our minds." Late in 1998, TMI heard rumors ttiat the FBI had some concerns with the company's plans. But not until April 1999, more than a year after TMI filed with the FCC, did the company receive formal notice that the FBI wanted to block the deal.
Trusting Canadians
TMI suggested that the FBI work with Canadian intelligence to monitor calls. "Clearly, they had to trust Canadian intelligence," recalls Mr. Boisvert. But the FBI said it couldn't turn its wiretapping duties over to a foreign government, a response that frustrated Mr. Boisvert.
By early June, TMI had agreed to run its U.S. catts through the new switching center in New England. But the FBI stilt wasn't satisfied. TMI phones also had to be equipped with geo-positioning technology so the FBI could pinpoint a suspect's location when he made a call.
This was crucial, as Deputy Attorney General Eric Holder wrote in a June 14, 1999, letter to FCC Chairman William Kennard. "Finding out that a drug deal, murder or bombing is about to occur, without having any indication of the location of the criminal is only marginally useful," he wrote. Unless TMI addressed the shortcomings, Mr. Holder wrote, its phones would become "a communication tool of choice among drug dealers, organized crime and terrorist groups."
By late last fall, TMI had grown so desperate to move ahead that it persuaded Canadian Prime Minister Jean Chretien to raise the issue when President Clinton visited Ottawa in October The matter was resolved just days before Mr. Clinton arrived, after TMI agreed to help the FBI pinpoint TMI calls within the U.S.
Mr. Furchtgott-Roth of the FCC blasted the FBI in a dissent issued with TMI licensing approval. "The commission may well have been able to approve this application a year ago, but for the last-minute epiphany of the FBI that the application raised grave national-security issues," the commissioner wrote. He added that the FCC's licensing procedure was being "hi-jacked to achieve other agencies' public-policy goals," and called the FBI's role "particularly unfortunate."
The FBI has its own version of the story, asserting that TMI prolonged the process by refusing to negotiate on key issues. Mr. Holder also noted that TMI's technology simply fell short of U.S. requirements, further complicating the talks.
Courting Favor
As the FBI's role has become better known in telecom circles, companies have begun courting the agency's favor. When Verizon Wireless, a unit of the former Bell Atlantic Corp., announced plans for a joint venture with Vodafone last fall, company lawyers requested a meeting at the Justice Department and offered a draft national-security agreement incorporating provisions the FBI had demanded in previous deals. Two meetings and a conference call later, the companies and the FBI had an agreement.
Until this year, the FBI hadn't gotten involved in Internet-related transactions. When Britain's Cable and Wireless bought MCI's Internet backbone for $1.75 billion two years ago, the FBI didn't say a word. The deal was "too new for them to realize that they might have an interest," says Stewart Baker, a Washington lawyer who represented MCI. FBI officials declined to comment on the deal.
But this spring, when Japan's NTT stepped up to buy Verio, which handles Web traffic for hundreds of U.S. companies, the FBI did get involved. The FCC didn't review the acquisition, but the FBI found a way in via an obscure federal law. The 1988 law, intended mainly to apply to sales of U.S. defense companies, allows the president to block any foreign acquisi tion that "could affect the national security of the United States." The FBI and Justice Department cited the law in insisting that the companies address their concerns.
Negotiations with NTT delayed the merger for nearly three months as the FBI pushed to assure that the Japanese government, which owns 53% of NTT, would have no role in Verio's day-to-day operations or involvement in wiretapping Verio's network. The agency also demanded -- and the companies agreed to -- a variety of restrictions on who could have access within Verio to federal wiretapping information.
The next likely subject for FBI scrutiny: Deutsche Telekom's proposed purchase of VoiceStream, which has caused more anxiety in the U.S., than any previous global deal. The fact that the German government has a big stake in Deutsche Telekom has raised great concerns and has some U.S. lawmakers threatening legislation to block the merger. The FBI is in a position to deploy more leverage than ever.
"We have things that we have to do to protect the American people and U.S. security," says Mr. McDonald. "That's what we get paid for."