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Bite into a ham sandwich someday soon, and the pork is likely to have originated from Chinese-owned Smithfield. Similarly, if you’re a Sprint Nextel customer, there’s a strong possibility that your service will soon be funded and provided by Japan’s Softbank.
By now we’re all accustomed to the growth of mega-billion dollar cross-border deals, and in the back of our minds understand that closure often depends on some form of government “thumbs up.” But in the case of the Sprint Nextel, far more is at stake than hog bellies and bacon. Any time a foreign carrier seeks to acquire or merge with a U.S. telecommunications company, a variety of security issues come into play, requiring review and approval by a special group whose name you rarely hear in public: Team Telecom.
At present – assuming an alternative offer by Dish Network doesn’t change the picture –Softbank’s acquisition of Sprint Nextel hinges on approval by this little known cast of players who operate quietly behind the scenes and wield tremendous power. To borrow a line from Butch Cassidy, “Who are those guys?”
Inside Team Telecom
Team Telecom is a working group of federal agencies outside the Federal Communications Commission that reviews applications by foreign service providers who need FCC authority to serve the U.S. market. The group includes representatives from the National Security Division of the Department of Justice, the Federal Bureau of Investigation, the Drug Enforcement Administration, the Department of Homeland Security and the Department of Defense. The representatives are typically lawyers with expertise in telecom technology.
Where Team TeIecom enters the scene: When a foreign-based communication service provider wants to serve the U.S. market it must secure a grant of authority from the FCC via a “Section 214” application. The Section 214 application is reviewed by the FCC’s International Bureau, and part of the Bureau’s processing requires approval from Team Telecom, which reviews the application from the perspective of national security and law enforcement.
The procedures of Team Telecom are not usually made public. However, the entity is currently in the news because it is reviewing the merger of SoftBank with Sprint Nextel, which in turn is seeking to acquire mobile and fixed broadband provider Clearwire.
The transaction is so significant that it has triggered a parallel national security review by a separate inter-agency group called the Committee on Foreign Investment in the United States. CFIUS studies the national security implications of major acquisitions of U.S. companies of all kinds, not just communications companies. As a result, an acquisition of a U.S. telecommunications carrier may simultaneously lead to a review by both CFIUS and Team Telecom.
The risk assessment
The mission of Team Telecom is to weed out the vast majority of companies that pose little or no security risk from the ones that do. Team Telecom assesses each communications service provider CSP through a list of “triage” questions, which ask for details on the CSP’s ownership structure, senior leadership, network topology, service offerings, customer base, and technical capabilities for lawful electronic surveillance. Depending on the answers to the triage questions, Team Telecom may seek follow-up information.
Team Telecom classifies CSPs based on their level of risk to U.S. national security or law enforcement. For example, a CSP owned by a foreign country that is not a U.S. ally may be assigned a high risk level. A moderate risk level may be assigned if a background check on a senior manager of the CSP reveals “derogatory information.” A CSP offering Internet access or satellite telephony may pose a greater risk than one offering only “last-mile” residential voice over Internet Protocol. And a CSP planning to deploy extensive infrastructure in the United States may raise more concern than a reseller of an American facilities-based carrier. The classification system is flexible enough to take individual considerations into account.
Risk mitigation measures
Depending on the risk level assigned to the CSP, Team Telecom may impose certain “risk mitigation” measures. One common risk mitigation measure is to have the CSP install a repository of its customer data records on U.S. soil. That would give U.S. courts jurisdiction over the data for purposes of ordering any data disclosures for a national security or law enforcement investigation. Similarly, Team Telecom may ask the CSP to make a resident U.S. citizen available for service of due process from a law enforcement agency that needs to investigate the customer data.
Some CSPs are subject to the Communications Assistance for Law Enforcement Act (CALEA), the U.S. statute that requires telecommunications carriers to install technical capabilities for lawful surveillance. In those cases Team Telecom would expect the CSP to comply with CALEA. In fact, Team Telecom could ask the CSP to install surveillance capabilities beyond the requirements of CALEA. If the CSP refuses, Team Telecom could withhold its consent to the CSP’s Section 214 application. That right of consent gives Team Telecom strong regulatory powers and leaves the CSP with little or no bargaining power as the risk mitigation measures are “negotiated.”
In the proposed Softbank/Sprint Nextel/Clearwire merger, CFIUS has already extracted highly unusual concessions from the parties. First, the Department of Defense, Department of Homeland Security and Department of Justice have the power to review and veto new equipment purchases in certain circumstances. The companies would also appoint a new Sprint Nextel board member, to be approved by the U.S. government, to supervise national security compliance. Finally, SoftBank reportedly agreed to remove any equipment in the networks of Sprint Nextel and Clearwire that were supplied by Chinese equipment vendor Huawei Technologies if the deal is consummated by 2016.
Notice that CFIUS has the power to control a telecommunication company’s management composition and its choice of equipment suppliers. The government rarely intervenes so extensively in a telecommunications carrier’s free market affairs.
Team Telecom has not yet completed its review of the Softbank/Sprint Nextel merger. The fact that CFIUS has already imposed uniquely burdensome conditions on the companies may negate the need for further impositions by Team Telecom. On the other hand, Team Telecom remains free to add conditions, if it sees fit.
The CSP’s commitments to Team Telecom are documented in one of two ways: a letter of assurances or a national security agreement. A letter of assurances is used in cases where only basic risk mitigation measures are needed, whereas an NSA would codify more elaborate measures in high-risk cases. An NSA, which is a formal, detailed contract, may subject a CSP to periodic law enforcement agency audits and regular reporting requirements. In rare cases an NSA may even require the CSP to have members of its security staff undergo FBI background investigations for purposes of obtaining security clearances.
Notification of determination to FCC
Upon finishing its review, Team Telecom then communicates its determination to the FCC’s International Bureau. Only if Team Telecom consents to the Section 214 application will the Bureau grant it. For a low-risk applicant Team Telecom may have “no comment” on the application. For higher-risk applicants, where a letter of assurances or NSA is needed, the grant would be conditioned on the CSP’s compliance with the letter or NSA.
Like Softbank, many international telecommunications carriers want to serve the U.S. market. They may assume all they must do is follow the FCC’s rules and obtain an FCC license. But when it comes to the protection of U.S. national security and law enforcement, some requirements are not found in any rule book. For a foreign carriers, merger with or acquisition of a U.S. telecom company is an exercise in obedience, not negotiation.
Joel Margolis is senior director, government affairs for Subsentio, the leading provider of trusted third party solutions for lawful intercept.
