Huawei Technologies Ltd, the Chinese telecom network gear maker, run by a former Chinese People's Liberation Army officer, has run into rough ground in the US with Washington asking it to seek approval for its $2-million acquisition of a small US start-up company in May 2010.

Shenzhen-based Huawei, which is already under intense scrutiny in many countries including India, has been asked by the US Committee on Foreign Investment (CFIUS) to secure retroactive clearance for its acquisition of 3Leaf Systems, The Wall Street Journal today reported citing reliable sources.

CFIUS, which is chaired by the Treasury Secretary Timothy Geithner and has representatives from the Defence and Homeland Security departments, is empowered to review acquisitions that could have national security implication

CFIUS does not formally block a deal, but informs American companies to voluntarily drop a transaction if it finds that the deal is not in the interest of national security. However it has blocked three Chinese deals earlier.

Huawei acquired the staff and intellectual property of Santa Clara, California-based 3Leaf Systems, a start-up company that provides server virtualisation solutions to support scale-up and scale-out virtual servers in enterprise data centres.

Founded in 2004 as 3Leaf Networks, the company's V-8000 delivers server virtualisation by virtualising the networking and storage I/O for large pools of computer nodes that makes several computers work together like a more powerful machine.

But the US government, which discovered the transaction only after it had been completed, has now asked Huwaei to retroactively clear the deal with Cfius.

Huawei and former 3Leaf executives are said to have believed tha they did not think that the transaction needed the approval of CFIUS, since Huwaei did not buy all the company assets, according to the WSJ.

Huawei bought intellectual property and hired 16 of the roughly 50 employees at 3Leaf, leaving behind hard assets like buildings and equipment for the company's creditors.
CFIUS does not review patent purchases or hiring, but the panel felt Huawei effectively bought the company, people familiar with the matter told the paper.

In its defence, Huawei said that it had filed with the US Commerce Department seeking to classify the technology under export control requirements before the company completed the acquisition.

But the Department of Commerce does not have the authority to stop an acquisition and Huwaei has already acquired the patent rights for 3Leaf's software and chips.

But alarm bell should have rung at 3Leaf since a $2.2-billion deal by Huwaei to acquire Massachusetts-based 3Com, a maker of equipment for computer networks, was shot down by the US government in 2008 on security concerns.

In 2003 Huwaei was sued by networking giant Cisco Systems for stealing its router code, which forced Huawei to remove its routers from the market and as recent as July 2010, Huwaei was sued by US mobile phone maker Motorola Inc of conspiring with its former employees to steal intellectual property over a number of years.

Last week, Huawei was removed by the US telecom company Sprint Next from its vendor list for one of its major equipment contract after Gary Locke, the US commerce secretary spoke to the Sprint's chief executive and voiced the US government security concerns on Huwaei.

Huwaei was founded by Ren Zhengfei, a former Peoples Liberation Army army officer and is reported to have close links with the Chinese intelligence and the PLA.

Although the company has refuted this claim, suspicions about the company working on behalf of the Chinese agencies keep on surfacing. It was called in by the Chinese embassy in New Delhi to sweep the embassy for any bugs, which has further hardened many governments' view on the company.  

Any investment by a Chinese company in a US firm raises the hackles of the US government as it feels that the Chinese government is backing all such deals.

The US government is also aware that China had blocked Coca Cola's $2.4-billion proposed acquisition of Beijing-based juice maker Huiyuan Juice in March 2009.