OGGO Committee Report

SUPPLEMENTARY OPINION OF THE CONSERVATIVE PARTY OF CANADA

“Some very significant Canadian interests were at risk in the Nuctech affair… Briefly, it’s not in Canada’s interest to advance the global dominance of a Chinese state-owned technology powerhouse, or to create long-term access and partnerships in our system that could make us vulnerable in the future.” David Mulroney, Former Ambassador of Canada to China, 7 December 2020.

INTRODUCTION

While the Conservative Party supports the main report, we consider it critical to uncover the extent of the systemic failures in the federal procurement process. This standing offer is the tip of the iceberg in the Federal Government’s complacency when addressing national security through its procurement. The Nuctech affair exemplifies the government’s failure to align federal procurement with objectives of national security. Changes in the procurement regime are urgent and necessary to correct these systemic failures. Strong leadership is also urgently needed. It is for these reasons that the Conservative Party is providing a supplementary report.

WHAT WAS NOT SAID ABOUT STANDING OFFERS

One of the misleading arguments used by officials from both Global Affairs Canada (GAC) and PSPC was the absence of a contract with Nuctech. The plan for GAC was to go ahead with a contract with this controversial Chine state-owned company called “the Huawei of airports”. This standing offer (SO), which was the only standing offer awarded[1] was a long-term supply instrument that would have allowed procurement of Nuctech equipment for GAC and other federal departments, agencies or Crown corporations on an as-and-when-requested basis[2]. In addition, GAC awarded only one SO. This means that any department, Crown corporation and agencies, including GAC, which expressed the need for this equipment, would have to contract with Nuctech, the sole approved provider of this equipment for the Government of Canada.^[3]

URGENT NEED TO RAISE THE BAR IN FEDERAL PROCUREMENT TO ADDRESS NATIONAL SECURITY

Given the growing technological challenges to national security faced by democratic countries, but also Canada’s relations with China, Canadians must question the current procurement approach towards China. Former Canadian Ambassador to China David Mulroney defined the approach to adopt towards China:

“It requires a much higher level, a raising of the bar, when it comes to the security standards that we expect of China… This is a long-term relationship with a company, Nuctech, that would be across the board for all of our embassies, whereby China can find the weakest link in that chain of embassies.”^[4]

Technical risks with the equipment currently used in Canada

Despite attempts by GAC and PSPC to downplay the issues of national security, there are several risks with this equipment that were not sufficiently defined in the report. Conservatives are also very preoccupied with the fact that the Canada Border Services Agency (CBSA) uses Nuctech equipment[5].

On July 20, 2020, the White House’s National Security Council Director (Canada and the Caribbean) contacted the Canadian embassy in Washington D.C. to express that the U.S. was “‘Quite concerned’ that GAC has agreed to purchase security equipment for embassies from a Chinese company.”^[6] On the same day, GAC internally produced a threat assessment. This assessment reveals that:

“Compromised X-ray machines would provide numerous opportunities for attack [emphasis added]:

• a) “Covert collection of scanning images and transmission to third party via Wifi, Bluetooth, mobile signal, exfiltration via USB;
• b) “Compromising of portable electronics transiting through a machine via implanted technology;
• c) “Spoofing of scanning, results; defeating the security layer, and thus, allowing bringing nefarious devices into the Chancery;
• d) “Access to a mission network visa implanted technology; and
• e) Bluetooth, mobile signal, or even electromagnetic emanation capture.”^[7]

In addition, the threat assessment prepared by GAC shows that mitigation measures “Would not eliminate the elevated threat [emphasis added] from espionage.”^[8] According to emails, this SO would require site access to the personnel of Nuctech. Its personnel would access facilities unrestricted.^[9]

Conservatives cannot comprehend why these technical facts were not presented to the elected members of Parliament during the hearings.

Recommendation

That the Government of Canada cancels all its current contracts with Nuctech and adopts and implements a plan for the replacement of the Nuctech equipment at the CBSA.

NATIONAL SECURITY RISKS IDENTIFIED BY CANADA’S ALLIES

“(Nuctech) represents an elevated threat because of the company’s direct relationship to, and legal obligation towards Chinese authorities.”^[10]

Conservatives support this committee’s findings on national security. However, additional facts need to be mentioned to grasp the full extent of the problem. Canada’s allies are aware of the risks associated with this company. However, officials involved in this procurement ignored or did not seem to be aware of our allies’ approach toward Nuctech. The Government of Canada’s current approach of ignoring our allies’ decisions is also exemplified in its dithering about Huawei and 5G technology.

In 2014, the U.S. banned the use of Nuctech X-ray scanners at airports nationwide.^[11] A document released to the committee also confirms that “China is one of the most (redacted) sophisticated intelligence collectors. The Chinese intelligence apparatus is large and sophisticated and uses the full range of espionage techniques.” ^[12] In addition, in June 2020, the Wall Street Journal wrote that “The U.S. is targeting China’s largest maker of security-screening equipment (Nuctech), saying its expanding presence in Europe is a threat to Western security and businesses.”^[13]

In 2020, the United States Senate Committee on Foreign Relations also assessed the role occupied by Nuctech in the Communist Chinese Party’s regime: “Nuctech’s parent company Tsinghua Tongfang has ties to the PLA (People’s Liberation Army). Company documents tout Tsinghua Tongfang’s role in advancing ‘the national strategy of military-civil fusion, encircling both the military and civilian markets,’ and its other portfolio holdings include a company that supplies command and control systems to the PLA.”^[14] 

Our European allies have taken steps to address dangers with Chinese state-owned companies such as Nuctech, including the distorting effects caused by Chinese subsidies on bids in EU public procurement procedures^[15]. The European Commission outlined proposals to prevent foreign companies that have received significant grants or other forms of state aid from competing for procurement contracts.  More recently, the government of Lithuania has blocked a subsidiary of China’s Nuctech from supplying baggage-scanning equipment for its airports, citing national security grounds.^[16]

Despite GAC claiming that “We work with our closest partners globally and exchange ideas and approaches,”^[17] its officials ignored our allies’ approach. The irony is that GAC did not even consider the National Cyber Threat Assessment 2020 produced by the Communications Security Establishment (CSE), which states that “China, Russia, Iran, and North Korea pose the greatest strategic threats to Canada”[18].

Conservatives agree with recommendation 1 to prohibit Chinese state-owned and partially state-owned enterprises from obtaining federal contracts related to information technology or security equipment or services. The Conservative Party is convinced that this ban should cover other countries like Russia and Iran.

Recommendations

That the Government of Canada work closely with its allies, including the Five Eyes, on issues related to procurement to exchange information on foreign companies bidding on domestic procurements, and to ensure that any company that has been disqualified from procurement opportunities for security reasons, or that is known to have engaged in illicit and corrupt practices such as bribery, be excluded from any procurement opportunities.

That the Government of Canada makes a decision on Huawei, works in collaboration with its allies on the 5G file and ensures that all procurement related to the 5G be in line with the Five Eyes.

FAILURES IN THE PROCUREMENT REGIME

The government excluded national security considerations from this procurement process. As one official noted, “Nuctech had the lowest evaluated price and was therefore awarded the standing offer.”^[19] PSPC and GAC adopted a short-sighted approach, as both departments ignored both the technical risks associated with this equipment and the concerns outlined by Canada’s allies. PSPC and GAC ignored the security expertise available. It worked independently from the Communications Security Establishment (CSE). It shocked Conservatives to learn that GAC did not request a CSE assessment of Nuctech and that there were no security requirements associated with this contract.

Issues with in-house procurement

“Depending on levels of contracting authority, procurement is either done in-house or via PSPC.”^[20]  Conservatives want to underline that certain types of procurement are done in-house. The government must ensure that this type of procurement is made in close collaboration with the CSE. According to email exchanges, “…Various teams within GAC identify needs, specifications and supply options to support security requirements through its embassy network.”[21] GAC’s team of in-house procurement could have identified options for security requirements. Errors similar to the Nuctech affair could happen with procurement for smaller contracts.

Recommendation

That the Government of Canada requires that each department’s in-house procurement unit work in close cooperation with the Communications Security Establishment to evaluate all contracts on information technology and/or security services or equipment, including those on which State-owned enterprises bid.

Once again, GAC did not address its responsibilities to secure its embassies. It was not the first time that GAC faced security-related criticism related to its embassies. The Auditor General’s 2018 report concluded that “Global Affairs Canada did not fully meet its physical security needs at missions abroad to protect its staff and assets.”[22]

Failure of PSPC and its Canadian Industrial Security Directorate (CISD)

According to Domestic Procurement Operations on July 16, 2020, “CISD determined that there are no security requirements for this procurement,”^[23] on the basis that the machines would be used in certain contexts mentioned in the main report, namely that “X-ray machines do not store data, and the machines were not used in non-operational zones”.^[24] However, this contradicts GAC’s security assessment produced in July 2020 when media became interested in this affair.

Rebuttal of the Deloitte report

Despite the attempt by GAC to argue that Ottawa has increased its national security requirements based on a risk review,[25] the fact is that only GAC is required to review its own procedure. This type of improperly informed procurement procedure could happen once again in another department. Additionally, PSPC did not guarantee that Nuctech could not obtain a contract again.^[26]

The Deloitte report states that despite “Standing offer being awarded to a state-owned Chinese firm, we did not observe any instances of non-compliance;” this should worry any security expert and any Canadian, as it demonstrates that our procurement officials were satisfied with how the Nuctech procurement was managed.

FAILURE TO ADDRESS HUMAN RIGHTS IN THE PROCUREMENT

Human rights are key component considerations of procurement for our allies. However, none of the government officials appearing before this committee addressed any concern related to human rights in this procurement process.

Professor Leuprecht expressed worries about Nuctech technology tracking dissidents seeking shelter in Canadian embassies, stating: “The ability to track how often (these) dissidents are going, how many of them are coming in and out, is a little bit like what signals intelligence agencies do. Just being able to track the traffic pattern, that in itself can give you a significant amount of information.”[27]

Therefore, Conservatives urge that the Government of Canada start addressing the multiple challenges related to procurement and human rights.

Recommendation:

That the Government of Canada modernize its current failed procurement regime and finally put in place strong and effective human rights principles and criteria to fix and guide Canada’s procurement, especially when sourced from China and other authoritarian regimes.

THE GOVERNMENT OF CANADA’S LACK OF FOREIGN POLICY ON CHINA

Another reason behind PSPC’s failure in the Nuctech affair is the current government’s lack of foreign policy toward China; specifically, the Chinese Communist Party. Ward Elcock, former Director of the Canadian Security Intelligence Service explained that “We need to know what our policy is with respect to China. Once you know what the policy is, many of the other decisions will fall out from that, together with building a relationship with other countries that allows us to confront China much more clearly than we can now.”[28]

The Conservative Party takes notes of the testimonies heard highlighting the lack of leadership in the Government of Canada on the failure to address the issues described in the report.

Recommendation

That the Government of Canada adopts, as soon as possible, a clear, consistent and comprehensive policy toward China, and that this policy includes procurement considerations related to national security.

ABSENCE OF AN EFFECTIVE PROCUREMENT POLICY TO ENCOURAGE CANADIAN COMPANIES INSTEAD OF THOSE FROM AUTHORITARIAN REGIMES LIKE CHINA

Priorities for Canadian businesses

We welcome testimonies calling for Canada’s federal procurement to help Canadian businesses secure contracts. We agree that the government must be careful when evaluating bids that include Canadian companies. As noted by Professor Leuprecht, “Canadian companies are precluded from competing for public procurement tenders in China. The principle of reciprocity suggests that companies that are either explicitly excluded from foreign tenders or that structure their markets so that foreign companies cannot compete should not be able to compete for federal public tenders in Canada.”[29]

Conservatives agree with several witnesses who explained that allowing state-owned enterprises to compete for federal standing offers and contracts is unfair as they can use aggressive pricing strategies to win these bids. Conservatives require the federal government to implement strong and decisive measures to force procurement officials to evaluate if bidding enterprises are state-owned or have significant subsidies before awarding standing offers and contracts.

We, therefore, recommend that the government change its procurement approach related to high-tech companies and take strong measures to stop encouraging companies from regimes that stop our companies from tendering.

Recommendation

That the Government of Canada applies the principle of reciprocity in its procurement with Chinese companies. 

CONCLUSION

Our supplementary report aims at increasing Canada’s national security. Professor Christian Leuprecht described the high level challenges facing our procurement by stating that “The 21st century is really about data and technology, and China is doing both to enable and promote digital authoritarianism and undermine democratic values, and to actively compromise and interfere in sovereign decision-making. We are now witnessing this on a daily basis and every successful public tender for Chinese technology in Canada is an accelerant towards this dystopian future.”[30]

Nuctech was not an exception. Other procurement failures that put at risk Canada’s national security have happened and will occur if the procurement system is not fixed. This will require leadership and close collaboration between Canada and its democratic allies who adopted defined policies linking procurement and national security. Therefore, we urge the Government of Canada, and in particular PSPC, to finally start to act now and begin working across departments and agencies in order to change the procurement regime and its culture. Canada’s national interests must be protected. It is only by protecting these interests that Canada can ensure the safety and liberty of each and every Canadian.

Standing Committee on Government Operations and Estimates

Pierre Paul-Hus, M.P.

Kelly McCauley, M.P.

Rachael Harder, M.P.