"China has the means, opportunity and motive to use telecommunications companies for malicious purposes," the report says.
The recommendations are the result of a yearlong probe, including a congressional hearing last month in which senior Chinese executives of both companies testified, and denied posing a security threat.
A U.S. executive of one of the companies said that the firm had cooperated with investigators, and defended its business record. Huawei is a "globally trusted and respected company," said William Plummer, vice president for external affairs.
The bipartisan report is likely to become fodder for a presidential campaign in which the candidates have been competing in their readiness to clamp down on Chinese trade violations. Republican Mitt Romney, in particular, has made it a key point to get tougher on China by designating it a currency manipulator and by fighting abuses such as intellectual-property theft.
The panel's recommendations will likely hamper Huawei's and ZTE's ambitions to expand their business in America. Their products are used in scores of countries, including in the West. Both deny being influenced by China's communist government.
The report says that the committee had received information from industry experts and current and former Huawei employees suggesting that Huawei, in particular, may be violating U.S. laws. It says that the committee will refer the allegations to the U.S. government for further review and possible investigation. The report mentions allegations of immigration violations, bribery and corruption, and of a "pattern and practice" of Huawei using pirated software in its U.S. facilities.
Huawei is a private company founded by a former Chinese military engineer, and has grown rapidly to become the world's second- largest supplier of telecommunications network gear, operating in more than 140 countries. ZTE Corp is the world's fourth- largest mobile-phone manufacturer, with 90,000 employees worldwide. Their business in selling mobile devices has grown in the U.S., but espionage fears have limited the companies from moving into network infrastructure.
The report says that the companies failed to provide responsive answers about their relationships with and support by the Chinese government, and detailed information about their operations in the U.S. It says that Huawei, in particular, failed to provide thorough information, including on its corporate structure, history, financial arrangements and management.
In justifying its scrutiny of the Chinese companies, the committee contended that Chinese intelligence services, as well as private companies and other entities, often recruit those with direct access to corporate networks to steal trade secrets and other sensitive proprietary data.
It warned that malicious hardware or software implants in Chinese-manufactured telecommunications components and systems headed for U.S. customers could allow Beijing to shut down or degrade critical national-security systems in a time of crisis or war.
ZTE's citing of China's state secrecy laws for limiting information it could release only added to concern over Chinese government influence over its operations, the report says.
