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Britain's national security is potentially being put at risk by the involvement of Chinese firms in the UK's telecoms systems, MPs have warned.
In a highly critical report, the parliamentary Intelligence and Security Committee (ISC (KOSDAQ: 095340.KQ - news) ) has warned that attempts by ministers to balance the need to encourage Chinese investment in the UK with security equipment had resulted in an "unacceptable" stalemate.
It highlighted the case of the Chinese telecoms company Huawei, which signed a major contract in 2005 to supply equipment to BT (LSE: BT-A.L - news) and has since signed deals with other companies including O2, TalkTalk and EverythingEverywhere.
But despite concerns that China exploits vulnerabilities in the Huawei equipment to spy on the UK through the telecoms system, the ISC said ministers were not even informed about the BT deal until a year after it was signed.
The committee said staff from the GCHQ signals intelligence agency should take over the running of Huawei's cyber security evaluation centre - known as the Cell - which it has built in Banbury, Oxfordshire.
"The Government's duty to protect the safety and security of its citizens should not be compromised by fears of financial consequences, or lack of appropriate protocols," the report says.
"However, a lack of clarity around procedures, responsibility and powers means that national security issues have risked, and continue to risk, being overlooked."
The report says members were "shocked" that officials chose not to inform - let alone consult - ministers about Huawei's deal with BT.
"We are not convinced that there has been any improvement since then in terms of an effective procedure for considering foreign investment in the CNI (critical national infrastructure)," it says.
"The difficulty of balancing economic competitiveness and national security seems to have resulted in stalemate. Given what is at stake, that is unacceptable."
The ISC expressed concern that the Cell (Milan: CTIC.MI - news) was funded and staffed by Huawei - even though personnel were security-cleared in the UK - and called for the National Security Adviser to carry out a review "as a matter of urgency".
As an "absolute minimum", the ISC said GCHQ should have greater oversight of the Cell and that the Government must be involved in the selection of its staff.
Despite strenuous denials by Huawei, the ISC described reported links between the firm and the Chinese state as "concerning", saying they raised suspicion as to whether Huawei's intentions were "strictly commercial or are more political".
It said that as far back as 2008, MI5 warned that the Chinese state could potentially exploit vulnerabilities in Huawei's equipment to access the BT network for espionage purposes.
The Joint Intelligence Committee - the UK's senior intelligence body - also warned that in the event of a cyberattack it "would be very difficult to detect or prevent and could enable the Chinese to intercept covertly or disrupt traffic passing through Huawei supplied networks".
The ISC said it had been assured by GCHQ that the UK network had not been put at risk because of "mitigation" measures by BT.
However, the report notes: "Any vulnerability, even as a result of an innocent mistake rather than malicious intent, would call into question whether a product is sufficiently well-engineered.
"An insecure product would risk a third party exploiting its weaknesses to access UK networks for hostile purposes."
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