Montreal firm targeted in Chinese takeover did research with Canadian government

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The Montreal high-tech firm at the centre of a foreign takeover by a Chinese investor that triggered national security concerns in Ottawa once participated in a research project with a Canadian spy agency and has sold equipment to the Department of National Defence.

The Trudeau government recently cancelled a Harper cabinet order for Hong Kong-based O-Net Communications to abandon its takeover of Montreal-based ITF Technologies. The Conservatives decided the ITF deal could be "injurious to national security" and tried to unwind it shortly before they lost power.

The Liberals have launched a "fresh review" of the transaction. Innovation Minister Navdeep Bains's office has declined to explain why, and referred all questions to his department, which said it could not comment for reasons of national security and commercial confidentiality.

Related: Liberals reverse Harper cabinet order to unwind Chinese takeover deal

The decision was made in November, 2016, just weeks after Mr. Trudeau visited China and then hosted Chinese Premier Li Keqiang on a visit to Canada.

ITF Technologies, formerly Avensys, is a leader in "fibre-laser" technology that is used in telecommunications, data communications and industrial applications. Its website indicates some of its products have military applications, but does not elaborate.

Prime Minister Justin Trudeau has made deepening trade relations with China, including a free-trade deal, key foreign-policy objectives and the Liberals are also loosening restrictions on outside investment. In November, Ottawa announced it would raise the threshold for automatic reviews of foreign takeovers to $1-billion two years ahead of schedule.

China, facing an uncertain economy, is attempting to keep its companies' investments at home.

Neither former Conservative government officials nor the Liberal government will elaborate on why the Tories ordered O-Net to abandon its purchase of ITF Technologies in July, 2015.

However, records show ITF has collaborated in cutting-edge university-level research on the science behind making messages more resistant to hacking – with affiliated partners that included Canada's eavesdropping spy agency, the Communications Security Establishment, as well as the National Research Council, Ottawa's chief research arm, and the Department of National Defence.

A review of photonic industry research between 2005 and 2009 shows CSE, the NRC and DND were affiliates, along with ITF, in a project that uses quantum cryptography to make advances in a field where experts try to produce coded messages that are difficult or impossible to crack. The research project concerned "absolutely secure optical fibre networks using quantum cryptography."

A CSE spokesman said the organization could not immediately answer questions about the project because it needed more time to research the matter.

Chinese government ownership may be part of what worried the Conservatives when they were in government. A corporation presentation prepared by O-Net in 2015 suggests that more than 25 per cent of its shares are owned by a company that is a subsidiary of Chinese state-owned China Electronics Corporation.

"Even a minority control by the Chinese government has to be considered as Beijing-controlled and any Canadian companies they might buy would be under their control," Conservative foreign affairs critic Peter Kent said in an interview on Thursday.

Mr. Kent said ITF's technology has military applications and to allow a company with a direct line to Beijing to acquire it is symptomatic of a "misguided rush to give the Chinese almost anything they ask for in the pursuit of trade."

When it was still named Avensys, the company sold more than $246,500 worth of high-tech equipment to the Department of National Defence, which also has a research arm, between 2005 and 2013. The NRC, through the Industrial Research Assistance Program, has also provided ITF with up to $169,500 for research and development.

Canada's allies are coming under more pressure at home to close the door to acquisitions in which the buyer is a state-owned enterprise in China. The U.S.-China Economic and Security Review Commission, a body set up to review the national security implications of trade with Beijing, has urged Congress to bar acquisitions by Chinese state-owned firms.

O-Net, which challenged the Harper cabinet order to divest itself of ITF, argued in court the deal is not a risk for Canada. "ITF … does not own any technologies that could be transferred to O-Net Communications that are not readily available in the marketplace," the company said in a court filing.

It said it acquired the ITF assets through an auction after the bankruptcy of its previous owner.

"There were no Canadian investors or investors from anywhere in North America that were willing to invest in ITF."

Briefing notes prepared for cabinet member Chrystia Freeland when she was trade minister show the Liberals are acutely aware of Beijing's unhappiness over the way Canadian authorities treat Chinese firms attempting takeovers.

"China has voiced concern over the existence of national security review provisions and their opacity under the Investment Canada Act, suggesting that China is unfairly targeted," the 2015 briefing book said.