Chinese telecom giants Huawei and ZTE pose a serious security threat to the U.S., a congressional panel has warned after completing an investigation into the two companies.

The year-long investigation by the House intelligence committee concluded that Huawei Technologies Inc. and ZTE Inc. pose security threats to the United States because their equipment could be used to spy on American citizens.

In a report to be released later on Monday, Oct. 8, the committee recommends that the U.S. block mergers and acquisitions involving the two companies through the Committee on Foreign Investments in the U.S. Moreover, it recommends that the U.S. government avoid using equipment from the two companies, and that U.S. firms seek alternative vendors for telecommunications equipment.

Tensions with China

The new report is likely to increase tensions with China. U.S. military and intelligence officials have be warning for a long time that China poses a cyberespionage threat to U.S. defense systems and companies. Until now, however, government officials have been very careful in voicing such concerns publicly for fear of angering china. The House report on Monday is the most direct statement of concerns regarding specific Chinese companies.

"China has the means, opportunity and motive to use telecommunications companies for malicious purposes," the committee warns in its report. "Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems."

The report deals a significant blow to the two Chinese companies, which have come up with a major lobbying campaign to ease concerns of government influence in their operations. Both Huawei and ZTE have footholds in the U.S. telecommunications market, and both plan to expand their share. The two firms also undercut their competitors on price in a bid to attract more clients in the U.S.

Huawei, ZTE Deny Allegations

Huawei and ZTE have repeatedly denied allegations that they would allow the Chinese government to use their equipment for surveillance, arguing that doing so would affect their business interests. The companies also said they have cooperated extensively with the committee and have done their best to respond to requests.

"Purporting that Huawei is somehow uniquely vulnerable to cyber-mischief ignores technical and commercial realities, recklessly threatens American jobs and innovation, does nothing to protect national security, and should be exposed as dangerous political distractions," said Huawei spokesman William Plummer, adding that such national-security concerns are "baseless."

"ZTE has set an unprecedented standard for cooperation by any Chinese company with a congressional investigation," said David Dai Shu, ZTE's director of global public affairs. "ZTE equipment is safe."

Failure to Ease Concerns

The committee, however, was not satisfied with the two companies' cooperation throughout the investigation.

"Neither company was willing to provide sufficient evidence to ameliorate the committee's concerns," reads a draft of the report. "The risks associated with Huawei's and ZTE's provisions of equipment to the U.S. critical infrastructure could undermine core U.S. national security interests."

"We simply cannot trust such vital systems to companies with known ties to the Chinese state, a country that is the largest perpetrator of cyberespionage against the U.S.," added House intelligence committee chairman Mike Rogers (R., Mich.).

The House intelligence committee does not have the authority to reach conclusions about violations of federal law, but according to the report committee officials intend to refer their findings to the Justice Department and the Department of Homeland Security.