LONDON(Reuters) - China's Huawei Technologies should not have been allowed to become embedded in Britain's critical network infrastructure without the knowledge and scrutiny of ministers, lawmakers said on Thursday.
The Chinese company has a multibillion-pound deal to supply equipment to BT Group, Britain's largest telecoms operator, stretching back to 2005.
It also supplies O2 (part of Spain's Telefonica SA), EE (owned by France Telecom SA and Deutsche Tekekom AG) and TalkTalk.
BT told government officials of Huawei's interest in the contract two years before it was awarded, but the officials did not inform ministers until 2006, a decision that "shocked" lawmakers, a report from the parliamentary intelligence and security committee said.
"Such a sensitive decision, with potentially damaging ramifications, should have been put in the hands of ministers," the committee said.
"The failure... to consult ministers seems to indicate a complacency which was extraordinary given the seriousness of the issue," it added, describing the lapse as "unacceptable".
It said a lack of clarity around procedures, responsibility and powers relating to the awarding of contracts meant national security issues risked being overlooked.
The report comes amid mounting concerns on both sides of the Atlantic over the potential security threat stemming from Huawei's access to communication infrastructure.
Huawei, founded in 1987 by Mr Ren Zhengfei, a former officer of the People's Liberation Army, has raised security concerns from countries including the United States and Australia about alleged links between the company and the Chinese state.
"China is suspected of being one of the main perpetrators of state-sponsored attacks... focused on espionage and the acquisition of information," the report said.
"In this context, the alleged links between Huawei and the Chinese state are concerning, as they generate suspicion as to whether Huawei's intentions are strictly commercial or are more political."
The company has denied it has links with the Chinese government or military and has said it receives no financial support from the Chinese government, the report noted.
The Joint Intelligence Committee - Britain's senior intelligence watchdog - also warned that in the event of a cyber attack, 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".
In a reponse to the report, ministers expressed strong support for inward investment from China, calling Huawei a "long-term valued investor in the UK".
"It is a personal priority of mine to increase trade links between the UK and China and I cannot emphasise enough that the UK is open to Chinese investment," said Finance Minister George Osborne.
Huawei said in a statement it had worked closely with the British government and its customers over the last 12 years.
"We believe the report will prompt governments and the communications industry to require ever-higher standards on this important global topic to further reduce the security risks and enable better and safer networks for consumers," a Huawei spokesman said.
He said that prior to BT's selection of Huawei in 2005, it was subject to a comprehensive audit that took two years to complete.
"Since then, BT has continued to conduct a thorough annual evaluation of Huawei," he said.
A BT spokesman said the report recognised BT had taken measures to ensure its infrastructure was secure. "Security is at the heart of BT and it will continue to be so in the future," he added.