RIO-TINTO UPDATES AMBASSADOR ON STERN HU ARREST

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 002658

SIPDIS

E.O. 12958: DECL: 09/15/2019
TAGS: ETRD EINV PREL EMIN CH AS
SUBJECT: RIO-TINTO UPDATES AMBASSADOR ON STERN HU ARREST

REF: (A) BEIJING 1966 AND PREVIOUS (B) SHANGHAI 321
(C) CANBERRA 621 AND PREVIOUS

BEIJING 00002658 001.2 OF 002


Classified By: Economic Minister Counselor William Weinstein. Reasons
1.4 (b, d)


1. (C) Summary: Rio Tinto Iron Ore (Rio) has quietly reopened
negotiations with Chinalco as part of an effort to win the
release of its employee and Australian national Stern Hu. In
response to Hu's arrest and to avoid further accusations of
stealing secrets, Rio is considering transferring all of its
decision-makers out of China. Rio's internal investigations
have uncovered no evidence of employees stealing secrets but
have found two employees holding relatively small amounts of
money from sources they cannot verify. The Ambassador agreed
to discuss with the Australian Ambassador how best to urge
China to handle the Hu arrest and other commercial cases
fairly and transparently. End summary.


2. (C) The Ambassador met on September 15 with Rio Tinto Iron
Ore's Managing Director for Sales and Marketing Ian Bauert
and Kennecott Utah Copper's CEO Andrew Harding.
Australia-based Rio Tinto Iron Ore (Rio) and U.S.-based
Kennecott Utah Copper are both subsidiaries of the UK
conglomerate Rio Tinto.


3. (C) Bauert said he visited Stern Hu in prison the week of
August 31. Hu was in fine physical shape, but he was much
worse emotionally than during previous visits. Hu complained
that his arrest was politically motivated, inspired by the
failed Rio-Chinalco deal, iron ore price negotiations, and a
recently announced BHP-Rio joint production deal.


4. (C) The PRC has not formally charged Hu, Bauert noted.
Press reports indicate that the original charge of espionage
had first been reduced to obtaining state secrets illegally,
which in turn was reduced to obtaining commercial secrets
illegally. The basis for this charge also morphed from
attempting to bribe state-owned steel mill employees to
receiving bribes from private steel mill employees. Rio has
not seen any evidence to substantiate these charges. Though
changed, both remaining charges are still serious.


5. (C) Rio has not had access to any evidence compiled by the
PRC, Bauert said. The company has launched an internal
investigation to uncover any possible illegal activity within
the company. Although the investigation has confirmed that
all information gathered by Rio employees was from publicly
available sources, there are two anomalies that the Rio
investigators are looking at more closely. One employee
received "dividends" of up to 20,000 Australian dollars (USD
15,000) from private steel mills in China. The money appears
to have been freely given, but the company is conducting
further checks on the source. Separately, Rio officials
found RMB 30,000 (USD 4,400) in the room of an arrested
employee that had already been searched and sealed by PRC
authorities. Rio reported this finding to the Public
Security Bureau and is continuing its internal investigation.



6. (C) The Hu arrest has significantly affected how Rio
conducts business here, Bauert emphasized. The company is
planning to move all of its decision-makers out of the
country, leaving only contract, shipping, and other
day-to-day work for employees in China. One Chinese-born
American citizen manager has refused to move forward with a
planed transfer to Shanghai for fear of his safety. Other
companies, including Caterpillar, have said that they, too,
are rethinking how they do business in China.


7. (C) Rio is asking the Australian, U.S., UK, and other
embassies to put pressure on PRC authorities. Rio has also
reopened talks with Chinalco on possible cooperative
ventures, but not on the same scale as the USD 19 billion
deal that Rio shareholders rejected earlier this year. Rio's
goal is to create an environment in which senior PRC
officials feel they can release Hu without losing face.


8. (C) The Ambassador recommended Rio managers continue to
raise their concerns at the highest levels in the PRC, and
said he would consult this week with the Australian
Ambassador to determine what we can do together on the Hu
case specifically and on rule of law in China more broadly.


9. (C) Comment: Regardless of whether Stern Hu is simply a
victim of political revenge (the Rio version of events) or
was involved in illegal business practices (as alleged by PRC

BEIJING 00002658 002.2 OF 002


authorities),his arrest has already spooked at least a few
major multinational corporations in China. Even though the
state espionage charge against Hu has been dropped for now,
the malleable definition of what constitutes a state secret
has a potentially chilling effect on those doing business in
China. In this regard, we hope to engage the Chinese on the
recently submitted USG comments urging the National People's
Congress to tighten and clarify the definition of state
secrets as it works on amending the State Secrets Law. End
comment.
HUNTSMAN