Huawei $2 billion security pledge followed walkout by British official - sources

By Jack Stubbs

LONDON (Reuters) - Huawei's relations with British authorities hit a low last month when a top official walked out of a meeting with the Chinese company over its perceived failure to fix security holes in its products, sources familiar with the talks told Reuters.

Although Huawei responded with a pledge to spend $2 billion on a security overhaul to address the British concerns, tensions between London and the world's biggest producer of telecoms equipment remain high as it fights U.S.-led allegations of Chinese state spying..

"Previously, you very much had British civil servants saying 'please do this' and asking rather than telling or banging the table," a source familiar with the matter told Reuters. "Huawei HQ now have the message."

The fraught nature of the meeting between Huawei executives and Britain's National Cyber Security Centre (NCSC) underlines the challenge facing the company in convincing Western governments its equipment is safe.

A spokesman for the NCSC - part of Britain's GCHQ spy agency - said the meeting in late November "ended prematurely because of increased tensions", but declined to provide any further details because the conversations were private.

Huawei did not respond directly to questions about the meeting or its talks with the NCSC, but said British officials had "identified some areas for improvement in our engineering processes."

"We are grateful for this feedback and committed to addressing these issues," it said in a statement.

Huawei has come under intense scrutiny as countries including Australia, New Zealand and Japan follow U.S. moves to restrict access to their markets, citing security concerns.

The company has repeatedly denied allegations that it facilitates Chinese espionage.

The arrest last week in Canada of its chief financial officer and founder's daughter, Meng Wanzhou, on U.S. charges that she misled multinational banks about Iran-linked transactions has ramped up the pressure. Meng, who has been freed on bail, has said she is innocent and will contest the allegations in the United Staes if extradited.

Huawei now increasingly needs to secure the approval of British authorities, who have so far resisted U.S. calls to act against the company and say they guard against security threats by having Huawei products reviewed at a special company laboratory.

But a British government report released in July found that technical and supply-chain "shortcomings" with Huawei equipment had exposed national telecom networks to new security risks.

Sources told Reuters that NCSC officials had become frustrated by Huawei's slow response to the report and its findings, which included issues raised in previous years about limitations on checking internal product code.

The report's critical language and NCSC Technical Director Ian Levy's dramatic exit from the November meeting showed company officials in China they needed to take prompt and significant action, the sources said.

The NCSC spokesman said relations with Huawei have been "strained since the report, but underlining that is a commitment to find solutions. We continue to have consistent dialogue."

(Reporting by Jack Stubbs; Editing by Alexander Smith)