|Hearing on Economic Espionage (2) |
Hearing on Economic Espionage (2)
Statement as delivered by Louis J. Freeh, Director, Federal Bureau of Investigation, Before the Senate Select Committee on Intelligence and Senate Committee on the Judiciary, Subcommittee on Terrorism, Technology and Government Information, February 28, 1996.
Good morning Mr. Chairman and distinguished members of the committees. At the request of the committees, I am pleased to have this opportunity to appear before you to discuss economic espionage, and to provide examples of this serious assault on our nation's intellectual property and advanced technologies.
I am also pleased the committees have had the opportunity to consult with Professor James P. Chandler from George Washington University. I had the pleasure of meeting with Professor Chandler last week. He makes a most compelling argument for legislation to address a problem that he estimates is costing American companies billions of dollars, with over a million jobs lost from stolen intellectual property. His reputation as a national expert on economic espionage is well deserved and I think the committee will find his written testimony most convincing.
The development and production of intellectual property and advanced technologies is an integral part of virtually every aspect of United States trade, commerce and business. Intellectual property, that is, government and corporate proprietary economic information, sustains the health, integrity and competitiveness of the American economy, and has been responsible for earning our nation's place in the world as an economic superpower.
The theft, misappropriation, and wrongful receipt of intellectual property and technology, particularly by foreign governments and their agents, directly threatens the development and making of the products that flow from that information. Such conduct deprives its owners -- individuals, corporations and our nation -- of the corresponding economic and social benefits. For an individual, a stolen plan, process or valuable idea may mean the loss of their livelihood; for a corporation, it could mean lost contracts, smaller market share, increased expenses and even bankruptcy; and, for our nation, a weakened economic capability, a diminished political stature, and loss of our technological superiority. Most estimates place the losses to businesses from theft and misappropriation of proprietary information at billions of dollars a year.
Economic espionage is devastatingly harmful to the United States. Our nation has historically placed high value on the development and exploitation of our citizens' creativity. The framers of the constitution believed in this principle (see article 1, section 8, clause 8: "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors exclusive Right of their respective Writings and Discoveries.") While serving as Secretary of State, Thomas Jefferson provided the vision and leadership which resulted in Congress enacting the Patent Act of 1790. This act created an agency in the Department of State which administered the infant patent system, demonstrating the immense importance which the framers attached to the principle of intellectual property. Congress ordered that it be overseen by the Secretary of State, the Secretary of the Department of War and the Attorney General. Jefferson's views were revealed in a letter he penned to Isaac McPherson in 1813, in which he stated, "that ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man ... Inventions then cannot, in nature, be a subject of property. [However] society may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility."
Thomas Jefferson believed that the government had a major responsibility for protecting from theft our intellectual property assets; assets important to the nation's security interests. That view is especially relevant today. U.S. policy-makers have stated that our nation's economic integrity is synonymous with our national security. During testimony before the Senate Foreign Relations Committee, November 4, 1993, Secretary of State Warren Christopher said, "in the post-cold war world our national security is inseparable from our economic security." In July 1994, President Clinton's "national security strategy of engagement and enlargement" was published. This document elaborates a new strategy for this new era, and identifies as a central goal "to bolster America's economic revitalization." Safeguarding proprietary economic information and technology is a national priority and an important part of our nation's tradition.
In today's environment, proprietary intellectual property and economic information in the global and domestic marketplace have become the most valuable and sought after commodity by all advanced nations. Within this evolving global environment in which information is created and shared instantaneously over national and global information highways -- an environment in which technology is critical to all types of industry -- both the opportunities and motives for engaging in economic espionage are increasing.
Some foreign governments, through a variety of means, actively target U.S. persons, firms, industries and the U.S. Government itself, to steal outright critical technologies, data, and proprietary information in order to provide their own industrial sectors not only a competitive advantage but, in fact, an unfair advantage. Similarly, theft or misappropriation of proprietary economic information by domestic thieves is equally damaging.
Foreign intelligence operations directed against U.S. economic interests are neither unusual nor unprecedented. The United States and other major industrial countries have been the targets of economic espionage for decades. However, U.S. counterintelligence has traditionally been directed at military, ideological or subversive threats to national security. This was due in large part to cold war security concerns, as well as by the reality of U.S. economic and technical predominance.
The end of the Cold War has brought with it several changes that have raised the profile of economic espionage. First, the collapse of Soviet communism has caused many foreign intelligence services to reassess collection priorities and redirect resources previously concentrated on cold war adversaries toward economic and technological targets. Second, military and ideological allies during the Cold War have become serious economic competitors. The former head of a foreign intelligence service stated on January 9, 1996, that in his country "the state is not just responsible for law making, it is in business as well." He added "it is true that for decades the state regulated the markets to some extent with its left hand while its right hand used the secret services to procure information for its own firms." Third, the globalization of the economy has brought about an environment in which national security and power are no longer measured exclusively by the number of tanks and nuclear weapons but increasingly in terms of economic and industrial capabilities. And finally, this information age environment challenges existing laws and programs which historically were designed to protect property and invention. Traditional federal statutes, such as the interstate transportation of stolen property were enacted long before there were computers, fax machines, modems and the other technologies that allows information -- valuable information -- to be sent instantaneously to anywhere in the world. Now formulas, ideas or proprietary economic information can be stolen with a few keystrokes and under many circumstances no criminal law can be applied to prosecute the offenders.
Obviously, this new era presents a new set of threats to our national security, and presents challenges to existing security, counterintelligence, and law enforcement structures and missions. Despite the challenges, these institutions continue to have as their fundamental duty and purpose as guaranteed in the preamble to the constitution, "to provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity."
Accordingly, it is our government's responsibility: 1) to take stock as to the resources important to our nation's welfare, liberties and security, that is, the imagination, innovation, and invention, especially in high-technology areas, of our nation's citizens and business institutions, 2) to identify threats to those resources, and 3) to effect provisions for deterring, counteracting and punishing those who attack or steal those resources.
The Federal Bureau of Investigation has already taken steps to deal with economic espionage. In 1994, I initiated an Economic Counterintelligence Program with a mission to detect and counteract economic espionage activities directed against U.S. interests. Through this program, the FBI has brought to bear both its foreign counterintelligence and criminal investigative jurisdictions, expertise and investigative resources to address this important national security issue. During the past year, the FBI has developed significant information on the foreign economic espionage threat, to include: 1) the identification of actors -- the perpetrators of economic espionage; 2) the economic targets of their spying and criminal activities, and 3) the methods used to steal clandestinely and illicitly proprietary economic information and technology.
FBI investigations reveal that numerous foreign powers are responsible for directing, controlling and/or financing economic espionage activities directed against both the government as well as the private sector. Of the approximately 800 economic espionage matters currently being investigated by the FBI, 23 foreign powers are directly implicated.
The targets of economic espionage are varied. Advanced technologies, defense-related industries and critical business information remain the primary targets of the foreign economic espionage activities. In many instances, the industries are of strategic interest to the United States for several reasons: some of them produce classified products for the government; others produce dual-use technology applicable to both the public and private sectors; and others develop leading-edge technologies that are critical to maintaining U.S. economic security.
These pieces of economic and technological information seldom exist in a vacuum. Foreign countries collect sensitive economic intelligence frequently to enhance both their military capabilities and their economic stability and competitiveness. Likewise, the line separating purely economic intelligence from political intelligence is as difficult to draw as that between technical and military intelligence. At times, foreign policy makers may be interested in our government's economic policy decisions or proprietary information on a U.S. company's financial stability for political as well as economic reasons.
Neither the FBI nor the U.S. Intelligence Community as a whole has systematically evaluated the costs of economic espionage. A variety of U.S. private sector surveys have attempted to quantify the potential damage in dollar terms, with varying results and a wide spectrum of estimates:
The U.S. International Trade Commission (ITC) estimated in 1982 that in five selected industrial sectors, piracy of U.S. intellectual property rights cost the nation's business $6 billion to $8 billion in annual sales and cost U.S. citizens 131,000 jobs.
In 1987, ITC estimated worldwide losses to all U.S. industries were $23.8 billion. (Using the 1982 average loss ratio of $7 billion = 130,000 jobs, this would constitute a loss of about 450,000 U.S. jobs.)
The last study conducted in 1988 by the U.S. ITC, estimated that U.S. companies lost from $43 billion to $61 billion in 1986 alone from foreign intellectual property right infringement.
In 1992, the American Society for Industrial Security surveyed 246 companies and found that proprietary information theft has risen 260% since 1985. The survey indicated that customer lists are the most frequently stolen category of U.S. proprietary information. The survey found that all types of commercial espionage during 1991-92 resulted in major losses to U.S. firms in the following areas: pricing data ($1 billion), product development and specification data ($597 million), and manufacturing process information ($110 million) -- total of $1.2 billion lost.
In a special report entitled "Trends in Intellectual Property Loss" sponsored by the American Society for Industrial Security (ASIS) co-authored by Richard J. Heffernan and Dan Swartwood, 325 U.S. corporations responded to a double-blind survey -- the third in a series. For 1995, 700 incidents of proprietary loss were cited by respondents which reflected a 323% increase in this activity between 1992 (9.9 incidents per month) and 1995 (32 incidents per month). Of these incidents, 59% were attributable to employees or ex-employees, and 15% were attributable to those with a contractual relationship with the company. In all, 74% of the incidents were committed by those who were in a position of trust with the company. In 21% of the incidents, foreign involvement was identified. The loss claimed for the 700 incidents was $5.1 Billion, approximately 9% of the U.S. GNP.
These survey estimates clearly indicate that the actual and potential losses incurred are immense.
In the past, although the FBI has not specifically focused resources on the issue of economic espionage, a sample of ten such investigations, spanning 20 years, reflect the following:
value of contracts targeted................
potential economic loss prevented.....
civil damages awarded......................
Despite not having a single definitive dollar loss figure, there are other tangible losses caused by economic espionage. When proprietary economic information is stolen from American companies: Americans lose jobs; U.S. capital migrate overseas; and the incentive for research and development investment declines.
Understandably, U.S. industry is reluctant to publicize occurrences of foreign economic espionage. Such publicity can adversely affect stock values, customers' confidence, and ultimately competitiveness and market share. Therefore, gathering the empirical data to quantify the damage is problematic. But regardless of the exact number, the damage caused by economic espionage is significant.
Practitioners of economic espionage seldom use one method of collection in isolation. Instead they conduct coordinated collection programs which combine both legal and illegal, traditional and more innovative methods. FBI investigations have identified various methods utilized by those engaged in economic espionage. Spotting, assessing and recruiting individuals with access to a targeted technology or information is a classical, time-proven technique which is well practiced.
As with classical espionage, foreign collectors assess the vulnerabilities of the individual, looking for any personal weaknesses or commonality between them and the targeted person that can be exploited to convince the individual to cooperate.
Other methods include tasking students who come to study in the United States; exploiting non-government affiliated organizations such as friendship societies, international exchange organizations, or import-export companies; hiring away knowledgeable employees of competing U.S. firms with the specific goal of exploiting their inside knowledge; and manipulating legitimate technology sharing agreements so that they also become conduits for receiving proprietary information, to list just a few.
The FBI and other U.S. government agencies have developed information clearly establishing that economic espionage is a very real and significant problem. However, current statutory remedies do not allow us to counter or to deter effectively this damaging activity. Since the criminal nature of unlawfully taking or appropriating trade secrets or proprietary economic information involves stealing, the most relevant current federal statute is T18 USC 2314, Interstate Transportation of Stolen Property. Ironically, and indicative of our problem however, this statute was enacted long before computers, copy machines, and instant communication even existed. Indeed, Congress passed this law when it became commonplace to transport stolen property across state lines in automobiles. Unfortunately, some courts have held that intangible proprietary economic information does not qualify as the "goods, wares, merchandise, securities or monies" set forth in the statute. For example, U.S. espionage statutes, designed to meet the demands of the Cold War, do not cover many current economic intelligence-gathering operations because often the information stolen, while sensitive or proprietary, is not classified national defense information. Federal criminal statutes relating to the theft of property often are not applicable because the stolen item is not tangible. Many states have laws against the theft of trade secrets, but these statutes do not apply or are greatly weakened when activity occurs in multiple state jurisdictions. Current federal and state statutes do not contain a uniform legal definition for intellectual property or technical information and thus have proven to be inadequate in addressing economic espionage.
Even basic concepts can prove problematic. For example, if an individual downloads computer program codes without permission of the owner, has a theft occurred even though the true owner never lost possession of the original? Similarly, if a U.S. company licenses a foreign company located in a foreign country to use its proprietary economic information, and an employee of the foreign company makes and sells an unauthorized copy of the information to agents of a third country, has any U.S. crime been committed?
Another difficulty with existing law is that it fails to afford explicit protection to the confidential nature of the information in question during enforcement proceedings. By its nature, proprietary economic information derives value from its exclusivity and confidentiality. If either is compromised during legal proceedings, the value of the information is diminished even though the goal of the legal process was to protect the information. Rather than risk such compromise, many companies opt to forego legal remedies in the hope or expectation that the information's residual value will exceed the damage done by a wrongdoer.
Since no federal statute directly addresses economic espionage or the protection of proprietary economic information in a thorough, systematic manner, the FBI has experienced difficulties prosecuting cases of economic espionage. In several instances, the FBI has conducted investigations where a review of the facts of the case did not fit existing laws and as such the department of justice or U.S. Attorney's offices declined prosecution.
In the absence of a modern federal statute designed to protect U.S. proprietary economic information in a systematic, direct manner, widely divergent outcomes are often produced by current laws, which were designed to counteract other problems.
Such inconsistent legal results seriously dilute the deterrent effect of these difficult prosecutions. Let me cite two such examples: in one case, an FBI undercover agent posing as a high-tech buyer agreed to buy a drug fermentation process for 1.5 million dollars from employees of two American biotechnology companies, Schering-Plough and Merck. The defendants agreed to sell a second such process to the undercover agent for six to eight million dollars. Over 750 million dollars in research and development cost had gone into developing the two fermentation processes. The exchange took place and the subjects were immediately arrested and the assets provided were recovered.
As no federal statute exists which directly addresses the theft of trade secrets, this investigation was pursued as a fraud matter. Each subject was convicted on 12 counts relating to conspiracy, fraud by wire, interstate transportation of stolen property and mail fraud violations. The U.S. District Court Judge who presided over the trial stated that the subjects attempted to compromise years and years of research undertaken by the victim companies. The judge added that there are few crimes with regard to monetary theft that could reach this magnitude and sentenced the offenders accordingly.
In contrast, in another 1993 case the FBI arrested two individuals who sold proprietary bid and pricing data regarding the Tomahawk cruise missile program to an FBI undercover agent for 50,000 dollars. The U.S. Navy was to award this $3 billion contract to a sole vendor, either Hughes Aircraft or McDonnell-Douglas missile systems. Both companies conceded that the loss of the highly competitive contract would have closed down their missile facilities. Both defendants were convicted of federal fraud violations. Not withstanding the gravity of the offense, one of the individuals was placed on probation for one year and ordered to participate in the home detention program for 60 days. The other was sentenced to four months in prison, with credit for time served, and four months of home detention.
These and other problems underscore the importance of developing a systemic approach to the problem of economic espionage. Only by adoption of a national statutory scheme to protect U.S. proprietary economic information can we hope to maintain our industrial and economic edge, and thus safeguard our national security.
The FBI supports a two-tiered approach to the problem. First, we advocate dealing specifically with economic espionage and protecting proprietary economic information. Federal law must provide key definitions, punish all manner of wrongful conduct associated with stealing proprietary economic information, provide for extraterritoriality under certain circumstances, preserve existing state law on the subject, and specifically preserve the confidentiality of the information in question during enforcement proceedings. Second, we support amending existing criminal statutes to reinforce and enhance enforcement efforts. We must find solutions to the many impediments that U.S. counterintelligence and law enforcement have experienced when attempting to counter economic espionage.
By doing this, we will recognize that the protection of proprietary economic information and the prevention of economic espionage is both a counterintelligence and law enforcement problem. We should not focus on one to the exclusion of the other but seek, instead, to forge a unified approach to combat a sophisticated threat to U.S. national interest. The FBI supports such an approach and hopes to see federal legislation enacted to better protect U.S. national security.