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Hearing on Economic Espionage (1)

Hearing on Economic Espionage (1)

Statement of 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.

Economic Espionage

The development and production of proprietary economic information is an integral part of virtually every aspect of United States trade, commerce and business and, hence, is essential to maintaining the health and competitiveness of critical segments of the United States economy. The theft, misappropriation, and wrongful receipt, transfer, and use of United States proprietary economic information, particularly by foreign governments and their agents and instrumentalities, but also by domestic malefactors, directly threatens the development and production of that information and, hence, directly imperils the health and competitiveness of our economy.

The ever increasing value of proprietary economic information in the global and domestic marketplaces, and the corresponding spread of technology, have combined to significantly increase both the opportunities and motives for conducting economic espionage. As a consequence, foreign governments, through a variety of means, actively target U.S. persons, firms, industries and the U.S. government itself, to steal or wrongfully obtain critical technologies, data, and information in order to provide their own industrial sectors with a competitive advantage. Similarly, theft or misappropriation of proprietary economic information by domestic thieves has also increased.

The resulting security environment presents a new set of threats to our national security, and presents challenges to existing security, intelligence, counterintelligence and law enforcement structures and missions. But in this new era these institutions continue to have the fundamental purpose "to provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity." This clause from the preamble of the Constitution bestows a sacred trust to the U.S. government, assigning responsibility for protecting the lives and personal safety of Americans, maintaining our political freedom and independence as a nation and providing for the well-being and prosperity of our nation.

The United States has become increasingly aware of the economic espionage threat to U.S. interests and U.S. policy-makers have begun to equate economic security with U.S. national security. The March 1990 and February 1995 national security strategies published by the White House focus on economic security as an integral part not only of U.S. national interest but also of national security. On November 4, 1993 before the Senate Foreign Relations Committee, Secretary of State Warren Christopher stated, "In the post-Cold War world, our national security is inseparable from our economic security." Secretary Christopher went on to emphasize "the new centrality of economic policy in our foreign policy."

Additionally, in February 1995, President Clinton published "A National Security Strategy of Engagement and Enlargement" which identified as one of our nation's three central strategy goals to bolster America's economic revitalization. Finally, in an October, 1995 issue of FOCUS magazine, Bruce Lehman, Commissioner of Patents and Trademarks, stated, "what America has to sell to the world is its genius, and if we don't get other countries to provide a system that makes a market for that genius and, secondly, do everything we can to set up market forces that encourage our inventors to exploit that market, we are going to have an extremely hobbled economy." Lehman went on to state, "I favor strong intellectual property rights for U.S. investors. Their creations are the wealth of America, and if you don't acknowledge those rights you have no wealth."

Consistent with U.S. national security policy since 1990, the Federal Bureau of Investigation initiated an Economic Counterintelligence program in 1994 with a mission to collect information and engage in activities to detect and counteract foreign power-sponsored or coordinated threats and activities directed against United States' economic interests, especially acts of economic espionage. This program does not involve offensively collecting economic information; it is defensive in nature with the ultimate goal of protecting U.S. national security. This goal has and will continue to be accomplished by the application of investigative tools, techniques and remedies available through the authorities and jurisdictions assigned to both the FBI's Foreign Counterintelligence and Criminal Investigative Programs. Through the Economic Counterintelligence program, the FBI has developed significant information on the foreign economic threat, to include the identification of actors, targets and methods utilized.

Actors

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, counterintelligence, which is the identification, penetration and neutralization of foreign intelligence activities that threaten U.S. national security, 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.

In today's world, a country's power and stature are often measured by its economic/industrial capability. Therefore, foreign governments, their ministries, such as those dealing with finance and trade, and major industrial sectors are increasingly expected to play a more prominent role in their respective country's collection efforts. While a military rival steals documents for a state-of-the-art weapon or defense system, an economic competitor steals a U.S. company's proprietary business information or government trade strategies. Just as a foreign country's defense establishment is the main recipient of U.S. defense-related information, foreign companies and commercially oriented government ministries are the main beneficiaries of U.S. economic information.

Foreign governments pose various levels and types of threats to U.S. economic and technological information. Some ideological and military adversaries continue their targeting of U.S. economic and technological information as an extension of a concerted intelligence assault on the United States conducted throughout the Cold War. The end of the Cold War has not resulted in a peace dividend regarding economic espionage. Just recently, one foreign leader urged better utilization of stolen technology to enhance his country's national security. He stated that currently "only 15 to 20 percent" of the information acquired by spies is being used "even though sometimes special services receive the freshest technological advances literally straight off the pages" of foreign blueprints and manuals.

Other governments targeting U.S. economic and technological information are either longtime allies of the United States or have traditionally been neutral. These countries target U.S. economic and technological information despite their friendly relations with the United States. In some cases, they take advantage of their considerable legitimate access to U.S. information and collect sensitive information more easily than our traditional adversaries. In addition, some of the countries traditionally

considered allies have infrastructures that allow them to easily internalize high-tech information and utilize it in competition against U.S. firms. On January 9, 1996, the former head of a foreign intelligence service told a German television station that in his country "the state is not just responsible for law making, it is in business as well." He added that "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."

In general, the governments and companies of highly industrialized nations collect economic intelligence to gain a competitive edge over major economic rivals, either across the board or in specific industries. In addition, intelligence is collected on U.S. Government plans and policies with regard to trade and industry. Other less industrialized countries tend to limit their economic collection activities to a few key industrial sectors. Current FBI investigations reflect 23 countries engaged in economic espionage activities against the United States.

Targets

The targets of economic espionage are varied but high-technology and defense-related industries remain the primary targets of foreign economic intelligence collection operations. The industries that have been the targets in most cases of economic espionage and other collection activities include biotechnology; aerospace; telecommunications, including the technology to build the National Information Infrastructure; computer software/hardware; advanced transportation and engine technology; advanced materials and coatings, including "stealth" technologies; energy research; defense and armaments technology; manufacturing processes; and semiconductors. Proprietary business information, i.e., bid, contract, customer and strategy information, in these sectors is aggressively targeted, as well. Foreign collectors have also shown great interest in government and corporate financial and trade data.

The industries described above are of strategic interest to the United States because they produce classified products for the government, produce dual-use technology used in both the public and private sectors, and are responsible for leading-edge technologies critical to maintaining U.S. economic security. Many other U.S. high-tech industrial sectors have been targeted. Any foreign company competing for a sale or a piece of a market share, regardless of the market, could resort to intelligence activities as a "force multiplier" to improve its chances.

A few recent examples of the targeting activities described above include: a foreign government-controlled corporation targeting U.S. proprietary business documents and information from U.S. telecommunications competitors; the acquisition of technical specifications for a U.S. automotive manufacturer's product by a foreign competitor; the attempted acquisition in violation of U.S. export laws of a U.S. company's radar technology; the targeting and acquisition of several U.S. companies' proprietary biotechnology information; and the theft of a U.S. company's data and technology regarding the manufacture of microprocessors.

Economic intelligence data seldom exist in a vacuum. Collection of sensitive foreign economic intelligence frequently enhances a nation's military, as well as economic capabilities. Likewise, the line separating purely economic intelligence from political intelligence is as difficult to draw as that between technical and military intelligence.

Types of U.S. government economic information, especially pre-publication data, of interest to foreign governments and intelligence services as determined through FBI investigations include: U.S. economic, trade and financial agreements; U.S. trade developments and policies; U.S. national debt levels; U.S. tax and monetary policies; foreign aid programs and export credits; technology transfer and munitions control regulations; U.S. energy policies and critical materials stockpiles data; U.S. commodity policies; and proposed legislation affecting the profitability of foreign firms operating in the United States.

Impact

Costs of economic espionage have not been systematically evaluated by the U.S. Intelligence Community or the FBI. The U.S. private sector, for its part, has only recently begun to estimate its losses to commercial espionage and other economic intelligence operations. To date, the private sector's cost estimates have generally been based upon small, unrepresentative samples of the U.S. business community and have tended to emphasize companies with holdings in the United States rather than overseas. Understandably, U.S. industry is reluctant to publicize occurrences of foreign economic and industrial espionage. Such publicity can adversely affect stock values, customers' confidence, and ultimately competitiveness and market share. Nevertheless, in the last few years, there have been a number of studies and estimates which have attempted to quantify the scope and impact of economic espionage.

In 1992, a survey by the American Society for Industrial Security 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).

The January, 1995 issue of "Law and Policy in International Business" stated that the White House Office of Science and Technology estimated losses to U.S. businesses from foreign economic espionage at nearly one hundred billion dollars per year.

The October 1995 issue of "FOCUS" magazine dealt with the loss of U.S. intellectual property and estimated that the unauthorized copying and counterfeiting of medicines by Argentina, Brazil, India and Turkey alone is costing U.S. drug firms more than 1.5 billion dollars annually.

Methods

Practitioners of economic espionage seldom use one method of collection, rather they have concerted collection programs which combine both legal and illegal, traditional and more innovative methods. Investigations have and continue to identify the various methods utilized by those engaged in economic espionage and to assess the scope of coordinated intelligence efforts against the United States. The following examples illustrate some of the methods utilized to engage in economic espionage.

An intelligence collector's best source is a trusted person inside a company or organization whom the collector can task to provide proprietary or classified information. These individuals are approached due to their legitimate and direct access to information. In some instances the insider is selected due to their apparent willingness to engage in unlawful or clandestine activity. For example, between 1986 and 1990, Dr. Ronald Hoffman, a rocket scientist and lead researcher for Science Applications International Corporation (SAIC), sold SAIC-developed technology which was restricted for export to four foreign companies. The technology sold consisted of computer codes developed for the U.S. Air Force to be utilized in Star Wars projects, but had commercial applications available nowhere else in the world. Press reports have stated that these companies, which were said to be years behind U.S. firms in space technology, have since gained a significant competitive advantage in the space industry.

Some foreign governments task foreign students specifically to acquire information on a variety of economic and technical subjects. In some instances, countries recruit students before they come to the United States to study and task them to send any technological information they acquire back to their home country. Additionally, as an alternative to compulsory military service, one foreign government has an organized program to send interns abroad, often with the specific task of collecting foreign business and technological information.

Upon completion of their studies, some foreign students are then encouraged to seek employment with U.S. firms to steal proprietary information. Although similar to clandestine recruitment used traditionally by intelligence services, often no intelligence service is involved, only a competing company or non-intelligence government agency. The collector then passes the information directly to a foreign firm or the government for use in its research and development (R&D) activities.

In 1989, the FBI conducted interviews of individuals who admitted to having been recruitments of a foreign intelligence service. Two of the individuals stated that they were recruited by the intelligence service just prior to their departure to study in the United States. These individuals worked at the behest of the intelligence agency while studying in the United States. Upon completion of their studies, both obtained positions with U.S. firms and continued their espionage activities, then directed at their employers, on behalf of the intelligence agency. The individuals each operated at the behest of that agency for 20 years.

Other FBI investigations have identified that some foreign governments exploit existing non-government affiliated organizations or create new ones, such as friendship societies, international exchange organizations, import-export companies and other entities that have frequent contact with foreigners, to gather intelligence and to station intelligence collectors. They conceal government involvement in these organizations and present them as purely private entities in order to cover their intelligence operations. These organizations spot and assess potential foreign intelligence recruits with whom they have contact. Such organizations also lobby U.S. government officials to change policies the foreign government considers unfavorable.

Foreign companies typically hire knowledgeable employees of competing U.S. firms to do corresponding work for the foreign firm. At times, they do this specifically to gain inside technical information from the employee and use it against the competing U.S. firm. For example, the FBI has identified an association of consultants, all of whom were long-term employees of a major U.S. corporation, attempting to sell proprietary high technology to a foreign power. These consultants have 1.5 million dollars in contracts with the foreign power and have offered to provide technology and guidance to the country in order to facilitate their development in the area of technology and allow them to compete with the United States. The result is a loss of proprietary information estimated by the U.S. corporation at billions of dollars.

For example, in 1988, a U.S. automotive manufacturer of a military vehicle was contacted by a foreign automotive manufacturer who requested a limited licensing agreement with the U.S. manufacturer to allow access to technical data on the military vehicle in order to bid on a contract to build similar vehicles for the foreign country. The U.S. manufacturer agreed but notified the foreign manufacturer of the proprietary nature of the information provided. The U.S. manufacturer was subsequently advised that the contract was awarded to a second foreign manufacturer. In 1993, the second foreign manufacturer produced its first prototype vehicle and displayed the vehicle at a major auto show. Except for the engine, the prototype is essentially a copy of the U.S. manufacturer's vehicle. According to the U.S. manufacturer, this prototype was produced too quickly to have been the product of reverse-engineering. It is not clear that any crime was committed here, but it appears that the specifications licensed to the first foreign manufacturer were provided to the second through an illicit means.

FBI investigations have determined that some countries frequently hire well-connected consultants to write reports on topics of interest and to lobby U.S. Government officials on the country's behalf. Often, the consultants are former high-ranking U.S. Government officials who maintain contacts with their former colleagues. They exploit these connections and contract relationships to illegally acquire protected information, and to gain access to other high-level officials who are currently holding positions of authority through whom they attempt to further illegally acquire protected information.

During joint R&D activities, foreign governments routinely request to have an on-site liaison officer to monitor progress and provide guidance. Using their close access to their U.S. counterparts conducting joint R&D, particularly in the defense arena, liaison officers have been caught wrongfully removing documents that are clearly marked as restricted or classified.

In October 1984, Recon Optical, a U.S. defense contractor and manufacturer of surveillance cameras, signed a 4-year, 40 million dollar contract with a foreign Government to design a top-secret airborne surveillance camera system for that governments intelligence service. Terms of the contract allowed three Air Force officers from that country to work in Recon's plant outside of Chicago. However, after months of disagreement and cost disputes, the U.S. company finally stopped the work in May 1986 and dismissed the three officers. As they left, the officers were caught by security guards stealing boxes of documents. Some of the documents described plans to steal Recon's secret and commercially valuable surveillance camera technology. Documents indicated that, throughout the working relationship, the officers had passed technical drawings to the their country's defense company, Electronics-Optics Industries, Ltd., enabling that country to build its own system.

Need for Legislation

As evidenced by the above, foreign powers, through a variety of means, actively target persons, firms and industries in the U.S. and the U.S. Government itself, to steal or wrongfully obtain critical technologies, data, and information in order to provide their own industrial sectors with a competitive advantage. There are gaps and inadequacies in existing federal laws which necessitate a federal statute to specifically proscribe the various acts defined by economic espionage and address the national security aspects of this crime.

Since no Federal statute directly addresses economic espionage or the protection of proprietary economic information in a thorough, systematic manner, investigations and prosecutions attempt to combat the problem by using existing laws, all of which were designed to counteract other problems. The Interstate Transportation of Stolen Property Act1 is an example. This law was designed to foil the "roving criminal" whose access to automobiles made movement of stolen property across state lines sufficiently easy that state and local law enforcement officials were often stymied. While the law works well enough for crimes involving traditional "goods, wares, or merchandise," it was drafted at a time when computers, biotechnology, and copy machines didn't even exist. It is, consequently, not particularly well suited to deal with situations in which information alone is wrongfully duplicated and transmitted electronically across domestic and international borders. One court has observed, for example, that "[t]he element of physical 'goods, wares, or merchandise' in sections 2314 and 2315 2 is critical. The limitation which this places on the reach of the Interstate Transportation of Stolen Property Act is imposed by the statute itself, and must be observed."3

Other existing statutes used by law enforcement agencies on a day-to-day basis to combat economic espionage have similar limitations. For example, the Mail Fraud statute4 may be used only if an economic espionage scheme involves the use of the mail. Similarly, the Fraud by Wire statute5 requires an intent to defraud as well as the use of wire, radio, or television.

Even basic concepts can prove problematic. For example, if an individual "downloads" computer program code without permission of the owner, has a theft occurred even though the true owner never lost possession of the original? Similarly, if a company doing business in the U.S. licenses a foreign company located in a foreign country to use proprietary economic information and an employee of the second 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 federal law is that it may not 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 or both are compromised during legal proceedings, then the value of the information is diminished notwithstanding that the proceeding was initiated to vindicate that value in the first place. Rather than risk such compromise, an owner may forego vindication of his or her legal rights in the hope or expectation that the information's residual value will exceed the damage done by a wrongdoer.

Over the past several years, the FBI has experienced difficulties prosecuting cases of economic espionage. The FBI has attempted to use various criminal statutes currently in force to counter economic espionage, but these laws do not specifically cover the theft or improper transfer of proprietary information and, therefore, are insufficient to protect these types of items. In several instances, the FBI has conducted investigations only to have prosecutions or permission to use further investigative procedures declined by the Department of Justice or U.S. Attorney's offices because of lack of criminal predicate.

In an investigation mentioned earlier regarding a consultant group engaged in contracts with a foreign power for the illicit sale of proprietary information from a U.S. corporation, an Assistant U.S. Attorney denied a request for consensual monitoring of a subject. Citing United States v. Brown, in which the Supreme Court ruled that trade secrets did not constitute "goods, wares, merchandise, securities, nor moneys" as required by the Transportation of Stolen Property in Interstate/Foreign Commerce statute, the AUSA decided that the subjects' actions did not constitute criminal behavior but were merely competitive business practices.

A second FBI investigation in which prosecution was declined involved the previously discussed case in which a U.S. automotive manufacturer entered into a limited licensing agreement with a foreign manufacturer. After a second foreign manufacturer produced a vehicle with many similarities to the U.S. company's product, the U.S. company alleged that the first foreign manufacturer provided the second with the U.S. manufacturer's proprietary information which the second then used in its vehicle. The Department of Justice returned an opinion stating that "case law is clear that [for Federal theft statutes to be invoked] there must be an actual theft of physical property, not an idea or 'information.'" The Department of Justice stated that if the U.S. company could acquire one of the alleged copied vehicles and "reverse-reverse-engineer" it, and if they could find parts in it that contain patented technology, then the U.S. company may have a patent infringement case.

In a third example, the FBI investigated an information broker who was engaged by two foreign companies to gather proprietary bid information from a major U.S. company regarding a multi-million dollar international construction project. The information broker contacted several employees from the U.S. company, paid them for information, and passed the information on to the foreign companies. The information broker was then paid a large sum of money for his services. For lack of a more applicable violation, the case was investigated as a Wire Fraud violation but a U.S. Attorney's office declined to prosecute the information broker. Significantly, a similar investigation regarding the same construction project and foreign companies was initiated in the United Kingdom. This investigation resulted in prison sentences for two other information brokers headquartered in England.

Two other recent examples demonstrate the widely varying outcomes in cases involving this type of criminal activity. In both of these instances, successful prosecutions occurred but the penalties in one did not effectively deter the activities.

In January, 1990, a source advised the FBI that two individuals sought to sell pharmaceutical trade secrets which had been stolen from the Schering-Plough Company and Merck and Company, Inc. One of the individuals had been a research scientist with the aforementioned companies and the other owned and operated a research laboratory. The pharmaceutical trade secrets involved two fermentation processes which were and are covered by active patents.

In February, 1990, an FBI undercover agent posing as a buyer for the fermentation processes was introduced to the individuals who agreed to sell one of the processes to the undercover agent for 1.5 million dollars; thereafter, the second process would be sold to the undercover agent for six to eight million dollars. The exchange took place in August, 1990, after which the subjects were immediately arrested and the assets provided were recovered.

Personnel with Schering-Plough and Merck and Company advised that over 750 million dollars in research and development cost had been incurred in developing the two fermentation processes. As no Federal statute exists which directly addresses the theft of trade secrets, this investigation was pursued as a fraud matter. Each subject was indicted on 13 counts related to conspiracy, fraud by wire, interstate transportation of stolen property and mail fraud violations. After a two week trial, each subject was convicted on 12 counts. One subject was sentenced to 9 years in prison, and the other 5 years. United States District Court Judge Alfred J. Lechner, who presided over the trial, stated that there are few crimes with regard to monetary theft that could reach this magnitude. Judge Lechner added that the subjects attempted to compromise years and years of research undertaken by the victim companies.

In contrast, in December, 1993, the FBI, working with the Naval Criminal Investigative Service arrested two inividuals who sold proprietary bid and pricing data to an FBI undercover agent. The two individuals had conspired to sell Hughes Aircraft bid and pricing data on an upcoming bid for the Tomahawk Cruise Missile Program to an individual they believed to be employed by McDonnell-Douglas for 50,000 dollars.

At the time both McDonnell-Douglas and Hughes manufactured the Tomahawk Cruise Missile for the United States Navy (USN). However, beginning in 1994, the USN was to award the contract to a sole vendor, either Hughes or McDonnell-Douglas. This updated Tomahawk Cruise Missile contract was valued at $3 billion, and was to have been awarded in June, 1994. This restructuring of the contract created an extremely competitive atmosphere between the two companies, and both conceded that loss of the contract would have closed down their missile facilities.

One individual was charged with Conspiracy to Deprive the U.S. of Its Right to Honest and Competitive Bidding on Contract (18 USC 371) and Aiding and Abetting (18 USC 2). The other was charged with Wire Fraud (18 USC 1343) and Aiding and Abetting. In April, 1994, both defendants plead guilty to the charges against them. Notwithstanding the gravity of the offenses, in June, 1994, one was placed on probation for only one year and ordered to participate in the home detention program for 60 days. The other was committed to the custody of the U.S. Bureau of Prisons to be imprisoned for a term of only four months, with credit for time served, and only four months of home detention.

These and other problems underscore the importance of developing a systemic approach to the problem of economic espionage. I believe that only by adoption of a national scheme to protect U.S. proprietary economic information can we hope to maintain our industrial and economic edge, and thus safeguard our national security.

Conclusion

FBI investigations demonstrate that economic espionage perpetrated by foreign governments, institutions, instrumentalities and persons directed against the United States, establishments, corporations or persons in the United States is a critical national security issue which requires both a counterintelligence and law enforcement response. The FBI is in a unique position to address this issue, utilizing the authorities and jurisdictions assigned to both the FBI's Foreign Counterintelligence and Criminal Investigative Programs.

Since the initiation of the FBI's Economic Counterintelligence Program, the FBI has seen a 100 percent increase in the number of economic espionage-related investigative matters, involving 23 countries. This increase is primarily due to recent changes in the FBI's counterintelligence program and the concomitant emphasis on resources and initiatives, but it also demonstrates that the problem is not a small one.

In order to maintain the health and competitiveness of critical segments of the United States economy, the development, production and utilization of proprietary economic information must be safe-guarded. The FBI will continue, as it has in the past, to utilize all available measures to protect this type of information from unlawful, illicit or clandestine collection by foreign powers. However, for the various reasons discussed, I believe a national scheme to protect proprietary economic information is warranted and necessary.

__________________

Footnotes:

118 U.S.C. section 2314. (U)

218 U.S.C. section 2315, dealing with the sale or receipt of stolen property. (U)

3United States v. Brown, 925 F.2d 1301 (10th Cir. 1991). (U)

418 U.S.C. section 1341. (U)

518 U.S.C. section 1343. (U)

 

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Directeur de la publication : Joël-François Dumont
Comité de rédaction : Jacques de Lestapis, Hugues Dumont, François de Vries (Bruxelles), Hans-Ulrich Helfer (Suisse), Michael Hellerforth (Allemagne).
Comité militaire : VAE Guy Labouérie (†), GAA François Mermet (2S), CF Patrice Théry (Asie).

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