The Industrious Spies

Industrial Espionage in the Digital Age

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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The Web site of GURPS (Generic Universal Role Playing System) lists 18 "state of the art equipments (sic) used for advanced spying". These include binoculars to read lips, voice activated bugs, electronic imaging devices, computer taps, electromagnetic induction detectors, acoustic stethoscopes, fiber optic scopes, detectors of acoustic emissions (e.g., of printers), laser mikes that can decipher and amplify voice-activated vibrations of windows, and other James Bond gear.

Such contraptions are an integral part of industrial espionage. The American Society for Industrial Security (ASIC) estimated a few years ago that the damage caused by economic or commercial espionage to American industry between 1993-5 alone was c. $63 billion.

The average net loss per incident reported was $19 million in high technology, $29 million in services, and $36 million in manufacturing. ASIC than upped its estimate to $300 billion in 1997 alone - compared to $100 billion assessed by the 1995 report of the White House Office of Science and Technology.

This figures are mere extrapolations based on anecdotal tales of failed espionage. Many incidents go unreported. In his address to the 1998 World Economic Forum, Frank Ciluffo, Deputy Director of the CSIS Global Organized Crime Project, made clear why:

"The perpetrators keep quiet for obvious reasons. The victims do so out of fear. It may jeopardize shareholder and consumer confidence. Employees may lose their jobs. It may invite copycats by inadvertently revealing vulnerabilities. And competitors may take advantage of the negative publicity. In fact, they keep quiet for all the same reasons corporations do not report computer intrusions."

Interactive Television Technologies complained - in a press release dated August 16, 1996 - that someone broke into its Amherst, NY, offices and stole "three computers containing the plans, schematics, diagrams and specifications for the BUTLER, plus a number of computer disks with access codes." BUTLER is a proprietary technology which helps connect television to computer networks, such as the Internet. It took four years to develop.

In a single case, described in the Jan/Feb 1996 issue of "Foreign Affairs", Ronald Hoffman, a software scientist, sold secret applications developed for the Strategic Defense Initiative to Japanese corporations, such as Nissan Motor Company, Mitsubishi Electric, Mitsubishi Heavy Industries, and Ishikawajima-Harima Heavy Industries. He was caught in 1992, having received $750,000 from his "clients", who used the software in their civilian aerospace projects.

Canal Plus Technologies, a subsidiary of French media giant Vivendi, filed a lawsuit last March against NDS, a division of News Corp. Canal accused NDS of hacking into its pay TV smart cards and distributing the cracked codes freely on a piracy Web site. It sued NDS for $1.1 billion in lost revenues. This provided a rare glimpse into information age, hacker-based, corporate espionage tactics.

Executives of publicly traded design software developer Avant! went to jail for purchasing batches of computer code from former employees of Cadence in 1997.

Reuters Analytics, an American subsidiary of Reuters Holdings, was accused in 1998 of theft of proprietary information from Bloomberg by stealing source codes from its computers.

In December 2001, Say Lye Ow, a Malaysian subject and a former employee of Intel, was sentenced to 24 months in prison for illicitly copying computer files containing advanced designs of Intel's Merced (Itanium) microprocessor. It was the crowning achievement of a collaboration between the FBI's High-Tech squad and the US Attorney's Office CHIP - Computer Hacking and Intellectual Property - unit.

U.S. Attorney David W. Shapiro said: "People and companies who steal intellectual property are thieves just as bank robbers are thieves. In this case, the Itanium microprocessor is an extremely valuable product that took Intel and HP years to develop. These cases should send the message throughout Silicon Valley and the Northern District that the U.S. Attorney's Office takes seriously the theft of intellectual property and will prosecute these cases to the full extent of the law."

Yet, such cases are vastly more common than publicly acknowledged.

"People have struck up online friendships with employers and then lured them into conspiracy to commit espionage. People have put bounties on laptops of executives. People have disguised themselves as janitors to gain physical access," Richard Power, editorial director of the Computer Security Institute told MSNBC.

Marshall Phelps, IBM Vice President for Commercial and Industry Relations admitted to the Senate Judiciary Committee as early as April 1992:

"Among the most blatant actions are outright theft of corporate proprietary assets. Such theft has occurred from many quarters: competitors, governments seeking to bolster national industrial champions, even employees. Unfortunately, IBM has been the victim of such acts."

Raytheon, a once thriving defense contractor, released "SilentRunner", a $25,000-65,000 software package designed to counter the "insider threat". Its brochure, quoted by "Wired", says:

"We know that 84 percent of your network threats can be expected to come from inside your organization.... This least intrusive of all detection systems will guard the integrity of your network against abuses from unauthorized employees, former employees, hackers or terrorists and competitors."

This reminds many of the FBI's Carnivore massive network sniffer software. It also revives the old dilemma between privacy and security. An Omni Consulting survey of 3200 companies worldwide pegged damage caused by insecure networks at $12 billion.

There is no end to the twists and turns of espionage cases and to the creativity shown by the perpetrators.

On June 2001 an indictment was handed down against Nicholas Daddona. He stands accused of a unique variation on the old theme of industrial espionage: he was employed by two firms - transferring trade secrets from one (Fabricated Metal Products) to the other (Eyelet).

Jungsheng Wang was indicted last year for copying the architecture of the Sequoia ultrasound machine developed by Acuson Corporation. He sold it to Bell Imaging, a Californian company which, together with a Chinese firm, owns a mainland China corporation, also charged in the case. The web of collaboration between foreign - or foreign born - scientists with access to trade and technology secrets, domestic corporations and foreign firms, often a cover for government interests - is clearly exposed here.

Kenneth Cullen and Bruce Zak were indicted on April 2001 for trying to purchase a printed or text version of the source code of a computer application for the processing of health care benefit claim forms developed by ZirMed. The legal status of printed source code is unclear. It is undoubtedly intellectual property - but of which kind? Is it software or printed matter?

Peter Morch, a senior R&D team leader for CISCO was accused on March 2001 for simply burning onto compact discs all the intellectual property he could lay his hands on with the intent of using it in his new workplace, Calix Networks, a competitor of CISCO.

Perhaps the most bizarre case involves Fausto Estrada. He was employed by a catering company that served the private lunches to Mastercard's board of directors. He offered to sell Visa proprietary information that he claimed to have stolen from Mastercard. In a letter signed "Cagliostro", Fausto demanded $1 million. He was caught red-handed in an FBI sting operation on February 2001.

Multinationals are rarely persecuted even when known to have colluded with offenders. Steven Louis Davis pleaded guilty on January 1998 to stealing trade secrets and designs from Gillette and selling them to its competitors, such as Bic Corporation, American Safety Razor, and Warner Lambert. Yet, it seems that only he paid the price for his misdeeds - 27 months in prison. Bic claims to have immediately informed Gillette of the theft and to have collaborated with Gillette’s Legal Department and the FBI.

Nor are industrial espionage or the theft of intellectual property limited to industry. Mayra Justine Trujillo-Cohen was sentenced on October 1998 to 48 months in prison for stealing proprietary software from Deloitte-Touche, where she worked as a consultant, and passing it for its own. Caroll Lee Campbell, the circulation manager of Gwinette Daily Post (GDP), offered to sell proprietary business and financial information of his employer to lawyers representing a rival paper locked in bitter dispute with GDP.

Nor does industrial espionage necessarily involve clandestine, cloak and dagger, operations. The Internet and information technology are playing an increasing role.

In a bizarre case, Caryn Camp developed in 1999 an Internet-relationship with a self-proclaimed entrepreneur, Stephen Martin. She stole he employer's trade secrets for Martin in the hope of attaining a senior position in Martin's outfit - or, at least, of being richly rewarded. Camp was exposed when she mis-addressed an e-mail expressing her fears - to a co-worker.

Steven Hallstead and Brian Pringle simply advertised their wares - designs of five advanced Intel chips - on the Web. They were, of course, caught and sentenced to more than 5 years in prison. David Kern copied the contents of a laptop inadvertently left behind by a serviceman of a competing firm. Kern trapped himself. He was forced to plead the Fifth Amendment during his deposition in a civil lawsuit he filed against his former employer. This, of course, provoked the curiosity of the FBI.

Stolen trade secrets can spell the difference between extinction and profitability. Jack Shearer admitted to building an $8 million business on trade secrets pilfered from Caterpillar and Solar Turbines.

United States Attorney Paul E. Coggins stated: "This is the first EEA case in which the defendants pled guilty to taking trade secret information and actually converting the stolen information into manufactured products that were placed in the stream of commerce. The sentences handed down today (June 15, 2000) are among the longest sentences ever imposed in an Economic Espionage case."

Economic intelligence gathering - usually based on open sources - is both legitimate and indispensable. Even reverse engineering - disassembling a competitor's products to learn its secrets - is a grey legal area. Spying is different. It involves the purchase or theft of proprietary information illicitly. It is mostly committed by firms. But governments also share with domestic corporations and multinationals the fruits of their intelligence networks.

Former - and current - intelligence operators (i.e., spooks), political and military information brokers, and assorted shady intermediaries - all switched from dwindling Cold War business to the lucrative market of "competitive intelligence".

US News and World Report described on May 6, 1996, how a certain Mr. Kota - an alleged purveyor of secret military technology to the KGB in the 1980's - conspired with a scientist, a decade later, to smuggle biotechnologically modified hamster ovaries to India.

This transition fosters international tensions even among allies. "Countries don't have friends - they have interests!" - screamed a DOE poster in the mid-nineties. France has vigorously protested US spying on French economic and technological developments - until it was revealed to be doing the same. French relentless and unscrupulous pursuit of purloined intellectual property in the USA is described in Peter Schweizer's "Friendly Spies: How America's Allies Are Using Economic Espionage to Steal Our Secrets."

"Le Mond" reported back in 1996 about intensified American efforts to purchase from French bureaucrats and legislators information regarding France's WTO, telecommunications, and audio-visual policies. Several CIA operators were expelled.

Similarly, according to Robert Dreyfuss in the January 1995 issue of "Mother Jones", Non Official Cover (NOC) CIA operators - usually posing as businessmen - are stationed in Japan. These agents conduct economic and technological espionage throughout Asia, including in South Korea and China.

Even the New York Times chimed in, accusing American intelligence agents of assisting US trade negotiators by eavesdropping on Japanese officials during the car imports row in 1995. And President Clinton admitted openly that intelligence gathered by the CIA regarding the illegal practices of French competitors allowed American aerospace firms to win multi-billion dollar contracts in Brazil and Saudi Arabia.

The respected German weekly, Der Spiegel, castigated the USA, in 1990, for arm-twisting the Indonesian government into splitting a $200 million satellite contract between the Japanese NEC and US manufacturers. The American, alleged the magazines, intercepted messages pertaining to the deal, using the infrastructure of the National Security Agency (NSA). Brian Gladwell, a former NATO computer expert, calls it "state-sponsored information piracy".

Robert Dreyfuss, writing in "Mother Jones", accused the CIA of actively gathering industrial intelligence (i.e., stealing trade secrets) and passing them on to America's Big Three carmakers. He quoted Clinton administration officials as saying: "(the CIA) is a good source of information about the current state of technology in a foreign country ... We've always managed to get intelligence to the business community. There is contact between business people and the intelligence community, and information flows both ways, informally."

A February 1995 National Security Strategy statement cited by MSNBC declared:

"Collection and analysis can help level the economic playing field by identifying threats to U.S. companies from foreign intelligence services and unfair trading practices."

The Commerce Department's Advocacy Center solicits commercial information thus:

"Contracts pursued by foreign firms that receive assistance from their home governments to pressure a customer into a buying decision; unfair treatment by government decision-makers, preventing you from a chance to compete; tenders tied up in bureaucratic red tape, resulting in lost opportunities and unfair advantage to a competitor. If these or any similar export issues are affecting your company, it's time to call the Advocacy Center."

And then, of course, there is Echelon.

Exposed two years ago by the European Parliament in great fanfare, this telecommunications interception network, run by the US, UK, New Zealand, Australia, and Canada has become the focus of bitter mutual recriminations and far flung conspiracy theories.

These have abated following the brutal terrorist attacks of September 11 when the need for Echelon-like system with even laxer legal control was made abundantly clear. France, Russia, and 28 other nations operate indigenous mini-Echelons, their hypocritical protestations to the contrary notwithstanding.

But, with well over $600 billion a year invested in easily pilfered R&D, the US is by far the prime target and main victim of such activities rather than their chief perpetrator. The harsh - and much industry lobbied - "Economic Espionage (and Protection of Proprietary Economic Information) Act of 1996" defines the criminal offender thus:

"Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly" and "whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will , injure any owner of that trade secret":

"(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret (2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret (3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization (4) attempts to commit any offense described in any of paragraphs (1) through (3); or (5) conspires with one or more other persons to commit any offense described in any of paragraphs (1) through (4), and one or more of such persons do any act to effect the object of conspiracy."

Other countries either have similar statutes (e.g., France) - or are considering to introduce them. Taiwan's National Security Council has been debating a local version of an economic espionage law lat month. There have been dozens of prosecutions under the law hitherto. Companies - such as "Four Pillars" which stole trade secrets from Avery Dennison - paid fines of millions of US dollars. Employees - such as PPG's Patrick Worthing - and their accomplices were jailed.

Foreign citizens - like the Taiwanese Kai-Lo Hsu and Prof. Charles Ho from National Chiao Tung university - were detained. Mark Halligan of Welsh and Katz in Chicago lists on his Web site more than 30 important economic espionage cases tried under the law by July last year.

The Economic Espionage law authorizes the FBI to act against foreign intelligence gathering agencies toiling on US soil with the aim of garnering proprietary economic information. During the Congressional hearings that preceded the law, the FBI estimated that no less that 23 governments, including the Israeli, French, Japanese, German, British, Swiss, Swedish, and Russian, were busy doing exactly that. Louis Freeh, the former director of the FBI, put it succinctly: "Economic Espionage is the greatest threat to our national security since the Cold War."

The French Ministry of Foreign Affairs runs a program which commutes military service to work at high tech US firms. Program-enrolled French computer engineers were arrested attempting to steal proprietary source codes from their American employers.

In an interview he granted to the German ZDF Television quoted by "Daily Yomiuri" and Netsafe, the former Director of the French foreign counterintelligence service, the DGSE, freely confessed:

"....All secret services of the big democracies undertake economic espionage ... Their role is to peer into hidden corners and in that context business plays an important part ... In France the state is not just responsible for the laws, it is also an entrepreneur. There are state-owned and semi-public companies. And that is why it is correct that for decades the French state regulated the market with its right hand in some ways and used its intelligence service with its left hand to furnish its commercial companies ... It is among the tasks of the secret services to shed light on and analyze the white, grey and black aspects of the granting of such major contracts, particularly in far-off countries."

The FBI investigated 400 economic espionage cases in 1995 - and 800 in 1996. It interfaces with American corporations and obtains investigative leads from them through its 26 years old Development of Espionage, Counterintelligence, and Counter terrorism Awareness (DECA) Program renamed ANSIR (Awareness of National Security Issues and Response). Every local FBI office has a White Collar Crime squad in charge of thwarting industrial espionage. The State Department runs a similar outfit called the Overseas Security Advisory Council (OSAC).

These are massive operations. In 1993-4 alone, the FBI briefed well over a quarter of a million corporate officers in more than 20,000 firms. By 1995, OSAC collaborated on overseas security problems with over 1400 private enterprises. "Country Councils", comprised of embassy official and private American business, operate in dozens of foreign cities. They facilitate the exchange of timely "unclassified" and threat-related security information.

These representatives provide the direction and guidance to develop programs that most benefit the U.S. private sector overseas. Representatives meet quarterly and staff committees tasked with specific projects. Current committees include Transnational Crime, Country Council Support, Protection of Information and Technology, and Security Awareness and Education."

But the FBI is only one of many agencies that deal with the problem in the USA. The President's Annual Report to Congress on "Foreign Economic Collection and Industrial Espionage" dated July 1995, describes the multiple competitive intelligence (CI) roles of the Customs Service, the Department of Defense, the Department of Energy, and the CIA.

The federal government alerts its contractors to CI threats and subjects them to "awareness programs" under the DOD's Defense Information Counter Espionage (DICE) program. The Defense Investigative Service (DIS) maintains a host of useful databases such as the Foreign Ownership, Control, or Influence (FOCI) register. It is active otherwise as well, conducting personal security interviews by industrial security representatives and keeping tabs on the foreign contacts of security cleared facilities. And the list goes on.

According to the aforementioned report to Congress:

"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 'information superhighway'; 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-that is, bid, contract, customer, and strategy in these sectors is aggressively targeted. Foreign collectors have also shown great interest in government and corporate financial and trade data."

The collection methods range from the traditional - agent recruitment and break ins - to the technologically fantastic. Mergers, acquisitions, joint ventures, research and development partnerships, licensing and franchise agreements, friendship societies, international exchange programs, import-export companies - often cover up for old fashioned reconnaissance. Foreign governments disseminate disinformation to scare off competitors - or lure then into well-set traps.

Foreign students, foreign employees, foreign tourist guides, tourists, immigrants, translators, affable employees of NGO's, eager consultants, lobbyists, spin doctors, and mock journalists are all part of national concerted efforts to prevail in the global commercial jungle. Recruitment of traitors and patriots is at its peak in international trade fairs, air shows, sabbaticals, scientific congresses, and conferences.

On May 2001, Takashi Okamoto and Hiroaki Serizwa were indicted of stealing DNA and cell line reagents from Lerner Research Institute and the Cleveland Clinic Foundation. This was done on behalf of the Institute of Physical and Chemical Research (RIKEN) in Japan - an outfit 94 funded by the Japanese government. The indictment called RIKEN "an instrumentality of the government of Japan".

The Chinese Ministry of Posts and Telecommunications was involved on May 2001 in an egregious case of theft of intellectual property. Two development scientists of Chinese origin transferred the PathStar Access Server technology to a Chinese corporation owned by the ministry. The joint venture it formed with the thieves promptly came out with its own product probably based on the stolen secrets.

The following ad appeared in the Asian Wall Street Journal in 1991 - followed by a contact phone number in western Europe:

"Do you have advanced/privileged information of any type of project/contract that is going to be carried out in your country? We hold commission/agency agreements with many large European companies and could introduce them to your project/contract. Any commission received would be shared with yourselves."

Ben Venzke, publisher of Intelligence Watch Report, describes how Mitsubishi filed c. 1500 FOIA (Freedom of Information Act) requests in 1987 alone, in an effort to enter the space industry. The US Patent office is another great source of freely available proprietary information.

Industrial espionage is not new. In his book, "War by Other Means: Economic Espionage in America", The Wall Street Journal's John Fialka, vividly describes how Frances Cabot Lowell absconded from Britain with the plans for the cutting edge Cartwright loom in 1813.

Still, the phenomenon has lately become more egregious and more controversial. As Cold War structures - from NATO to the KGB and the CIA - seek to redefine themselves and to assume new roles and new functions, economic espionage offers a tempting solution.

Moreover, decades of increasing state involvement in modern economies have blurred the traditional demarcation between the private and the public sectors. Many firms are either state-owned (in Europe) or state-financed (in Asia) or sustained by state largesse and patronage (the USA). Many businessmen double as politicians and numerous politicians serve on corporate boards.

Eisenhower's "military-industrial complex" though not as sinister as once imagined is, all the same, a reality. The deployment of state intelligence assets and resources to help the private sector gain a competitive edge is merely its manifestation.

As foreign corporate ownership becomes widespread, as multinationals expand, as nation-states dissolve into regions and coalesce into supranational states - the classic, exclusionary, and dichotomous view of the world ("we" versus "they") will fade. But the notion of "proprietary information" is here to stay. And theft will never cease as long as there is profit to be had.

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The Shadowy World of International Finance

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Money Laundering in a Changed World

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Straf - Corruption in CEE

The Criminality of Transition

The Kleptocracies of the East

The Enrons of the East

Bully at Work - Interview with Tim Field

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The Business of Torture

Fimaco Wouldn't Die - Russia's Missing Billions

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Organ Trafficking in Eastern Europe

Begging Your Trust in Africa

Slush Funds

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