The Industrious Spies - Industrial Espionage in the Digital Age
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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
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
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
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 -
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
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
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
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
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
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
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
"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
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.
More than 1600 US companies and organization are currently permanently
affiliated wit OSAC. Its Advisory Council is made up of twenty-one private
sector and four public sector member organizations that, according to OSAC,
"represent specific industries or agencies that operate abroad. Private sector
members serve for two to three years. More than fifty U.S. companies and
organizations have already served on the Council. Member organizations designate
representatives to work on the Council.
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
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
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
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.
About the Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and
"After the Rain - How the West Lost the East". He is a columnist in "Central
Europe Review", United Press International (UPI) and ebookweb.org and the editor
of mental health and Central East Europe categories in The Open Directory,
Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor
to the Government of Macedonia.
His web site:
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Article Published/Sorted/Amended on Scopulus 2007-11-03 23:11:24 in Economic Articles