1996 Congressional Hearings
Intelligence and Security


Statement
of

Louis J. Freeh
Director

FEDERAL BUREAU OF INVESTIGATION


Before the
House Judiciary Committee
Subcommittee on Crime


HEARING ON
ECONOMIC ESPIONAGE

May 9, 1996





ECONOMIC ESPIONAGE


INTRODUCTION

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, as a result, 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. Consequently, 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.

POST-COLD WAR SHIFT

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, during the Cold War, intelligence collection activity directed at economic and technological information was treated as an adjunct to traditional espionage, not as a separate topic. Counterintelligence, which the FBI defines as the identification, penetration and neutralization of foreign intelligence activities that threaten U.S. national security, was primarily directed at military, ideological or subversive threats. This was explained in large part by Cold War security concerns, as well as by the reality of U.S. global economic and technical predominance.

In today's world, a country's power and stature are increasingly measured by its economic and industrial capacity. Consequently, foreign government ministries that deal with finance and trade and major industrial sectors play a growing 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.

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 on 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.

U.S. GOVERNMENT AWARENESS

The senior U.S. policy makers have become increasingly aware of the inseparable link between economic security and national security. Over the past several years, the annual issues of the White House's "National Security Strategy" have emphasized that economic security is an integral part not only of U.S. national interest but also of national security. In the February 1995 edition, President Clinton included bolstering America's economic revitalization in the list of our nation's three central strategy goals. He also underscores the concept that "the strength of our diplomacy, our ability to maintain an unrivaled military, [and] the attractiveness of our values abroad" all depend, at least in part, on our economic strength. These ideas were reaffirmed in the February 1996 edition of the "National Security Strategy of Enlargement and Engagement."

Additionally, 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." Finally, in an October 1995 issue of FOCUS magazine, Bruce Lehman, U.S. Commissioner of Patents and Trademarks, is quoted as saying, "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 these policy statements, the FBI began in 1992 to refocus its counterintelligence resources to provide greater protection to U.S. economic security. In 1994, the FBI initiated an Economic Counterintelligence program with a mission to collect information and engage in activities to detect and counteract foreign power-sponsored or coordinated threats and activities directed against U.S. economic interests, especially acts of economic espionage. This program is defensive in nature with the ultimate goal of protecting U.S. national security. To accomplish this goal the FBI applies a full range of investigative tools, techniques and remedies available through the authorities and jurisdictions assigned to both the Foreign Counterintelligence and Criminal Investigative Programs.

Through the Economic Counterintelligence program, the FBI has developed significant information on foreign economic threats, to include the identification of actors who pose these threats, their targets, and the methods they utilized.

ACTORS

The FBI is currently investigating reports and allegations of economic espionage activities conducted against the United States by individuals or organizations from 23 different countries. The foreign governments involved 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. For example, 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 political and military 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.

In general, the governments and companies of highly industrialized nations steal economic intelligence to gain a competitive edge over major economic rivals such as the United States, either across the board or in specific industries. Other less industrialized countries tend to limit their economic collection activities to a few key industrial sectors. Some of these countries find no contradiction in maintaining a military alliance with the United States while at the same time using their intelligence service to target U.S. technologies. On January 9, 1996, the former head of one 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."

TARGETS

The targets of economic espionage are varied. In general, 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. But high-technology and defense-related industries remain the primary targets of foreign economic intelligence collection operations.

Many U.S. high-tech industrial sectors have been targeted. 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 and 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.

These industries are of strategic interest to the United States on three levels: 1) they produce classified products for the government; 2) they produce dual-use technology used in both the public and private sectors; and 3) they are responsible for R&D and creation of leading-edge technologies critical to maintaining U.S. economic security. Losses at any of these levels could affect U.S. international competitiveness and security.

A few recent examples of the targeting activities described above include:

In addition to technological information, foreign governments also collect intelligence on U.S. Government plans and policies with regard to trade and industry. 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.

FBI investigations have identified the following types of U.S. government economic information of interest to foreign governments and intelligence services: U.S. economic, trade and financial agreements; U.S. trade developments and policies; U.S. tax and monetary policies; technology transfer and munitions control regulations; U.S. energy policies; and proposed legislation affecting the profitability of foreign firms operating in the United States. Foreign competitors attempt to collect these items before they are publicly available in order gain a competitive advantage and formulate responses that could influence U.S. policy deliberation on the issues.

IMPACT

Neither the U.S. Intelligence Community as a whole nor the FBI specifically has systematically evaluated the costs of economic espionage. The U.S. private sector has recently made some efforts to estimate its losses to economic espionage and other foreign economic intelligence operations; however, to date, these 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.

METHODS

Investigations conducted under the Economic Counterintelligence Program are identifying a variety of methods utilized by those engaged in economic espionage and are making it possible to assess the scope of coordinated intelligence efforts against the United States. These investigations have revealed that practitioners of economic espionage seldom use one collection method in isolation, rather they conduct well- orchestrated programs that combine both legal and illegal, traditional and more innovative methods. The following examples illustrate some of the clandestine collection methods that these investigations have uncovered.

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 of greatest value to a collector because of their legitimate and direct access to information. In some instances an insider is selected because of personal weaknesses or vulnerabilities, such as 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, export- restricted technology to four foreign companies. The technology consisted of computer codes developed for the U.S. Air Force to be utilized in Strategic Defense Initiative projects, but also 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, have since gained significant ground in their development of space technology as a result of this compromise.

Some foreign governments task foreign students specifically to clandestinely 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. Although these students and interns often do not have access to highly sensitive information, they represent a pool of technically trained individuals with experience living in the United States who have already cooperated with the foreign intelligence service. Upon completion of their studies or internships, some of these foreign students are then encouraged to seek employment with U.S. firms to steal proprietary information.

In 1989, the FBI conducted interviews of individuals who admitted to having been recruited by 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 and they worked at the behest of the intelligence service while in school. 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 service. The individuals each operated at the behest of that service for 20 years.

Other FBI investigations have revealed 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 as cover for intelligence operatives. 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 attempt to manipulate U.S. government officials' perceptions in order to influence U.S. policy making in favor of the foreign government.

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 over $1 million in contracts with the foreign power and have offered to provide it with technology and guidance in order to facilitate its R&D and allow it to compete with the United States. The result is a loss of proprietary information estimated by the U.S. corporation to be in the billions of dollars.

Another method revealed by FBI investigations is foreign government or corporate exploitation of legitimate business agreements for illicit collection. For example, in 1988, a foreign automotive manufacturer contacted a U.S. automotive manufacturer that performs contracts with the U.S. military requesting a limited licensing agreement. The agreement would give the foreign company access to technical data on a U.S. military vehicle in order to bid on a contract to build similar vehicles for the foreign company's government. The U.S. manufacturer accepted the agreement, but notified the foreign manufacturer of the proprietary nature of the information provided. The U.S. manufacturer subsequently learned that a second foreign manufacturer had won the foreign government contract, not the company with which it had made the licensing agreement. The second foreign manufacturer produced its first prototype vehicle and displayed the vehicle at a major auto show. Except for the engine, the prototype was 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. Although there is no explicit proof, it appears that the specifications licensed to the first foreign manufacturer were illicitly provided to the second, in violation of the agreement.

In a similar method, foreign governments routinely request to have a liaison officer on-site at U.S. facilities during joint R&D projects to monitor progress and provide guidance, particularly in the defense arena. Some liaison officers have exploited the close access to U.S. counterparts afforded by this on-site presence and have illegally acquired information clearly designated as restricted or classified.

Recon Optical, a U.S. defense contractor and manufacturer of surveillance cameras, was the victim of a particularly egregious example of this method. In October 1984, Recon signed a 4-year, $40 million contract with a foreign government to design a top-secret airborne surveillance camera system for that government's intelligence service. Terms of the contract allowed three foreign Air Force officers to work in Recon■s plant outside of Chicago. After months of disagreement and cost disputes, Recon finally halted work on the contract in May 1986 and dismissed the three officers. As they left, the officers were caught by security guards removing boxes of documents without authorization. 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 government-owned defense company, enabling that country to build its own system.

FBI investigations have determined that some countries frequently hire well-connected consultants to write reports on topics of interest and to influence 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 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 acquire sensitive policy information.

NEED FOR LEGISLATION

As evidenced by the above, foreign powers, through a variety of means, actively target persons, firms and industries in the United States 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. However, gaps and inadequacies in existing federal laws result in the laws having little deterrent effect and have made it difficult for the U.S. Government to efficiently counter these damaging activities. Closing these gaps requires a federal statute to specifically proscribe the various acts defined under economic espionage and to address the national security aspects of this crime.

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 Federal prosecutors because of lack of statutory criminal predicate.

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 originally designed in the 1930s 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 for crimes involving traditional "goods, wares, or merchandise," it was drafted at a time when copy machines, computers, and fax 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 § 2314 and 23152 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

The non-tangible nature of proprietary information has been the cause for a number of prosecutive declinations in cases of economic espionage. In some cases, prosecutors have specifically cited the lack of goods, wares, or merchandise as the reason for their declination. These cases highlight the need for a Federal statute that includes non-tangible property as an item that can actually be stolen and which places penalties on the theft of such information.

In one such example, a prosecutor denied that a theft had occurred when a subject with insider knowledge gained while working for a U.S. company used his knowledge in direct competition with his former employer. In the case, the subject supplied generic, non-sensitive information to his clients, and then ■guided■ their further research so that it would appear that the clients developed the sensitive technology themselves. Citing a Supreme Court decision (Dowling v. The United States, 473 U.S. 207, 105 S.Ct. 3127) in which the Supreme Court ruled that trade secrets did not constitute "goods, wares, merchandise, securities, nor moneys," the prosecutor decided that the subject's 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 another example, a company approached the FBI complaining that a foreign competitor had stolen its proprietary marketing information. The information had been compiled by the U.S. company to identify possible business opportunities, the nature of the business opportunities, the likely customers, the anticipated "win" price, and the company's level of confidence that it could obtain the contract at the projected price. If obtained by a competitor, it would be extremely useful. A prosecutor, after reviewing the allegation, stated that he did not believe that this case was attractive for federal prosecution based strictly on the loss of marketing information.

These cases illustrate the difficulty that the FBI has experienced using the Interstate Transport of Stolen Property statute to counter economic espionage. Although in each of the cases above, a foreign company, and possibly a foreign government, was involved, and the possible economic loss was substantial, the U.S. Government had no tool available to effectively counter the activity.

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 and without stealing the original, has a theft occurred? Similarly, if a company doing business in the United States licenses a foreign company located abroad to use proprietary economic information and an employee of the second company makes an unauthorized copy of the information and sells it 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, the value of the information is diminished, notwithstanding the fact that the proceeding was initiated to vindicate that value in the first place. Rather than risk such compromise, victims often choose to forego vindication of their legal rights in the hope or expectation that the information's residual value will exceed the damage done by a wrongdoer.

Two other recent case examples demonstrate the widely varying outcomes in cases involving this type of criminal activity and highlight another problem with existing legal remedies. In these instances, successful prosecutions occurred but the penalties did not balance with the magnitude of the crime and 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 patented fermentation processes.

In February 1990, an FBI undercover agent posing as a buyer for the fermentation processes met the individuals who agreed to sell one of the processes to the undercover agent for $1.5 million. They also promised to sell the second process to the undercover agent for $6 million to $8 million. The exchange took place in August 1990, after which 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 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.

Personnel with Schering-Plough and Merck and Company advised that over $750 million in research and development cost had been incurred in developing the two fermentation processes. United States District Court Judge Alfred J. Lechner, who presided over the trial, stated that the subjects attempted to compromise years of research undertaken by the victim companies. Judge Lechner added that there are few crimes with regard to monetary theft that could reach this magnitude.

In another example, two major U.S. defense contractors, McDonnell-Douglas and Hughes, were in competition to be selected by the United States Navy (USN) as the sole vendor for an updated Tomahawk Cruise Missile. The USN planned to award the contract for the project, valued at $3 billion, in June 1994. This contract restructuring created an extremely competitive atmosphere between the two companies, and both conceded that loss of the contract would have closed down their missile facilities.

In the midst of this highly competitive atmosphere, the FBI, working with the Naval Criminal Investigative Service, arrested two individuals in December 1993 who sold Hughes Aircraft proprietary bid and pricing data to an FBI undercover agent posing as a McDonnell-Douglas employee. Both individuals were prosecuted, one for "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 for Wire Fraud (18 USC 1343) and Aiding and Abetting. In April 1994, both defendants pleaded guilty to the charges against them. However, notwithstanding the gravity of the offenses and the amount of money potentially involved, one defendant was sentenced to probation for one year and ordered to participate in a home detention program for 60 days. The other was sentenced to four months in prison, with credit for time served, and to a total of four months of home detention.

These and other problems underscore the importance of developing a systemic approach to the problem of economic espionage. The FBI believes 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 of 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. 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. This, along with a new national scheme to protect proprietary economic information, will protect U.S. economic security, thereby securing national security into the future.

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Footnotes:
1 18 U.S.C. § 2314. (U)
2 18 U.S.C. § 2315, dealing with the sale or receipt of stolen property.
3 United States v. Brown, 925 F.2d 1301 (10th Cir. 1991). (U)
4 18 U.S.C. § 1341. (U)
5 18 U.S.C. § 1343. (U)