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Communications Privacy: Federal Policy and Actions

(Letter Report, 11/04/93, GAO/OSI-94-2)



Increased use of computer and communications networks, rising levels of
computer literacy, and growing dependence on information technology
heighten U.S. industry's risk of losing proprietary information to
economic espionage.  Although industry is turning more and more to
hardware and software with encryption features--the conversion of clear
text to unreadable form--the development of U.S. encryption technology
may be hindered by federal policy that accommodates the needs of law
enforcement.  For example, the Federal Bureau of Investigation opposes
the use of technology by telecommunications firms that would thwart the
government's ability to wiretap.  During the past several decades, the
issue of how best to reconcile these competing needs has been debated
extensively, as has the question of whether to establish a civilian or a
military agency to control the development of federal
information-processing standards for sensitive, unclassified
information.  The Computer Security Act of 1987 reaffirmed the role of a
civilian organization--the National Institute of Standards and
Technology (NIST)--in developing such standards, albeit in consultation
with the National Security Agency.  Because national security and law
enforcement concerns have been driving significant NIST decisions on
these standards and because the demand for encryption is mounting, the
debate continues.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  OSI-94-2
     TITLE:  Communications Privacy: Federal Policy and Actions
      DATE:  11/04/93
   SUBJECT:  Dual-use technologies
             Communications operations
             Computerized information systems
             Proprietary data
             Computer security
             Export regulation
             Foreign governments
             Counterintelligence operations
             Information disclosure
             Intelligence gathering operations
IDENTIFIER:  NIST Digital Signal Standard
             
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Cover
================================================================ COVER


Report to the Honorable
Jack Brooks, Chairman, Committee on the Judiciary, House of
Representatives

November 1993

COMMUNICATIONS PRIVACY - FEDERAL
POLICY AND ACTIONS

GAO/OSI-94-2

Communications Privacy:  Federal Policy and Actions


Abbreviations
=============================================================== ABBREV

  CIA - Central Intelligence Agency
  COCOM - Coordinating Committee for Multilateral Export Controls
  DES - Data Encryption Standard
  DSS - Digital Signature Standard
  FBI - Federal Bureau of Investigation
  GAO - U.S.  General Accounting Office
  IBM - International Business Machines, Inc. 
  IMTEC - Information Management and Technology Division, GAO
  NIST - National Institute of Standards and Technology
  NSA - National Security Agency
  NSDD - National Security Decision Directive
  NSIAD - National Security and International Affairs Division, GAO
  OSI - Office of Special Investigations, GAO
  RC2 - Rivest Cipher 2
  RC4 - Rivest Cipher 4
  RSA - Rivest, Shamir, and Adleman

Letter
=============================================================== LETTER


B-253647

November 8, 1993

The Honorable Jack Brooks
Chairman, Committee on the Judiciary
House of Representatives

Dear Mr.  Chairman: 

In April 1992, we testified before your Subcommittee on Economic and
Commercial Law about the threat of "economic espionage"--the
unauthorized acquisition of U.S.  proprietary or other information by
a foreign government to advance the economic position of that
country--against U.S.  industry.  Subsequently, you requested that we
further examine whether federal policies negatively affect U.S. 
corporations' ability to protect themselves against economic
espionage. 

On the basis of your request, we focused on the following issues: 

  the need for information privacy in computer and communications
     systems--through such means as encryption, or conversion of
     clear text to an unreadable form--to mitigate the threat of
     economic espionage to U.S.  industry;

  federal agency authority to develop cryptographic standards for the
     protection of sensitive, unclassified information and the
     actions and policies of the National Security Agency (NSA),
     Department of Defense, and of the National Institute of
     Standards and Technology (NIST), Department of Commerce,
     regarding the selection of federal cryptographic standards;

  roles, actions, and policies of NSA and the Department of State
     related to export controls for products with encryption
     capabilities and industry rationale for requesting
     liberalization of such controls; and

  the Federal Bureau of Investigation's (FBI) legislative proposal
     regarding telephone systems that use digital communications
     technology. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In July 1990, you requested that we determine if industrial espionage
against U.S.  industry by foreign entities was a problem and, if so,
the federal government's response.  We found that with the end of the
Cold War and the resulting shift in focus from military to economic
power, there was evidence that economic espionage has become a
growing problem for U.S.  companies at home and abroad.  However, the
extent of the problem in the United States cannot be quantified for a
number of reasons:  First, U.S.  companies are reticent to disclose
such information to the public for fear of disclosing information to
competitors or of losing their stockholders' confidence.  Also, once
it is determined that a company has been victimized, it is often
difficult to place an approximate value on the proprietary data and
trade secrets that have been lost.  Third, foreign intelligence
agencies often use sophisticated techniques that may go undetected,
making it difficult for companies to prove theft or compromise. 

In our April 29, 1992, testimony before your Subcommittee,\1

we stated that economic espionage hurts U.S.  industry.  U.S. 
vendors of products with encryption capabilities and
telecommunications-service providers also testified that U.S. 
government policy hinders both the safekeeping of U.S.  industry's
competitive secrets and international competitiveness.  They further
testified that because products with commercial encryption technology
are available internationally, the U.S.  government should relax
restrictions on the export of such products to improve their ability
to compete in the world marketplace. 

The growth in reliance upon computer and communications technologies
for commerce has led to increased international attention to securing
information through cryptography.  Powerful cryptographic techniques
have been published for years and are increasingly available in
products worldwide.  This increased availability is causing concern
for law enforcement and national security entities worldwide,
relative to the performance of their missions.  For decades,
governments around the world have used statutory and regulatory
powers to restrict the use and dissemination of cryptographic
technologies.  However, these restrictions are generally not
published or available for study. 

U.S.  vendors expressed concern about policies regarding (1) federal
cryptographic standards for communications privacy of sensitive,
unclassified information and (2) the FBI's digital telephony
legislative proposal and public comments on encryption.  They stated
that to be consistent with prevailing standards, the U.S.  industry
has made substantial investment in secure technology products that
might not be compatible with evolving federal standards.  The lack of
industry input in the evolving standards, representatives believed,
would cause the industry to follow two sets of standards in its
technology development:  one set to protect against unauthorized
access and to compete in the international marketplace; the other to
interact with the federal sector.  Further, U.S.  vendors were
concerned that restrictions would be placed on the development and
the use of communications and encryption technologies to meet law
enforcement requirements and national security concerns, thus
hampering their ability to compete in the global marketplace.  The
FBI and NSA, on the other hand, were concerned that such technologies
might interfere with the performance of their missions, causing
serious law enforcement and national security problems.  (See app. 
I.)


--------------------
\1 Economic Espionage:  The Threat to U.S.  Industry
(GAO/T-OSI-92-6). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Increased use of computer and communications networks, computer
literacy, and dependence on information technology heighten U.S. 
industry's risk of losing proprietary information to economic
espionage.  In part to reduce the risk, industry is more frequently
using hardware and software with encryption capabilities.  However,
federal policies and actions stemming from national security and law
enforcement concerns hinder the use and the export of U.S. 
commercial encryption technology and may hinder its development.\2

NIST and NSA have invested several years of effort in developing
certain federal cryptographic policies and federal standards relating
to communications privacy for sensitive, unclassified information. 
These policy issues are formulated and announced to the public,
however, with very little input from directly affected business
interests, academia, and others.  Although the Computer Security Act
of 1987 reaffirmed NIST's responsibility for developing federal
information-processing standards for the security of sensitive,
unclassified information, NIST follows NSA's lead in developing
certain cryptographic standards. 

Although the Departments of State and Commerce are responsible for
the U.S.  export control system, NSA plays a major role in
determining rules for exporting U.S.  products with encryption
capabilities.  NSA affects such decisions as (1) whether individual
products are placed on the more restrictive State-controlled
"munitions list" or the less restrictive Commerce-controlled list and
(2) whether particular products on the munitions list can be licensed
for export.  Industry representatives stated that stringent export
controls restrict U.S.  industry's ability to compete for market
share in international markets for products with encryption
capabilities. 

The export controls (for products with encryption) of many countries
may be similar in stringency to those of the United States.  However,
industry representatives cited examples of products exported from
other countries that would be restricted for export from the United
States.  Thus, it appears that the controls of several countries are
less stringent than are U.S.  controls. 

The FBI, in 1992, proposed legislation designed to ensure wiretapping
capabilities in the face of emerging digital telecommunications
technology.  The proposal was to compel telecommunications service
providers and private branch exchange operators to ensure that
wiretapping needs could be met.  It sought to prohibit the use of any
technology by these entities that would impede the government's
ability to intercept electronic communications when authorized by
law.  In early 1993, the FBI informed us that it was reevaluating its
position on this proposal. 

Thus, national security, law enforcement, and business concerns--plus
the effectiveness of U.S.  export controls--are all factors to be
considered in determining what U.S.  policies should be. 


--------------------
\2 We did not evaluate the validity of the law enforcement or
national security concerns relative to federal cryptographic policy
or export control. 


   USE OF ENCRYPTION TO PROTECT
   AGAINST ECONOMIC ESPIONAGE
------------------------------------------------------------ Letter :3

During your Subcommittee's spring 1992 hearings, the Director,
Central Intelligence Agency (CIA), testified that the communications
and computer systems of U.S.  industry were attractive targets for
sophisticated foreign intelligence attacks.  While it is well
recognized that industry is increasingly using encryption to protect
proprietary information, U.S.  industry's development of products
with encryption capabilities--as well as their use and export--is
hindered by federal policy responding to national security and law
enforcement concerns.  (See app.  I.)


   NIST AND NSA ACTIONS REGARDING
   DEVELOPMENT OF CRYPTOGRAPHIC
   STANDARDS
------------------------------------------------------------ Letter :4

Over the past decade, hardware and software industry representatives,
cryptographers outside NSA, academia, and others have had little
opportunity to participate in or contribute to the selection or the
development of cryptographic algorithms, or mathematical procedures,
for proposed federal standards related to cryptography.  One type of
cryptographic standard would support the privacy of communications
and provide for both the verification of a sender's identity and the
integrity of the message.  It is referred to as a public-key
cryptographic\3 standard, in which the word "key" relates to the code
for unlocking encrypted messages.  NSA and NIST discuss the
development or the selection of cryptographic algorithms for the
development of these standards primarily in classified meetings, such
as those of the Technical Working Group.\4

As a result, federal agencies invest years in developing proposed
cryptographic standards for sensitive, unclassified information
before public input is solicited.  (See app.  II.)

The Computer Security Act of 1987 reaffirmed NIST as the responsible
federal agency for developing federal cryptographic
information-processing standards for the security of sensitive,
unclassified information.  However, NIST has followed NSA's lead when
developing certain cryptographic standards for communications
privacy.  For example, in 1982, NIST began developing a public-key
cryptographic standard.  NIST terminated the project at NSA's
request.  Then, in 1989, in accordance with a 1989 NIST/NSA
Memorandum of Understanding, NIST requested NSA assistance in another
effort to develop such a standard.  This standard was to provide for
verification of signature--the sender's identity; provide for
integrity of the message; and support communications privacy using
one algorithm.  In 1991, NIST proposed the Digital Signature Standard
(DSS), a standard based on an algorithm developed by NSA that,
because of NSA and FBI concerns, provides for verification of the
sender's identity and the integrity of the message but does not
support communications privacy.  When public input was solicited in
1991, industry representatives stated that a federal public-key
standard was needed that (1) supported privacy in communications and
(2) was compatible with other U.S.  and international standards. 
They stated that delay in developing such a federal standard has
hindered industry's development of products with encryption
capabilities. 

In April 1993, the administration announced its telecommunications
privacy initiative and plan to develop a comprehensive policy on
encryption.  The President directed the Secretary of Commerce, in
consultation with other federal agencies, to develop an encryption
standard based on a key-escrow system.\5 This standard, proposed by
NIST in July 1993, is to facilitate the use of a chip\6 that
incorporates a classified encryption algorithm.  Use of the chip will
allow legally authorized government officials to have access to the
clear (plain) text of encrypted communications.  The Attorney General
is tasked to establish two cooperating third parties to maintain
computer databases that will enable government officials to access
the clear text of encrypted communications.  According to a Justice
Department official in September 1993, key-escrow candidates were to
be discussed with Members of Congress prior to being publicly
announced.  This official confirmed that NIST and a
nonlaw-enforcement agency of the Treasury Department were among those
being considered.  As of October 28, 1993, the key-escrow agents had
not been publicly announced.  Although NSA began developing this
key-escrow system over 3 years ago, public input was not requested
until June 1993.  (See app.  II.)


--------------------
\3 Public-key cryptography uses two matched keys--a shared public key
and a private key.  See glossary. 

\4 A Technical Working Group was established pursuant to the 1989
Memorandum of Understanding between NIST and NSA to coordinate NIST's
cryptographic efforts. 

\5 A key-escrow system involves third-party organizations that,
together, have the means for decoding communications and the
responsibility for maintaining the privacy of encrypted
communications, except when interception of electronic communications
is legally authorized.  See glossary. 

\6 The administration previously referred to this computer chip as
Clipper Chip.  It was developed on the basis of NSA technology. 


   FEDERAL POLICY REGARDING EXPORT
   CONTROL OF PRODUCTS WITH
   ENCRYPTION CAPABILITIES
------------------------------------------------------------ Letter :5

The U.S.  export control system is divided into two regimes:  the
Department of State controls a list of munitions items under the
authority of the Arms Export Control Act, and the Department of
Commerce controls a list of dual-use items, i.e., items having both
military and civilian applications, under the Export Administration
Act.\7 Controls on munitions items are generally more restrictive
than those on dual-use items.  Therefore, industry generally prefers
to have products on the dual-use list controlled by Commerce. 

NSA plays a major role in determining rules for exporting U.S. 
products with encryption capabilities.  The scope of NSA's review is
generally limited to those products and technologies whose export
could affect the performance of NSA missions.  The review affects
such decisions as (1) whether individual products are placed on the
more restrictive State-controlled "munitions list" or the less
restrictive Commerce-controlled dual-use list and (2) whether
particular products on the munitions list may be licensed for export. 

State is required to periodically review the munitions list to see if
certain items can be transferred to Commerce's jurisdiction.  Any
changes to the munitions list, however, must have the concurrence of
the Department of Defense.  NSA plays an extensive role in this
concurrence when encryption products are being considered for removal
from the munitions list.  Responding to a 1990 executive order, State
led an interagency review of the munitions list to identify items
that could be transferred to Commerce's jurisdiction.  Mass-market
software with encryption capabilities was one item reviewed. 

The software industry pressed for the transfer of mass-market
software with encryption capabilities from State to Commerce,
claiming that export controls reduced U.S.  international sales of
products with encryption capabilities and might hinder the pace at
which these products were developed.  State proposed to transfer
export-control jurisdiction of mass-market software to Commerce on
the condition that Commerce impose foreign policy controls on the
licensing of such products.  One reason for the request is that State
believed that it would be impossible to control the export of
mass-market software because the products were widely available.  NSA
successfully argued against the proposal on national security
grounds. 

To allay industry's concern that such software continues to be
controlled on the munitions list, State amended its regulation in
July 1992.  It established a procedure to expeditiously transfer to
the Commerce list those mass-market software products with encryption
capabilities that met certain criteria.  Industry representatives
continue to press for the transfer of additional mass-market software
and other products with encryption capabilities to the Commerce list
to improve the possibility and the predictability of export approval. 
(See app.  III.)

Although the extent is not possible to quantify, U.S.  industry
representatives stated that stringent U.S.  export control of
products with encryption capabilities reduced their international
sales.\8 An example of a product type for which export controls
affect U.S.  global competitiveness is software with encryption
capabilities used in international commercial networks.  As an
example of less stringent foreign controls, a German company
contracts with a Japanese company to manufacture a high-speed
encryption chip for export to Germany.  In contrast, U.S.  export
controls prevent U.S.  companies from exporting such a chip to the
German company.  Although the United States may not export such chips
to this German company, U.S.  companies may purchase secure products
that contain these chips. 


--------------------
\7 Export Controls:  Issues in Removing Militarily Sensitive Items
From the Munitions List (GAO/NSIAD-93-67, Mar.  31, 1993). 

\8 The Software Publishers Association has estimated that (1) the
foreign market for mass-market software with encryption capabilities
is growing at least 20 percent each year and (2) the potential U.S. 
share of the foreign market could total $3-5 billion annually by
1997. 


   FBI-PROPOSED DIGITAL TELEPHONY
   LEGISLATION AND COMMENTS ON
   ENCRYPTION
------------------------------------------------------------ Letter :6

In 1992, the FBI proposed legislation to ensure its wiretapping
capabilities in a digital communications environment.  The proposed
legislation would have required electronic communications service
providers--such as local telephone companies and cellular service
providers--to ensure the ability of government agencies to implement
lawful orders or authorizations to intercept communications. 
Communications providers would have been prohibited from employing
communications technology that would bar the government's ability to
intercept electronic communications when authorized by law.  However,
according to FBI representatives in early 1993, the FBI was
reevaluating its position on the proposal.  In the meantime, industry
has been working with the FBI to improve the capability of
intercepting telephone traffic when legally authorized. 

Additionally, in April 1993, the administration announced that a
comprehensive policy on encryption would be developed.  The FBI
publicly announced that it supported the administration's key-escrow
system, which would allow government officials, when legally
authorized, access to the clear text of encrypted communications. 
(See app.  IV.)


---------------------------------------------------------- Letter :6.1

A dilemma exists between the growing need for communications privacy
in today's global competitive environment and the need for access to
communications by our law enforcement and national security agencies. 
Extensive debate has occurred during the past several decades over
how to meet these competing needs and whether a civilian organization
or a military intelligence agency should control the development of
federal information-processing standards for sensitive, unclassified
information. 

The Computer Security Act of 1987 reaffirmed the role of a civilian
organization--NIST, Department of Commerce--in developing such
standards, albeit in consultation with NSA.  Because national
security and law enforcement concerns have been driving significant
NIST decisions related to these standards and because the demand for
encryption is increasing, the debate endures. 


---------------------------------------------------------- Letter :6.2

Between November 1992 and June 1993, we reviewed federal actions and
policies that affect technologies related to privacy of electronic
communications.  We relied on our prior work for much of the
information on economic espionage, the proposed DSS, digital
telephony, and export control.  We gathered other information largely
from interviews and correspondence with officials of the Departments
of Commerce and State, NIST, and NSA, as well as representatives of
industry and academia.  The FBI declined to provide briefings on
economic espionage, digital telephony, and encryption issues for our
1992 testimony and for this report.  As requested, we did not obtain
official agency comments on a draft of this report. 

For the reader's convenience, we have included a glossary of
communications, cryptographic, and related terms used in the report. 

As arranged with your office, unless you publicly release its
contents earlier, we will not make this report available to others
until 10 days after the date of this letter.  At that time, we will
send copies of the report to the appropriate congressional committees
and interested parties.  We will also make copies available to others
on request. 

If you have questions concerning this report, please contact me or
Assistant Director Donald G.  Fulwider of my staff on (202) 512-6722. 
Major contributors to this report are listed in appendix V. 

Sincerely yours,




Richard C.  Stiener
Director


BACKGROUND AND METHODOLOGY
=========================================================== Appendix I


   NEED FOR PRIVACY OF INFORMATION
   IN COMPUTER/COMMUNICATIONS
   SYSTEMS--THE THREAT OF ECONOMIC
   ESPIONAGE AGAINST U.S. 
   INDUSTRY
--------------------------------------------------------- Appendix I:1

The federal government has historically recognized and addressed the
international nature of military and intelligence threats.  The
government is beginning to recognize that a broader international
threat to U.S.  information resources is emerging with the
proliferation of international computer networking and a shift from
conventional military conflict to economic competition.  During an
April 1992 hearing on economic espionage conducted by the
Subcommittee on Economic and Commercial Law, House Committee on the
Judiciary, the Director of the FBI stated, "Now and in the future,
the collection strategies of adversaries and allies alike will not
only focus on defense related information, but also include
scientific, technological, political and economic information." The
Director of the CIA similarly testified that U.S.  industry computer
and communications systems were attractive targets for sophisticated
foreign intelligence attacks. 

Increasingly serious threats in the global marketplace require the
commercial sector to effectively secure its information resources,
according to an Information Systems Security Association paper
presented to the Computer System Security and Privacy Advisory Board. 
While nonelectronic proprietary information can be compromised
through the theft of marketing reports or photos of prototypes, the
theft of electronic proprietary information can be accomplished
through breaking into a computer system--or computer hacking--and
message and voice monitoring during data and voice transmission. 
Individuals can compromise information, for example, by guessing
passwords or exploiting operating-system weaknesses.  Additionally,
message and voice monitoring during data and voice transmission can
occur at a number of locations throughout the communications flow,
such as where the message recipient is located. 

The increased use of computer and communications systems by industry
has increased the risk of theft of proprietary information.  A 1986
National Telecommunications and Information Systems Security
Committee\9 report assessed the security posture of the U.S. 
government and telecommunications/information systems that process
classified or sensitive, unclassified information.  The report
stated, "Hostile government intelligence collection agencies,
terrorist organizations, and criminal elements are undoubtedly
exploiting this lack of security to the detriment of U.S.  national
interests." Although these threats may require a variety of
countermeasures, encryption is a primary method of protecting
valuable electronic information. 


--------------------
\9 The Committee was established by National Security Decision
Directive 145 to help manage federal information systems security
issues.  This directive was partially replaced in 1990. 


   ENCRYPTION AS A SECURITY
   MEASURE
--------------------------------------------------------- Appendix I:2

Encryption--the conversion of clear text into an unreadable form--is
a tool that can be used to protect valuable information and perform
other functions.  Encryption can be used to (1) encrypt and decrypt
data, (2) send or exchange secret coding and decoding keys securely
and electronically without sharing them with a third party, and (3)
digitally sign a document.  The first two functions provide for
privacy and security of messages.  The third function, "digital
signature," is used to verify both the sender of a message and that a
message has not been tampered with. 

Encryption requires an algorithm, or a mathematical procedure, which
is used in conjunction with at least one key--a long string of
bits--to encrypt and decrypt messages.  In this report, we discuss
six encryption algorithms--Skipjack, the Data Encryption Standard
(DES), RC2, RC4, RSA,\10 and the algorithm in the proposed DSS. 
Skipjack, DES, RC2, and RC4 encrypt and decrypt information but
require an additional method for transporting secret keys to other
parties.  The method can be (1) a courier, (2) an additional
algorithm that transports or exchanges secret keys securely and
electronically between two parties, or (3) an electronic method
requiring a third party with whom the secret keys have been shared. 
DSS supports digital signature only.  RSA supports digital signature,
message encryption, and key management--the ability to securely send
secret keys electronically without sharing the secret keys. 

Key management/exchange--sending or exchanging secret keys securely
and electronically without having to share them with a third
party--is an important aspect of providing communications privacy for
international commerce.  Sharing secret keys with a third party can
represent added risk and cost. 

Encryption algorithms can be compared to locks.  Strong encryption
algorithms, like strong locks, require more time and effort to break. 
The design of the algorithm and the length of its keys are two
factors that contribute to its strength.  In general, the longer an
algorithm's keys are, the stronger the security or privacy provided
by that algorithm.  Keys must be known or guessed to forge a digital
signature or read an encrypted message. 


--------------------
\10 The "RC" in RC2 and RC4 is an abbreviation for Rivest Cipher. 
RSA's name is based on the last initials of its three inventors: 
Ronald L.  Rivest, Adi Shamir, and Leonard M.  Adleman. 


   SCOPE AND METHODOLOGY
--------------------------------------------------------- Appendix I:3

To respond to the request, we reviewed information collected for our
April 1992 testimony (GAO/T-OSI-92-6, Apr.  29, 1992).  We also
reviewed federal laws, regulations, policies, White House
correspondence, a Memorandum of Understanding, hearing records,
memorandums of NIST/NSA Technical Working Group meetings, and GAO
testimony\11 to understand the history of authority over
cryptographic standards, as well as how they are developed. 

We reviewed information developed for our report entitled Export
Controls:  Issues in Removing Militarily Sensitive Items From the
Munitions List (GAO/NSIAD-93-67, Mar.  31, 1993).  We also
interviewed cryptographers working for industry and representatives
of NIST and the Bureau of Export Control of the Department of
Commerce; NSA; the Department of State; hardware and software
manufacturers; and industry associations--e.g., the Information
Technology Association of America, the Industry Coalition on
Technology Transfer,\12 the Software Publishers Association, and the
Computer Business Equipment Manufacturing Association. 

Our previous report--FBI:  Advanced Communications Technologies Pose
Wiretapping Challenges (GAO/IMTEC-92-68BR, July 17, 1992)--provided
much of the information regarding the FBI's legislative proposals. 
The FBI declined to provide briefings on economic espionage, digital
telephony, and encryption issues for our 1992 testimony and for this
report. 

Our work was performed primarily between November 1992 and June 1993
in Washington, D.C. 


--------------------
\11 The Potential Impact of National Security Decision Directive
(NSDD) 145 on Civil Agencies, statement by Warren G.  Reed, GAO,
before the U.S.  House of Representatives, Subcommittee on
Transportation, Aviation and Materials, Committee on Science and
Technology (June 27, 1985).  National Institute of Standards and
Technology and the National Security Agency's Memorandum of
Understanding on Implementing the Computer Security Act of 1987
(GAO/T-IMTEC-89-7, May 4, 1989). 

\12 The coalition represents 10 information technology associations,
such as the Computer and Business Equipment Manufacturers
Association. 


FEDERAL AGENCY AUTHORITY AND
ACTIONS CONCERNING CRYPTOGRAPHIC
STANDARDS
========================================================== Appendix II


   CONFLICT OVER FEDERAL AGENCY
   AUTHORITY FOR CRYPTOGRAPHIC
   STANDARDS TO PROTECT SENSITIVE,
   UNCLASSIFIED INFORMATION
-------------------------------------------------------- Appendix II:1

An information-processing standard is a set of detailed technical
guidelines used to support specific functions and/or interoperability
in hardware, software, or telecommunications development, testing,
and/or operation.  Federal information-processing standards often
significantly affect the widespread adoption of technology and can
result in lower unit costs to the user.  Although federal agencies
are required to comply with federal information-processing standards,
industry voluntarily has adopted many of these standards. 

One of the missions given to NIST\13 when established by the Congress
was to help industry develop technology and to facilitate rapid
commercialization of products.  NIST became responsible for federal
standards for information systems, including the security of
unclassified information in 1965, when the Brooks Act (P.L.  89-306)
was enacted. 

In 1984, the President signed National Security Decision Directive
145\14 --developed by the Department of Defense--that authorized the
Director of NSA to review and approve all security-related standards
for information systems, including those set by NIST.  We testified
in 1985 that this directive could significantly affect the management
of systems by civil agencies and commercial interests\15 because it
established a new category of "sensitive, unclassified government or
government-derived information, the loss of which could adversely
affect the national security interest .  .  .  " without clearly
defining the types of information in this category. 

During hearings in the mid-1980s, the Congress raised the issue about
having NSA or NIST--a military or a civilian agency--control federal
information-processing standards to protect sensitive, unclassified
information.  One concern that was raised related to the
appropriateness of giving NSA a role in developing or approving
standards for the privacy of sensitive, unclassified information
because of its national security role with respect to cryptography. 
The Computer Security Act of 1987 was enacted, in part, to address
this concern.  The act reaffirmed NIST's responsibility for
developing standards to help government agencies protect sensitive,
unclassified information.  The act authorized NIST to draw upon the
technical advice and assistance of NSA, when appropriate, to avoid
unnecessary and costly duplication of effort and ensure that
standards for protecting sensitive, unclassified information were
consistent and compatible, to the maximum extent feasible, with
standards for classified systems.  The act required that NIST draw
upon NSA guidelines to the extent that NIST determined that such
guidelines were consistent with requirements to protect sensitive,
unclassified information in federal computer systems. 

In March 1989, NSA and NIST signed a Memorandum of Understanding that
is still in effect.  The memorandum requires that NIST request NSA's
assistance on all matters related to cryptographic algorithms, not
solely NIST-selected cryptographic matters.\16 If NIST and NSA
disagree on an issue, the memorandum states that the matter may be
appealed to the Secretaries of Commerce and Defense.  Unresolved
matters may be referred through the National Security Council to the
President.  At a number of Technical Working Group meetings, NIST and
NSA representatives have disagreed over whether to develop a
public-key standard for key management/exchange.  NSA and NIST have
not elevated any issues of disagreement to their Secretaries, as
allowed by the process outlined in the Memorandum of Understanding. 

We testified\17 in 1989 that this Memorandum of Understanding made
NSA appear to be more influential in NIST's standard-setting
processes relative to cryptographic systems than was intended by the
Congress in the Computer Security Act of 1987.  We further testified,
"The [memorandum] appears to increase the burden of leadership which
the Secretary of Commerce must exercise in implementing the Computer
Security Act of 1987.  .  .  ."


--------------------
\13 NIST was formerly the National Bureau of Standards. 

\14 In 1990, National Security Directive 42 replaced National
Security Decision Directive (NSDD) 145, except for ongoing
telecommunications protection activities mandated by NSDD 145 and
Presidential Directive 24. 

\15 Reed, GAO, June 27, 1985. 

\16 According to the Memorandum of Understanding, both agencies are
to share project updates quarterly, as well as project reviews upon
request.  The memorandum also established a Technical Working Group
of three NIST and three NSA representatives to review and analyze
technical issues of mutual interest. 

\17 GAO/T-IMTEC-89-7, May 4, 1989. 


   NIST, NSA, AND ADMINISTRATION
   ACTIONS RELATED TO STANDARDS
   FOR COMMUNICATIONS PRIVACY AND
   FOR DIGITAL SIGNATURE
-------------------------------------------------------- Appendix II:2

NSA, because of its expertise and national security concerns, has
significantly participated in NIST's development of federal
cryptographic standards.  NIST has insufficient resources to develop
and evaluate cryptographic algorithms for federal standards without
assistance, according to a NIST representative.  Further, national
security and law enforcement concerns have hindered the development
of standards related to (1) a specific secret-key encryption
standard--DES--and (2) public-key encryption. 

Secret-key cryptography uses an algorithm and the same secret key for
encrypting and decrypting data.  Public-key cryptography uses an
algorithm and two matched keys--a public key and a private key--and
can perform (1) digital signature, (2) secure transmission or
exchange of secret keys, and/or (3) encryption and decryption. 

We did not evaluate the validity of law enforcement or national
security concerns related to national cryptographic policy. 


      THE DATA ENCRYPTION STANDARD
      AND COMMUNICATIONS PRIVACY
------------------------------------------------------ Appendix II:2.1

DES, published in 1977 after extensive NSA involvement, is the most
widely known modern encryption algorithm.  The U.S.  and
international financial communities and others use DES to provide
communications security.  For example, Fedwire and the Clearing House
Interbank Payment System, which process over 350,000 messages daily
valued at $1-2 trillion, use DES to protect messages from
unauthorized modification.  DES has withstood the test of publicly
known attempts to break it.  However, DES has been the subject of
controversy since its inception. 


         INITIAL CONTROVERSY AND
         1983 REAFFIRMATION
---------------------------------------------------- Appendix II:2.1.1

In May 1973, NIST issued a solicitation through the Federal Register
for interested parties to submit cryptographic algorithms for
possible consideration as a data encryption standard.  NIST requested
NSA's assistance in evaluating the few cryptographic algorithms
received, and NSA reported that no suitable algorithms had been
submitted. 

NIST solicited for algorithms again in August 1974.  At NSA's
suggestion, IBM (International Business Machines, Inc.) submitted one
of its algorithms to NIST.  On the basis of NSA advice, IBM shortened
the key length and, at NSA's request, did not publicly disclose all
the design criteria used in creating its candidate algorithm. 

The lack of public disclosure of design criteria and the shortened
key length became the subjects of controversy.  NIST held two
workshops prior to publishing the DES algorithm, which was based on
the IBM-submitted algorithm.  One workshop was related to the design
of the algorithm and focused on whether a "trapdoor"--a secret entry
point to DES through which a developer or other entity could bypass
security controls and decrypt messages--existed.  The other workshop
focused on the economic and security trade-offs of modifying the
implementation of the algorithm to increase its key length.  In 1977,
NIST adopted DES as a federal standard, with the provision that NIST
review it every 5 years. 

Because of several allegations by cryptographers in industry and
academia, including one that NSA had been improperly involved in the
development of DES, the Senate Select Committee on Intelligence
conducted an investigation.  In 1978, the staff report concluded that
NSA had acted properly and that the agreed-upon key size was more
than adequate for commercial applications.  NIST reaffirmed DES in
1983. 


         RENEWED CONTROVERSY AND
         1988 REAFFIRMATION
---------------------------------------------------- Appendix II:2.1.2

In 1985, NSA announced that it would not endorse new products with
DES implementations after 1987.  Although there were no publicly
known security problems or risks related to DES use and about 20
vendors had produced numerous products implementing the DES
algorithm, NSA planned to endorse a new classified algorithm, which
it would control, for industry's use with sensitive, unclassified
information.  The major reason that NSA cited for wanting industry to
use a nonpublic algorithm was that it would be more secure if it was
not published and available to the public.  However, a representative
of the American Bankers Association testified in 1987 before the
Legislation and National Security Subcommittee, House Committee on
Government Operations regarding bankers' concerns.  These included
that (1) NSA might control the encryption keys, (2) financial
institutions would bear considerable cost in switching algorithms,
(3) DES was still considered secure, and (4) the classified algorithm
could not be used internationally. 

In 1987, NSA recommended to NIST that DES be used to protect only
electronic financial transactions, not other electronic information. 
NSA stated that reducing DES use would also reduce the potential
attractiveness of DES as an intelligence target.  NSA offered to work
with DES chip manufacturers and develop pin-for-pin replaceable
circuits employing the NSA-developed cryptography.  However, none
expressed interest.  After much discussion, NIST reaffirmed
DES--without limiting its use to financial transactions--in 1988. 


         1989 NIST REQUEST FOR NSA
         ASSISTANCE IN DEVELOPING
         KEY-GENERATION STANDARD
---------------------------------------------------- Appendix II:2.1.3

In 1989, NIST requested NSA assistance in developing a federal
information-processing standard for generating pseudorandom (good)
cryptographic keys for DES and began to discuss this issue at the
NSA/NIST Technical Working Group meetings.  NIST did not develop this
standard because NSA disapproved of the effort and did not provide
the requested assistance.  This standard was intended to help users
select DES keys that could not be easily compromised.  NIST stated
that the system should be able to (1) generate pseudorandom keys for
DES and (2) verify that a generated key could not be predicted by
examining any sequence of previously generated keys. 

According to a NIST issue paper, commercial organizations do not want
to use cryptographic keys generated by the federal government.  The
paper stated that to maximize security, each agency should generate
its own keys.  NSA did not believe that NIST had the responsibility
to publish a standard on key generation, according to a NIST
memorandum.  The memorandum further recorded that NSA had stated it
was prepared to generate DES keys for federal agencies and provide
private sector DES users that had government sponsors with keying
material.  Finally, the memorandum stated that NSA's chief concerns
with this standards effort were that it would help the private sector
develop stronger key-management systems and hence they would have
better security. 


         1993 REVIEW AND POSSIBLE
         REAFFIRMATION
---------------------------------------------------- Appendix II:2.1.4

In September 1992, NIST requested comments, through the Federal
Register, for NIST's review of DES.  NIST requested comments on three
alternatives:  (1) reaffirm DES, (2) withdraw DES and possibly issue
another standard, and (3) revise the applicability and/or
implementation of DES.  All 38 respondents favored DES reaffirmation;
about two-thirds recommended reaffirmation and revision.  Six
government and six industry respondents proposed that the standard be
revised to allow DES implementation in software--currently DES is
limited to hardware implementation, and federal agencies are required
to get a waiver to implement DES in software.  DES continues to be a
strong algorithm, according to NIST.  NIST has proposed the
reaffirmation of DES with the above-mentioned revision to the
Secretary of Commerce.  However, as of September 14, 1993, the
Secretary had not approved it.  NIST will consider DES alternatives
over the next 5 years. 


         PUBLIC-KEY
         MANAGEMENT/EXCHANGE AND
         DIGITAL SIGNATURE
         STANDARDS
---------------------------------------------------- Appendix II:2.1.5

NIST has not proposed a key-management/exchange standard based on
public-key cryptography--to support the secure transmission, or the
exchange, of secret keys electronically without sharing them with a
third party--because of NSA and FBI concerns.  Such a standard would
support communications privacy. 


         EARLY 1980S
---------------------------------------------------- Appendix II:2.1.6

In 1982, NIST solicited, through a Federal Register notice, for
public-key algorithms--the basis of public-key cryptography, which
can provide message encryption, key management/exchange, and digital
signature.  RSA Data Security, Inc., was willing to negotiate the
rights to use RSA--the most widely accepted public-key algorithm--as
a federal standard, according to a NIST representative.  NSA and NIST
representatives met several times to discuss NSA concerns regarding
the 1982 solicitation.  However, NIST terminated the public-key
cryptographic project because of an NSA request, according to a 1987
NIST memorandum.  The 1982 NIST solicitation was the last formal
opportunity provided for industry, academia, and others to offer
public-key algorithms for a federal standard and to participate in
the development of a federal public-key standard that could support
key management/exchange. 


         LATE 1980S
---------------------------------------------------- Appendix II:2.1.7

In 1989, NIST requested that NSA assist it in evaluating
NIST-proposed candidate algorithms for a set of public-key encryption
standards.  NIST stated that the selected algorithm must be public,
unclassified, and implementable in both hardware and software.  NIST
preferred one algorithm to perform both digital signature and key
distribution (management/exchange), which is the ability to send
secret keys securely and electronically without sharing them with a
third party.  According to NIST memorandums, the NIST members of the
Technical Working Group preferred RSA because it performed both
functions.  NSA and NIST met frequently to discuss these standards. 

NSA briefed NIST on its work regarding the public-key encryption
algorithms 7 months after NIST's first request for assistance in
1989.  NIST representatives noted that NSA had excluded RSA as a
candidate algorithm.  For the proposed DSS, NSA developed an
algorithm that performs digital signature but not key
management/exchange, which supports communications privacy. 


         EARLY 1990S--THE PROPOSED
         DIGITAL SIGNATURE
         STANDARD
---------------------------------------------------- Appendix II:2.1.8

In an August 1991 Federal Register, NIST announced a proposed federal
DSS.  Impact on national security and law enforcement were factors
considered in selecting the proposed DSS, as cited in the Federal
Register notice.  The majority of private sector comments on the
proposed DSS were negative, according to a NIST representative. 
Responding to one industry security concern, NIST agreed to provide
the capability for longer keys.  However, other concerns, including
the following, have yet to be resolved: 

  Many large U.S.  software producers and other companies (e.g., IBM,
     Apple, Lotus, and Microsoft) had already obtained licenses to
     use RSA, commonly referred to as the de facto, international
     standard for digital signature.  (RSA is the most well-known
     algorithm that complies with the international standard for
     digital signature.) Several of these companies have produced, or
     are in the process of evaluating or producing, mass-market
     software with encryption capabilities--such as Lotus Notes--that
     uses RSA for digital signature and/or public-key management
     support of message privacy. 

  A number of industry representatives stated that most of their
     customers will want to use RSA for digital signature to support
     international commerce.  Thus, industry may be required to
     develop and support two different versions of products to
     support digital signature--one for government users (DSS) and
     one for nongovernment and international users (RSA). 

  For a broad range of digital signature applications, it appears
     that DSS, as proposed, may be less efficient than RSA. 
     According to a number of industry representatives and
     cryptographers, this is because RSA can verify signatures
     faster.  Signature verification, in general, is the most
     frequent, and thus most time-consuming, operation in the digital
     signature process.  One example of the frequency of signature
     verification versus that of signature is check processing. 
     Although a check is signed once, the signature may be verified
     numerous times while the check is being processed. 


         EARLY 1990S--NO PROPOSAL
         FOR A
         KEY-MANAGEMENT/EXCHANGE
         STANDARD
---------------------------------------------------- Appendix II:2.1.9

NIST has not yet proposed a key-management/exchange standard based on
public-key cryptography because of NSA requests.  Although in May
1990 NSA proposed a key-management/exchange technique to NIST, the
technique did not meet two of NIST's requirements--that the algorithm
be made public and be capable of implementation in software. 

In December 1991, the Computer System Security and Privacy Advisory
Board--composed of representatives from the computer and
telecommunications industry, independent experts in
telecommunications, and federal employees and established by the
Computer Security Act of 1987--voted to inform the NIST Director that
DSS had grave problems.  Board members stated that DSS was a drain on
NIST's resources, inconsistent with international standards, and
technically inadequate without a key-management functionality.  In
1992, they also resolved that the Secretary of Commerce should
approve DSS only on conclusion of a national review--to include the
national security, law enforcement, "government sensitive
unclassified," and commercial communities--to discuss the widespread
use of cryptography. 

In a statement before your Subcommittee on May 7, 1992, the NIST
Director stated that a key-distribution (management/exchange)
technique was needed.  He further stated that public-key
cryptography, if implemented properly, better satisfied this need,
although law enforcement and national security concerns were to be
considered.  NIST plans to submit DSS to the Secretary of Commerce
for approval as a Federal Information Processing Standard in 1993,
although the Board's concerns have not been resolved. 


      ANNOUNCEMENT OF A PROPOSED
      STANDARD FOR ENCRYPTION WITH
      A KEY-ESCROW SYSTEM BASED ON
      NSA-DEVELOPED TECHNOLOGY
------------------------------------------------------ Appendix II:2.2

In July 1993, NIST proposed a cryptographic Federal Information
Processing Standard--the key-escrow system\18 --that would enable
decryption of lawfully intercepted telecommunications.  This system
would allow legally authorized government officials to access the
plain text of encrypted communications.  NSA proposed this technique
to NIST in 1990.  However, NIST rejected the technique because NIST
required that the algorithm be made public and capable of being
implemented in software.  In April 1993, the President directed NIST,
in consultation with other federal agencies, to begin writing
standards to facilitate the procurement and the use of the key-escrow
technique in federal communications systems. 

The purpose of the currently proposed standard is to promote the use
of an NSA-developed classified encryption algorithm, known as
Skipjack, as part of a key-escrow system on an NSA-developed chip.\19

The administration also seeks with this same technology to help
companies protect proprietary information, protect the privacy of
telephone conversations, and prevent unauthorized access to
electronically transmitted data. 

Under the current proposal, the keys would be secured and controlled
as follows:  Two databases will be established to hold the two
components of each key produced for each chip.  These two components
are necessary to decrypt the message.  According to a Justice
Department official in September 1993, key-escrow candidates were to
be discussed with Members of Congress prior to being publicly
announced.  This official confirmed that NIST and a
nonlaw-enforcement agency of the Treasury Department were among those
being considered.  As of October 28, 1993, the key-escrow agents had
not been publicly announced.  The FBI has publicly announced that it
supports the administration's key-escrow proposal. 


--------------------
\18 A key-escrow system is an electronic means of reconstructing a
secret key (for secret-key encryption) or a private key (for
public-key encryption) for the purpose of decrypting a message. 

\19 The current Administration previously referred to this chip as
Clipper Chip. 


ACTIONS AND POLICY REGARDING THE
EXPORT OF PRODUCTS WITH PRIVACY
CAPABILITY
========================================================= Appendix III


   BACKGROUND
------------------------------------------------------- Appendix III:1

The U.S.  export control system is divided into two parts--munitions
items and dual-use items, or items having both civilian and military
uses.  The Department of State controls the export of munitions items
under the Arms Export Control Act and is required to have Department
of Defense concurrence when adding items to or deleting items from
the U.S.  Munitions List.\20 The Department of Commerce, on the other
hand, controls the export of dual-use items under the Export
Administration Act and establishes the Commerce Control List.  In
general, munitions controls are more stringent than Commerce's
dual-use controls. 


--------------------
\20 GAO/NSIAD-93-67, Mar.  31, 1993. 


   DEFENSE REFUSAL TO REMOVE
   MASS-MARKET SOFTWARE WITH
   ENCRYPTION CAPABILITIES FROM
   THE U.S.  MUNITIONS LIST
------------------------------------------------------- Appendix III:2

Over the years, the two lists began to overlap and included, among
other items, mass-market software\21 with encryption capabilities. 
In November 1990, the President ordered the removal of Coordinating
Committee for Multilateral Export Controls (COCOM)\22 dual-use items
from the U.S.  Munitions List and its licensing controls unless
significant national security interests would be jeopardized. 
Pursuant to the November 1990 executive order, the Department of
State led an interagency review--including State, Commerce, and
Defense--to identify overlapping items and determine which could be
removed from the munitions list and transferred to Commerce's
jurisdiction. 

We reviewed the export control jurisdiction decisions the Departments
of State and Defense had made regarding certain militarily sensitive
items.\23 That review focused primarily on items other than
encryption items.  However, as a result of the President's order, one
dual-use item in the interagency review was mass-market software with
cryptographic capabilities.  U.S.  software exporters pressed the
federal government to liberalize U.S.  export controls to enhance the
international competitiveness of their products. 

Nevertheless, in April 1991, the Departments of State and Defense
agreed to retain software with cryptographic capabilities on the U.S. 
Munitions List so that NSA could review all new software with
cryptographic capabilities to determine if the products should be
controlled on the munitions list or the Commerce list.  Additional
reasons for maintaining this item on the munitions list are
classified. 

In January 1992, State reversed its position and proposed moving such
software to the Commerce list, along with other items.  State
believed that controlling mass-market software with cryptographic
capabilities would be impossible because the products were widely
available.  However, Defense refused to include such software in any
compromise with Commerce, citing the inadequacy of Commerce's control
system even with added foreign policy controls.  Defense further
cited the administration's opposition to the provision in a bill to
reauthorize and amend the Export Administration Act as another reason
that jurisdiction over this software should not be transferred. 
NSA's appeal to the Under Secretary of State for International
Security Affairs prevailed, according to a State Department
representative, and mass-market software with cryptographic
capabilities was retained on the munitions list.  NSA also presented
its case to the President's Assistant for National Security Affairs,
according to State Department representatives. 


--------------------
\21 Mass-market software is software that is (1) generally available
to the public by sale, without restriction, from stock at retail
selling points through over-the-counter, telephone, and mail
transactions and (2) designed for user installation without
substantial supplier support. 

\22 COCOM is an informal international organization that
cooperatively restricts strategic exports to controlled countries. 

\23 GAO/NSIAD-93-67, Mar.  31, 1993. 


   NSA AND STATE DEPARTMENT EXPORT
   CONTROL ROLES
------------------------------------------------------- Appendix III:3

NSA performs the technical review that determines, for national
security reasons, (1) if a product with encryption capabilities is a
munitions item or a Commerce list item and (2) which munitions items
with encryption capabilities may be exported.  The Department of
State examines the NSA determination for consistency with prior NSA
determinations and may add export restrictions for foreign policy
reasons--e.g., all exports to certain countries may be banned for a
time period. 

Neither NSA, the Department of State, nor the Department of Commerce
has provided industry with the detailed criteria for determining
whether an item is a munitions item or a Commerce list item.  The
detailed criteria for these decisions are generally classified. 
However, vendors exporting these items can learn some of the general
criteria through prior export approvals or denials that they have
received.  NSA representatives also advise companies regarding
whether products they are planning would likely be munitions items
and whether they would be exportable, according to State Department
representatives. 


      INDUSTRY RAISES CONCERN
      ABOUT EXPORT LICENSE PROCESS
----------------------------------------------------- Appendix III:3.1

Products with certain algorithms, such as DES, for message encryption
require a munitions license and are generally nonexportable to
foreign commercial users, except foreign subsidiaries of U.S.  firms
and international banking concerns.  Other algorithms are permitted
for export for privacy purposes at restricted key lengths.  (DES and
other algorithms--for nonprivacy purposes, such as password access
control--are exported under control of the Commerce list.)

The Software Publishers Association sought to have export control
jurisdiction of mass-market software with encryption capabilities
transferred to Commerce.  NSA and National Security Council
representatives met with representatives of the Association, which
specifically sought change regarding controls on DES. 


      STATE ESTABLISHES A
      PROCEDURE EXPEDITING PRODUCT
      REVIEWS FOR DETERMINING
      MUNITIONS ITEMS
----------------------------------------------------- Appendix III:3.2

The Department of State amended\24 the regulations for implementing
the Arms Export Control Act.  The new regulation established a
procedure that permits an expedited review--to determine whether the
product is a munitions or a Commerce-controlled item--for certain
mass-market software with encryption capabilities.\25

According to a procedure outlined by the President's Assistant for
National Security Affairs, a representative of the National Security
Council will host a meeting with software industry representatives
twice a year to enable the industry representatives to present their
concerns, including whether keys should be lengthened to counteract
the threat of increased computer power. 


--------------------
\24 The U.S.  Munitions List, 22 C.F.R.  section 121.1, Category
XIII, note (1993). 

\25 The procedure can be applied for products with RSA, RC2, or RC4
when RSA key lengths are limited to 512 bits and RC2 and RC4 key
lengths are limited to 40 bits.  Key lengths affect the degree of
message privacy.  For example, an algorithm with a 56-bit key is over
65,000 times stronger against a certain kind of attack than the same
algorithm with a 40-bit key.  Different algorithms with the same key
length are not necessarily equally strong because other factors
contribute to strength. 


      U.S.  EXPORT CONTROLS FOR
      PRODUCTS WITH ENCRYPTION
      CAPABILITIES, IN SOME CASES,
      APPARENTLY MORE STRINGENT
      THAN THOSE OF OTHER
      COUNTRIES
----------------------------------------------------- Appendix III:3.3

U.S.  export controls for products with encryption capabilities--in
at least some cases--appear more stringent than those of other
countries.  U.S.  and foreign companies and an association provided
three examples of such cases. 

First, some member countries of COCOM, such as the United Kingdom,
permit the export of mass-market software with encryption
capabilities.  In 1991, the COCOM countries agreed to exclude
mass-market software with encryption capabilities or software in the
public domain from one of the COCOM embargo lists used for export
control.  However, the United States maintains export control over
this software. 

Second, foreign companies may export products with encryption
algorithms for message privacy, such as DES, to user groups and
countries that U.S.  companies and their foreign subsidiaries may
not.  According to an industry official, a German company contracts
with a Japanese company to manufacture a high-speed encryption chip
for export to Germany because U.S.  companies are prevented by U.S. 
export rules from exporting to the German company. 

Further, a U.S.  subsidiary of a leading British vendor of encryption
products uses these chips in a network security system.  This U.S. 
subsidiary may market these products to any user in the United
States.  In contrast, foreign subsidiaries of U.S.  companies are
often limited by U.S.  export rules to selling such products to
designated user groups--the financial industry and foreign
subsidiaries of U.S.  companies--in countries where they are based,
according to a representative of the Computer and Business Equipment
Manufacturers Association. 


      INDUSTRY CITES REASONS FOR
      RELAXING EXPORT CONTROLS FOR
      PRODUCTS WITH ENCRYPTION
      CAPABILITIES
----------------------------------------------------- Appendix III:3.4

A number of industry representatives stated that the international
availability of hardware and software with encryption capabilities
could not be effectively suppressed because sophisticated,
foreign-made encryption products were becoming more available
worldwide.  Although U.S.  firms are restricted in the international
sale of these products, vendors in the United Kingdom, Switzerland,
Israel, Belgium, and the Commonwealth of Independent States offer a
wide variety of secure products that use DES, RSA, and other
algorithms, according to a statement by the Computer and Business
Equipment Manufacturers Association and the Information Technology
Association of America.  They stated that about 16 companies in these
5 countries and Holland sold hardware and software products with
cryptographic capabilities in their own and/or other countries,
including the United States, Germany, Australia, Cyprus, Ireland,
Israel, Singapore, and Sweden.  As an example of the international
availability of RSA and DES in software, ASKRI, a company in the
Commonwealth of Independent States, sells an encryption product that
implements both RSA and DES, according to its user's manual. 

Although the extent is not possible to quantify, U.S.  industry
representatives stated that stringent U.S.  export control of
products with encryption capabilities reduced their international
sales.  International markets are important sources of revenue for
U.S.  industries.\26 According to a number of industry
representatives, export controls also hinder the pace at which these
products are developed in the United States.  Industry
representatives state that because of the cost of development, they
are reticent to develop products with encryption capabilities that
may not be exported. 


--------------------
\26 The Software Publishers Association has estimated that (1) the
foreign market for mass-market software with encryption capabilities
is growing at least 20 percent each year and (2) the potential U.S. 
share of the foreign market could total $3-5 billion annually by
1997. 


FBI-PROPOSED DIGITAL TELEPHONY
LEGISLATION AND COMMENTS ON
ENCRYPTION
========================================================== Appendix IV

Since 1986, the FBI has become increasingly aware of the potential
loss of wiretapping capability due to the rapid deployment of new
technologies, such as cellular and integrated voice and data
services.  In 1991, the FBI commented on a Senate bill concerning
encryption.  In 1992, the FBI developed several legislative proposals
concerning wiretapping.  Both encryption and wiretapping affect the
FBI's methods and ability to collect evidence.  In early 1993, the
FBI told us that it is reevaluating its positions regarding digital
telephony legislation and encryption issues until it has discussed
these topics with officials in the new administration. 


   1992 DIGITAL TELEPHONY
   PROPOSALS
-------------------------------------------------------- Appendix IV:1

In 1992, the FBI developed a legislative proposal to facilitate law
enforcement agency wiretapping operations in a digital telephone
network.  (The proposal was not introduced as a bill in the
Congress.) A law consistent with the proposal would have required
compliance by telecommunications service providers and private branch
exchanges with Federal Communications Commission regulations within a
specified time period and would have prohibited the use of
nonconforming equipment.  However, according to our July 1992
report,\27 the FBI did not define its wiretapping needs in its
original proposal. 

The second version of the FBI proposal generally addressed the FBI's
needs but did not provide the specifics necessary for the
telecommunications industry to determine what would constitute full
compliance with the proposal.  For example, the version did not
specify the time allowed to install a wiretap after receipt of a
court order.  Further, the second version did not address who should
pay the cost of changes to the systems that would ensure the FBI's
access.  The FBI's third version in 1992 was similar to the second. 

Collecting evidence by wiretapping is becoming difficult because of
four growing technologies:  (1) the integrated services digital
network--an emerging communications system to integrate voice and
data; (2) extended cellular telephone communications; (3) encryption;
and (4) personal communication networks--advanced cellular telephone
communications that will offer new communications services via very
small, portable handsets. 

In the summer of 1990, the FBI began technical discussions with
industry experts on wiretapping solutions.  The FBI had previously
conducted its own research on wiretapping but had not coordinated its
research with industry research and development. 

In May 1992, the FBI formed a technical committee composed of
representatives from the FBI and the telecommunications industry. 
The purpose of this committee was to identify and select the
technological alternatives that best met the FBI's needs.  According
to our July 1992 report, neither the FBI nor the telecommunications
industry had a comprehensive analysis of the technological
alternatives for wiretapping current and emerging technologies. 

The General Services Administration expressed its views on the first
and second versions of the FBI-proposed legislation in response to
the Office of Management and Budget.  The General Services
Administration stated, in part, "there would be unknown associated
costs to implement the proposed new technological procedures and
equipment."

In addition, the Electronic Frontier Foundation--in coalition with
communications services providers, computer hardware and software
companies, and other groups--published a September 1992 report
concerning the proposal.\28 The report expressed concern that a law
based on the FBI's legislative proposal would impose new engineering
standards with substantial costs. 


--------------------
\27 GAO/IMTEC-92-68BR, July 17, 1992. 

\28 Electronic Frontier Foundation, et al., "An Analysis of the FBI
Digital Telephony Proposal" (Sept.  18, 1992). 


   FBI COMMENTS ON ENCRYPTION
-------------------------------------------------------- Appendix IV:2

In January 1991, the Senate Committee on the Judiciary proposed S. 
266, the Comprehensive Counter-Terrorism Act of 1991, which addressed
government access to "plain text," or decrypted, communications.  The
FBI supported the bill.  However, representatives of industry and
academia expressed concern that such a proposal would undermine the
security, reliability, and privacy of computer-based communications. 

Section 2201 of the bill, "Cooperation of Telecommunications
Providers With Law Enforcement," read in part: 

     "It is the sense of Congress that providers of electronic
     communications services and manufacturers of electronic
     communications service equipment shall ensure that
     communications systems permit the government to obtain the plain
     text contents of voice, data, and other communications when
     appropriately authorized by law."

On April 26, 1991, the FBI issued a press response expressing its
support of section 2201 of S.  266, stating that the bill "seeks to
place on the telecommunications industry a sense of duty to design
its new digital telecommunications systems so that law enforcement
continues to receive only those communications specifically
authorized by court order." The press response further stated,
"[a]ffording a criminal subject the means, through encryption, of
securely communicating in furtherance of an illicit activity is
tantamount to providing a sanctuary immune from judicially authorized
collection of evidence."

S.  266 was not enacted.  Section 2201 of the bill was later included
in
S.  618, the proposed Violent Crime Control Act of 1991.  Neither S. 
618 nor its companion bill in the House of Representatives passed. 

On April 19, 1993, representatives from the FBI announced support for
the administration's key-escrow system.  This system would allow
legally authorized government officials to obtain access to the plain
text of encrypted communications. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V


   OFFICE OF SPECIAL
   INVESTIGATIONS, WASHINGTON,
   D.C. 
--------------------------------------------------------- Appendix V:1

Donald G.  Fulwider, Assistant Director for Financial and Economic
 Crimes
Robyn D.  Stewart-Murray, Special Agent
Shelia A.  James, Report Reviewer
M.  Jane Hunt, Special Assistant for Investigative Plans and Reports


   ACCOUNTING AND INFORMATION
   MANAGEMENT DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix V:2

Dr.  Harold J.  Podell, Assistant Director
Beverly A.  Peterson, Senior Evaluator


   OFFICE OF THE GENERAL COUNSEL,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix V:3

James M.  Lager, Senior Attorney Adviser


GLOSSARY
=========================================================== Appendix 0


      ALGORITHM
------------------------------------------------------- Appendix 0:0.1

A mathematical procedure that can usually be explicitly encoded in a
set of computer language instructions that manipulates data. 
Cryptographic algorithms are mathematical procedures used for such
purposes as encrypting and decrypting messages and signing documents
digitally. 


      BIT
------------------------------------------------------- Appendix 0:0.2

Short for binary digit--0 or 1.  Keys are strings of bits. 


      CELLULAR TRANSMISSION
------------------------------------------------------- Appendix 0:0.3

Data transmission via interchangeable wireless (radio) communications
in a network of numerous small geographic cells.  Most current
technology is analog--represented as electrical levels, not bits. 
However, the trend is toward digital cellular data transmission. 


      CLIPPER CHIP
------------------------------------------------------- Appendix 0:0.4

A microcircuit that contains a classified secret-key encryption
algorithm--"Skipjack." Skipjack can be used in place of DES, RC2,
RC4, and other secret-key algorithms to provide message privacy with
a "key-escrow" system.  (The administration initially referred to the
microcircuit as the Clipper Chip and later discontinued using the
term.)


      COCOM
------------------------------------------------------- Appendix 0:0.5

The Coordinating Committee for Multilateral Export Controls--an
informal organization that cooperatively restricts strategic exports
to controlled countries.  COCOM consists of 17 countries that
maintain three export control lists:  (1) the International
Industrial List, (2) the International Munitions List, and (3) the
International Atomic Energy List.  Members include the countries of
the North Atlantic Treaty Organization, except Iceland, with the
addition of Japan and Australia. 


      CRYPTOGRAPHY
------------------------------------------------------- Appendix 0:0.6

The transformation of ordinary text, or "plain text," into coded form
by encryption and the transformation of coded text into plain text by
decryption.  Cryptography can be used to support digital signature,
key management or exchange, and communications privacy. 


      DATA ENCRYPTION STANDARD
      (DES)
------------------------------------------------------- Appendix 0:0.7

A NIST Federal Information Processing Standard and a commonly used
secret-key cryptographic algorithm for encrypting and decrypting data
and performing other functions.  For example, DES can be used to
check message integrity.  DES specifies a key length of 56 bits. 


      DIGITAL SIGNATURE
------------------------------------------------------- Appendix 0:0.8

A cryptographic method, provided by public-key cryptography, used by
a message's recipient or any third party to verify the identity of
the message's sender and the integrity of the message.  A sender
creates a digital signature or a message by transforming the message
with his/her private key.  A recipient, using the sender's public
key, verifies the digital signature by applying a corresponding
transformation to the message and the signature. 


      DIGITAL SIGNATURE STANDARD
      (DSS)
------------------------------------------------------- Appendix 0:0.9

A NIST-proposed Federal Information Processing Standard that supports
digital signature. 


      DIGITAL TELEPHONY
------------------------------------------------------ Appendix 0:0.10

Telephone systems that use digital communications technology. 


      ECONOMIC ESPIONAGE
------------------------------------------------------ Appendix 0:0.11

The unauthorized acquisition of U.S.  proprietary or other
information by a foreign government to advance the economic position
of that country. 


      ENCRYPTION
------------------------------------------------------ Appendix 0:0.12

The process of making information indecipherable to protect it from
unauthorized viewing or use, especially during transmission or
storage.  Encryption is based on an algorithm and at least one key. 
Even if the algorithm is known, the information cannot be decrypted
without the key(s). 


      INFORMATION-PROCESSING
      STANDARD
------------------------------------------------------ Appendix 0:0.13

A set of detailed technical guidelines used to establish uniformity
to support specific functions and/or interoperability in hardware,
software, or telecommunications development, testing, and/or
operation. 


      INTEGRATED SERVICES DIGITAL
      NETWORK
------------------------------------------------------ Appendix 0:0.14

An emerging communications system enabling the simultaneous
transmission of data, facsimile, video, and voice over a single
communications link. 


      INTEROPERABILITY
------------------------------------------------------ Appendix 0:0.15

The ability of computers to act upon information received from one
another. 


      KEY
------------------------------------------------------ Appendix 0:0.16

A long string of seemingly random bits used with cryptographic
algorithms to create/verify digital signatures and encrypt/decrypt
messages and conversations.  The keys must be known or guessed to
forge a digital signature or decrypt an encrypted message. 


      KEY-ESCROW SYSTEM
------------------------------------------------------ Appendix 0:0.17

An electronic means of reconstructing a secret key (for secret-key
encryption) or a private key (for public-key encryption).  The
reconstructed key can then be used in a process to decrypt a
communication. 


      KEY MANAGEMENT/EXCHANGE
------------------------------------------------------ Appendix 0:0.18

A method of electronically transmitting, in a secure fashion, a
secret key for use with a secret-key cryptographic system.  Key
management can be used to support communications privacy.  This
method can be accomplished most securely with public-key
cryptographic systems, which do not require the sharing of secret
keys with third parties.  Instead, a secret key is encrypted with a
recipient's public key, and the recipient decrypts the result with
his/her private key to receive the secret key.  A variation of key
management that is based on key exchange does not require encrypting
the secret key. 


      MASS-MARKET SOFTWARE
------------------------------------------------------ Appendix 0:0.19

Software that is (1) generally available to the public by sale,
without restriction, from stock at retail selling points through
over-the-counter, telephone, and mail transactions and (2) designed
for user installation without substantial supplier support. 


      PERSONAL COMMUNICATIONS
      NETWORK
------------------------------------------------------ Appendix 0:0.20

Advanced cellular telephone communications and the interworking of
both wired and wireless networks that will offer new communications
services via very small, portable handsets.  The network will rely on
microcellular technology--many low-power, small-coverage cells--and a
common channel-signaling technology, such as that used in the
telephone system, to provide a wide variety of features in addition
to the basic two-way calling service. 


      PRIVATE KEY
------------------------------------------------------ Appendix 0:0.21

The undisclosed key in a matched key pair--private key and public
key--that each party safeguards for public-key cryptography. 


      PUBLIC KEY
------------------------------------------------------ Appendix 0:0.22

The key in a matched key pair--private key and public key--that may
be published, e.g., posted in a directory, for public-key
cryptography. 


      PUBLIC-KEY CRYPTOGRAPHY
------------------------------------------------------ Appendix 0:0.23

Cryptography using two matched keys (or asymmetric cryptography) in
which a single private key is not shared by a pair of users. 
Instead, users have their own key pairs.  Each key pair consists of a
matched private and public key.  Public-key cryptography can perform
(1) digital signature, (2) secure transmission or exchange of secret
keys, and/or (3) encryption and decryption.  Examples of public-key
cryptography are DSS and RSA. 


      RC2, RC4 (RIVEST CIPHER 2
      AND RIVEST CIPHER 4)
------------------------------------------------------ Appendix 0:0.24

Two secret-key encryption systems that are implemented in mass-market
software.  These systems are proprietary and are marketed by RSA Data
Security, Inc.  RC2 and RC4 can be used with various key lengths,
such as 40 bits or 56 bits. 


      RSA
------------------------------------------------------ Appendix 0:0.25

A public-key algorithm invented by Ronald L.  Rivest, Adi Shamir, and
Leonard M.  Adleman.  RSA can be used to generate digital signatures;
encrypt messages; and provide key management for DES, RC2, RC4, and
other secret-key algorithms.  RSA performs the key-management
process, in part, by encrypting a secret key for an algorithm such as
DES, RC2, or RC4 with the recipient's public key for secure
transmission to the recipient.  This secret key can then be used to
support private communications. 


      SECRET KEY
------------------------------------------------------ Appendix 0:0.26

The key that two parties share and keep secret for secret-key
cryptography.  Given secret-key algorithms of equal strength, the
approximate difficulty of decrypting encrypted messages by brute
force search can be measured by the number of possible keys.  For
example, a key length of 56 bits is over 65,000 times stronger or
more resistant to attack than a key length of 40 bits. 


      SECRET-KEY CRYPTOGRAPHY
------------------------------------------------------ Appendix 0:0.27

Cryptography based on a single key (or symmetric cryptography).  It
uses the same secret key for encryption and decryption.  Messages are
encrypted using a secret key and a secret-key cryptographic
algorithm, such as Skipjack, DES, RC2, and RC4. 


      SKIPJACK
------------------------------------------------------ Appendix 0:0.28

A classified 64-bit block encryption, or secret-key encryption,
algorithm.  The algorithm uses 80-bit keys (compared with 56 for DES)
and has 32 computational rounds or iterations (compared with 16 for
DES).  Skipjack supports all DES modes of operation.  Skipjack
provides high-speed encryption when implemented in a Clipper Chip
(initial name). 


      TRAPDOOR
------------------------------------------------------ Appendix 0:0.29

A secret entry point to a cryptographic algorithm through which the
developer or another entity can bypass security controls and decrypt
messages. 


      WIRETAPPING
------------------------------------------------------ Appendix 0:0.30

The real-time collection of transmitted data, such as dialed digits,
and the sending of that data in real time to a listening device. 
("Real time" is defined as the actual time that something, such as
the communication of information, takes place.)