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Learning from the Annual Report to Congress on Foreign Economic Collection and Industrial Espionage


Key Findings

This annual examination by US government agencies of the threat of foreign economic collection and industrial espionage is conducted in compliance with Congressional mandate. Information obtained during the past year showed no reduction in attempts by foreign government, corporations, and individuals to acquire US proprietary economic information:

• The increasing value of trade secrets in the global and domestic marketplaces and the corresponding spread of technology with dual applications have contributed to a significant increase in both incentives and opportunities for economic espionage.

• Foreign counties continue to target items in all 18 categories of the Department of Defense Militarily Critical Technologies List. The most sought-after critical technology categories in 1999 in rank order were information systems, sensors, lasers, electronics, and aeronautic systems technologies.

• In addition to activities in the United States, foreign collectors also operate against US economic interests in their respective countries and in third countries. These activities conducted outside US territory are more difficult to identify and counter.


Background

There are no agreed upon definitions of economic or industrial espionage. For the purposes of this report NACIC will heed to the US Attorney General’s definition of economic espionage as “the unlawful or clandestine targeting or acquisition of sensitive financial, trade, or economic policy information; proprietary economic information; or critical technologies.” This definition excludes the collection of open and legally available information that constitutes the overwhelming majority of economic collection. Aggressive intelligence collection that is entirely open and legal may harm US industry but is not espionage. This, however, can help a foreign intelligence service identify and fill information gaps, which in some cases may be a precursor to economic espionage.

Industrial espionage is defined as activity conducted by a foreign government or by a foreign company with direct assistance of a foreign government against a private US company for the purpose of obtaining commercial secrets. This definition does not extend to activity of private entities conducted without foreign government involvement, nor does it pertain to lawful efforts to obtain commercially useful information, such as information available on the Internet. Although some legal actions may be a precursor to clandestine collection, they do not constitute industrial espionage. Some countries have a long tradition of ties between government and industry; however, it is often not easy to determine what is foreign government-sponsored espionage, a necessary requirement under the Economic Espionage Act, Title 18 U.S.C., Section 1831.

Another term used in this report is proprietary technology and economic information, the definition of which is information not within the public domain and that which the owner has taken some measures to protect. Generally, such information concerns US business and economic resources, activities, research and development, policies, and critical technologies. Although it may be unclassified, the loss of this information could adversely affect the ability of the United States to compete in the world marketplace and could have a detrimental effect on the US economy, ultimately weakening national security. Commonly referred to as “trade secrets,” this i n f o rmation typically is protected under both state and federal laws.


Overview of the Threat to US National Security

In a world that increasingly measures national power and security in economic as well as military terms, the United States continues to be threatened by the theft of proprietary economic information and critical technologies. The risks to sensitive business information and advanced technologies have dramatically increased in the post–Cold War era as foreign governments— both former adversaries and allies—have shifted their espionage resources away from military and political targets to commerce. The information they seek is not simply technological data but also financial and commercial information that will give their countries a competitive edge in the global economy.

During the past year, foreign governments, corporations, and individuals have continued t o collect economic, technological, and trade secret information through a variety of legal and illegal means. The global spread of technology and the corresponding increase in the value of trade secrets have contributed to a significant increase in both the incentives and opportunities for conducting such activity. Much of what these foreign rivals (and allies) seek is in the public domain. Just as with traditional political-military espionage, however, trends in the collection of open-source information can be important indicators of strategic objectives that might ultimately be met by resorting to collection methods that are not legal. This report notes such trends.


Targeted US Defense Information and Technology

A review of reported suspected targeting incidents against critical technologies categorized in the Department of Defense (DoD) Militarily Critical Technologies List (MCTL), Part I: Weapons Systems Technologies in 1999 reaffirmed that all 18 categories of critical technologies continue to be the subject of foreign interest for military and economic exploitation. The 18 categories are, in order of suspected targeting: information systems; sensors and lasers; electronics; aeronautics; armaments and energetic materials; marine systems; guidance, navigation, and vehicle; signature control; space systems; materials; manufacturing and fabrication; information warfare; nuclear systems technology; power systems; chemical-biological systems; weapons effects and countermeasures; ground systems; and directed and kinetic energy systems. In 1999 as in 1998, foreign governments and commercially sponsored entities continued to target US companies involved in developing weapon components, new technologies, and technical information.

The extent of foreign interest in specific categories of technology varied dramatically from country to country. Contrary to private industry’s belief, the leading-edge technologies are not the only technologies being targeted. Countries with less developed industrial sectors often prefer older “off-the-shelf” hardware and software. They will also seek military technologies that are at least a generation old because such technologies cost less, are easier to procure, and are more suitable for integration into their military structures.

More developed and traditional threat countries seem to seek technical information that will enable them to disable, copy, neutralize, or cause significant change to US military systems. By contrast, other countries often seek command, control, and decisionmaking systems, and information on major ground, airborne, and seaborne weapon systems, sometimes to enhance interoperability.


Collection Methods

Foreign collectors seldom use one method of collection; they combine collection techniques into a concerted effort that includes legal and illegal methods, while becoming more innovative in the new millennium. Specialized training and instruction courses in business intelligence collection methodology are becoming increasingly available. Such courses provide instruction on how to conduct HUMINT operations, including how to develop, create, and maintain dossiers and psychological profiles on potential sources; exploitation and elicitation techniques; debriefing methodologies; competitor targeting, including how to exploit industrial conventions, seminars and meetings; and real-world practical exercises.

In addition to traditional HUMINT recruiting strategies, studies of economic espionage consistently identify two primary techniques as the methods used to acquire economic intelligence:


• Open-Source Collection

- Requesting information through e-mail or letters.

- Exploiting Internet discussion groups.

- Exploiting multinational conferences, business information exchanges, or joint ventures.

- Misleading open-source collection.


• Illegal Collection

- Acquisition of export-controlled technologies.

- Theft of trade secrets, critical technologies, and critical information in host country.

- Agents recruitment, co-optees, and US volunteers.


Open-Source Collection

Requesting Information Through E-Mail or Letters. Request for information is the most often reported method of operation by foreign collectors to obtain trade secrets, critical technologies, and sensitive and classified information. The use of e-mail is the vehicle of choice to solicit information, and the use of e-mail is becoming more common in countries with limited or highly restricted public Internet access. However, use of postcards and letters for information requests continues.

The majority of the suspicious requests reported by industry are indirectly solicited. Requests can be linked to information available on Internet Web sites, in advertisements, in articles in trade journals, and in marketing materials at trade shows and seminars. The requests range from legitimate inquiries to those clearly seeking information that is restricted or sensitive. The inquiries may start as mundane solicitations for price lists, catalogues, published papers, research assistance, or for assistance in finding employment. Requests become suspicious when they originate from embargoed countries, pose questions that would reveal sensitive or classified information, or indicate that the requester is trying to evade export control or security procedures. Persistent requests from the same source also raises suspicion.

Company annual reports, patent data, corporate and government Internet sites, and marketing materials are exploited. Open-source research can inadvertently provide a collector with sensitive or restricted information, or assist in further targeting efforts by identifying industry and government relationships with specific technologies and activities. Many foreign collectors are technically astute and diligent readers of company publications; they attend industry conferences and trade shows; and they exploit professional contacts through memberships in trade and professional associations.

Highly assertive collection efforts are dubbed by some government agencies and private industry as aggressive open-source collection or AGGROS.

Exploiting Internet Discussion Groups. The anonymity of the Internet makes it a perfect medium for collection attempts using e-mail, search engines, and discussion groups. One technique is the exploitation of listserv, an e-mail-based discussion group organized along topics of interest and open to anyone. Subscribers who join a list may send an e-mail message to the list.The message in turn is sent to all members of the group by the listserv, which provides subscribers with e-mail addresses of all other members. This procedure facilitates a discussion involving research advice on specific technical challenges, which are permanently archived and searchable. Such exchanges can pose a serious threat to economic and technological security for two reasons.

First, it is not uncommon for concepts, research, development, testing, and evaluation of a technology to take place in an open or unclassified environment. This is particularly significant when it comes to sensitive but unclassified or dual-use technologies and proprietary information. Second, a foreign national involved in collecting information on future programs or in acquiring research being conducted in another country could have an e-mail address from within the United States.

Exploiting Multinational Conferences, Business Information Exchanges, or Joint Ventures. International technical and academic conferences, both home and abroad, offer an excellent venue for foreign collectors to obtain information and to spot and assess experts in a given field of interest. Many contractors involved with US Government and DoD contracts attend such conferences on behalf of their companies’ commercial interests and thus can become targets of foreign collection. There have been many instances when US participants at international conferences have been contacted at a later date and asked to provide information on a given technology or proprietary data. Probing for information outside the scope of the conference is also a common activity. Often these approaches play on cultural commonalties as a reason to cooperate.

Misleading Open-Source Collection. Practitioners of economic and industrial espionage may employ legal, but misleading steps to hide a collector’s true interest, affiliation, or location. For example, a collector may use public access Internet connections found at public libraries and educational institutions for browsing Web sites. This type of activity can protect the collector’s identity and provide a means to “lose” the requester’s individual inquiry amongst the multitude of requests generated from the public and educational computers.

A public library presents a disarming persona, and the credibility of an educational institution inadvertently adds a measure of legitimacy to a request. Such misleading measures reduce the chance of a request raising suspicions and being reported to security personnel, while increasing the likelihood that a request will receive a response. Other misleading techniques include routing e-mail through one or more countries to hide the true point of origin and using contacts established through membership in professional organizations and at conference to unwittingly broker foreign visits or obtain the required information.


Illegal Collection

Acquisition of Export-Controlled Technologies. The unlawful acquisition of export-controlled technologies by foreign collectors is of growing concern. Methods of operation employed to circumvent the export-control process include: the use front companies within the United States and abroad, the illegal transportation of goods to an undisclosed end user by utilizing third country cut-outs or false end-user certificates, and the purchase of an exportable version of a product and then having it modified during the manufacturing process to meet the specifications of the export-controlled version. In 1999, for example, a US company reported that it received a telephone call from an individual in New York who wanted to purchase thousands of dollars worth of computer equipment, under a United Nations program, for shipment to Jordan. Several minutes into the conversation, the perspective buyer admitted that the computers were to be transshipped from Jordan to Iraq, an embargoed country.

Theft of Trade Secrets, Critical Technologies, and Critical Information. The theft of trade secrets, critical technologies, and critical information knows no boundaries. As recent cases indicate—from the insider threat, to laptop computer thefts, to hotel room intrusions abroad—foreign entities employ a wide range of redundant and complementary methods of operation. The perpetrators of economic and industrial espionage include traditional foreign intelligence services, state-sponsored educational and scientific institutions, and independent, nonstate-sponsored companies and individuals. The increased identification of nonstate sanctioned industrial espionage, however, should not be viewed as the demise of traditional foreign intelligence service clandestine espionage. US businessmen traveling abroad routinely report incidents of suspected targeting. Their briefcases and laptop computer have been tampered with, or outright stolen; they have reported excessive elicitation by foreign officials at border crossing points, and their hotel rooms have been searched.

Agent Recruitment, Co-optees, and US Volunteers. US persons with access to trade secrets, critical technologies, and classified information are potential recruits to aid in foreign collection operations. Some become unwitting facilitators by brokering foreign visits, the process of using a third party to arrange visits that circumvent official visitation procedures. In addition, foreign collectors have enticed US experts to present papers overseas as a means to exploit their knowledge of export-controlled information, or to facilitate their recruitment as agents or co-optees. Foreign intelligence services and other government-sponsored entities continue to employ traditional clandestine espionage methods to obtain US trade secrets, critical technologies, and critical information. These methods include agent recruitment, US volunteers, and co-optees.


Conclusion

As long as the United States remains the world’s leading industrial power and US industry continues to lead the world in technology development, the United States will remain a prime target of foreign economic collection and industrial espionage. Indeed, economic collection against the United States, including the theft of trade secrets and competitive business information is likely to intensify in the new millennium as the race to control scarce resources and global markets intensifies. Not only have traditional allies and adversaries increased their economic collection activities against the United States, but as developing countries emerge as potential new economic competitors, they can be expected to increase their collection efforts against US targets, as well. Traditional allies as well as adversaries have increased and will continue to pursue economic collection activities against the United States.

Private industry and the counterintelligence community will continue to face the challenge of distinguishing legitimate competitive collection activities from those whose ultimate aims are the illegal transfer of trade secrets and critical technologies. It is the scrutiny of open-source collection that frequently reveals other illegal activities or intentions. Among economic collectors, malicious intentions may be more difficult to detect, but the increasing competition for limited global resources suggests that the problem will only increase.

Additional factors make the true extent of economic espionage difficult to measure. Successful espionage seldom comes to light, and even when economic espionage is discovered, companies are often reluctant to report to authorities that they have been the victim of such activity because of the embarrassing publicity and legal complications that may follow. The findings of a recent survey sponsored by PricewaterhouseCoopers indicate that Fortune 1,000 companies sustained losses in the billions in 1999 from the theft of their proprietary information. Some of the other key findings of this survey indicate:

• The greatest known losses to US companies involve information concerning the manufacturing processes and research and development.

• The global Internet and proliferation of information systems have significantly increased the risks to corporate proprietary information.

• On-site contract employees and original equipment manufacturers are now perceived as the greatest threat to proprietary information.

• The majority of companies have not effectively met the challenge of providing a framework for safeguarding proprietary information.

• Most companies lack a mechanism and process by which to assess the value of proprietary information.

The leading collectors of technical intelligence are most interested in the following information: classified US defense information—information systems, sensors and lasers, electronics, and aeronautic systems technologies—trade information, and commercial technologies. Collection efforts, either open-source or illegal collection are gradually increasing.