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| Author's Note | p. vii |
| Prologue | p. xi |
| The Intelligencing of Corporate America | p. 1 |
| Motorola: First in Business Collection | p. 23 |
| The Mole--Victor Lee | p. 47 |
| The Kite | p. 73 |
| Trade Show Cowboy | p. 85 |
| Spy Trap--P. Y. Yang | p. 99 |
| The Librarian | p. 109 |
| Double-Cross | p. 127 |
| Chief Hacking Officer | p. 151 |
| Afterword | p. 177 |
| Index | p. 181 |
| Table of Contents provided by Syndetics. All Rights Reserved. |
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Chapter One
The Intelligencing of
Corporate America
When the FBI learned Edward O'Malley had been invited to a conference in France to give a talk on the newly passed Economic Espionage Act of 1996, Bureau brass asked him to carry a message. Tell the French government and spy community the rules have changed, they said. Tell them the Bureau takes the act seriously and plans to enforce it. Tell them the United States would not look the other way anymore if a foreign company or government tried to steal U.S. corporate secrets.
O'Malley was an apt choice to act as emissary. Not only was he a former FBI chief of counterintelligence, he was famous for helping IBM nail a Japanese competitor in a complex sting operation in the early 1980s. This resulted in two employees of Hitachi pleading guilty to conspiring to transport stolen documents and components for IBM's then-snazziest generation of computers. "Meetings between Hitachi officials and our undercover IBM agent showed Hitachi officials saying, `Yes, we want to beat IBM to market,' and caught the Hitachi officials paying $650,000 for the information," O'Malley says. "It was then easy for the feds to come in and arrest them."
After skimming the tarmac at Charles de Gaulle International Airport the former G-man gave his briefing, noting "a certain amount of discomfort," he says. "I told the audience the act was not aimed at CI [competitive intelligence] professionals. It was aimed at those who steal corporate trade secrets. Collecting can be done legitimately, but stealing is not okay."
There was some Franco-style grumbling, and someone who identified himself as being from DGSE, France's version of the CIA, asked a few questions. O'Malley characterizes the tone as "hostile." Afterward O'Malley was invited to give a personal briefing to a retired French general, accompanied by a colonel. He briefed them on the new law, the same presentation he had given earlier.
When he finished, the general asked for a copy of the act. "Now let me give you a message to take back with you," he told O'Malley with the imperiousness of a nobleman addressing an errand boy. "If you Americans enforce this act, we French will retaliate against American corporations who are stealing French corporate secrets."
As an intelligence professional O'Malley knew that France, the nation that put the "gall" in Gallic, had no intention of curtailing its corporate espionage activities. Three former heads of DGSE openly admitted that France engaged in spying on American business and that computer hacking is illegal only if the victim is located on French soil. But France hasn't been the only ally sifting through American corporate R&D, it has just been the most open about it.
A 1997 report to Congress compiled by the CIA, FBI, and military intelligence grabbers concluded that foreign government-backed corporate espionage "poses a direct threat to the health and competitiveness of the U.S. economy." Repeat offenders: China, France, Japan, the United Kingdom, Mexico and Russia, South Korea and Taiwan. Although it is not on the list, you can add Israel, too. "We have an agreement with Israel not to spy, though they spy on us, so it's b.s.," says Guy Dubois, former chief of the CIA's operations group Committee on Imagery Requirements and Exploitation, which specializes in industrial counter-espionage. "With the possible exception of the British, American intelligence has no friends."
Now more than ever corporations rely on information about competitors--their products, strategies, marketing, pricing, and corporate leadership. It is often the difference between a fat, happy hundred-million-dollar company and bankruptcy. Of course, if you are the victim, it can be the difference between suffering bankruptcy and being that fat, happy hundred-million-dollar company.
The U.S. Chamber of Commerce believes espionage has led to losses to corporate shareholders of about $25 billion a year in intellectual property. But companies are reluctant to report infobreaches, afraid of public humiliation or that shareholders will hold them accountable and mount multimillion-dollar class-action suits. They are also leery of being forced to divulge even more information about their tightly held secrets in the discovery phase of a trial. So the usual victim strategy is to do nothing except try to correct the security flaws. Normally corporate espionage is written off as a cost of doing business. This has made it easy for America's allies and enemies alike.
Israeli and Chinese spies are notorious for setting up front companies to purchase technology they are barred from obtaining on the up and up. Israel, for example, was not able to purchase high-speed computers on the open market because of the belief they could be diverted to the plucky desert nation's nuclear arsenal, so it found alternative methods. One blown operation: In 1987 a group of Israelis went to negotiate a joint venture with Lockheed Saunders, an electronics firm in New Jersey. One of the Israelis was in the process of leaving the plant when he had a problem with his briefcase. The lock flipped open to reveal a hidden camera and stash of film. Lockheed didn't bother to press charges. Instead, following the usual corporate protocol, guards confiscated the camera and film and kicked the group out.
Similar spy strategies aren't all Israel and China have in common. A lot of Israeli military technology has ended up in China. Israel's high-tech industry assisted the Chinese in developing infrared and electri-optical sights for its tanks and helped them retrofit MIG-21s (the Chinese call them F-7s) with an upgraded electronics package. Israel's tech sector has traditionally maintained close ties with the Israeli Defense Force, which is always looking for ways to raise cash. That is why it sometimes acts as middleman for Israeli industry, as it did with China's military, and the reason you find Israeli commandos training military groups in Africa. It is also how American R&D ends up in Israeli high-tech companies, who are eager to continue their miracle in the desert in cyberspace. It is a main reason there are more Israeli companies listed on the NASDAQ exchange than all of Europe combined: this cycle of information.
As far as spying on allies goes, however, Israel doesn't hold a candle to France, which has no peers. Competivite intelligence professionals--called CI in spook speak--advise clients to avoid French airlines because it's generally accepted that conversations are recorded and flight attendants are trained in information elicitation techniques. French not-so-secret agents are famous for conducting what are called "black bag jobs," breaking into the Paris hotel rooms of foreign executives and copying documents.
But the French aren't just renowned for spying on visitors to their country. A different kind of black bag job took place on American soil in 1991, when two men were spotted heaving trash bags into the back of a van in front of the home of a Texas Instruments executive. The van's license number was subsequently traced to the French consulate in Houston. What was the French government's response? The consul general calmly explained he and an aide had been out collecting grass clippings--grass clippings. And in January 2000, French Intelligence was caught eavesdropping on executives from British Aerospace, British Petroleum, and British Airways who dared to talk business over their cell phones while in their own country.
France has also made use of stolen American corporate R&D: After Motorola inked a deal in 1979 for the manufacture of a sixteen-bit advanced microprocessor by, among others, Societe pour l'Erude & la Fabrication de Circuits Integres Speciaux, a company owned jointly by Thomson CSF, a French military and electronics behemoth, and Commissariat a l'Energie Atomique, the French Atomic Energy Commission, Thomson would transform itself into a major player in semiconductors. A number of media outlets have reported that DGSE recruited former European employees of IBM, Texas Instruments, and other electronics firms for debriefing, then submitted their information to Compagnie des Machines Bull, a computer firm largely owned by the French government.
Although the French have been the most aggressive, Japan has turned business intelligence into a fine art: "The Japanese are the professionals," says former CIA agent Jan Herring, founder of the Society of Competitive Intelligence Professionals (SCIP), a trade organization. "They're the ones who started it. They do it almost second nature. It's just part of their companies." Mitsui, the giant Japanese trading company, has as its corporate motto, "Information is the lifeblood of the company," and it means it. Even back in the days before e-mail transformed corporate communication, the firm's internal network conveyed some 80,000 messages a day, many of them containing competitor intelligence between 200 offices worldwide via satellite. Companies like Mitsui and Mitsubishi also reap assistance from the Japanese government. Both the Ministry of International Trade and Industry (MITI) and Japan External Trade Organization glean prodigious amounts of commercial information, translate and analyze it, then share it with whole industries. MITI even started a school for corporate spying in 1962, called the Institute for Industrial Protection.
One way the Japanese have funneled technology from the United States is by placing key people in organizations like the National Institutes of Health and National Bureau of Standards and assigning them the important job of deciding the standards that allow machines to talk to one another. "If you look at Japanese R&D, it is focused on applied research," Dubois says. "But a large share of American research is blue-sky, which requires a lot of cooperation between corporations, education, and government. The Japanese tried to get broadened access to it and used it as the basis to develop commercial products."
The U.S. Commerce Department found that foreign-owned companies often cluster in high-tech corridors near universities and corporate research facilities, where new ideas and technologies percolate. The 1995 Commerce Department report estimated that foreign corporations spent more than $14.6 billion on R&D at 645 foreign-owned facilities in the United States, including 75 in New Jersey, of all places. Why Jersey? It is a center for the nation's pharmaceutical industry, where a quarter of all foreign spending on R&D in the United States takes place. Silicon Valley and North Carolina's Research Triangle also had high concentrations of foreign companies, who said their top two reasons for choosing these particular locations was to "acquire technology" and "keep abreast of technological development." The response "Engage in basic research" ended up near the bottom of the list.
If this has been the behavior of America's allies, how have its enemies treated its businesses? Like one giant R&D laboratory.
In the early 1980s a reliable CIA operative high up in the KGB food chain passed Dubois stunning information: a list of 100 top technology companies that Soviet Intelligence had been targeting in a massive technology transfer program involving the whole Warsaw Pact. To Dubois it read like a KGB wish list: General Electric, Boeing, Lockheed, Hewlett-Packard, GTE, Sperry, Honeywell, IBM, Westinghouse, Digital Equipment Corp.
The Soviet's objective was to funnel technology from the West so it could achieve military-technical parity. The industries the KGB targeted were at the heart of America's military-industrial complex: electronics; armor and electro-optics; aviation; missiles and space; projectiles and explosives; communications and chemicals; radars and computers. The CIA believed this corporate spy strategy was instrumental in the Soviets squeezing America's lead in certain key tech industries like microelectronics from twelve years to six. It also helped them create carbon copies of hot American military technology. The Soviet AWACS and space shuttles were almost exact duplicates of America's original models. The Soviet AN-72, an exact copy of the prototype for Boeing's short takeoff and landing technology, was deployed in the Russian arsenal just sixteen months after it had been invented. And where did the original missile guidance system technology used in the Russian fighter that shot down Korean Air Line's Flight 007 in 1983 come from? The United States.
The material was so extensive and so inside, did Dubois ever fear he was being fed disinformation by his KGB plant? "No, not with this source," he says. "I had 100 percent confidence the information was good." Dubois went to work on a CIA white paper. In it, he characterized the Soviet technological transfer program as "massive and global," which had successfully closed the technology gap with the West. William Casey, then head of the CIA, liked it so much he asked Dubois to circulate the paper within the agency for comment. All the internal CIA reviews were positive, except one. Duane "Dewey" Clarridge, CIA chief of European operations, called Dubois to tell him the report was "a crashing bore." Clarridge suggested spiking it with some forged documents that implicated the Soviets in going after four or five companies in the UK, to influence the British government.
Clarridge, who single-handedly mined harbors in Nicaragua in the covert war against the Sandinistas and would eventually be forced to testify during Iran/contra, wanted more sex and violence in the report. Dubois refused. Their disagreement escalated to the point that both were ordered into Bill Casey's office, with Casey, in a forty-five-minute meeting, eventually siding with Dubois. Even without Clarridge's sexing it up, Soviet Acquisition of Western Technology, published in 1982, became a global best-seller and was translated into five languages.
According to Dubois, one major diversion program initiated by the Soviets involved microelectronic technology. Tapping unscrupulous Western traders eager to bid for the KGB's usual 500 percent markups, the Soviets were able to set up some 400 dummy corporations in Europe alone, with a number of others in the United States. They provided falsified licenses and deceptive equipment descriptions and lied about who would ultimately receive the technology. This way the Soviets were able to acquire enough equipment and technology to architect almost its entire microelectronic industry, from material preparation to design and fabrication to final testing of chips to the creation of whole lines of computers.
In 1982 U.S. Customs officials came across a cache of laser components and sophisticated electronics in a divorcee's garage in Redwood City, California, a suburb of San Francisco. They charged Millie McKee with attempting to illegally export her glitzy high-tech stash to Switzerland, where authorities believed it would be rerouted to the Soviet Union. Her penalty: six months in work release for providing a false statement, which she characterized as "technical violations," like driving over the speed limit. Three years later Italian national Marino Pradetto, who operated with a West German electronics firm, was arrested at a trade show in California and charged with illegal diversion of the VAX II/780 mainframe computer to Czechoslovakia via a circuitous shipping route: San Jose, Haiti, and Switzerland.
As the final days of the Cold War dragged to an end, the FBI estimated a third of Russian diplomats were involved in espionage. One early 1980s Soviet spy hub was situated in a brick building with a whitewashed roof and a sweeping view of San Francisco Bay. Not only was the setting beautiful, it was perfect for receiving unobstructed microwave signals. The building housed some forty Soviet officials, a lot for a city this size, but they were not sitting on the dock of San Francisco Bay to boost Soviet tourism. The antennae on the roof were hooked into electronic wizardry that could grab whole conversations out of the air when it recognized certain words or phrases. But the Soviet's tried and true method was to turn a corporate insider into a mole, and it didn't limit its spying on the United States. Between 1967 and 1984 the KGB received data on the "Tornado" aircraft manufactured by the European Panavia consortium from West German citizen Manfred Rotsch, head of the planning department of the aviation firm Messerschmitt-Bolkow-Blohm. Deiter Gerhardt, a South African naval officer who had served at the embassy in London, passed another Soviet spy division, the GRU, information on a number of antiaircraft missiles.
Not all of these operations were the product of KGB guile. Eastern European spy services in Poland and the former Czechoslovakia and East Germany were often more successful than their Soviet counterparts. Poland's intelligence service turned two spy stunners. The CIA believes Poland saved the Soviets several tens of millions of rubles in research efforts and advanced the state of radar technology between 1978 and 1981 when it made a traitor out of William Bell, an American radar specialist working for Hughes Aircraft Company. Bell's expertise was in advanced and experimental U.S. radar systems and air-to-air and surface-to-air missiles. Poland also flipped James Harper, an electronics engineer whose wife had access to Ballistic Missile Defense Advanced Technology Center contracts at Systems Control Inc., California. Over a ten-year period starting in 1971, Harper turned over dozens of documents relating to potential U.S. ballistic missile programs and ICBM basing modes.
The program was so successful the Soviet Union abandoned the idea of producing its own computers. For its Kremlin mainframe RIAD computer the Russians cloned IBM's 360 and 370 mainframe series, and the Apple II had its nameplate switched to the Soviet AGAT personal computer. From the late 1970s to the end of the Cold War, the Soviets siphoned off perhaps as many as 30,000 pieces of high-tech equipment and 400,000 technical documents, which, according to then-assistant secretary of defense Richard Perle, helped it to slice America's lead in technology from ten years to as little as three. What the Soviet Union couldn't steal, it bought. In 1979 and 1981, it received two dry docks from Sweden and Japan, agreeing to use them only for commercial shipping. Shortly after they were converted to military use in aircraft carriers.
Stealing industrial secrets is not new, of course. In 1811 Francis Cabot Lowell traveled to England and ripped off the plans for the Cartwright loom, which he memorized while touring a factory. With it, Lowell, who was rewarded for his coup with the naming of a Massachusetts town after him, brought home the blueprints for America's industrial revolution. The Soviets got started later, in the 1930s, when Communist agents swiped Eastman Kodak's process for developing color pictures. By the 1960s, as the United States began to alter the strategic military balance with more accurate missiles, Soviet information collecting was redirected to high tech. Former U.S. Navy admiral Bobby Ray Inman, the former deputy director of the CIA, believed the Kremlin waited until the bugs were worked out of a particular weapon before going after it. Toward the end, though, they became more interested in uncovering the theory behind a particular technology instead of merely copying it.
After Dubois published his white paper he went on a road show, offering presentations to some of the targeted companies. "I remember being at Boeing in Seattle, where I put up a slide with six technologies the Soviets wanted," Dubois says. "The Soviets had captured specifications on semiconductors, how to slice silicon wafers, and knew exactly how the components worked. A guy in the audience stands up and says, `It's not possible. Those technologies come from my department.' He just couldn't believe it. I told Boeing the Soviets clearly had some gaps to fill, which is why I was addressing them."
These presentations, however, shouldn't be confused with the CIA passing information to an American company. That is against the agency's stated mission, Dubois says. "We have given American companies briefings on industrial developments and exchanged information, like when a company has been targeted by a foreign entity. But has the CIA ever walked into Boeing and said, `Airbus just got a $40 million subsidy from the government under the table?' No."
That may have been true in Dubois's day--he left the CIA in 1998 after serving twenty-six years. Nowadays, as more government agents move to the private sector while maintaining close contact with their former colleagues, the line between America's government and its corporations is beginning to blur, especially at the NSA, which has been maintaining secret corporate connections.
On January 1, 1999, strategists from Eastman Kodak, Coca-Cola, GTE, Mitre Corporation, Mobile Oil, and Boeing, along with agents from the CIA, FBI, DIA, NSA, and DoD were all present during an NSA briefing. Entitled "The Generic Intelligence Training Initiative," the presentation featured the National Security Agency's Nomogenisis Project, an Internet-based training module. Nomogenisis strived to teach intelligence analysts how to collect and assemble random intelligence data from many different sources, share it amongst themselves, and assemble it into a mosaic-like picture. It also improved the analysts' ability to correctly interpret the subtext of the intelligence they analyzed in order to understand a target's true intentions. Reading the subtext correctly allows an analyst to predict the target's next move in order to develop more accurate intelligence forecasts.
(Continues...)
Excerpted from Spooked by Adam L. Penenberg Marc Barry. Copyright © 2000 by Adam L. Penenberg and Marc Barry. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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