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COMMENTARY No. 46

a CANADIAN SECURITY INTELLIGENCE SERVICE publication


ECONOMIC ESPIONAGE (II)

July 1994

Unclassified

Editors Note:

In his second and final paper in a series, the author (Mr. Samuel Porteous, a Strategic Analyst in the Analysis and Production Branch of CSIS) moves the discussion of economic espionage forward from his earlier Commentary #32, and provides an overview and analysis of the current state of the debate on economic espionage.


Disclaimer: Publication of an article in the COMMENTARY series does not imply CSIS authentication of the information nor CSIS endorsement of the author's views.


Introduction

Despite the high profile that the topic of economic espionage has enjoyed over the past few years, little progress appears to have been made in the actual analysis of the issue. Most treatments of the subject run through the same questions and arguments in much the same manner. What is needed is a critical analysis of these arguments and an examination of newer issues not yet introduced into the discussion.


Definitions

Surprisingly, the examination of economic espionage continues to be plagued by a lack of coherent terminology. Many commentators speak of economic espionage as if it were economic intelligence or industrial espionage, and economic security as if it were something a country could obtain by locking its doors. Much of the confusion can be avoided by defining some key terms.

Economic security is the maintenance of those conditions necessary to encourage sustained, long-term relative improvements in labour and capital productivity and thus a high and rising standard of living for a nation's citizens, including the maintenance of a fair, secure and dynamic business environment conducive to innovation, domestic and foreign investment and sustainable economic growth.

This is a broad goal sought by all governments. Clearly, the intelligence community's role in achieving this goal is secondary to that of the private sector and even government actors responsible for commercial/industrial policy. Yet the secondary nature of the intelligence community's role does not render it unimportant. It is in assisting in the "maintenance of a fair, secure and dynamic business environment" that the intelligence community's contribution to economic security is felt.

Economic intelligence is policy or commercially relevant economic information, including technological data, financial, proprietary commercial and government information, the acquisition of which by foreign interests could, either directly or indirectly, assist the relative productivity or competitive position of the economy of the collecting organization's country.

While economic security is a major governmental goal, economic intelligence is an important element in the attainment of that goal. It should also be acknowledged that the vast majority of economic intelligence gathered by businesses or governments is derived legally from open sources, involving no clandestine, coercive or deceptive methods. The collection and dissemination of information in this manner, either through visiting students, scientists or business people, is rightly seen as a beneficial element of a free and open society, crucial to technological and economic development. In a minority of cases, however, economic intelligence is obtained by more intrusive techniques with less than desirable results. This narrows the discussion to the subset of economic intelligence-gathering of most concern to the intelligence community: economic espionage.

Economic espionage is the use of, or facilitation of, illegal, clandestine, coercive or deceptive means by a foreign government or its surrogates to acquire economic intelligence. (The acquisition of an actual piece of technology is assumed to be covered by this definition, in that actual objects can be considered physical embodiments of technological information and just another means, not unlike the printed word, to transmit information.) Beyond the acquisition of information or technology by a government or its surrogates, other activities engaged in by different actors are relevant to this analysis.

Industrial espionage is the use of, or facilitation of, illegal, clandestine, coercive or deceptive means by a private sector entity or its surrogates to acquire economic intelligence.

Until quite recently these terms would have provided a sufficient basis to discuss the interaction of intelligence and commercial interests. Recent statements by the Director of the CIA, however, have indicated that the American intelligence community's interest in questionable business practices is not confined to the narrow matter of economic espionage. An American policy tasking the CIA to deal with some other "sharp practices" by foreign firms inevitably forces non-American intelligence services to confront their approach to these same issues.

Sharp practices are the use of illegal, clandestine, coercive or deceptive means by a foreign government or entity intended to benefit the economic interests of the perpetrator.

This broad category includes not only economic espionage but other questionable practices such as bribery and sabotage. These latter techniques should not be considered economic espionage, since they do not necessarily require a link to government or directly involve the acquisition of information or technology belonging to a foreign state or person—corporate or otherwise. For example, in many cases the bribery which concerns the Americans simply involves a non-American bribing another non-American outside the United States. No American economic intelligence is obtained. Any attempt to include activities of this nature as part of the definition of economic espionage rather than the broad category of sharp practices only adds to the confusion.


Economic espionage: perception & prevalence

Everyone's a victim

Reading North American coverage of economic espionage, one could be forgiven for thinking the New World was besieged by the corrupt practices of the Old World and the mysterious East. North American economic interests are typically presented as the victim, never the beneficiary, of these practices. Reports even include earnest discussions of "cultural and ethical qualities" unique to North American business that render their economies more vulnerable to economic espionage than those of their counterparts in Europe or Asia.

Not surprisingly, this view is not widely shared outside North America.

What is of particular interest in examining the foreign analysis of this issue is the blasé manner with which accusations against other countries, often allies, are made. This, despite most countries' repeated and vocal denials that they engage in the activity.

The debate over the impact of economic espionage

Commentary #32 and other analyses generally dealt with the issue of the significance of economic espionage through extrapolation from known occurrences; i.e., claims of hundreds of millions of dollars lost due to the theft of new product plans, or 10 years' know-how being stolen overnight through a breach in computer security. Many organizations, both government and private, have attempted to gauge the impact of this activity through surveys, with varying degrees of success and credibility. At this stage it seems clear that policy-makers are unlikely to obtain abundant hard data regarding the impact and significance of economic espionage. For reasons discussed in the previous Commentary, economic espionage, similar to computer and financial fraud, is simply not an activity conducive to the production of this type of information.

An analogy can, however, be drawn between the impact of economic espionage on a country's economic interests and the impact of more familiar espionage on its military security or political interests. In this way, economic espionage could be said to be as important to a country's economic interests as more familiar types of espionage are to its more traditional political and security interests.

Clearly, espionage plays a minor role in the great volume of international relations conducted between nations. For the most part the impacts of espionage-related activities on a country's political or security interests are almost never acknowledged and rarely disclosed. This, however, is not the same as saying they are either exceptionally rare or insignificant. Recent reportage concerning alleged assistance provided by the American intelligence community to Boris Yeltsin on orders from then President George Bush during the 1991 Soviet coup dramatically demonstrates the potential impact and significance of some espionage activity. In this instance the alleged assistance was reportedly a crucial element of Yeltsin's ascension to power. In much the same manner, economic espionage, while not influencing the vast bulk of economic exchanges, has the potential to have dramatic impacts in some cases, such as influencing the awarding of a major contract.

Intellectual property infringement

The difficulty in estimating the financial impact of economic espionage has also encouraged an unfortunate tendency among some media and government officials. Unable to produce more concrete figures, they resort to equating costs due to economic espionage with costs relating to all incidents of intellectual property (IP) infringement. Articles on economic espionage cite global estimates of costs due to IP infringement as evidence of the severity of the economic espionage problem. This is not a good measure. IP infringement costs, such as those due to copyright or trademark infringement, can easily be projected into the billions, but in the vast majority of cases, these infringements have nothing to do with economic espionage. The use of these estimates, highly subjective to begin with, needs to be examined closely. Economic espionage is not trademark or copyright infringement engaged in by private sector entities—activities from which the bulk of these costs are derived. Private sector copyright or trademark infringement would, however, qualify as part of the previously mentioned "sharp practices" category. If these figures are to be used in future in this manner, some effort should be made to identify what components of these estimates actually relate to what has been defined as economic espionage.

Is it efficient?

Another argument often presented in North American analysis is that intelligence obtained through economic espionage would be "tactically useless" for a number of reasons. Typically, the barriers to potential efficiency are related to an intelligence agency's lack of knowledge of the subject area and to problems associated with the dissemination of intelligence once acquired. These arguments tend to come from individuals who at the same time argue for or accept the need for government to defend against economic espionage engaged in by other governments. It is difficult to support these points simultaneously: if economic espionage is "tactically useless", it is similarly useless to foreign governments that practice it, and thus need not be defended against.

Knowledge

As noted, lack of direct knowledge of a certain business or its technology has been cited as a significant obstacle to intelligence services engaging in economic espionage. Yet during the Cold War, intelligence services spent significant amounts of time and energy, with some success, trying to obtain intelligence on various complex military technologies of which the case officers would not have had a profound knowledge. If intelligence services were trusted to obtain such information, a shift of focus to complex commercial technologies and intelligence would not be unthinkable. The same techniques used to obtain military secrets could be turned to complex commercial technologies or strategies without too much difficulty.

Dissemination

Although dissemination presents difficulties, the argument can be overplayed. In fact, some would argue the intelligence dissemination issue is no different than distribution questions involving other government benefits, such as subsidies, that are rarely distributed in a egalitarian manner. In most cases the dissemination issue would be dealt with prior to tasking. An intelligence service would not likely pursue a piece of information or technology absent any idea of what to do with it once obtained.

Distribution problems relating to competition between firms can be further mitigated to the extent that government-led consortia are used as the conduit through which government supplies intelligence gained through economic espionage. Government-led consortia, whereby firms receive government support while working together, are common in Europe and Asia and appear to be gaining popularity in North America. For example, the three major American auto manufacturers compete ferociously for market share, but the Clinton administration has brought the "Big Three" together in a government-sponsored consortium called "U.S. Car". Within the consortium all three will have access to previously top secret government technology and will pool their resources to develop pre-commercial technology for the car of the future. Furthermore, the existence of numerous high-technology research consortia that limit membership according to company nationality indicates that another often raised issue—the difficulty of determining the nationality of corporations—may not be the problem some think it is.

On the other hand, the existence of means to reduce dissemination difficulties will not erase them. Problems will inevitably arise. Those countries considering engaging in or expanding their practice of economic espionage would be well-advised to consider the alleged experience of France in this area. It has recently been suggested that the embarrassing release of information indicating French intelligence service targeting of American companies, which triggered an American boycott of the Paris Airshow, was the work of disgruntled French firms. The companies responsible for releasing the material to the press apparently were unhappy with what they saw as the French intelligence service's (DGSE's) tendency to favour some French firms over others in distributing material obtained through economic espionage. The incident reportedly cooled relations between the DGSE and certain elements of French industry.

The shift toward Asia

While North American coverage has promulgated the view of its companies as victims of economic espionage, the perception of primary practioners is beginning to change. Early on, the French and the Russians were presented in most North American analyses as the primary practioners of economic espionage. Now, in a realignment perhaps more attuned to today's geopolitical realities, this dubious status is being transferred to the Japanese and emerging Asian economies. In a recent article in the Far Eastern Economic Review, FBI officials stated 57 countries are running operations to obtain information out of Silicon Valley. These same officials were quoted as labelling Asian governments and multinationals, particularly Japan, Taiwan and South Korea, as the chief culprits. Michael J. Yamaguchi, identified as the American government's top prosecutor in San Francisco, stated that "the biggest fear we have is the Pacific Rim countries". Recent statements on perceived origins of incidents of both industrial and economic espionage released by the Canadian Security Intelligence Service mirror these concerns.

This shift in focus may also encourage a reassessment of the link to foreign governments typically required by domestic intelligence services before investigating economic espionage. Corporate links with government, always difficult to discern in economic espionage cases, become even more so when Western intelligence services find themselves faced with Asian firms. In many cases, Asian firms' links to government, although substantial, are far more fluid than the relationships between some of Europe's state-owned corporations and their governments. The prospect of huge Asian multinational corporations, with their definite but elusive relationship with government, engaging in industrial or economic espionage, may open new debates on when and how intelligence services should intervene in these cases. For while European states move towards privatization (albeit retaining a "golden share") in many cases there is little sign of a lessening of links between business and government in the high growth communitarian societies of Asia. The imminent emergence of powerful Chinese multinationals out of the so-called "socialist market economy" of China will only increase this trend.

Legal issues

While economic espionage is considered a threat to national security, it, like other forms of espionage, does not necessarily involve an illegal act. The legal grey zone within which economic espionage is practised explains to a certain extent why countering this activity is the province of intelligence services rather than enforcement agencies such as the police.

Furthermore, the current increased focus on industrial and economic espionage has forced many industrialized countries to recognize that their current legal régimes are inadequate to deal with several aspects of the problem. For example, it came as a shock to many in Britain to learn that a large firm which admitted carrying out a three-year operation including surveillance of its rival's directors, trash and briefcase searches and actually planting a mole at their competitor's head offices had, under current British law, done nothing illegal. Partially in response to this case and others, Michael Howard, the Home Secretary, announced in April 1994 the introduction of legislation to crack down on private surveillance and industrial/economic espionage. The proposed legislation would make it an offence to gain information through deception. This will put tremendous pressure on practioners of economic and industrial espionage who rely heavily on the popular "pretext call" technique whereby the caller elicits information by pretending to be someone else.

The problems posed by the uncertain legal status of most espionage techniques has also been recognized by David L. Boren, former Chairman of America's Senate Select Committee on Intelligence. Boren has noted that "current laws need to be reviewed since most penalties apply only to the theft of government military secrets".

Reacting to a similar concern regarding gaps in its own legal structure, the French government recently passed a new criminal law. Effective 1 March 1994, it contains several articles whose enactment was reportedly encouraged by the French intelligence community. The law expands the definition of spying from just military and political matters to include industrial and commercial matters. Significantly, the description of what the espionage law sought to protect was changed from "national defence interests" to "fundamental interests of the nation". The coverage of the law was also expanded from just "foreign powers and their agents" to include organizations such as the Mafia and foreign businesses.

This is a clear statement that the French intelligence community has a strong mandate to counter foreign corporations that threaten national security, broadly defined. This will be the case regardless of their link to a foreign government. The new law reportedly makes even some open-source information-collection illegal. Consequently, it has been criticized by some as uncomfortably similar to legislation such as China's state secret law, which leaves authorities with arbitrary powers to interpret what is or is not a state secret.

Other sharp practices

As noted earlier, economic espionage can be considered a subset of a broader category of what have been termed sharp practices. Recently, there has been some discussion, particularly in the USA, of the intelligence community's role in dealing with sharp practices other than economic espionage.

The United States is the only member of the Organization for Economic Cooperation and Development (OECD) to pass legislation—the Foreign Corrupt Practices Act—criminalizing the payment of a bribe to a foreign official. The legislation arose out of the American bribery scandals of the 1970s. These restraints, which are extraterritorial in scope, have proven a constant irritant to Americans doing business abroad. According to Secretary of State Warren Christopher, the legislation costs American companies "hundreds of millions of dollars in contracts every year". Not surprisingly, the USA is particularly upset about the practice engaged in by some countries of not only turning a blind eye to bribery by their own nationals but recognizing these same bribes as tax-deductible business expenses. The Clinton administration has not been encouraged by progress in lobbying fellow OECD members to pass domestic legislation mirroring America's, or to agree to an enforceable international code condemning the practice. In the absence of any international support for these initiatives, American commercial interests have been pressuring their government either to change the international regime or to rescind the legislation. Unwilling to rescind, the Clinton administration turned to the CIA.

CIA Director James Woolsey recently stated that the CIA would enthusiastically fulfil its role of monitoring sharp business practices abroad. In response to questions on this issue Woolsey replied, "We are in the business of understanding when other countries and foreign companies—some of these countries quite friendly to the United States otherwise—are engaged in bribery in order to take contracts away from American corporations. We spend a great deal of time and effort trying to help the Secretary of State and the Secretary of Commerce be able to level that playing field." The way this reportedly functions is that after being informed by the CIA, State or Commerce officials contact the relevant foreign government in an attempt to ensure this activity does not distort the decision-making process. Woolsey also mentioned that this work has saved American companies billions in sales that otherwise would have been lost due to bribery of foreign officials and added, "Most such companies never realize they have received our assistance and even state publicly they don't need it ... That's fine with us. That's the nature of the intelligence business." Savings in the billions from this sort of activity by the CIA may not be as fantastic as it seems. Foreign governments often make purchases of telecommunications systems, aircraft or arms that frequently amount to such sums.

Inevitably the CIA, in pursuing this mandate, will have to use other than open means to determine if this activity is going on. It is unclear how foreign intelligence services whose companies are targeted by these investigations will react. Another troublesome issue is whether the CIA would be compelled to turn in an American company they discovered breaching the provisions of theForeign Corrupt Practices Act.

Finally, the decision to use the CIA in assisting the implementation of the extraterritorial application of American laws dealing with one category of sharp practices raises the question of whether CIA resources will be used to assist the implementation of others; for example, American competition laws.

Telecommunication interception & computer system vulnerability

SIGINT: the "atomic bomb" of economic espionage

Perhaps the most important comparative advantage certain governments have in practicing economic espionage is their signals intelligence (SIGINT) ability. Their considerable capacity to target, intercept and decode private and confidential communications poses a serious threat to the communications security of both government and business. The same technical infrastructure used to collect military and political information about hostile nations during the Cold War can be focused just as easily on an important trans-Atlantic telephone conversation between two executives. The former head of the French intelligence service, Pierre Marion has described with characteristic reticence, the unsurpassed American SIGINT capacity as the "atomic bomb" of economic espionage.

In a world where NFL coaches routinely encrypt messages radioed to their quarterbacks, the potential of this worldwide telecommunications interception network has not gone unnoticed. Jim Royer, of Chicago's FMC Corp., producer of the M-3 Bradley fighting vehicle as well as industrial chemicals, conveys the view of many large corporations when he says, "We can handle the ordinary industrial spy, but we don't have the technology or know-how to combat the type of advanced technologies governments can throw at us. For example, spy satellites and sophisticated strategic espionage ... only government can combat that." These concerns were echoed by James E. Riesback, executive vice-president of Corning, Inc. In testimony before a US committee, Riesback stated, "Our intelligence agencies must become partners with US industry in providing secure, enhanced telecommunications services on an international basis". Riesback's concern was such that he proposed government agencies consider, as a "short-term option", "establishing a secure overseas pipeline for use by businesses seeking to communicate proprietary information to their foreign operations". Riesback's concerns appear to be supported by many recent reports of economic espionage where SIGINT was employed.

The information super-highway: economic espionage, trading blocs and regional routes

Beyond traditional telecommunication traffic, the development of one of the newest modes of communication and its infrastructure has, predictably, instigated a debate concerning what access government intelligence agencies should be given to its operations. The American "clipper chip" proposal would enable governments to monitor more easily the communications darting across the information superhighway. A parallel proposal is being examined in Canada, where proposed legislation described by RCMP spokesmen as "similar to the law the US is putting in place" is being reviewed.

Those in favour of ensuring government's capacity to eavesdrop on new communication conduits argue the need to combat organized crime and terrorism. Yet the wealth of economic intelligence to be gleaned from this new core-communication pathway leaves many concerned that governments with access to this global network will use it for economic espionage.

Accusations of computer systems with trap doors, economic espionage and intelligence services are not new. Thomson's International Banking Regulator, a banking industry publication, recently reported that the National Security Agency (NSA) had been accused of getting confidential information from the World Bank and other international banks via a software trap door the banks did not know existed. An investigation by an American House Judiciary Committee in 1992 concluded there was substantive evidence that software with the alleged trap door was illegally sold during the 1980s. Not surprisingly, the Information Security Business Advisory Group (Ibag), a European business group, has warned European governments to ignore American calls to restrict the use of the information superhighway to users whose encryptions can be broken by government agencies. Concerns of this nature in both Europe and Asia have led some to speculate that instead of one global system, three regional systems paralleling what could be described as European, North American and Asian trading blocs, will emerge.

The idea of regionalized information highways fits neatly with the prospect raised in the earlier Commentary of a eventual segmentation and interaction of intelligence communities to better reflect the economic interests of regional trade groupings. We exist today with a military/political structure inherited from the Cold War resting awkwardly on a dynamic world market where new economic alliances strain traditional military/political ties. The clearest public acknowledgement of this growing linkage of economic and security interests with trading blocs can be found in France's recently published global military review. The document, with which France hopes to influence the European security agenda, recognizes both that security is now defined less in terms of territory than economic and industrial interests and that France's vital interests, particularly at the economic and industrial level, are `barely dissociable' from those of fellow EU members.

The Western European Union (WEU) was selected as the medium to promote this common European security policy. According to the document, the WEU, often described as the weak cousin of NATO, must acquire strategic autonomy in a number of areas including "intelligence". The paper calls for the development of common intelligence structures and a consequent reduction of Europe's dependence on American intelligence resources. The USA and Canada are not members of the WEU.

Interestingly, there has recently been some friction between the American intelligence community and European officials regarding information-sharing in the Volkswagen-General Motors industrial espionage case. The increasingly byzantine case involving accusations that VW officials stole commercial secrets from GM's Opel Division in Europe has drawn the attention of governments on both sides of the Atlantic. Ron Brown, US Commerce Secretary, said the dispute had the potential to disrupt relations between Germany and the USA if German authorities did not quickly become more co-operative with FBI officials conducting a parallel investigation into the affair. Reported attempts by Gerhard Schroeder, the Prime Minister of Lower Saxony and effective holder of that state's 20% interest in VW, to have the case against the company he is part-owner of thrown out of the German courts, may have motivated this very public intervention by Brown.

Conclusion

While intelligence services' approach to major mandates such as terrorism and proliferation are relatively set, the same cannot be said for economic espionage and other sharp practices. With governments around the world focusing on the pursuit of economic and commercial interests, issues raised by the interface of commercial interests and intelligence will continue, welcome or not, to press in upon intelligence services and policy-makers. Only by better understanding the issue and its complexity will proper decisions be made in this area, and better understanding can only be obtained through better analysis.


The views expressed herein are those of the author, who may be contacted by writing to :

CSIS 
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Ottawa, Ontario K1G 4G4 
FAX: (613) 842-1312

ISSN 1192-277X
Catalogue JS73-1/46


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