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Economic Espionage and Counterespionage in the U.S.

November 04, 2016
The U.S. has been a giant on the global economic stage, but can it really do anything to protect the loss of trade secrets through espionage?

By Cornell Overfield 

Since the end of World War II, the United States has been an economic titan with only China’s recent rise as a threat to American primacy. Among the various factors enabling this primacy is a strong research culture in American government, universities, and firms, which spurs economic growth and entrenches American strength in both soft and hard power terms on the global stage. Research and development, however, is a costly process often involving numerous failures before success is achieved. Thus, both nations and firms have an interest in engaging in industrial espionage in order to free ride off of the efforts of others.

Industrial espionage has been a feature of global politics for centuries, and has often been a way for weaker states to rapidly challenge hegemonic actors or disrupt state monopolies in certain goods. In his work Histories, Procopius states that Emperor Justinian sent two Nestorian monks to China to steal the secrets of silk production. Their success broke the monopoly which Chinese emperors held over the commodity and permitted the art of silk cultivation to spread slowly throughout Europe. Later, 19th century German industrial agents clandestinely brought British steel-production techniques back to Germany, kick-starting the buildup of the Ruhr valley into the industrial heartland of Europe. Finally, in the famous case of the Atom Spies during the 1940s, progress and discoveries from the top-secret Manhattan project were passed by atomic physicist Klaus Fuchs and others to the Soviet Union. Though all major wartime powers had made some degree of progress on nuclear weapons, the United States and United Kingdom had clearly made the fastest progress. The information that Fuchs passed to the Soviet Union is agreed to have greatly sped up their development of nuclear weapons and usher in the start of the nuclear standoff that defined the Cold War.

Several factors have combined to make modern economic espionage in America far more lucrative for thieves and far more damaging for victims. As leaders in innovation, American firms make for alluring targets, with valuable secrets produced by substantial investments in research and development. Global supply chains also mean that the ability of a foreign firm to steal an American firm’s intellectual property can allow the foreign firm to avoid spending hundreds of millions of dollars on product development, but can also deny the American firm a possibly massive national market by undercutting their prices.

The rise of cyber communications and cloud storage makes penetration easier, provided vulnerabilities can be unearthed or credentials can be phished. Indeed, a 2011 study by the Counterintelligence Center to Congress (CIC) suggested that the rise of cyberspace as a platform for innovation and storage of trade secrets was greatly enhancing the risks faced by American firms. The report also found that while actors of all stripes, primarily China and Russia, conduct economic intelligence operations against American firms, our closest allies who have close and easy access to American institutions and firms pose a more significant threat.[1] It is interesting to note that the states whose intelligence services appear most likely to conduct or aid economic espionage are those where the national government has close ties with large companies in key sectors, such as Russia, China and France.

A transition to the cybersphere greatly reduces the costs and increases the number of states and firms who have the resources to conduct such espionage. The CIC believes that small states, particularly those hostile to the United States, may develop relationships with hackers in order to gain access to sensitive government and commercial information.[1] The opportunity presented by attacks on the cyber front allows for mass coordinated attacks on a variety of targets on a near-constant basis. The hypnotic live-attack tracker compiled by Norse Security shows China (overtly) and Russia (covertly, through several European states) conducting the vast majority of attacks, with America and the United Arab Emirates being two of the most targeted states.[2]

The fact that both states and foreign companies sponsor industrial espionage means that any firm can be a target. Military contractors often find themselves targeted, especially those who work on advanced weapons systems, such as the F-35. However, any company with an innovative product can find itself under attack from international competitors, many of whom will persist until they are successful. While attacks most frequently target formulas, blueprints and other patented information, the increasing value of Internet-based commercial interactions makes customer data an increasingly popular target.

The scope of industrial and economic espionage is, like any illicit activity, hard to precisely measure. Several additional barriers to self-reporting from firms which may have been the target of espionage make the task of studying this phenomenon more challenging. Firms may be unaware that they have been targeted by foreign intelligence agencies or other companies, or they may be reluctant to go public for fear of damaging stock values or investor confidence. It is difficult to assign a dollar value to economic intelligence in the form of meeting minutes or strategy, further complicating such a reckoning. Finally, some firms believe that the government has little help to offer targeted firms. The Center for Responsible Enterprise and Trade partnered with PricewaterhouseCoopers to estimate that anywhere from 1-3% of GDP is lost each year in more economically developed countries due to espionage, based on extrapolations from national R&D spending and its associated benefits.[3]

Though the United States conducts offensive economic and industrial espionage far less aggressively than other countries, it attempts to offer a robust counterintelligence program to American firms, under the aegis of the Federal Bureau of Investigation. Countering espionage has been designated the FBI’s second highest priority, ranked only behind countering terrorism. The FBI’s website offers useful information ranging from what they does to counter espionage and what services they offer to American companies, to how penetration and elicitation attempts can be detected.[4] The most valuable resource for companies and research institutions seeking to protect their trade secrets must be the FBI field offices. Each field office can be contacted with concerns or for briefings on how to build robust counterespionage structures within companies. The FBI also recently released a short film (below) based on a real case to help address misconceptions and concerns on the part of companies who believe themselves to be under attack.

 

While this is a valuable resource for American companies, there is some concern that the penalties for those caught engaging in espionage, as imposed under the Economic Espionage Act of 1996,  are too lenient. Though weak penalties pose a deterrence problem, the larger issue is that those directing industrial espionage are essentially never in a position to be charged under the EEA, as they are not the ones carrying out espionage themselves and generally remain outside of the United States. More loudly publicizing economic espionage cases and the nations which endorse such attacks may be the one realistic way to bring pressure on foreign actors to reform, however such a course of action will entail political costs, particularly with close American allies. 

Espionage from both foreign countries and firms targeting American industries are certain to continue as long as economic competition exists. No legal option will be sufficient to prosecute those directing espionage, a globalized economy will increase the cost of a loss of trade secrets and the increasingly common shift to cyber platforms makes penetration easier, less costly and more accessible to smaller actors. American companies, particularly in high-tech and defense sectors, will continue to be prime targets, a risk which can really only be mitigated by taking advantage of resources offered by the FBI and private security firms, and ultimately, remaining vigilant to the ever present threat of industrial intelligence.

References 

  [1] Office of the National Counterintelligence Executive, “Report to Congress on Foreign Economic Collection and Industrial Espionage”, 2009-2011, October 2011. [Digital]. [Accessed 21 July, 2016].

  [2] http://map.norsecorp.com/

  [3] “Economic Impact of Trade Secret Theft”, www.pwc.com, February 2014. [Digital]. Available: https://www.pwc.com/us/en/forensic-services/publications/assets/economic-impact.pdf. [Accessed: 21 July, 2016].

  [4] https://www.youtube.com/watch?v=Gy_6HwujAtU

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