The West Begins to Address Chinese Industrial Espionage

Reading about spies can be intriguing, whether they are in novels or real life.  There's a certain romance about the cloak-and-dagger world they inhabit — unless your company becomes the victim of industrial espionage.

Industrial espionage is certainly nothing new.  Just the names change.  Today, China is the leading player in the spy game.

Why China?  Why now?  The tremendous potential of the global market is not lost on companies in China, and many are looking for a shortcut to global political and economic power and influence.  Therefore, many Chinese state-run companies are turning to espionage in order to improve their own products, both for the success of their companies and in the national interest of China.

Their main target is no secret.  A report issued in 2008, by the U.S. Director of National Intelligence and National Counterintelligence, offers insight.¹ "The fact of the matter is that the United States, with about three percent of the world's population, spends 25 percent of all the world's research and development dollars, so we are the number one target in the world."

Our military hardware in particular is desired by China's expanding military, which sees the U.S. as a potential adversary.

But it's not just military technology that China has targeted.  It has also been systematically stealing Western scientific and industrial secrets.  Targets of attack include high-tech firms and companies in the manufacturing and service industries that make proprietary products and use unique processes that give them a competitive advantage.

Of course, the U.S. is not alone.  China is also engaged in a vast, well-coordinated, and resourceful espionage campaign against European governments and companies.

China's approach to intelligence is based on a wholly different paradigm than that of the West, which could be making detection more difficult.  The approach can best be described as "mosaic."

The Chinese recruit as many low-level operatives as possible and task them with vacuuming up all available open-source information.  These innumerable bits of intelligence are then compiled and analyzed to assemble a complete picture.  This method fits well with Chinese demographics, which are characterized by countless thousands of capable and industrious people working overseas, as well as thousands more analyzing various pieces of the mosaic back home.

Many believe that these people working overseas include members of the military, intelligence services, and trade missions abroad, as well as Chinese-born citizens who are sent to form espionage sleeper cells, and students sent to foreign universities.

According to the Guardian² newspaper, French intelligence services are wary of the roughly 20,000 Chinese students in France, many of whom work as interns in French companies.

Peer de Jong, of the French School of Economic Warfare, points out, "They're not all spies, but the sheer number of them means we have to be careful and put in place systems to guard our secrets."

Chinese nationals are not the only threat.  In a few cases, Americans have been accused of being Chinese agents, such as former Defense Department official James Fondren, who was caught and convicted in 2009.  These cases are rare, although they may increase as Beijing tries to reach higher levels of infiltration.

The Chinese approach to espionage may be different, but the techniques used to gain access to information are right out of spy thrillers — from the mundane to the creative.

• There's the standard bribing of insiders for
  information and documents.
• There's blackmailing executives about affairs.
• There are hidden cameras in factories and wiretaps in boardrooms.

A recent article in the Guardian³ summarized a report from French secret services.  It revealed some unique methods Chinese agents have used to steal French secrets:

• In some cases, senior employees have been invited to interviews for nonexistent jobs and found themselves asked about their work and company.
• One creative technique involved a Chinese businessman who was visiting a French factory.  He dipped his tie into a vat of an unnamed product, enabling him to return with a sample.
• Other Chinese visitors used crepe-soled shoes when they toured factories so they could pick up fragments of materials from the floors.
• A group of Chinese engineers were given six-month training courses after Beijing expressed an interest in buying French TGV trains.  A few months later, China introduced its own locomotive, which looked almost identical to the French train.

In addition to these methods, China is developing the ability to plot large-scale assaults on computer systems and networks.  In 2010, China allegedly launched a cyber attack against Google, in which servers were hacked and customer account information was accessed.

Even more useful for espionage purposes are stealthy hackers prowling the Internet.  Valuable information on intranets and in e-mails can be intercepted by persistent hacking.

Still other companies allow their secrets to be stolen by spies who penetrate the company dressed as photocopier repairmen or electrical inspectors.

But it's not just about how secrets are stolen, but also where.

General Daniel Schaeffer, a former French defense attaché in Beijing, says French companies are not doing enough to protect themselves from "very
patriotic" Chinese spies.

According to Schaeffer, "If, for example, you display a new technology at a salon where everyone can take photographs, you shouldn't be surprised if someone copies it."

U.S. officials were worried about the recent World's Expo, staged in Shanghai in 2010.⁴ A 2008 report issued by the U.S. intelligence community to Congress warned that "These public venues are laden with opportunities for foreign collectors to interact with U.S. experts and glean information regarding dual-use and sensitive technologies.  Such events offer host-country intelligence agencies the opportunity to spot, assess, and even recruit new intelligence sources within the U.S. private sector and to gain electronic access to companies' virtual networks and databases through technology brought to the events by corporate personnel."

Before events such as the World's Expo or the 2008 Olympic Games in Beijing, the intelligence and law enforcement communities offered valuable tips to business executives for protecting information.  These tips are good advice for anyone who may be traveling to countries suspected of increased levels of espionage:

• First, intelligence officials urged traveling business executives to take a "throw-away" cell phone instead of their "normal" devices.  Marion Bowman, former U.S. Deputy National Counterintelligence Executive, warns that "If you take your Blackberry and you go back home and you sync it up to your Internet and to your office files, the chances of you being penetrated by a bug that's been planted in your Blackberry are just too high to merit the risk."
• The second suggestion is to leave laptops at home.  Again, according to Bowman, "In China, a hotel maid could simply install a file on a guest's computer.  Or, to make things even easier, a hotel employee could steal information through a guest's use of the hotel's Internet service."

The United States prosecuted 11 cases against Chinese agents in 2010, featuring a wide range of espionage targets.  However, it's likely that for every case prosecuted, thousands are not detected.

In light of this trend, consider the following three forecasts:

First, Chinese espionage activities will continue to grow in 2011. There is simply too much at stake in the global economy to expect a voluntary reduction of this practice.  What will be interesting will be seeing what information is targeted.  Certainly, high-tech companies and military-related industries will be prime objectives and should be vigilant against infiltration.

Second, while China will inevitably suffer some losses as its name becomes synonymous with industrial espionage, the payoff is simply too big for this to make a difference. It only stands to reason that as espionage increases, so will the number of spies caught and prosecuted.  But with our insatiable appetite for inexpensive products and our need for a complicit lender to feed our out-of-control government spending, it's doubtful there will be a backlash against China, despite revelations of widespread spying.

Third, Western companies will develop better procedures and safeguards to help minimize the damage. As spies are caught and headlines reveal this growing threat to the general public, businesses will wake up to the need to implement better defense measures.  They'll realize the importance of protecting secrets so when they head off to market with a product, they aren't undercut by a lower price on a competing product that features the same design.  Many companies will act decisively and even name a "Chief Knowledge Security Officer" to prevent their intellectual property from reaching the hands of competitors.