Chinese Espionage: The Risks Within U.S. Companies
Peter J. Toren is a partner with Weisbrod, Matteis & Copley in Washington, D.C. Formerly a federal prosecutor with the Computer Crime & Intellectual Property Section of the Justice Department, he is also the author of Intellectual Property & Computer Crimes.
Over the past several months, Congress has heard from a slew of witnesses who have testified about the threat posed by foreign computer hackers, particularly from China, who penetrate U.S. companies’ computers and steal valuable data and intellectual property. FBI Director Robert Mueller testified that hacking could soon replace terrorism as the FBI’s primary concern. Gen. Keith Alexander, head of the military’s Cyber Command, characterized the losses caused by cybertheft as “the greatest transfer of wealth in history.”
Less attention, however, has been given to an equally insidious threat from employees or other insiders, who steal trade secrets from their corporate employers and depart with the stolen information and provide the information to foreign governments or foreign companies, most often in China. Until recently, there has been no reliable public studies about the extent of foreign economic espionage, especially with a link to China. But the results of a detailed analysis of the prosecutions under the Economic Espionage Act establishes that economic espionage with a China connection also creates a great risk to the financial well-being of U.S. companies, and, in turn to the U.S. economy.
The government has brought about 115 prosecutions under the EEA alleging theft of trade secrets. Nine have involved claims that the defendant acted with the intent to benefit a foreign government, while the remaining 106 concern allegations that the defendant intended to economically benefit a third party. Although the government does not have to prove foreign government sponsorship to obtain a conviction in the 106 cases, an analysis of both categories of prosecutions finds a disproportionate share with a link to China.
In particular, almost 80% of the prosecutions that concern foreign government sponsorship involve allegations of direct Chinese government sponsorship. All of the thefts also involve sophisticated technology. Most recently, the government unsealed an indictment charging that a Chinese company, the Panang Group, with ties to the Chinese government, stole trade secrets from DuPont relating to the obscure but valuable technology on how to produce titanium dioxide, a white pigment used in paints and other products. Pangang allegedly paid over $12 million to U.S. individuals for access to DuPont’s trade secret secrets.
In another egregious example, Dongfan Chung was found guilty on July 16, 2009, of stealing trade secrets from Boeing. Chung worked at Boeing, with a few breaks, from 1964 until September 11, 2006, when federal agents searched his home and discovered a trove of Boeing technical documents stored beneath his house relating to the space shuttle, Delta IV Rocket, F-15 Fighter, B-52 Bomber and Chinook Helicopter. The court found that Chung’s theft of Boeing trade secrets was intended to benefit a number of Chinese government agencies and sentenced him to 188 months imprisonment.
The government alleged in 21% of the prosecutions that did not involve state sponsorship that the purpose of the theft was to benefit a company in China. Again, nearly all of the thefts involved sophisticated and valuable technology. For example, on January 19, 2012, Yuan Li, a former Sanofi Aventis research chemist pleaded guilty to stealing the company’s trade secrets and selling them to a U.S. sales and distribution unit of a Chinese chemical company. In another significant case, Wen Chyu Liou was convicted of stealing trade secrets from Dow Chemical and offering to sell them to companies in China. Liou worked for Dow for 27 years and after he retired in 1992 he conspired with at least four current and former Dow employees to misappropriate the corporation’s trade secrets. He was sentenced last year to 60 months imprisonment.
Further, 86% of the cases that were adjudicated in 2010 under the EEA involved a link to China. This emerging trend confirms a government understanding that, as part of the development process, China’s intelligence services as well as private companies and other entities, frequently seek to exploit Chinese citizens or persons with family ties to China who can use their insider access to U.S. corporations to steal trade secrets.
What can and should be done to stem this transfer of wealth before it is too late?
First, Congress must put aside its partisan bickering and enact a comprehensive cybersecurity law that addresses the risks posed by Chinese hackers. The current version of the bill, which has been stalled in committee, does little to address Chinese cyberespionage. Congress should also amend the EEA to increase the penalties and to address questions created by a recent court decision. In addition, Congress should finally enact a civil trade secrets law with a broad extraterritorial effect that would permit companies that have been victims of economic espionage to sue in federal court. State laws do not entirely fill the holes left by the lack of a federal law especially since state laws do not have the extraterritorial reach, which may be critical where the theft involved a foreign entity. It is past time that trade secrets be accorded the same status as patent, copyrights and trademarks.
While waiting for Congress to act, there are a number of steps that the executive branch can and should do.
- First, President Obama, even without authority from Congress, can issue a finding that would authorize agencies to monitor the Internet outside the United States and to block the exportation of files containing information stolen from the United States.
- Second, the government should increase the number of prosecutors and agents charged with investigating and prosecuting thefts of trade secrets.
- Third, the Justice Department should consider what it can do to improve how it investigates and prosecutes EEA cases. Currently, the authority to investigate EEA cases is divided depending on whether or not the cases are state sponsored. If they are, they are handled by counter-intelligence FBI agents and prosecutors from the Internal Security Section of the Justice Department, whereas non-state sponsored prosecutions are the responsibility of FBI agents skilled in investigating financial crimes and are prosecuted by special IP units in U.S. Attorney’s Offices and by the Computer Crime & Intellectual Property Section. Whether agents and prosecutors, who normally handle investigations and prosecutions involving spying against the United States, should be assigned matters where the victim is a U.S. corporation is open to debate.
While the government has stepped up investigating theft of trade secrets cases, companies should not rely on the government for protection. Corporations should carefully examine whether they are doing enough to protect their intellectual property. Tangible assets can be replaced, but intangible assets if lost, are lost for good. Even companies that have sophisticated and elaborate trade secret protection programs should consistently reevaluate their programs and learn from the mistakes of other corporations that have been the victim of trade secret thefts. Legal experts should be included in this process to ensure that the company is not running afould of any laws. In many of the EEA prosecutions the theft was only discovered through luck, such as where the defendant was stopped by Customs agents, while boarding a flight to China, who only found the stolen confidential documents she was carrying, after searching her because they did not find her answers to routine questions truthful. The corporation may have discovered what she was doing earlier if they had spotted a number of red flags earlier.
Companies should also reevaluate whether or not to report thefts of trade secrets to the government. Many companies are reluctant to report trade secret thefts to the government for fear of the damage to their reputations. However, while current management may save face, non-reporting is probably not in the best long-term interests of the company. A corporate policy of always reporting thefts to the government may be the best deterrent against future thefts.
Protection of intellectual property is critical to the economic well-being of the United States. When it is not protected, we lose not only jobs, productions and profits today, but also our ability to undertake the research and the investment that lead to further technological progress tomorrow. This hurts not only today’s workers and investors, but also future generations of U.S. citizens.