Spies Took $300-Billion Toll on U.S. Firms in ’97


Despite passage of the 1996 Economic Espionage Act, the FBI says foreign spies have stepped up their attacks on U.S.-based companies, and a new national survey estimates that intellectual property losses from foreign and domestic espionage may have exceeded $300 billion in 1997 alone.

Governments of at least 23 countries, ranging from Germany to China, are targeting U.S. firms, according to the FBI.

Urging U.S. firms to notify the FBI if they suspect espionage, Larry Torrence, deputy assistant director of national security, said: “The odds are not favorable for any American company when they are targeted for clandestine action by some country’s intelligence service.”


More than 1,100 documented incidents of economic espionage and 550 suspected incidents that could not be fully documented were reported last year by major companies in a survey conducted by the American Society for Industrial Security. The Times obtained results of the survey, which is scheduled to be released Wednesday.

The society’s periodic surveys, which FBI Director Louis J. Freeh has cited in congressional testimony, provide the federal government with its only estimate of potential damage from economic espionage.

The 1997 survey disclosed that high-tech companies, especially in Silicon Valley, were the most frequent targets of foreign spies, followed by manufacturing and service industries. Among the spies’ most sought-after information were research and development strategies, manufacturing and marketing plans, and customer lists.

As a matter of policy, the FBI does not identify governments that sponsor economic espionage. But in a recent article in an academic journal, an FBI agent who works in the field named some of the countries and provided a rare look into commercial spying by foreign intelligence services.

France, Germany, Israel, China, Russia and South Korea were named as major offenders in the article by Edwin Fraumann, a New York-based FBI agent who teaches at John Jay College of Criminal Justice. His article appeared in Public Administration Review, published by the American Society for Public Administration.

Both Fraumann and intelligence sources say China has accelerated its efforts to penetrate the security of U.S. firms. In fact, China was involved in one of the relatively few cases the FBI has brought into court so far under the 1996 Economic Espionage Act, which makes theft of proprietary economic information a felony punishable by a $10-million fine and 15-year prison sentence.


Harold C. Worden, 56, a retired Eastman Kodak manager, pleaded guilty in November to stealing Kodak’s formulas, drawings and blueprints and passing them along to China. He agreed to cooperate in a continuing investigation.

U.S. District Judge Michael Telesca, in sentencing him to a year in prison under a plea bargain negotiated by prosecutors, denounced Worden for providing trade secrets to “not just any foreign national, but China,” a longtime U.S. adversary with a bad human rights record.

The FBI confirmed Fraumann’s report that pending before the bureau are more than 700 foreign counterintelligence investigations involving economic espionage. It said economic spying by countries considered friends as well as adversaries of the United States has been increasing.

French intelligence, according to Fraumann, has spied on U.S. companies by wiretapping U.S. businesspeople flying on Air France between New York and Paris. France has also used such clandestine methods as surveillance of business personnel and communications inside France, including telephone conversations and faxes.

The Directorate General of the External, France’s equivalent of the CIA, and the Directorate of Surveillance and Terrorism, its equivalent of the FBI, continually use their databases to target foreign companies and personnel, Fraumann wrote. When they identify a particular target, he said, “individuals are sometimes placed in ‘deep cover’ within a foreign firm without revealing their true allegiance.”

The CIA, FBI and other U.S. agencies engage in counterespionage, but officials of the agencies insist that U.S. policy bars spying on foreign firms and governments. However, U.S. intelligence sources have engaged in commercial espionage--with decidedly mixed results.


As recently as 1995, five Americans--four of them CIA agents--were expelled from France after being accused of economic spying against the French government. U.S. sources said the bungled operation forced the CIA to temporarily suspend virtually all of its operations in France. In addition, sources said, it made U.S. intelligence agencies much more conservative in their overall approach to commercial espionage.

With President Clinton giving priority to economic intelligence in foreign policy, however, intelligence sources claim that the CIA has scored several successes in commercial spying. Although reluctant to provide details, the sources say that in crucial trade talks with Japan, the CIA supplied U.S. officials with important information on Japan’s negotiating strategy obtained through covert methods.

Whatever the extent of U.S. economic spying, foreign governments appear to be much more unabashed in their approach. And that frustrates intelligence agents who think that the United States should be much more aggressive and unapologetic.

“We don’t do much of it,” said one agent. “But there are societies where it’s second nature. It’s second nature to the French, to the British. So they’re working in these environments where the nice, dumb, Middle or Western Americans from Dubuque who think everything is lovely are getting stolen blind. They leave their briefcases and their laptops in their rooms in the Creon Hotel [in Paris]. Just stupid and naive.”

France, intelligence sources say, is among the world’s worst offenders and at one time targeted more than 70 major U.S. corporations, including Boeing, IBM, Texas Instruments and Corning Glass.

Agent Fraumann, in his article, listed a series of “intrusive methods” used by foreign countries, including:


* Eavesdropping by wiretapping, bugging offices or capturing cellular telephone conversations.

* Penetrating computer networks.

* Stealing proprietary information contained in drawings and documents and on floppy disks and CD ROMs.

* Using the services of prostitutes for blackmail purposes.

* Using a “swallow” (an attractive woman) or a “raven” (an attractive man) to form a close personal relationship with an employee with access to trade secrets.

* Hiring a competitor’s employee who has valuable knowledge.

* Bribing a supplier or employee.

* Planting an agent or “mole” in a company with the mission to compromise key employees, tap into computer databases and intercept communications to ferret out confidential research, technologies and other information.

Fraumann wrote that Germany’s Federal Intelligence Service had been “very active and quite successful” in economic espionage by using a top-secret computer facility outside Frankfurt to break into data networks and databases of companies and governments around the world.

Their operation, code-named project RAHAB, he wrote, involves gaining systematic entry into computer databases and accessing computer systems throughout the United States, targeting electronics, optics, avionics, chemistry, computers and telecommunications.


Of other countries, Fraumann reported:

China: The Chinese External Liaison Department monitors data communications and actively eavesdrops on digital links within China. The Chinese government often uses visiting students and professors to penetrate American corporate and academic laboratories and report their findings to Chinese authorities.

Japan: At Stanford and six other American universities, Japanese corporations have endowed six permanent chairs and one visiting professorship devoted to business or engineering. Half of the foreign companies that participate in the Industrial Liaison Program at the Massachusetts Institute of Technology are Japanese, and more than a third of the corporate chairs there are endowed by Japanese companies.

“This involvement certainly allows for the use of many non-intrusive methods for information collection, while at the same time quite possibly providing access to trade secrets as well,” Fraumann said.

Russia: The National Center for Data Exchanges in Moscow uses physical and electronic means to clandestinely monitor Soviet computer users and foreign data networks and databases to steal trade secrets and intellectual property.

South Korea: Intelligence agents “are extremely active in collecting political, economic and technological secrets,” Fraumann wrote. “For its size, South Korea possesses one of the world’s most successful intelligence organizations. Its National Security Planning Agency boasts of possessing technically proficient agents, enormous financial resources and well-organized informers who are paid large sums for helping collect proprietary information.”

Times researcher Robin Cochran in Washington contributed to this story.