WERT Economic Espionage
November 11, 2005
Inauguration of the Women’s Economic Round Table® Forum of the Knight-Bagehot Program of the Graduate School of Journalism, Columbia University*
Ms. Terri Thompson, Director of the Knight-Bagehot Program of the Graduate School of Journalism, Columbia University welcomed everyone and expressed her pleasure about making this new event a permanent part of their graduate program in economics and business journalism.
Dr. Amelia Augustus, cofounder and Director Round Table, opened the program by acknowledging the date, November 11, as a day to remember past and present veterans who fought to preserve the liberties and opportunities of Americans, including immigrants like her parents from Greece.
Prof. Hedieh Nasheri, Author, Economic Espionage and Industrial Spying, Cambridge, U.K.: Cambridge University Press, 2005 (the first comprehensive treatment of domestic and international industrial spying activities and their competitive impact on businesses and governments).
Jules Kroll, Vice Chairman of Marsh Inc. and Founder of Kroll Inc., a major independent risk consulting company, helps reduce companies’ exposure to global threats, capitalize on business opportunities, and protect employees and assets, in addition to working with governments around the world.
Special Agent Gerd Ballner, Jr., Federal Bureau of Investigation, Counter-intelligence
Moderated by Jeanette Wagner, Vice Chairman emerita, Estee Lauder Cos.
Why Worry about Economic Espionage?
- Today many new products can be quickly copied, often within 6 months, before companies have earned a return on their investment in research and development. Other products can be copied and sold globally with the profits going to organized crime or terrorists as well as to those who stole the technology
- The quality of life, standards of living, economic opportunities, wealth and health in the US depend on advanced scientific knowledge (government, business, technical information)
- The individuals, companies, universities and government agencies that advance scientific knowledge need incentives to invest their time and money. If there is no protection for their discoveries and knowledge, innovations will slow, and with them, economic conditions
- Economic espionage threatens the economic security of the U.S.
U.S. Intellectual Property as a Highly Valued Asset
- The U.S. is the main source of technological breakthroughs (about 86% of the world’s intellectual property).
- Many foreign entities (governments and companies) depend on U.S. technology. A country’s standard of living, political stability and the success its industries often depend on access to scientific advancements and break-throughs in technology. Therefore, companies all over the world and their nations may consider spying on the U.S. corporations and government agencies as a matter of national security, not an illegal act.
- Few US corporate executives understand economic espionage and how to recognize, prevent or handle it.
Main Targets in the U.S. and Abroad:
- Research Labs (government, academic institutions with research funding, corporate R&D)
- Small companies that manufacture a small component for equipment manufactured by a larger company
- Some easily copied products, e.g. CDs and DVDs, are sold to raise money for terrorism or organized crime
What are “Trade Secrets”?
- Any materials marked “proprietary” or “classified” with steps taken to protect the info (but not open source, public information, legally exportable information, academic or scientific exchanges, etc.)
- An FBI guide sheet on “Economic Espionage – the Enemy” defines trade secrets as “all forms and types of financial, business, scientific, technical, economic or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically or in writing, which the owner has taken reasonable measures to protect; and has an independent economic value. Commonly referred to as classified proprietary information, economic policy information, trade information, proprietary technology, or critical technology.”
- About 86% of the world’s intellectual property in U.S., but the U.S. only earns about 50% of the profit because of espionage
- U.S. is open, and therefore an easy target for economic espionage
- Some countries specialize in the type of intellectual property they steal, e.g. in counterfeit cosmetics and pharmaceuticals
How to Recognize Economic Espionage
- Companies usually spend money only after an incident instead of educating all employees to recognize and prevent espionage
- To identify or handle espionage, people need the same skills involved in good investigative reporting and detective work. But those skills take time, cost money, and can be “messy.” And some investigative technology, e.g. pin hole cameras set up to monitor who goes into files
- Usual way that people find out about economic espionage: by accident. For example, one company saw that a competitor in another country was always releasing a new product ahead of their launch. Kroll investigated, found out a disgruntled employee was selling information
- In the book “The Insider”, a manager blamed the Japanese competition to cover his bad management. When caught, he tried to save his own skin by telling about his company’s price fixing. Some companies do not ask for help with espionage situations for fear that they might set off disgruntled employees, angry spouses, or others who might start baring all problems to the press or authorities
- An espionage relationship can start as simple friendship with someone who is actually an intelligence officer for an embassy whose goal is to recruit government or corporate insider(s) with access, knowledge and willingness to give information. The intelligence officer may cultivate the person for years, develop a relationship, start by asking for innocent information, e.g. an annual report, get to know the person’s motivations and use them to get more information
- Identifying the players can be difficult, particularly when bribes can buy off some of the plaintiffs and allegiances change unexpectedly. Kroll’s own employees were sent to jail when they were investigating a corporate espionage situation and the two governments of the companies involved together set up the Kroll employees
- Internet sites are mined daily from all across the world for information
- One way to get information: an unsolicited email or telephone call to an employee from someone claiming to be a marketing consultant or buyer. The employee, out of zeal to help his/her own company develop business may give too much information
How to Prevent/Handle Economic Espionage
- Companies often need to take responsibility for preventing, detecting, and dealing with espionage. Two main reasons for this: 1) the FBI is understaffed, 2) some corporations don’t want to talk to FBI – if the problem
- becomes public, the news could hurt the company. Some companies also say FBI says agents are too busy for corporate spying problems
- Since 9-11 counter intelligence, including economic espionage, has become FBI’s second highest priority after terrorism (before 9-11, crime).
- Top – down: heads of FBI are talking to CEOs, heads of universities, etc.;
- Grassroots level: agents are talking with security managers, local branch heads, small companies
The Kroll Corporation and FBI both train corporate or government employees to understand the threat, identify organizational weaknesses, make recommendations and then prevent/recognize espionage (e.g. See something? Say something!)
Employees are the first line of defense 3.
- Prevention strategy: careful background checks, due diligence at point of hiring – checks of U.S. as well as non-U.S. candidates. Treat all the same for everyone because anyone may be involved
- Smaller companies with fewer resources need to do background checks and be more careful about hiring than they are now. Don’t hire based on personal references without background checks
- Background checks can help reduce concern about hiring non-US citizens so that U.S. companies do not close doors to talent from around the world
- The U.S. can’t quickly change the poverty, desperation, political corruption and unequal resources that drive economic espionage in the developing world… but the U.S. can embarrass, monitor and reform companies from industrialized countries that give bribes to get business in developing world.
- Transparency International (www.transparency.org), an international non-governmental organization devoted to combating corruption, works in this area - brings civil society, business, and governments together in a powerful global coalition.
Espionage Outside the U.S.
- R&D operations outside the U.S. are difficult to protect
- More and more global companies must provide technology for overseas operations
- Can report incident or suspicion to local FBI field office that works with U.S. attorney generals
- Some countries do not have an effective rule of international law. Some are police states or so corrupt that bribery is just their way of doing business – bribery in some places goes all the way up to the top of the government. In other countries people are desperate, looking for ways to get money by selling information
- U.S. Economic Espionage Act of 1996. Applies to non-US citizens as well as US citizens. The Act states that whoever knowingly performs targeting or acquisition of trade secrets to knowingly benefit anyone other than the owner can be prosecuted
- Applies if the espionage occurs outside the U.S. if the violator is a US person or organization, or if the offense is furthered by some action committed in the U.S
- Since very difficult to enforce national laws internationally and there’s no global law, one strategy: align the economic interests of both parties
- Links between economic espionage and terrorism: espionage as a way to make cheap, highly marketable products and use sales to fund terrorism; direct sabotage, e.g. take down a key financial computer network – only possible if employees inside the organization have been recruited and co-opted
Different Cultural Views of Intellectual Property
- Important to educate employees and the public, give talks
- Some people who take intellectual property are innocent and just lack knowledge. Some may not see the line between legal and illegal collection of information
- In some countries, bribery is an acceptable way of doing business
- Disparity between rich/poor countries drives espionage. Can’t change behavior of people who are desperate, need to do what they feel they have to do to survive. Focus on industrialized nations that give the bribes. Embarrass, monitor, try to reform them… although some European nations have highly effective bribery strategies
- Developing world has a different perspective – they need the knowledge of science and technology in order to help their countries survive, but don’t have the resources to make their own innovations – and may see economic espionage as part of their national security
- Some countries insist on bribery as a way to do business. Western companies can decide not to work in those countries. If they are successful in those countries, they have probably given into the system of bribery
- Many companies and citizens in the countries were bribery and other corruption is rampant do not want to be corrupt. They see no alternatives as they try to survive in a highly competitive world where they have fewer resources and where corruption reaches the top of their companies and government
- As developing countries become stronger economically, they need to protect their own assets and become more interested in the rule of law
- Best strategy for working with companies in other countries– align their economic interests with yours so that the theft of intellectual property or technology will hurt them as much as it will hurt you.
Global Laws Protecting Trade Secrets
- There are no international laws to protect trade secrets
- National laws mean nothing without international protection and multi-lateral agreements
- Need worldwide policy on global information as an asset
- U.S. law against bribery in other countries by U.S. corporations
- US Law: Economic Espionage Act of 1996 (Title 18 U.S.C. Sections 1831 and 1832). If trade secrets are not classified and therefore cannot be prosecuted under the Economic Espionage Act, violations can be prosecuted under laws involving Mail Fraud, Wire Fraud, Interstate Transportation of Stolen Property, Export Control, and Intellectual Property Rights
- As countries become stronger economically, they have more to lose and are more interested in protecting their intellectual rights through international law and agreements
FBI’s Commitment to fighting Economic Espionage
- The FBI Director Robert Mueller has designated economic espionage as the FBI’s number two priority – second only to terrorism
- The FBI’s proactive approach to economic espionage is based in the Economic Espionage Unit, dedicated to countering the threat, develops training and outreach materials, participates in conferences and visits private industry in order to inform corporate and government leaders and employees about how to recognize possible espionage (so they can “see something? say something!”)
- The Unit also works with the law enforcement and intelligence community on requirement issues, and provides specific classified and unclassified presentations
- To report violations, obtain additional information, or schedule a presentation regarding Economic Espionage: ANSIR Coordinator, FBI NY Field Office, 212-384-5000. For general information: http://www.fbi.gov
About WERT: The annual Women’s Economic Round Table® Forum of the Knight-Bagehot Program of the Graduate School of Journalism, Columbia University features predominately women experts in roundtable discussions on vital economic and business policies and issues impacting the U.S.
Brought to Columbia University by Dean Nicholas Lemann and Director Terri Thompson, the forum’s major goals are to add another vehicle for enriching the teaching and learning environment of the distinguished Knight-Bagehot Program and the Columbia School of Journalism as well as to introduce the only program concentrating on economics and business within the School of Journalism that is open to the public-at-large.
Dr. Amelia Augustus, Director
Women’s Economic Round Table®
of the Knight-Bagehot Program,
The Journalism School, Columbia University
328 West 86th Street, #10-B
New York, NY 10024
212-873-1605 ~ Fax: 212-854-3900
Founded in 1978 by Maria Rolfe in memory of her husband, Sidney E. Rolfe, the international economist.