United States General Accounting Office

GAO Testimony

Before the Select Committee on Intelligence

United States Senate

For Release on Delivery

Expected at

10:30 a.m., EST

Wednesday,

February 28, 1996

ECONOMIC ESPIONAGE

Information on Threat From

U.S. Allies

Statement for the Record by David E. Cooper, Associate

Director, Defense Acquisitions Issues, National Security

and

International Affairs Division

G O A

years

1921 - 1996

GAO/T-NSIAD-96-114

Mr. Chairman and Members of the Committee:

I am pleased to be able to provide this statement for the record. We

recently completed a report on security arrangements used to protect

sensitive information when foreign-owned U.S. companies work on

classified Department of Defense contracts.1

 As part of this effort, we

examined the threat of foreign espionage facing U.S. defense companies, a

concern of today’s hearing.

In brief, Mr. Chairman, we reported that, according to the Federal Bureau

of Investigation and intelligence agencies, some close U.S. allies actively

seek to obtain classified and technical information from the United States

through unauthorized means. These agencies have determined that foreign

intelligence activities directed at U.S. critical technologies pose a

significant threat to national security.

Economic Espionage

Efforts of Allies

U.S. intelligence agencies report a continuing economic espionage threat

from certain U.S. allies. Our report discussed the espionage activities of

five allies.

A goal common to most of these countries was the support of the

country’s defense industry. Countries seek U.S. defense technologies to

incorporate into domestically produced systems. By obtaining the

technology from the United States, a country can have cutting-edge

weapon systems without the cost of research and development. The

cutting-edge technologies not only provide superior weapon systems for a

country’s own use, but also make these products more marketable for

exports.

Country a According to a U.S. intelligence agency, the government of Country A

conducts the most aggressive espionage operation against the United

States of any U.S. ally. Classified military information and sensitive

military technologies are high-priority targets for the intelligence agencies

of this country. Country A seeks this information for three reasons: (1) to

help the technological development of its own defense industrial base,

(2) to sell or trade the information with other countries for economic

reasons, and (3) to sell or trade the information with other countries to

develop political alliances and alternative sources of arms. According to a

1

Defense Industrial Security: Weaknesses in U.S. Security Arrangements With Foreign-Owned Defense

Contractors (GAO/NSIAD-96-64, Feb. 20, 1996)

Page 1 GAO/T-NSIAD-96-114
classified 1994 report produced by a U.S. government interagency working

group on U.S. critical technology companies,2

 Country A routinely resorts

to state-sponsored espionage using covert collection techniques to obtain

sensitive U.S. economic information and technology. Agents of Country A

collect a variety of classified and proprietary information through

observation, elicitation, and theft.

The following are intelligence agency examples of Country A information

collection efforts:

• An espionage operation run by the intelligence organization responsible

for collecting scientific and technological information for Country A paid a

U.S. government employee to obtain U.S. classified military intelligence

documents.

• Several citizens of Country A were caught in the United States stealing

sensitive technology used in manufacturing artillery gun tubes.

• Agents of Country A allegedly stole design plans for a classified

reconnaissance system from a U.S. company and gave them to a defense

contractor from Country A.

• A company from Country A is suspected of surreptitiously monitoring a

DOD telecommunications system to obtain classified information for

Country A intelligence.

• Citizens of Country A were investigated for allegations of passing

advanced aerospace design technology to unauthorized scientists and

researchers.

• Country A is suspected of targeting U.S. avionics, missile telemetry and

testing data, and aircraft communication systems for intelligence

operations.

• It has been determined that Country A targeted specialized software that is

used to store data in friendly aircraft warning systems.

• Country A has targeted information on advanced materials and coatings

for collection. A Country A government agency allegedly obtained

information regarding a chemical finish used on missile reentry vehicles

from a U.S. person.

Country B According to intelligence agencies, in the 1960s, the government of

Country B began an aggressive and massive espionage effort against the

United States. The 1994 interagency report on U.S. critical technology

companies pointed out that recent international developments have

2

Report on U.S. Critical Technology Companies, Report to Congress on Foreign Acquisition of and

Espionage Activities Against U.S. Critical Technology Companies (1994).

Page 2 GAO/T-NSIAD-96-114
increased foreign intelligence collection efforts against U.S. economic

interests. The lessening of East-West tensions in the late 1980s and early

1990s enabled Country B intelligence services to allocate greater resources

to collect sensitive U.S. economic information and technology.

Methods used by Country B are updated versions of classic Cold War

recruitment and technical operations. The Country B government

organization that conducts these activities does not target U.S. national

defense information such as war plans, but rather seeks U.S. technology.

The motivation for these activities is the health of Country B’s defense

industrial base. Country B considers it vital to its national security to be

self-sufficient in manufacturing arms. Since domestic consumption will

not support its defense industries, Country B must export arms. Country B

seeks U.S. defense technologies to incorporate into domestically produced

systems. By stealing the technology from the United States, Country B can

have cutting-edge weapon systems without the cost of research and

development. The cutting-edge technologies not only provide superior

weapon systems for Country B’s own use, but also make these products

more marketable for exports. It is believed that Country B espionage

efforts against the U.S. defense industries will continue and may increase.

Country B needs the cutting-edge technologies to compete with U.S.

systems in the international arms market.

The following are intelligence agency examples of Country B information

collection efforts:

• In the late 1980s, Country B’s intelligence agency recruited agents at the

European offices of three U.S. computer and electronics firms. The agents

apparently were stealing unusually sensitive technical information for a

struggling Country B company. This Country B company also owns a U.S.

company performing classified contracts for DOD.

• Country B companies and government officials have been investigated for

suspected efforts to acquire advanced abrasive technology and

stealth-related coatings.

• Country B representatives have been investigated for targeting software

that performs high-speed, real-time computational analysis that can be

used in a missile attack system.

• Information was obtained that Country B targeted a number of U.S.

defense companies and their missile and satellite technologies for

espionage efforts. Companies of Country B have made efforts, some

successful, to acquire targeted companies.

Page 3 GAO/T-NSIAD-96-114
Country C The motivation for Country C industrial espionage against the United

States is much like that of Country B: Country C wants cutting-edge

technologies to incorporate into weapon systems it produces. The

technology would give Country C armed forces a quality weapon and

would increase the weapon’s export market potential. The Country C

government intelligence organization has assisted Country C industry in

obtaining defense technologies, but not as actively as Country B

intelligence has for its industry. One example of Country C government

assistance occurred in the late 1980s, when a Country C firm wanted to

enter Strategic Defense Initiative work. At that time, the Country C

intelligence organization assisted this firm in obtaining applicable

technology.

Country D The Country D government has no official foreign intelligence service.

Private Country D companies are the intelligence gatherers. They have

more of a presence throughout the world than the Country D government.

However, according to the 1994 interagency report, the Country D

government obtains much of the economic intelligence that Country D

private-sector firms operating abroad collect for their own purposes. This

occasionally includes classified foreign government documents and

corporate proprietary data. Country D employees have been quite

successful in developing and exploiting Americans who have access to

classified and proprietary information.

The following are examples of information collection efforts of Country D:

• Firms from Country D have been investigated for targeting advanced

propulsion technologies, from slush-hydrogen fuel to torpedo target

motors, and attempting to export these items through intermediaries and

specialty shipping companies in violation of export restrictions.

• Individuals from Country D have been investigated for allegedly passing

advanced aerospace design technology to unauthorized scientists and

researchers.

• Electronics firms from Country D directed information-gathering efforts at

competing U.S. firms in order to increase the market share of Country D in

the semiconductor field.

Country E Intelligence community officials stated that they did not have indications

that the intelligence service of Country E has targeted the United States or

its defense industry for espionage efforts. However, according to the 1994

Page 4 GAO/T-NSIAD-96-114
interagency report, in 1991 the intelligence service of this country was

considering moving toward what it called “semi-overt” collection of

foreign economic intelligence. At that time, Country E’s intelligence

service reportedly planned to increase the number of its senior officers in

Washington to improve its semi-overt collection—probably referring to

more intense elicitation from government and business contacts.

The main counterintelligence concern cited by one intelligence agency

regarding Country E is not that its government may be targeting the United

States with espionage efforts, but that any technology that does find its

way into Country E will probably be diverted to countries to which the

United States would not sell its defense technologies. The defense industry

of this country is of particular concern in this regard.

It was reported that information diversions from Country E have serious

implications for U.S. national security. Large-scale losses of technology

were discovered in the early 1990s. Primary responsibility for industrial

security resides in a small staff of the government of Country E. It was

reported that this limited staff often loses when its regulatory concerns

clash with business interests. The intelligence agency concluded that the

additional time needed to eradicate the diversion systems will

consequently limit the degree of technological security available for

several years. The question suggested by this situation is, if technology

from a U.S. defense contractor owned by interests of Country E is

transferred to Country E, will this U.S. defense technology then be

diverted to countries to which the United States would not sell?

Our report also discusses how the Department of Defense seeks to protect

sensitive information and technologies at foreign-owned U.S. companies

against such threats. It makes recommendations aimed at improving

information security at firms operating under these security arrangements.

(707158) Page 5 GAO/T-NSIAD-96-114
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