January 21, 1997. Document from GPO Access, GAO Documents at:
http://www.access.gpo.gov/su_docs/aces/aces160.shtml

-----------------------------------------------------------------------


Economic Espionage: 
Information on Threat from U.S. Allies 
(Testimony, 02/28/96, GAO/T-NSIAD-96-114).

GAO provided a statement for the record on allied foreign governments'
economic espionage activities against the United States. GAO noted that:
(1) one country conducts the most aggressive economic espionage against
the United States to help develop its own defense industrial base, and
to sell or trade information with other countries for economic or
political purposes; (2) another government conducts aggressive and
massive economic espionage against the United States because its primary
goal is to achieve self-sufficiency in arms manufacturing; (3) another
country conducts industrial espionage against the United States for the
same reasons, but at a lower intensity; (4) a country that has no
foreign intelligence service uses its private-sector companies to obtain
economic intelligence from the United States; and (5) a fifth country
has not targeted the United States or its defense industry for
espionage, but has begun to move toward more overt collection of
economic intelligence, which may be diverted to countries to which the
United States would not sell defense technologies.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD-96-114
     TITLE:  Economic Espionage: Information on Threat from U.S. Allies
      DATE:  02/28/96
   SUBJECT:  Foreign governments
             Foreign corporations
             Intelligence gathering operations
             Technology transfer
             Counterintelligence operations
             Proprietary data
             Classified records
             International economic relations

             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file:          **
** [ http://jya.com/ecospy.pdf (119K) ]                         **
** for a complete electronic file of the printed document's     **
** contents.                                                    **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                    <info@www.gao.gov>                        **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


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

GAO/T-NSIAD-96-114

GAO/NSIAD-96-114T


(707158)


Abbreviations
=============================================================== ABBREV


============================================================ Chapter 0

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. 


--------------------
\1 Defense Industrial Security:  Weaknesses in U.S.  Security
Arrangements With Foreign-Owned Defense Contractors (GAO/NSIAD-96-64,
Feb.  20, 1996) [ http://jya.com/defsec.txt ]


   ECONOMIC ESPIONAGE EFFORTS OF
   ALLIES
---------------------------------------------------------- Chapter 0:1

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
-------------------------------------------------------- Chapter 0:1.1

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
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. 


--------------------
\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). 


      COUNTRY B
-------------------------------------------------------- Chapter 0:1.2

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 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. 


      COUNTRY C
-------------------------------------------------------- Chapter 0:1.3

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
-------------------------------------------------------- Chapter 0:1.4

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
-------------------------------------------------------- Chapter 0:1.5

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 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? 


-------------------------------------------------------- Chapter 0:1.6

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. 


*** End of document. ***
