State Entities Targeting Intellectual Property

June 25, 2009 by ADMIN

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By Richard Power and Christopher Burgess

Read Secrets Stolen, Fortunes Lost: Part I Here

Secrets Stolen, Fortunes Lost Part II: When State Entities Target Intellectual Property

State-sponsored economic espionage and intellectual property theft are the most sophisticated and formidable threats.

Why do nation states engage in economic espionage and intellectual property theft? Primarily, to acquire technology to advance a military program, or to advance the economic competitiveness of the nation’s industrial base, or simply to ensure that the major companies and contributors to the nation’s GDP continue to make that contribution.

How do nation states affect the acquisition of coveted intellectual property? In some instances, they engage their own law enforcement or intelligence services to surreptitiously acquire it, while in other instances, they publicly engage the owners of the intellectual property with a demand, which it believes is in the best interest of their citizens.

State-sponsored economic espionage and intellectual property theft are global issues. The threat is not unique to U.S. businesses or researchers. Many nations conduct such activities, and the interests of many nations are targeted.

When an insider is co-opted by an intelligence service, the activity becomes more sophisticated, and the ability to detect and/or defend against it is beyond the means of most corporate security mechanisms.

Ironically, sometimes the target is a company that was itself found guilty by the legal system as having instigated instances of industrial espionage, and to have stolen a competitor’s intellectual property.

Here are some examples:

French Intelligence

One well-documented historical case concerns Airbus’s egregious attempt to bribe its way into the 1994 Saudi Arabian Airlines fleet-modernization effort by offering bribes to individuals from both the Saudi airlines and government.

During a 1994 visit to the late King Fahd, then-French Prime Minister Edouard Balladur had hoped to follow through and secure the $6 billion order for Airbus. But he was derailed when the United States provided the Saudis with U.S. National Security Agency (NSA) intercepts, which fully documented the nefarious French activity.

Without the U.S. government’s intercession, the U.S. aviation industry might have been found “non-competitive.”

Pierre Marion and Charles Silberzahn, former directors of the French foreign intelligence service, Direction Generale de la Securite Exterieure, have publicly stated that one of its priorities is to collect economic intelligence. Silberzahn even noted that French efforts had been successful, and theft of classified and proprietary information was a long-term government policy.

Russian Intelligence

In January 2005, Russian Prime Minister Michail Fradkov requested the leadership of Russia’s internal security service, the Federal’naya Sluzhba Bezopasnosti (FSB), to increase its efforts to assist Russian commercial enterprises:

We continue to require up-to-date information from the FSB that allows us to form a quality legal foundation and to make decisions on leveling the playing field for competition, developing businesses and creating an attractive investment climate.

While no surprise to many experts who believe that Russia has been covertly engaged in such activity since even before the Cold War, Fradkov’s statement was nevertheless tantamount to a public declaration that the Russian government’s intelligence and security services engage in collection and reporting activities in support of Russian commercial enterprises.

In late October 2005, the Public Safety Department of the Tokyo Police charged Vladimir Saveliev, an officer in Russia’s foreign intelligence service, the Sluzhba Vneshny Razvedki (SVR), with having recruited an employee of Toshiba Discrete Semiconductor Technology. Saveliev, who was serving undercover as a diplomat assigned to the Russian trade mission in Tokyo, is alleged to have paid this unidentified Toshiba employee 1 million yen (approximately US$9,000) for proprietary information that had military applicability and referenced semiconductor systems for electric flux control, missile guidance systems and jet fighter radars.

In early 2004, Saveliev, posing as an “Italian consultant,” introduced himself to the unidentified Japanese citizen. They met nine times between September 2004 and May 2005, in Tokyo’s cheap beer shops and bistros. The information was passed on to Saveliev via “smart memory cards.” In June 2005, Saveliev quietly departed Japan.

Why did the SVR target Toshiba? Perhaps the information would be used to augment Russian military knowledge of technology used in an adversary’s weapon systems? Perhaps it was provided to a Russian commercial or state-owned entity to jump-start research and development activities, and thus garner greater market share in the global economy? Whatever the motivations behind the theft, its implications aren’t limited to Toshiba, or to the Japanese law enforcement and counterintelligence entities involved in the investigation. And although Toshiba claims the loss is minimal (the information stolen is now freely available), there are, nevertheless, long-term issues to be addressed.

Future users must consider the fact that the technology was of sufficient importance to the Russian Federation that it used its most valuable intelligence resource (an undercover intelligence officer) to acquire Toshiba’s intellectual property. Remember, Saveliev was posted abroad, serving under diplomatic cover within the Russian commercial office in Tokyo. He opted to undertake a high-risk operation—using an alias persona in a city where he was well known in his true persona. Is this a case of incompetence? Why was the information of such import that it warranted the risk of discovery, especially when it appears that the information could have been obtained by Saveliev via direct overt contact? Surely, the SVR resident—i.e., the head of the SVR field entity—in Tokyo weighed the risks, or blowback, against the potential gain. The technical requirement levied by headquarters must have been extraordinarily important.

In this case, a government had a need, and its special services moved forward to fulfill the need, and used its human intelligence tools to recruit someone who had access to information of interest, i.e., an insider. But that isn’t the only covert methodology used by nation states.

Japan’s Institute of Physical and Chemical Research (RIKEN)

In May 2001, the U.S. attorney in the Northern District of Ohio indicted Takashi Okamoto and Hiroaki Serizawa for the theft of intellectual property belonging to the Lerner Research Institute of the world-renowned Cleveland Clinic Foundation (CCF). According to DoJ, from January 1998 through September 1999, Serizawa and Okamoto conspired to misappropriate genetic research materials from the CCF, specifically, “deoxyribonucleic acid (DNA) and cell line reagents and constructs” developed to study “the genetic cause of and possible treatment for Alzheimer’s disease.” The indictments charged that Okamoto and Serizawa then provided the stolen research to the Japanese Institute of Physical and Chemical Research (RIKEN), a research facility owned by the government of Japan. Subsequently, the indictments further allege that RIKEN, at the direction of the Japanese Ministry of Science and Technology, formed a Brain Science Institute to conduct research in the area of neuroscience (which includes the genetic cause and possible treatments for Alzheimer’s).

DoJ alleged that Okamoto intended not only to purloin the CCF’s research and results, but also to destroy and sabotage the DNA and cell line reagents and constructs that were left behind. Okamoto shipped the boxes of stolen materials to Kansas, where Serizawa resided, and then hand-carried them to Japan a month or so later. The investigation showed that Serizawa had been an unwitting accomplice of Okamoto, and was duped into storing the stolen research. Serizawa was convicted of making false statements to the FBI, fined $500 and placed on probation for three years. In addition, his movements were restricted, and he was ordered to perform 150 hours of community service.

The government of Japan claimed no knowledge of the activity. The DoJ continues to seek the extradition of Okamoto from Japan. There are important questions that remain unanswered. Was Okamoto sent to the CCF to obtain a trusted position and then abscond with the intellectual property, to provide RIKEN with a baseline from which to begin its efforts on Alzheimer’s disease? Or was Okamoto simply a conniving individual who saw an opportunity to propel himself to the front of the Japanese research community? And why won’t the government of Japan deliver Okamoto to the United States for prosecution by the DoJ?

TsNIIMASH-Export

TsNIIMASH-Export is a state-owned Russian space technology company run by the Central Scientific Research Institute for Machine Building, and located in Korolyov, the center of Russian space community and home to the “Mission Control” for all Russian space flights.

On Oct. 25, 2005, TsNIIMASH-Export Director Igor Reshetin, along with his deputy Sergei Tverdokhklebov and Tverdokhklebov’s aide, Alexander Rozhkin, were arrested by the FSB, and charged with embezzlement and the selling of secret Russian space technology to China.

They were alleged to have illegally provided Russian space technology to a Chinese import/export company specializing in precision engineering. The dual-use technology apparently had applicability to Russian weapon systems, and could have potentially provided the Chinese military with valuable, secret information. The trio was also charged with embezzling approximately US$1 million of TsNIIMASH-Export’s funds through multiple front companies.

Is this case an instance of state-sponsored economic espionage, personal greed and opportunism, or both? The FSB is certainly treating it as if it were state-sponsored, and has also deemed it of sufficient importance to publicize the arrest of the head of one of Russia’s most respected technological concerns and link his alleged crimes to a Chinese organization. The timing, in the midst of the successful Chinese manned space flight, invites another question: Is there a message being sent to the People’s Republic of China (PRC) by the Russian Federation? There has been no comment from the government of the PRC, nor has the identity of the Chinese company or its employees been revealed.

Coca-Cola in India

There are also, of course, overt nation-state attempts to garner intellectual property from corporate entities for a variety of reasons. Currently, the estimated value of Coca-Cola’s trademark is greater than US$70 billion. Would it be at this current value had Coca-Cola acquiesced to the government of India in 1977? Maybe, maybe not, but Coca-Cola didn’t take any chances. It protected its intellectual property.

In 1977, Coca-Cola controlled the Indian cola soft-drink market, and Indira Gandhi’s Congress party had just lost control of the legislature to the Janata Party. One of Ghandi’s prime financial backers was the Coca-Cola bottler/distributor. In an apparent act of political revenge, new Industry Minister George Fernandes applied the Foreign Exchange Regulation Act, which at the time strictly limited foreign investment in domestic companies to 40 percent. Coca-Cola’s equity investment exceeded the threshold. Fernandes told Coca-Cola officials to divest, and transfer their intellectual property, i.e., the syrup formula, to their Indian partners. The only alternative was to leave the Indian market. Coca-Cola opted to leave. It returned 12 years later, in 1989. Fernandes continues to advocate the removal of Coca-Cola from the Indian domestic market. Would or could this happen today? Countries can, and sometimes do, nationalize commercial concerns.

Abbott, Merck and Gilead in Brazil

In 2005, the Brazilian Ministry of Health presented Abbott Laboratories of Chicago with an ultimatum: Either you reduce the price of Kaletra (an effective AIDS/HIV drug), or we will break the patent and produce the drug ourselves. After a month of negotiation, Abbott opted to reduce the price for Kaletra, from $1.17 a pill to 63 cents a pill, effectively reducing the cost to the government of Brazil by approximately $339 million over six years. Health Minister Jose Saraiva Felipe noted:

With the agreement, the need for breaking the patent is suspended. The price we reached is what the national AIDS program could pay.

Brazil has also engaged other pharmaceuticals in discussions aimed at reducing the price of the antiretroviral drugs. It wants Merck Laboratories to allow it to produce a generic version (efavirenz) of Stocrin. It wants Gilead Laboratories to give it a discount on the price of Viread, which costs about $7 a capsule, but is available in generic form (tenofovir) from India at less than $1 a capsule.

There is nothing covert about Brazil’s effort; it is publicly stated policy. The amount of funds available in the nation’s coffers to provide free AIDS/HIV antiretroviral drugs to the infected population of Brazil is defined. Brazil has opted to engage in a frontal attack on the pharmaceutical industry. Some call this tactic no more than industrial blackmail; others call it socialism at its best.

Roche in India

The avian flu outbreak in the Far East has created a fear of a global pandemic, and governments around the globe are demanding product. In India, Dr. Ashwani Kumar, drug controller general of India, has noted that Roche Holdings of Switzerland does not have a Tamiflu product patent in India, and therefore, India does not recognize the international patent license, which Roche does possess. Kumar has invited Indian companies to file license applications with the government to produce a generic form of Tamiflu.

Although invited to break the patent, two Indian biopharmaceutical manufacturers, Cipla and Ranbaxy, are reported to be working with Roche to license Tamiflu, and then develop the generic Tamiflu (oseltamivir) without resorting to breaking the patent. In addition, Roche has approached a number of other drug manufacturers to discuss licensing Tamiflu, which Roche itself obtained via exclusive license agreement from Gilead Laboratories in 1996. While there is no guarantee any of these discussions will lead to a licensing agreement, Roche is hopeful that such will be possible, and that an equitable relationship will be sought to address the emergency need for Tamiflu.

In 2003, the World Trade Organization agreed to allow governments to override patents during national health crises, but as of October 2005, no member state had invoked the clause with respect to the avian flu.

Despite requests from a number of countries to allow generic production of the drug, Roche is standing firm on its unwillingness to relinquish the patent, which is protected into 2016, and demanding a licensing fee. It stood to earn approximately $1 billion from Tamiflu sales in 2005. Roche spokeswoman Martina Rupp defends the position: “Since we have been making this drug for the last 10 years, it would be best for countries to enter into discussion with us.” Rupp noted that the 10-step process of manufacturing Tamiflu is complex.

What will prevent a nation from extending the concept that worked so well with pharmaceutical manufacturers to other sectors? The precedent has been set. The World Intellectual Property Organization must address this issue; otherwise, the basic incentive to invent, create and innovate will be dealt a severe blow.

Where Does It End?

Attacks on intellectual property, whether covert or overt, have profound consequences and sweeping implications.

A lawless world, in which government intelligence services routinely insinuate themselves into competition between commercial enterprises in the private sector, and internationally recognized patents can be unilaterally disregarded by governments, whether motivated by the social good or geopolitical ambition, will certainly not contribute to the establishment of peace and prosperity for all nations. Nor does a lawless world, in which private-sector corporations can move freely and globally, without restraint, conscience, accountability or international oversight, lead us any closer to that lofty goal.

The United States has no program or policy to provide economic or industrial competitive intelligence to U.S. businesses. The country’s economic policy precludes it.

U.S. governmental efforts are focused on the protection of intellectual property owned by U.S. persons or U.S. corporate entities, and keeping the economic pitch level as U.S. corporations compete within the global marketplace.

Discussion points have been made both for and against allowing U.S. governmental agencies and departments, such as the Department of State, Department of Commerce, the National Intelligence Director and the various agencies that make up the U.S. intelligence community, to devote resources and provide economic intelligence to U.S. persons or corporations.

The best approach is to maintain the current policy, except when U.S. corporate interests are specifically targeted by a foreign government-sponsored activity, or when the economic playing field must be leveled. The U.S. government’s abilities should be dedicated to national security issues. No U.S. intelligence officer should put his or her life in jeopardy to improve shareholder value. The ultimate sacrifice should be reserved only for the nation’s security.

According to a study published by USA for Innovation (www.usaforinnovation.org) in late October 2005, intellectual property in the United States alone carried the value of US$5 trillion to $5.5 trillion, equivalent to 45 percent of the gross domestic product, far larger than the GDP of any other nation. The intellectual property retained by U.S. companies is central to U.S. economic security. This study also indicates that a direct correlation exists between the level of a nation state’s protection of foreign-owned intellectual property and the level of foreign investment in that same country—i.e., where the state offers increased protection of the investor’s intellectual property, investors increase their investment in the nation’s economy.

The United States is under economic attack, according to the National Counterintelligence Executive’s report to U.S. Congress in February 2005. The report goes into some depth in identifying the types of foreign entities conducting industrial and economic espionage, the kind of information targeted by these foreign entities, and which foreign entities are attempting to acquire sensitive U.S. technology (either classified or proprietary)—be they private or governmental.

The report indicates that individuals from almost 100 separate countries attempted to acquire sensitive U.S. information. Characterizing the role of the state-supported intelligence collection effort against U.S. technology and intellectual property, it states:

“It is clear, however, that some foreign countries, including the major players, also continued to employ state actors—including their intelligence services—as well as commercial enterprises, particularly when seeking the most sensitive and difficult to acquire technologies.”

The report identified several dual-use areas as being targeted, including:

• Information systems
• Military production processes and communication systems
• Aeronautics
• Electronics
• Armaments
• Energy materials

The report laments the difficulty of tracking the foreign targeting of purely civilian technologies, and highlights U.S. organizations’ reluctance to share information. Such reluctance, it opines, is due to their not wishing to highlight their losses, because such revelations could have a deleterious effect on “investor and consumer confidence and stock prices.”

Commercial technologies identified as stolen by foreign entities included:

• Semiconductor production processes
• Computer microprocessors
• Software
• Proprietary information
• Chemical formulas

The U.S. counterintelligence community expects no decline in foreign intelligence activities, and also notes that stemming the flow of information will become even more difficult. The report specifically mentions the challenge of isolating trade secrets from foreign managers and employees and U.S. companies’ increasing practice of placing their research and development centers in foreign environs.

U.S. corporations must take appropriate steps, on their own initiative, and incorporate security procedures in order to effectively protect their intellectual property against the efforts of foreign governments eager to obtain it.

Read Secrets Stolen, Fortunes Lost: Part I Here

Watch for Secrets Stolen, Fortunes Lost: Part III

Christopher Burgess is a Senior Security Adviser for a Fortune 100 firm, and is a retire of the U.S. Central Intelligence Agency, with 30 years of experience in the clandestine services. He can be reached via e-mail: cburgess@att.net and his website is www.secretsstolen.com

Richard Power (www.wordsofpower.net) is an internationally recognized authority on cybercrime, information age espionage and other threats. He can be reached via e-mail: richardpower@wordsofpower.net.

NOTE: Portions of this study were reviewed, and cleared without objection, by the Publication Review Board of the U.S. Central Intelligence Agency. Originally published June 2006 by CSO Magazine - www.csoonline.com.

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