China's Spies Target Corporate America In the great game of economic espionage, China is emerging as a bold new player. Its primary mission: to get its hands on the world's most advanced technology.
By Edward A. Robinson Reporter Associate Ann Harrington

(FORTUNE Magazine) – For China's all-powerful spy agency, the Ministry of State Security, Bin Wu was a chen di yu, a "fish at the bottom of the ocean"--a long-term agent operating under deep cover. The ministry had sent Wu, a 33-year-old former philosophy professor from Nanjing, to the U.S. to acquire technology and military items and export them back to China through an MSS-controlled front company in Hong Kong. A member of the pro-democracy movement, Wu had been told to spy or face arrest. So this reluctant agent approached the FBI's elite counterintelligence office in 1991 with an invaluable gift: a chance to use him as a telescope into the shadowy world of Chinese intelligence operations.

Wu seemed the ideal double agent. He was motivated, smart, and articulate, and formed a strong bond with his FBI handler. And according to court records, no sooner had the bureau started running Wu (code name: Succor Delight) than he delivered the identities of his MSS handlers, their front companies, other Chinese agents operating in the U.S., and even information on a group of Yugoslavians who were trying to purchase Chinese rocket launchers.

But in 1992, Wu's cover was blown, and today, instead of operating as an FBI "foreign national asset," Wu sits in a federal prison in western Pennsylvania serving a ten-year sentence for violating the Arms Export Control Act. In an interview with FORTUNE, he says that he has filed a petition to avoid the customary fate of freed foreign felons--being deported home after he is released in 2001. "I hope I can stay here after what I did for this country," Wu says in carefully phrased English. "There is no doubt in my mind that if the Chinese get their hands on me, I will die."

As this disturbing episode suggests, China has for some time been spying on corporate America. What's only beginning to be understood is the scope and depth of its intelligence-gathering apparatus. "This is serious business," says Sen. Richard Shelby, chairman of the Senate Select Committee on Intelligence. "China is trying to make the great leap forward, technologically speaking, and it has great needs for information, especially in the high-tech field. This is going to be an ongoing challenge for both law enforcement and business."

Indeed. Intelligence officials, members of Congress, corporate security directors, and former Chinese spies themselves tell FORTUNE that over the past several years Chinese-backed industrial spying has increased dramatically against U.S. business. In a soon-to-be-released survey of 1,300 major U.S. companies, the American Society for Industrial Security (ASIS), an association for corporate-security types, found that America business now sees China as its No. 1 foreign economic-espionage threat.

According to the experts, China's commercial spy apparatus has been targeting two fronts simultaneously: the U.S. government and corporate America. Suspicions that Beijing sought to pilfer classified economic reports from Washington are already creating a buzz on Capitol Hill. Senate Republicans investigating the Clinton campaign fundraising scandal have suggested that John Huang, formerly assigned to the Taiwan desk in the Commerce Department, may have passed secret economic and trade material to China. Democrats respond that the Republicans have no hard evidence to prove such a charge. Huang's lawyer denies the charge.

But the evidence for a PRC assault on corporate America is stronger. Recent examples:

--Amgen discovered that a Chinese spy had infiltrated its organization and was trying to steal a vial of cell cultures for Epogen, now a $1.2-billion-a-year anemia drug.

--A Chinese spy in Hong Kong was recently caught using sophisticated telecommunications software to secretly listen in on sensitive phone conversations between American executives.

--A Chinese engineer working at a Boulder, Colo., software company allegedly stole proprietary source code and peddled it to a PRC company. As a result, the company went out of business.

To be sure, China is not alone in this game. In January, FBI Director Louis Freeh testified to Congress that the companies or governments of 23 countries are currently involved in the illicit acquisition of U.S. trade secrets and that 12 of those have aggressively "targeted U.S. proprietary economic information and critical technologies."

Before China emerged as a major new player in this old game, Japan and France clearly led the pack. In the 1980s, Hitachi was caught trying to steal secrets from IBM. More recently the Commerce Department warned American aerospace executives to watch out for spying by French intelligence at the Paris Air Show--Hughes Aircraft pulled out altogether. Of course, the U.S. itself is not above blame. Just last year Germany reportedly accused an American diplomat of committing economic espionage by trying to obtain information on high technology. It expelled the diplomat, who was believed to be a CIA officer operating undercover.

And now, into this wilderness, steps China. Says Richard Heffernan, a corporate security consultant based in Branford, Conn.: "It is a naive company that thinks that just because it doesn't have a venture in China, it's not at risk of being penetrated here at home." Late last year a concerned Congress passed a law that requires the U.S. intelligence community to prepare a classified report specifically on Chinese intelligence activities, citing economic-espionage operations as one of its top priorities. On top of that, the U.S. Trade Representative's Office is insisting that the Chinese government take action against industrial espionage and product piracy as a condition of joining the World Trade Organization.

The Chinese government flatly denies that it is involved in economic espionage. China does say that it is eager to absorb technology from around the world and sometimes uses its market might to get foreign companies to share their technology. Explains Yu Shuning, the press secretary at the Chinese Embassy: "For our modernization program we are trying hard to learn from others. But everything is done on a commercial basis for everyone's mutual benefit. When you sell your products to China, you earn a profit, and in this kind of deal we should benefit also, and sometimes that may be from technology transfer, but this is always done through lawful, normal means."

Chinese industrial spying is believed to run the gamut from routine competitive intelligence gathering of company information on Websites and at trade shows to the theft of company trade secrets from offices and labs. No one really knows for sure the value of the secrets stolen or which industries have been hit the hardest--although computers, biotech, and defense probably top the list.

As experts take a closer look at China's intelligence operation, they are also finding it difficult to determine how organized it is. Is Beijing using its spy services to direct an overarching program of industrial espionage in the U.S., or is Chinese spying driven primarily by independent black-marketers out to pocket illicit profits?

Nicholas Eftimiades, an intelligence officer with the Pentagon's Defense Intelligence Agency and author of the book Chinese Intelligence Operations, believes that Beijing's intelligence services have erected an extensive spy network in the U.S. that bears all the hallmarks of a John le Carre spy novel. Eftimiades says the network focuses as much on netting commercial secrets as on traditional military and political targets.

According to Eftimiades, officials at the Ministry of State Security, which runs civilian intelligence activities domestically and abroad, "task" agents to acquire products or data requested by Chinese industry. "They request thousands of items from abroad every year," agrees Stanislav Lunev, a former colonel in the Soviet Union's military-intelligence branch, the GRU, who was stationed in Beijing. Some of those items might be off-the-shelf products like a fertilizer, a machine tool, or a compact-disk player, and the Chinese enterprise requesting the item might simply be seeking to harmlessly "reverse engineer" it. But many of the items sought are also trade secrets, says the former Russian spy, who defected to the U.S. in 1992. "Only now are American companies starting to open their eyes and see the level of Chinese espionage in their country," says the old cold warrior, with a wry smile.

Both Eftimiades and Lunev say the MSS recruits professionals, college students, and scientists to be agents in the U.S. Some are instructed to ingrain themselves in companies, universities, and government, and provide a lifetime of service to their spymasters. Information funneled back to China could be as harmless as an annual report or as harmful as proprietary computer code developed after years of R&D spending.

One such former Chinese agent, who fears for family members back home and has asked to remain anonymous, has told FORTUNE about a school in Nanjing that trains these spies. Over the past decade, this former agent has periodically recognized fellow graduates from the school working in companies from Silicon Valley to Massachusetts and even in the halls of government in Washington.

Systematic as all this sounds, there is also evidence that a great deal of Chinese espionage is actually not so organized, but rather the work of freebooters. Though they might exploit connections to the Chinese state, most of these types are operating on their own for lucre, pure and simple. Take the case involving Amgen, the biotechnology firm based in Thousand Oaks, Calif. In 1993 the company's information-security director, William Boni, learned through an anonymous letter that an employee was poised to steal a vial of cell cultures for Epogen, a drug that helps kidney dialysis patients and that had generated $587 million in revenue for Amgen that year. Boni pulled the accused thief's phone records and saw that over the past few weeks the man had placed more than 70 personal telephone calls to China.

Working with the Hong Kong office of Kroll Associates, the New York private-investigation firm, Boni learned that the employee was hunting for Epogen buyers in China and had, through intermediaries, made contact with Chinese government officials. Boni and his Kroll associates put the employee and his partner under surveillance. Then, on a Sunday evening, the spies entered Amgen's labs, and Boni's team pounced. Stunned, the employee confessed to the plot. Yet Amgen chose not to pursue any criminal action because Boni had stopped him before any real damage had been done. All the company did was fire the man.

Chinese spy operations can run from the sublime to the ridiculous. In one episode that smacked more of Maxwell Smart than James Bond, members of a Chinese scientific delegation at a Paris trade show were seen dipping their neckties into a photo-processing solution made by Agfa, the German photography company. Apparently the delegates--much to the amusement of French security officials --hoped to analyze "specimens" of the solution taken from their ties.

Yet other incidents reveal a high degree of sophistication. In one case three years ago, security consultant Heffernan exposed a Chinese spy in Hong Kong who was trying to learn an American high-tech company's secrets by manipulating a piece of telephone software known as executive override. That feature allows anyone to listen in on lines. The spy, however, had disabled the warning tone indicating the call is being monitored and had used the program to eavesdrop on sensitive conversations between executives. Fortunately, the spy left an obvious electronic fingerprint on his handiwork, and he was caught. Even though the company's top brass were furious, little was done, other than sending the exposed operative on his way.

Why did Heffernan's clients let the guy go? Actually, this reaction is not uncommon. Companies victimized by espionage are concerned that going to the authorities will publicize the incident and leave the impression that they don't take their security seriously or are even incompetent. Such a disclosure can dampen a stock price, scare off customers, or in serious cases topple senior executives. "When a company gets hit by a spy, it's like it suddenly has a sexually transmitted disease," says Kevin D. Murray, a New Jersey-based specialist in electronic-surveillance detection. "Everyone wants something done to prevent it from spreading, but no one wants to talk about it, even though talking about it, sharing the experience, is the only way to make it safer for everyone to do business."

Chinese espionage poses a special set of worries. The last thing U.S. firms want to do is antagonize Chinese officials, who hold the keys to a market with 1.2 billion people--something an embarrassing public accusation of spying is likely to do. James P. Chandler, president of the National Intellectual Property Law Institute in Washington, D.C., says scores of American companies are continually parrying Chinese penetration, both in ventures in China itself and at home in the U.S., but making little noise about it publicly. His latest message: Corporations should report incidents of spying to the authorities. Chandler argues that when a victim keeps a crime hushed up, it sends a dangerous message that it's okay to steal intellectual property. And that will encourage countries like China to keep on spying. "The gravity of what's involved here has not come home to a lot of U.S. industry, from lawyers on up to senior management," says Chandler.

That said, Americans should be careful not to brand all Chinese businessmen as spies, especially at a time when U.S.-China relations are already strained. In fact, one can argue that there's a gray area between spying and good old-fashioned competitive intelligence. "We need to be very careful with these kinds of issues," says Evan Feigenbaum, a fellow with the John M. Olin Institute for Strategic Studies at Harvard University and an expert on China. "People can be very incautious with the term 'espionage,' and the simple fact that the Chinese are interested in technology doesn't mean it's espionage."

So there lies the dilemma. On the one hand, a CEO must protect his trade secrets. But he also doesn't want to create a suffocating, Orwellian culture that stifles the free flow of ideas--something that has become an increasingly vital ingredient in today's knowledge economy. The fact is, companies must strike a fine balance between protecting their intellectual property and encouraging open discourse with those outside their corporate walls. And with China's bold new entrance into the industrial spy game, that's not going to be easy.

REPORTER ASSOCIATE Ann Harrington