Corporate Cloak and Dagger

By John Greenwald

New efforts are under way to stop an epidemic of industrial espionage

Albert Franz Kessler, 39, a well-to-do Swiss citizen with business interests in Southern California, was among the passengers boarding the London-bound Trans World Airlines jetliner in Los Angeles last May 28. Wearing crisply pressed slacks and a sports shirt, Kessler was looking forward to a relaxing flight as he waited in line to board his plane. But suddenly he spotted two U.S. customs agents at the door of the Boeing 747. All at once nervous, he tried to back away from the entrance to the plane.

Too late. The men rushed forward and arrested him. The charge: conspiring to export advanced electronic defense gear illegally. Inside two Samsonite suitcases that Kessler had checked, agents found more than $200,000 worth of radar and communications testing equipment made by Hughes Aircraft Corp. Last week Kessler and two accused accomplices went on trial in Los Angeles. Kessler, wearing a rumpled suit this time, was handcuffed as he entered the federal courtroom. He and Dierk Hagemann of West Germany and Robert Lambert, a California export consultant, sat silently while their lawyers questioned prospective jurors. The products confiscated at the airport were now in cartons stacked next to the jury box. The intended destination of the goods remains unknown, but officials believe that it was the Soviet Union. Said Donald Roberts, Customs Service assistant regional director, before the trial, which is expected to last several weeks: "This is an extremely important case for us."

Industrial espionage is hardly a new phenomenon. Since earliest times, in fact, it has been a source of fear and the cause of extraordinary precautions. The ancient Chinese were so eager to preserve the secret of silkmaking that they prescribed death by torture for revealing it to outsiders. In 1790 Samuel Slater evaded English laws against exporting textile manufacturing plans by memorizing the layout of a mill to build the first cotton-yarn factory in America.

Today, however, many companies and countries pursue corporate secrets like sharks in a frenzy at feeding time. As Japan, the Soviet Union and Western countries vie with ever increasing intensity for industrial power, the pressure to save years of research time and expense by stealing know-how has created an industrial espionage epidemic. In West Germany, where intrigue has been a way of life since the onset of the cold war, last year for the first time there were more known cases of business spying than of political espionage. In the U.S., thefts of secrets ranging from technological breakthroughs to mailing lists now cost American firms up to $20 billion annually, according to August Bequai, a Washington lawyer and leading security expert. Says he: "Little companies steal from big companies. Big companies steal from little companies. Everybody steals from everybody."

The Reagan Administration and some private experts now view Soviet and Eastern bloc industrial spies as alarming threats, particularly so in California, the nerve center of U.S. defense, aerospace and electronics research. Intelligence sources estimate that more than 30 of the 52 diplomats in the San Francisco Soviet consulate are members of the KGB, the Soviet espionage agency. Says Senator William Roth of Delaware: "There is no doubt that the Soviets have undertaken a massive, well-financed, expertly coordinated program to systematically acquire as much of our high technology as they can steal, purchase through middlemen, or otherwise appropriate." Declares Los Angeles FBI Chief Richard Bretzing: "We've been losing some highly classified secrets."

The leaks flow through known, but hard-to-plug, channels. Highly paid operatives may buy equipment from unwitting U.S. firms and ship it to Communist countries through foreign shell companies. Or thieves with no direct interest in espionage may steal advanced electronic gear from manufacturers and sell it to underground dealers in Southern California. They, in turn, offer it to all comers, with no questions asked. In one ingenious act of deception, Soviet engineers touring an aircraft plant reportedly wore sticky shoes that picked up metal filings that could later be analyzed.

The Reagan Administration this year has pumped an additional $8 million into the Customs Service to help shut off the illegal flow of technology abroad. The program, called Operation Exodus, relies heavily on tips from manufacturers and shippers to stop unlicensed exports from leaving the country. The effort has so far netted 573 seizures valued at some $45 million and led to the arrest of Kessler. U.S. Customs has been proudly touting this record. Says Commissioner William von Raab: "Individual seizures aren't that important in themselves. But they're a measure of what I call the screw-'em-up factor, and right now we're really screwing them up." The FBI, the CIA and the Commerce and Defense departments are also increasing their efforts to combat industrial spying.

Although public attention has recently been on the Japanese, the Soviets are the main focus of Operation Exodus and other campaigns. Insiders say that what the press had dubbed the Japan-scam sting operation was really a trap laid for Communist agents. In that case, the FBI arrested employees of Hitachi Ltd. and Mitsubishi Electric Corp. and charged them with conspiring to transport stolen IBM computer secrets from California's Silicon Valley, near San Francisco, to Japan.

The fact that Japanese businessmen were snared, though, did not surprise some U.S. counterintelligence officers, who say that the Japanese are almost as active as the Soviets. Experts report that the Japanese and other Asians are scouring American high-technology centers in California and Massachusetts in search of industrial secrets. Says one informed observer: "They're very aggressive. They know how to use whatever they get and take it one step further." The flood of cheap copies of Apple computers now pouring out of Hong Kong and Taiwan helps to fuel this view.

Industrial espionage would remain a major problem for U.S. firms even without the presence of foreign spies. Reason: American companies are stealing from each other. John Shea, president of Technology Analysis Group Inc., indicts all of Silicon Valley in the practice. Says he: "It's a very entrepreneurial society here. Trafficking in trade secrets is just a way of life and has been for the past dozen years." Belden Menkus, a top security consultant with offices in New Jersey, offers an even more sweeping assessment. Says he: "If you were to prosecute all companies doing industrial espionage, you would have to put most of the Fortune 500 into jail."

Many large firms are reluctant to acknowledge the theft of secrets for fear of compounding the damage. "Most executives would rather bury the losses in earnings statements than admit that they've lost the family jewels," says New Jersey Consultant Menkus. Businessmen are also hesitant to sue because court cases can both reveal important details of the stolen material and provide an inside look at a company's security system.

Such corporate safeguards are often shockingly lax, particularly when the transmission of computer data is involved. Many firms now routinely bounce this information off satellites instead of sending it over telephone lines. But satellite transmissions are easier to intercept. Companies often fail to take elementary precautions even when they use phone lines. Bank of America transfers about $20 billion by wire every day, for example, without making much use of either scrambling or encryption techniques for protection. The largest U.S. bank relies instead on its own security procedures.

Perhaps the most popular form of industrial spying happens to be totally legal. Companies now make extensive use of the Freedom of Information Act to keep abreast of one another. Although the law was created in 1966 to help the press get access to public records, it is mainly used by corporations to find out what the competition and the Government are doing. The Food and Drug Administration, for example, reports that up to 85% of the requests for information come from other businesses. In one case, a report supplied by the agency under the act revealed details of an exclusive filtration process to a rival manufacturer. Congress is now considering a bill to tighten the measure by allowing firms to challenge disclosures more easily.

Many other acts of corporate espionage fall within a legal twilight zone. Employees who migrate from one firm to another, for example, are a major source of leaks. But since no law prevents a person from carrying ideas and information in his head, companies can do little to stop the flow of facts. Their only legal recourse is a requirement that workers sign nondisclosure statements, backed up by the threat of court actions if the agreements are violated.

Damaging information can leak out of any part of a company, from the mail-room to the executive suite. The motive for some informants is money, while for others it may be a desire for revenge. "That former vice president can really zap you," says Industrial Espionage Expert Bequai. Computer programmers are particularly rich sources of secrets because they handle massive amounts of data. Salesmen also spread tidbits as they make their rounds, gossiping and exchanging news.

Many high-technology firms steal secrets without even bothering to hire away another company's employees. They simply use the prospect of a job to pump information from eager applicants during interviews. That technique has long been in wide use among the 1,300 or so high-tech firms packed together in 250-sq.-mi. Silicon Valley. William H. Bell, a convicted spy who sold military secrets to a Polish agent, described the approach to a congressional committee in May. Said he: "Within the avionics industry, it is a common practice for all companies to obtain secrets of their competitors by the same techniques that the agent used with me. Considerable benefits are dangled in front of the engineer in terms of increased earnings and a better position. He is asked to produce samples of his work, without regard to its security classification. Sometimes he is hired. More often he is not."

The financial rewards of espionage have created some strange and frightening partners. Among those attracted to high-technology centers have been professional criminals who resort to blackmail, bribery and the use of sex to obtain equipment and proprietary information.

Dave Roberts, a known criminal and narcotics user, was to testify last October in a trial arising from the theft of $100,000 worth of integrated electronic circuits in Santa Clara, Calif. The defendant was ultimately convicted, but without Roberts' help. One month before the trial, he was murdered execution-style and dumped in a shallow grave in the nearby Santa Cruz Mountains.

The boom in corporate espionage has triggered a corresponding explosion in the business of guarding secrets. Revenues of security consulting firms topped an estimated $200 million in 1981, and should double that amount this year. New shops are springing up across the landscape, and Burns International, Pinkerton's and other traditional protection companies are rapidly expanding. The Washington-based American Society for Industrial Security now has more than 18,000 members.

The mushrooming firms offer a bewildering variety of services and devices (see box). Some merely sweep for electronic bugs and telephone taps several times a year. Others conduct prehiring investigations, give lie-detector tests, place undercover agents on assembly lines and even scrutinize potential customers.

Security-minded companies have added their own panoply of defensive measures. Many high-technology firms have installed electronic gear that rivals their own products in sophistication. Ultrasonic motion detectors emit high-frequency sound waves that can instantly sense intruders. Invisible infrared beams of light set off alarms as they are broken. Rolm Corp., a Silicon Valley computer manufacturer, uses an electronic control room to monitor its extensive protection system.

No surveillance equipment is foolproof, however, because miniaturized state-of-the-art components can easily be dropped into a pocket or hidden inside a coat lining. Says Robert McDiarmid, a former sheriffs lieutenant and now a partner in a California security firm: "I don't give a damn how good your system is, or how sophisticated your hardware. Generally speaking, when the system fails, it's a people failure." The best way to solve that problem may be the one used by companies like IBM and Apple Computer, which strive to keep their employees loyal by treating them fairly and warning them constantly about the importance of corporate security.

Industrial espionage can be tamed a bit, but it will probably never be entirely subdued. Competition will always lead some companies or countries to try it, and a few dishonest employees will undoubtedly always be found. But both the Government and a growing number of firms now seem determined to keep spying to a minimum.

--By John Greenwald.

Reported by Jay Branegan/ Washington and Benjamin W. Cate/ Los Angeles

With reporting by Jay Branegan, Benjamin W. Cate

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