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Intellectual property in China

China ‘has taken the gloves off’ in its theft of US technology secrets

  • US officials say Beijing over the last two years has significantly ramped up its economic espionage
  • The spike in hacking is taking place after a marked lull in such activity during the last two years of the Obama administration
PUBLISHED : Monday, 19 November, 2018, 4:56am
UPDATED : Monday, 26 November, 2018, 4:37pm

It was the great microchip heist – a stunning Chinese-backed effort that pilfered as much as US$8.75 billion in patented American technology.

US officials say the theft took a year to pull off and involved commercial spies, a Chinese-backed company, a Taiwanese chip maker and employees affiliated with Micron Technology, a US-based microchip behemoth.

Yet what Micron called “one of the boldest schemes of commercial espionage in recent times” is most notable because it is not unusual.

Beijing over the last two years has significantly stepped up its swiping of commercial technology and intellectual property, from jet engines to genetically modified rice, as relations with China have grown more acrimonious under US President Donald Trump, according to US officials and security experts.

“They want technology by hook or by crook. They want it now. The spy game has always been a gentleman’s game, but China has taken the gloves off,” said John Bennett, the special agent in charge of the FBI’s San Francisco office, which battles economic spies targeting Silicon Valley.

“They don’t care if they get caught or if people go to jail. As long as it justifies their ends, they are not going to stop.”

The Trump administration has toughened its rhetoric against China and announced several dramatic arrests as the threats – and the costs – have soared.

In a harshly worded speech last month, Vice-President Mike Pence accused Chinese security agencies of masterminding the “wholesale theft of American technology”.

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China long has prioritised stealing US intellectual property to boost its domestic industries and its rise as a global power, according to federal law enforcement officials.

They say Beijing relies on an army of domestic computer hackers, traditional spies overseas and corrupt corporate insiders in US and other companies.

The surge in economic espionage comes as Trump has lobbed broadsides at China over trade, security and other issues.

He has railed against what he calls China’s unfair trade policies, and has imposed tariffs on US$250 billion of Chinese goods. Beijing has counterpunched, imposing duties on US$110 billion in US goods.

Efforts to resolve the expensive trade war have been bogged down for months. Trump is expected to meet with Chinese President Xi Jinping on the sidelines of a Group of 20 summit in Argentina late next week.

US officials say Chinese thefts of US commercial software and technology are relentless, growing and hitting on multiple fronts – with hackers penetrating corporate and government email and digital networks, and Chinese operatives recruiting US executives and engineers to spill juicy secrets.

The spike in hacking is taking place after a marked lull in such activity during the last two years of the Obama administration.

After a spate of digital attacks on US defence contractors, telecommunications and other companies traced back to China, then US president Barack Obama confronted Xi during an informal summit at Sunnylands in Palm Springs in June 2013.

Obama said he expressed “deep concerns” about China’s theft of intellectual property and hacks of private and government computer networks, warning of “uncharted waters” in global cybersecurity.

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When Xi returned in September 2015 for a state visit to the White House, he and Obama finalised a series of tough cybersecurity measures.

Among them, according to a White House fact sheet, neither government would “conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors.”

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US officials say China probably entered the accord to avoid threatened sanctions and stepped-up legal pressure, including the 2014 indictment of five Chinese military hackers on economic espionage charges.

CrowdStrike, a cybersecurity technology company based in Sunnyvale, California, assessed that Chinese commercial hacks plummeted as much as 90 per cent in the months after the agreement was reached.

That trend has since reversed itself, US officials and cyber experts say.

Over the last two years, Beijing has drastically increased its hacking of US industry, growing far more aggressive in its economic espionage, said Dmitri Alperovitch, CrowdStrike’s co-founder and chief technology officer.

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“It is being done at a high pace,” Alperovitch said in a telephone interview. “Is it exactly at the same level as before the accord? That is harder to tell. But the threat is definitely back and has increased since 2016.”

Alperovitch and US officials also have noticed a shift in who is behind the attacks. China’s military is no longer directing the bulk of the hacks. It appears China’s chief civilian intelligence agency, the Ministry of State Security, has taken the lead instead.

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The trend is troubling because the spy service employs more sophisticated and seasoned hackers than the military, and catching and attributing the digital sabotage or thefts are more difficult.

“Their tradecraft is much better,” Alperovitch said.

It took federal prosecutors in San Diego years, for example, to finally bring criminal charges in October against two Chinese intelligence officers and five alleged hackers.

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They are accused of conspiring from 2011 through 2015 to steal aviation and technology data from a slew of private companies in the US and overseas.

China has also increased its efforts, US officials say, to recruit corporate insiders to provide trade secrets.

The Justice Department disclosed in October that the FBI had arrested a Chinese intelligence operative in Belgium in a sting operation. Yanjun Xu, a senior officer with the Ministry of State Security, was charged with attempting to commit economic espionage and steal trade secrets from multiple US aerospace companies, including GE Aviation, by paying employees to steal secrets for him.

He was flown to the United States and arraigned in a federal court in Cincinnati, where GE Aviation has spent decades developing jet engines and fan blades. The case drew headlines as the first known extradition of an alleged Chinese spy to face US charges. He has pleaded not guilty.

Several other major economic espionage cases have emerged in recent months.

In September, federal prosecutors charged a Chicago man with giving Beijing detailed information on engineers and scientists who might make good recruits.

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In August, a former scientist at GlaxoSmithKline, a pharmaceutical giant, pleaded guilty in Philadelphia to federal charges of stealing data and research on bio-pharmaceutical products. The scientist, working with two friends, had established a firm in China, with financial backing from Beijing, to develop anti-cancer drugs, court records show.

The Justice Department also charged two Chinese researchers with conspiring to steal rice seeds designed for use in medicine.

“The problem here is the scale and scope of the threat,” said John Demers, the Justice Department’s assistant attorney general for national security. “It is both impressive and frightening. The Chinese are methodical, persistent and well-resourced. It’s a concerted effort to steal and gather the know-how to produce technology.”

A representative of the Chinese Embassy in Washington did not respond to emails seeking comment. China in the past has denied state support for corporate espionage, and said it was often the victim of US spying.

The Chinese theft from Idaho-based Micron shows how a major US technology company was targeted and systematically rifled of trade secrets, according to a federal indictment unsealed last month in San Francisco.

Among Micron’s most successful products are dynamic random-access memory microchips.  Dynamic random access memory (DRAM) chips help power most of the world’s electronic gadgets, including smartphones, computers, cars and televisions.

Micron controls about 20 per cent of the world’s DRAM market, and the chips account for about 70 per cent of the company’s annual US$30 billion in revenue.

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China announced in 2016 that producing its own DRAM chips was a national security priority. That same year, according to US officials, the Chinese government provided more than US$5 billion to create Fujian Jinhua Circuit Co to produce the chips at a factory in Jinjiang, an industrial centre on China’s coast.

But Fujian Jinhua did not have the chips or the knowledge to make them. So it entered into an agreement with a Taiwanese company, United Microelectronics Corp (UMC) to provide the technology, according to court papers filed by US and Taiwanese prosecutors.

To obtain the know-how, prosecutors allege, one of UMC’s vice-presidents, Chen Zhengkun – who also used the name Stephen Chen – turned to employees at a subsidiary of Micron for help.

Chen had worked for the subsidiary, Micron Memory Taiwan Co, or MMT, and he recruited several colleagues to join him at UMC.

One engineer brought with him “trade secrets pertaining to the prior, current and future generations of Micron’s DRAM technology", federal prosecutors alleged.

Another recruit, a manager, downloaded and brought to Chen’s company “900 confidential and proprietary files” with Micron data, the US indictment alleges.

Prosecutors estimate the information was worth between US$400 million and US$8.75 billion.

Chen and the UMC employees charged in the federal indictment could not be reached for comment.

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A lawyer representing Fujian Jinhua and UMC declined to comment, but UMC said in a statement that it had developed technology “fundamentally” different than Micron’s.

In a statement in Chinese on its website, Fujian Jinhua said that it “places great importance on the protection of intellectual property rights” and that it did not “steal other companies’ technology.”

US officials announced the indictment as Fujian Jinhua’s massive factory is nearing completion and moved to hinder its ability to export DRAM chips.

The Justice Department has sued to block the companies from exporting DRAM products to the United States, or from giving the stolen Micron technology to others. The Commerce Department issued a separate order prohibiting Fujian Jinhua from obtaining US components needed to manufacture microchips.

Despite the activity, it may be too late to halt the damage from the Micron theft.

One of Chen’s recruits, Micron alleged in its own lawsuit, “spent his last days at MMT in a frenzied dash to pillage as much of Micron’s confidential data as possible. … The trade secrets (he) stole covered the gamut of technologies necessary” for Chen’s company to deliver the DRAM technology to Fujian Jinhua – where Chen later became president and was put in charge of the DRAM production facility.