FINAL DRAFT

Industrial Espionage

 

 The Ever-Spiraling Crisis

   in Unauthorized Technology Transfer

 

Art Madsen, M.Ed.

 

 

As technology advances it invades, for better or for worse, not only the private homes and small businesses of America and the Global Community, but impacts the corporate environment composed of large domestic industries and multinational conglomerates.  Similarly, as the complexity of business transactions becomes even more challenging, competitive and interwoven, a resurgence of illicit and frequently criminal activities has developed, involving the use of technology, both old and new.

After briefly reviewing the history of this phenomenon, which originated in the early days of the American Nation, and dates much farther back into European and Asian commerce and industry, this report will examine the nature, scope and impact of industrial espionage within the context of American and International industry.

At the beginning of the 19th Century, the growth of American business was not always based on the most Christian and Puritanical of principles.  Entire industries thrived on stolen technology or industrial processes.  The textile mills of Lowell, Massachusetts, as a case in point, were founded almost exclusively on purloined knowledge from England.  Indeed, the entire Merrimack Valley in North Central Massachusetts and Southern New Hampshire was kept economically afloat and competitively viable on the basis of the Cartwright Loom, which  utilized a secret process perfected ingeniously in the United Kingdom.  Through what amounts  to nothing less than industrial espionage by the standards of both this century and last, concepts, design features and plans for the Cartwright Loom were stolen by the very man after whom the City of Lowell was named!        Indeed, Francis Cabot Lowell, whose memory and cleverness were just a little too good for England’s sake, exported, in 1813, specific design plans for these looms which were adapted only slightly for large scale production in New England of fabrics and textiles. [1]  Thus American industry was off to a flying start, and so was the blossoming field of  “corporate information”, which is, in the opinion of some authors, a polite euphemism for “competitive intelligence,” or more seriously, “industrial espionage.” 

With due respect to America, this country was not alone. Documents dating back to the ancient days of the silk trade in China also attest to the intelligence-gathering capabilities of competing traders, and, in more recent times, the Chinese have been particularly active in this area, as in the case of Bin Wu who became embroiled in a major industrial-military espionage case in 1991.[2]

Generally speaking, specialists in this field make a fine distinction between the two terms, namely “corporate information” and “competitive intelligence.”[3]  They feel that “corporate information” consists of fairly isolated factual data that has not been analyzed and interpreted.  Whereas, “competitive intelligence” is material that has been sifted, grouped, categorized and analyzed, with a view toward enhancing competitive position in a given market.   When this knowledge is fully processed it is sometimes converted into competitive intelligence systems or models. These two concepts fall well within the boundaries of the law and have been practiced aggressively in American industry without judicial consequences.  But, in the case of Mr. Lowell, for example, the limits were exceeded because he exported, without the Crown’s authorization, specific plans and processes that had been protected by British industrial secrecy legislation.  In fact, the Lowell case, and that of Mr. Wu in the 1990s, fall into a distinctly different classification which forms the real subject of this report: industrial espionage. 

Although gaining information from data bases, trash receptacles, privately circulated memoranda, and conversation at loose-lipped three Martini luncheons falls into a permissible category, industrial espionage does not.  Espionage within and among corporations is occurring with increasing frequency and measures are being taken to protect against it.[4]  These measures fall into a special strategic category known as counter-intelligence, representing an entire field in itself.  However, both the illicit gathering of intelligence and the defense systems against it involve the highest technological expertise available and consume a great deal of corporate and governmental time on both sides of the question.  Industrial espionage falls into a disturbingly shady area where people assume identities, play roles and move about in patterns that can only be regarded as dramatic and invasive.  The stakes are quite high because competition has become so brutal, high-pressured, and confrontational  that major industries -- although  they may initially have pure motives -- often  find themselves drawn into doubtful practices simply to stay ahead of their competitor or to maintain market share.

The U.S. Government has considered the threat of unfriendly espionage in business and industry so serious that it has authorized and mandated preparation of an annual report documenting the extent and nature of sub-rosa practices.[5]  Perhaps because the industrial infrastructure of the United States was, in part, founded centuries ago on material obtained surreptitiously, and this activity has continued unabated both domestically and internationally,  the U.S. Government is well aware, not only of how easy it is to obtain secret information, but  of the extreme danger of on-going data collection and industrial espionage as they are practiced in the United States today, particularly in defense-related and high-tech industries.

With government and industry officials committed to protecting the vital interests of the nation and its economy, serious study of the three identified levels[6] of intrusive tactics has been conducted. Naturally, investigative efforts are focused on the most serious of these three: unlawful espionage activities.  So prevalent have these activities become that a Harvard study demonstrated that 27% of firms surveyed had discovered serious incursions into secret, patented or off-limits processes or documents.[7]  

Additionally, over twenty years ago, Harvard published scholarly material on effective methodologies used in assessing both political and espionage risk in given industrial settings.[8]  These studies, conducted some time ago, may now be outdated as the incidence of covert crime within corporations continues to escalate.

Many of these publications, whether they consist of Harvard-generated material, managerial textbooks, academic journals, or  government sources, make mention of industrial espionage methods and strategies which include the standard array one might expect, plus desperate tactics verging on blackmail, extortion and, not least of all, implied or actual theft.[9]  These methods would simply not be used unless they were, on balance, successful in obtaining the desired information.

Apart from informal written studies dealing with counter-espionage techniques, this clandestine struggle, a contemporary fact-of-life throughout the world, is documented at length in texts such as the referenced Heims volume. 

The first line of defense against such industrial spying is to restrict circulation of documents within the firm, as well as access to databases.  Then, of course, restricting physical access to research labs and secured sectors of industrial complexes can be tried.  Nonetheless, all of this, and much more, is merely child’s play for the experienced “sleeper” or potential “traitor”.  He or she finds it easy to penetrate security precautions and obstacles. 

Because 70% of Americans hired to work on U.S. Projects overseas fail to complete their employment contracts[10], foreign nationals are being hired with predictable results: a proliferation of leaks, divided loyalties, covert operations, corruption and a consequential

financial loss to the U.S. industrial sector amounting to billions of dollars.

As the sophistication of intelligence operations improves, and as corporations struggle to maintain an edge (whether they engage in these practices and/or strive to protect against them),  the playing field becomes muddied and the stakes rise inexorably.

The rules of the game become blurred, and the initial aura of mere “impropriety” gives way to undercover, surreptitious conduct aimed at sheer survival of the company in an increasingly unethical climate.  There are relatively few firms that have completely escaped this scenario.  Many attempt valiantly to ward off the invasiveness of unscrupulous employees who will compromise their personal honor and that of their firms, sometimes without a second thought.  Since human behavior seems to be at the root of this conduct, providing strong “disincentives” might prove a possible solution, but the penalties will have to be stiff. Indeed, serious thought in the field of counter-intelligence is being given to increasing the price such “practitioners” must pay should they transgress basic ethical practice.     

The readings and articles surveyed in preparing this analysis seem to point toward  the ever-spiraling growth of industrial espionage and many authors document either the corporate sector’s increasing participation in such practices, or protection against them. 

References

 

Bottom, N.R., Gallati, R.J.  Industrial Espionage: Intelligence Techniques and                     Countermeasures, Butterworth Publishers, Boston, 1984.

 

Fialka J.  War by Other Means: Economic Espionage in America, W.W. Norton and Company, New York, 1997.

 

Heims, P.A.  Countering Industrial Espionage, 20th Century Security Education, Ltd., Surrey, England, 1982.

 

Kahaner, L. Competitive Intelligence, Simon & Schuster, New York, N.Y.,1996.

 

Roukis, G.S., Conway, H., Charnov, B.H. Global Corporate Intelligence, Quorum Books, New York, N.Y. 1990.

 

Rummel, R. And Heenan, D. “How Multinationals Analyze Political Risk”, Harvard Business Review, 56:1, Jan-Feb 1978, 67-76.

 

.......................  Annual Report to Congress on Economic Collection and Industrial Espionage, National Counter-Intelligence Center, NACIC, Washington, D.C., July 1995.  (http://www.fas.org/sgp/othergov/indust.html)