Intelligence: China And The Shadow Wars

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May 26, 2018: In April 2018 two Chinese born men (Shan Shi and Gang Liu) were indicted for conspiring to commit economic espionage in the United States. It was also revealed that the two men (one of them an American citizen and the other a permanent resident) and four others were also indicted in July 2017 for conspiring to steal trade secrets. The theft involved obtaining, from 2014 onward, information necessary to create and mass produce syntactic foam, a substance used to keep objects afloat in deep water. Syntactic foam is used in offshore oil exploration and production as well as for several military systems. The two accused spies were provided with technical and financial support by CBMF, a state-owned Chinese firm that had been established to develop new maritime technologies and put the technology into production. The Chinese spies were provided with several million dollars to establish a CBMF subsidiary in Texas where key technical people were hired away from an unnamed multinational firm that had developed syntactic foam production technology. Using bribes and other financial inducements the Chinese spies provided the necessary information for CBMF to build a factory in 2016 for the production of syntactic foam. The main customer for this syntactic foam was a Chinese shipyard building warships and other naval equipment. CBMF also began offering their syntactic foam to foreign customers.

If convicted Shan Shi (an American citizen) faced 45 years in prison while Gang Liu faces 25 years. Economic espionage like this is a common activity for China and has been used mainly against the United States but other Western nations as well. Even Chinese neighbor and ally Russia has suffered heavy losses due to this Chinese economic espionage. There are going to be a lot more court cases like this because Chinese firms are becoming bolder in how they exploit stolen software, trade secrets and other technology. In the past, the Chinese were careful in the use of stolen tech when exporting their own military equipment copied from Russian designs. The Chinese had started doing this during the Cold War, which sometimes got fairly hot (there were some deadly border skirmishes in the 1970a) because China and Russia developed some territorial and ideological disputes that did not settle down until the Soviet Union dissolved in 1991.

The Russians are still angry about the continued Chinese theft of their tech and growing Russian threats over this caused the Chinese to sign agreements in the last decade that declared Chinese firms would stop stealing and reselling Russian tech. In practice, this only slowed the Chinese down, but it placated the Russians for a while. Currently, the Americans are starting to sound like the Russians in the 1990s, but the Americans have more legal and economic clout to deploy and this situation is liable to get ugly before (if ever) it gets better.

By 2012 most American officials had come to openly admit that a whole lot of American military and commercial technical data has been stolen via Chinese Internet (and more conventional) espionage efforts. Details of exactly all the evidence of this is unclear, but apparently, it was pretty convincing for many American politicians and senior officials who had previously been skeptical. The Chinese efforts have resulted in most major American weapons systems having tech details obtained by the Chinese, in addition to a lot of non-defense or dual-use technology (as in the syntactic foam case above). It’s not just the United States that is being hit but most nations with anything worth stealing. Many of these nations are noticing that China is the source of most of this espionage and few are content to remain silent any longer.

It’s no secret that Chinese intelligence collecting efforts since the late 1990s have been spectacularly successful. As the rest of the world comes to realize the extent of this success, there is a building desire for retaliation. What form that payback will take remains to be seen. Collecting information, both military and commercial, often means breaking laws and striking (or hacking) back at the suspected attackers will involve even more felonies. China has broken a lot of laws. Technically, China has committed acts of war because of the degree to which it penetrated military networks and carried away copies of highly secret material. The U.S. and many other victims has been warning China there will be consequences. As the extent of Chinese espionage becomes known and understood, the call for “consequences” becomes louder.

China has tried hard to conceal its espionage efforts. Not just denying anything and everything connected to its hacking and conventional spying but also taking precautions. But as their success continued year after year, some of the Chinese hackers became cocky and sloppy. At the same time, the victims became more adept at detecting Chinese efforts and tracing them back to specific Chinese government organizations or non-government hackers inside China.

Undeterred, China has sought to keep its espionage effort going and has even expanded operations. For example, starting in 2008 China opened National Intelligence Colleges in many major universities. In effect, each of these is an "Espionage Department" where, each year, several hundred carefully selected applicants are accepted in each school, to be trained as spies and intelligence operatives. China has found that espionage is an enormously profitable way to obtain military and commercial secrets and now China trains and rewards those who have a talent for such things and make a career of it. The Internet based operations, however, are only one part of China’s espionage efforts.

While Chinese Cyber War operations in this area get a lot of publicity, the more conventional spying brings in a lot of stuff that is not reachable on the Internet. One indicator of this effort is the fact that American counter-intelligence efforts are snagging more Chinese spies. This is partly due to increased spying efforts by China (which puts more of their people out there to get caught), as well as more success by the FBI and CIA. All this espionage, in all its forms, has played a large part in turning China into one of the mightiest industrial and military powers on the planet. China is having a hard time hiding the source of the new technologies they are incorporating into their weapons and commercial products. Many of the victims initially had a hard time accepting the fact that the oh-so-eager (to export) Chinese were robbing their best customers of intellectual property on a grand scale. Now Western firms are a lot more wary about dealing with the Chinese.

China has been getting away with something the Soviet Union never accomplished, stealing Western technology and then using it to move ahead of the West. The Soviets lacked the many essential supporting industries found in the West (largely founded and run by entrepreneurs) and was never able to acquire all the many pieces needed to match Western technical accomplishments. Soviet copies of American computers, for example, were crude, less reliable, and less powerful. It was the same situation with their jet fighters, tanks, and warships.

China gets around this by making it seemingly profitable for Western firms to set up factories in China, where Chinese managers and workers can be taught how to make things right. At the same time, China allows thousands of their best students to go to the United States to study. While many of these students will stay in America, where there are better jobs and more opportunities, a growing number are coming back to China and bringing American business and technical skills with them. Finally, China energetically uses the "thousand grains of sand" approach to espionage. This involves China trying to get all Chinese going overseas, and those of Chinese ancestry living outside the motherland, to spy for China, if only a tiny bit.

This approach to espionage is nothing new. Other nations have used similar systems for centuries. What is unusual is the scale of the Chinese effort, and that makes a difference. Supporting it all is a Chinese intelligence bureaucracy back home that is huge, with nearly 100,000 people working just to keep track of the many Chinese overseas and what they could, or should, be trying to grab for the motherland. This is where many of the graduates of the National Intelligence College program will work.

It begins when Chinese intelligence officials examine who is going overseas and for what purpose. Chinese citizens cannot leave the country, legally, without the state security organizations being notified. The intel people are not being asked to give permission. They are being alerted in case they want to have a talk with students, tourists, or business people before leaving the country. Interviews are often held when these people come back as well.

Those who might be coming in contact with useful information are asked to remember what they saw or bring back souvenirs (legal or otherwise). Over 100,000 Chinese students go off to foreign universities each year. Even more go abroad as tourists or on business. Most of these people were not asked to actually act as spies but simply to share, with Chinese government officials (who are not always identified as intelligence personnel), whatever information they obtained. The more ambitious of these people are getting caught and prosecuted. But the majority are quite casual and individually bring back relatively little and are almost impossible to catch, much less prosecute.

Like the Russians, the Chinese are also employing the traditional methods, using people with diplomatic immunity to recruit spies and offering cash, or whatever, to get people to sell them information. This is still effective and when combined with the "thousand grains of sand" methods brings in a lot of secrets. The final ingredient is a shadowy venture capital operation, sometimes called Project 863 that offers money for Chinese entrepreneurs who will turn the stolen technology into something real. No questions asked. If you can get back to China with the secrets, you are home free and potentially very rich. This is the approach Chinese firms like CBMF are set up to do. While CBMF was technically supposed to develop new technologies in China the unofficial mandate was to steal as much as possible from other nations and not get caught.

Not getting caught is becoming more important because that can lead to increasingly dangerous diplomatic and legal problems. When the Chinese steal some technology and produce something that the Western victims can prove was stolen (via patents and prior use of the technology), legal action can make it impossible, or very difficult, to sell anything using the stolen tech outside of China. This is what the recent syntactic foam case is all about. For that reason, the Chinese long preferred stealing military technology and tried to avoid using stolen commercial tech in a way that made it easy to determine the source of stolen data. This meant keeping stolen commercial tech inside China. And in some cases, like manufacturing technology, there's an advantage to not selling it outside of China. Because China is still a communist dictatorship, the courts do as they are told, and they are rarely told to honor foreign patent claims when stolen tech is discovered in China by its foreign owners.

But increasingly, Chinese firms are boldly using their stolen technology, daring foreign firms to try and use Chinese courts to get justice. Instead, the foreign firms are trying to muster support from their governments for lawsuits outside China. Naturally, the Chinese government will howl and insist that it’s all a plot to oppress China. This has worked for a long time, but many of the victims are now telling China that this conflict is being taken to a new, and more dangerous, level.

 


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