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Emerging Technologies in U.S. A Ripe Target for Espionage

The dark side of global economic development is that American research and trade secrets are being systematically stolen according to the FBI.

One day in June, FBI agents swooped into two affluent Silicon Valley homes and arrested two engineers. Lan Lee and Yuefei Ge stand accused of stealing proprietary chip designs and software from their employer, NetLogic Microsystems of Mountain View, and Taiwan Semiconductor Manufacturing Co. in San Jose.

Now investigators are asking the Department of Justice to charge Lee, an American citizen, and Ge, a Chinese national, with a more serious crime: economic espionage to benefit China.

The case highlights China's role as the main adversary in a complex game of 21st-century espionage where many agents aren't trained spies in trench coats but businessmen, students and researchers. Silicon Valley, counterintelligence experts say, is ground zero.

"Silicon Valley is a hotbed" of economic espionage, said Don Przybyla, who heads a FBI counterintelligence unit in San Jose. The valley is home to many of the estimated 3,000 Chinese front companies nationwide set up to steal secrets and acquire technology, according to the FBI.

Lee and Ge allegedly set up a front company backed by a Beijing venture-capital firm with links to China's military, and planned to go into business with the Chinese government.

In a global economy where intellectual property has become a valuable currency, state-directed espionage increasingly targets technology and commercial trade secrets to advance a nation's military and economic strength.

The intertwining of the economies of America and China complicates the problem, experts say.

"America's being robbed blind. ... We simply don't want to believe it," said John Tkacik Jr. of the conservative think tank Heritage Foundation, who headed China intelligence analysis at the State Department in the early 1990s. "If American manufacturers believed it, they'd have to modify their behavior significantly."

Other countries -- including U.S. allies such as France and Israel -- also steal American secrets, but China tops the list, experts say. China is "the No. 1 counterintelligence threat that the U.S. faces," said David Szady, who until this spring was assistant director of the FBI's counterintelligence division.

"If you look at where the Chinese are going to get a lot of the research and development, cutting-edge technology, from nanotechnology to quantum physics to the next generation of missiles and planes -- that all points to Silicon Valley," he said.

To counter the growing problem, the FBI added the San Jose economic espionage and counterintelligence unit last month, officials said. The FBI also operates an economic-espionage unit in Palo Alto.

"We see the same people and institutions in China popping up again and again," said Julie Salcido, who oversees a Department of Commerce unit in San Jose that focuses on export violations of technology with potential military uses.

The culprits may be government-backed research institutions, state-owned enterprises or individual provincial governments. China's central government runs a program linked to its military, dubbed 863, that invests in companies with innovative technologies and that the FBI suspects is involved in many economic-espionage cases.

China has a "market-driven espionage effort. What they collect is what they need," said Paul Moore, who served as the FBI's top analyst on Chinese counterintelligence for 20 years.

Jianhua Li, a Chinese Embassy official in Washington, D.C., scoffed at the claim that China is the chief threat to U.S. trade secrets.

"That assessment is not true," he said in a telephone interview. "You don't have evidence that the Chinese government is sending people to the United States to do this."

Experts say Chinese espionage often involves tapping the hundreds of thousands of Chinese students and visiting business executives in the United States. A modest number of Chinese nationals living in the U.S. and Americans of Chinese descent also are recruited to help acquire information or technology, experts say.

U.S. spy catchers have been accused of unfairly targeting ethnic Chinese. That charge arose in the case of Los Alamos nuclear weapons scientist Wen Ho Lee, a Taiwanese-born American citizen once suspected of giving nuclear secrets to China. He was released in 2000 after pleading guilty to a felony count of mishandling classified information.

In the aftermath of the Lee case, some Asian-Americans still complain of racial profiling. "They demonize China and all Chinese-Americans by casting this wide net," said George Koo, Deloitte & Touche's director of Chinese services in San Jose, who has criticized the FBI's methods. "It's a situation where every Chinese is required to prove why they're not a spy."

Szady counters that the government isn't singling out Chinese-Americans -- the Chinese government is.

The FBI's Palo Alto office is currently investigating approximately a dozen economic-espionage cases with suspected ties to China, Przybyla said. Nationwide, the number of cases involving China is not available, but it has spiked more than 50 percent in the past few years, Szady said.

The economic-espionage unit investigates only cases in which it suspects involvement by a foreign government, though perpetrators often are charged with the lesser crime of trade-secrets theft.

That's because proving government involvement is difficult, partly because money isn't always a visible ingredient of the plot, experts said.

"Typically China doesn't directly pay people dollars for documents," Moore said. But he added that money or a business deal might be in the background.

The Chinese word for intelligence agent is pengyou, or friend, said Moore, who is compiling a dictionary of Chinese spying. Appealing to the sympathetic to help China modernize is China's "holy grail of motivation," Moore said.

In many espionage cases in which suspects were simply charged with the theft of trade secrets, investigators suspected the Chinese government was the intended beneficiary, said Ross Nadel, the assistant U.S. attorney who until this year handled all of the economic-espionage cases in the Northern District of California court.

The FBI has set up an outreach program for defense contractors and Silicon Valley companies, but agents say they often encounter resistance from victimized firms. Many corporations don't want the exposure, particularly public firms that fear news of a lost trade secret might hurt stock prices, say investigators.

"Sometimes going to the FBI and going to court might expose the very trade secrets you are trying to protect," said Stephen Fink, who runs a Los Angeles consulting firm specializing in economic espionage and the author of "Sticky Fingers," which details the problem.

Others have told enforcement authorities that they fear ruffling the Chinese might affect business deals across the Pacific.

In 2004, a Chinese national affiliated with the Chinese state-owned oil company PetroChina was convicted in the United States for illegally accessing the computer network at 3DGeo, a seismic-imaging firm in Mountain View. Investigators said Yan Ming Shan copied 3DGeo's proprietary source code while on a training stint arranged by PetroChina, a 3DGeo customer. Investigators suspect that the state-owned firm was behind the crime.

The incident hurt 3DGeo's business in China, said President Dimitri Bevc. But now the two companies have made peace and are in discussions to renew business ties.

"They have a big demand for services and technology," said Bevc, underscoring the allure for American companies, as well as an impediment to containing Chinese espionage.

"There's still opportunity for us in China."

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(c) 2006, San Jose Mercury News. Distributed by McClatchy-Tribune Information Services via Newscom. Photo