1998 Congressional Hearings
Intelligence and Security

Statement by

Nicholas Eftimiades
Author, "Chinese Intelligence Operations"

before the

Joint Economic Committee
United States Congress

Wednesday, May 20, 1998

Mr Chairman,

      I thank you for the opportunity to speak before this Committee today. I'd like to take a brief moment to emphasize that I speak today as an author and private citizen; not as a representative of the Department of Defense or the U.S. government.

      The operational methods of the China's intelligence services are nothing new to espionage. Those methods are, however, uniquely Chinese in their application. To collect technology and trade related information, China's premier intelligence services -- the Ministry of State Security (MSS) and the People's Liberation Army/General Staff Department/Second Department (also known as the Military Intelligence Department) -- co-opt vast numbers of Chinese citizens living or traveling overseas. The MSS also runs aggressive surveillance and recruitment programs against visiting foreign businessmen, scholars, government officials, and scientists.

      Senior U.S. counterintelligence officials compare China's methods to classical Russian espionage techniques, which used fewer people but gathered more information per person. The Chinese approach poses many problems for U.S. law enforcement efforts, according to FBI counterintelligence chief Harry Godfrey III: "For prosecutive purposes, you are looking at an individual collecting one small part one time, and you don't have the quality of case that our country will take to prosecute as far as espionage."

Foreign Operations

      Most of China's clandestine economic espionage activities are not sophisticated operations, but their numbers compensate for this weakness. In the U.S., those activities focus on the theft of American technology. For example, In the early 1990s the PRC's clandestine collection operations in the United States expanded to the point where approximately 50 percent of the nine hundred technology transfer cases investigated annually on the West Coast involved the Chinese. This figure is interesting when examined in the context of the list compiled by the Justice Department's Export Control Enforcement Unit, Internal Security Section, and published as Significant Export Control Cases from January 1981 to May 1992.

      Statistical analysis of the Department of Justice list indicates that only 6 percent of 272 significant cases involved China, and that 62.5 percent of those cases occurred on the West Coast. In addition, 13.4 percent of the incidents listed in Department of Commerce Export Enforcement Cases: Closed January 1, 1986, to March 31, 1993, involved the PRC. Much of China's espionage efforts in industrialized nations is focused on mid-level technology, that may or may not be cleared for export. The focus of this economic espionage on mid-level technology is because China's technological industrial infrastructure is still 10-15 years behind the United States.

      Illegal acquisition of such items draws less interest from U.S. law enforcement agencies and judicial organs (i.e., state and federal prosecutors and the courts) than does the theft of state-of-the-art technology. For that reason the PRC's technology-related intelligence collection operations have gone relatively unimpeded.

      Computer-assisted analysis of China's exposed technology-related economic espionage activities in the United States reveals three basic operational patterns. First, co-optees are recruited in China and asked to acquire the targeted technologies while they travel abroad. Second, American companies with access to the desired level of technology are purchased outright by Chinese state-run firms. In intelligence circles this is considered a bold or aggressive operation. Third and most commonly, high-technology equipment is purchased by recruited agents running front companies. China's most productive method of legally acquiring foreign technology is to send scientists overseas on scholarly exchange programs.

      Each year several thousand Chinese citizens travel to the U.S. trade missions, scientific cooperation programs, and the like. It is a normal, "open" intelligence procedure to debrief the returning delegates to determine whether useful information was acquired by simple observation. However, the MSS and military intelligence services further exploit these opportunities by co-opting a number of these travelers to carry out specific operational activities.

      The operational differences between professional intelligence officers and co-opted individuals are often noticeable. The intelligence officer generally has less technical knowledge about the subject matter involved in the operation, while the co-optee usually has no expertise in collecting information clandestinely. For example, at a trade show in Paris, French military investigators observed members of a Chinese scientific delegation discreetly dipping their ties in a photo processing solution made by the German firm Agfa.

      The goal of this clumsy act of espionage was presumably to obtain specimens of the solution for later analysis. Technology-related clandestine intelligence activities are by no means limited to scientific and trade delegations. The PRC has attempted to purchase U.S. firms with access to high technology not authorized for release to foreign countries. In February 1990 the United States, citing national security concerns, ordered the China National Aero-Technology Import & Export Corp. (CATIC) to divest itself of Mamco Manufacturing Inc., a Seattle aircraft parts manufacturer.

      The Bush administration said publicly that CATIC had a "checkered history" and had sought technology that would provide the Chinese People's Liberation Army's Air Force with in-flight refueling capabilities. More disturbing to administration officials was the belief that CATIC used Mamco as a front to penetrate other, more promising areas of restricted technology.

      The purchase of a large American company is a rare operation compared to the more frequent economic espionage activities of the MSS, which generally procures technology through more subtle and clandestine means. It appears that the most effective means of stealing foreign technology involves the use of recruited agents in Hong Kong. I should emphasize that not enough time has elapsed since the return of Hong Kong to the PRC to identify any change in operational patterns.

      Examination of several public cases of attempted (and successful) thefts of high technology reveals a unique pattern of operation. The recruited agent establishes a front company in Hong Kong. The company may in fact carry on legitimate trading activities in addition to illegally purchasing and shipping technology. The agent approaches several U.S. firms and tries to purchase restricted high-tech equipment--either in person at trade shows, over the phone, or by fax Sub-sources within the target country can be used to facilitate purchasing and shipping transactions.

Domestic Operations

      At first glance, the intelligence and security environment in the PRC may appear to be relatively benign. The only categories of people who routinely report surveillance or other forms of harassment are dissidents and foreign journalists. The average business, tourist, or academic, visiting China does not immediately notice surveillance or overt intelligence collection activities. However, an internal security structure that collects information is woven into the fabric of Chinese society as well as into its economic, cultural, and political infrastructure.

      Chinese intelligence services can count on state ministries, people's friendship societies, academic institutions, and the military-industrial complex to support activities such as agent recruitment and information collection as well as to provide cover jobs to their operatives. Many PRC domestic intelligence activities are directed against foreign businessman or technical experts. The data elicited from unsuspecting persons or collected by technical surveillance means is used by Chinese state run or private enterprises.

      In China, intelligence operations against foreign nationals include targets such as businessmen, government officials, academics, journalists. The MSS recruits these people to conduct espionage against their home government, to influence events overseas on behalf of the PRC, or to provide business intelligence and restricted technology.

      The MSS and China's Military Intelligence Department (MID) invite foreign scholars and technical experts to lecture or attend conferences in the PRC under the guise of research associations or universities. All expenses for the visiting lecturer and his or her family frequently are paid for by the intelligence services. The visiting specialist is subjected to a demanding itinerary of lectures, meetings, travel, and social engagements. The purpose of this rigorous schedule is to wear down the prospective recruit's physical and mental stamina. The visitor is encouraged to partake of alcohol as much as circumstances permit. The subject is then more approachable concerning personal or confidential matters.

      Academics, businessman, and other subject-matter experts are potentially lucrative targets for the PRC intelligence services for two reasons: (1) they possess unique insights in fields of interest to the MSS or MID, and (2) they have access to policymakers and other potential recruitment targets. In the first scenario, less subtlety is required to solicit information because the individual came to China expecting to provide details on a specific subject. The second scenario necessitates a more discreet approach. Another intelligence objective achieved by hosting foreign scholars is to persuade and co-opt those who are in positions to influence policymakers or businessman in their home countries.

      The MSS appears to be far more comfortable recruiting persons of Chinese descent as opposed to non-Chinese foreign nationals. But one must consider that Beijing expects ethnically Chinese foreign nationals to have some loyalty to China. As a result, espionage recruitment techniques used against such persons in some ways resemble those used against Chinese nationals; the primary motivating factors being ethnic loyalty, implied threats of reprisals against PRC national relatives, and money gain.

Technical Surveillance

      A key aspect of the PRC's internal collection network against foreign targets is the aggressive use of technical surveillance measures. Many of the prominent hotels that cater to foreigners are equipped for the technical surveillance of guests and visitors. Technical surveillance of foreigners in these and other Chinese hotels is carried out by the MSS's Technical Operations Department.

      In May 1989 Chinese student dissident Wuer Kaixi was recorded on videotape as he ate lunch with foreign journalists in the Beijing Hotel. The tape was made by the hotel's static surveillance cameras, located in the ceiling of the dining room. Other prominent Beijing hotels that are known to monitor the activities of their clientele are the Palace Hotel, the Great Wall Hotel, and the Xiang Shan Hotel. In addition, the MPS owns the Kunlun Hotel and probably monitors its guests. And according to Chinese prostitutes who frequent the Jianguo Hotel, the guest rooms used by foreign businessmen there also contain microphones.

      The Palace Hotel is owned in part by the PLA's General Staff Department. One of the American contractors for the Xiang Shan Hotel had a series of verbal battles with PRC officials as it was being built. The Chinese demanded that additional wires be installed in each room. The purpose of the wires was to tie in microphones.

      The video and audio surveillance of foreigners in China is the responsibility of the MSS. The monitoring of international mail and telecommunications involving Chinese nationals is handled by the Ministry of Post and Telecommunications. Conclusion

      Western policy, intelligence, and law enforcement agencies must adjust the focus of their collection and counterintelligence operations if they are to contend effectively with the PRC's economic espionage activities. At the policy level an increased emphasis on protecting commercial intelligence and monitoring illegal technology transfer issues is needed. In the United States, the notion of government helping private industry to protect itself from foreign intelligence activity is controversial. Providing industry with foreign high technology and economic intelligence, as practiced in the PRC, is not a policy option in the United States. For that reason, presidential administrations must supply strong leadership and thoughtful guidance to private industry on the issue of safeguarding sensitive advanced technology and corporate trade secrets.

      Washington must establish the type of relationship with business that promotes the mutual development of policy guidelines for protecting sensitive technology. Such guidelines will be difficult to develop and implement due to the necessity of maintaining the domestic free flow of ideas. The legislative and judicial branches of government must also be made aware of the seriousness of illegal high-technology transfers and their potential impact on U.S. national security.

      At the working level, intelligence and law enforcement agencies must redirect their operational focus and allocate the appropriate resources to specialized area studies, analyses of PRC intelligence tradecraft, and linguistic capabilities. The shifting of U.S. counterintelligence concerns is likely to be a long, slow process due to fiscal restraints, competing agency interests, and bureaucratic inertia. Congressional oversight of this process may be wise, because intelligence bureaucracies tend to be self-perpetuating and therefore resistant to change.

      Another impediment to effective action against Chinese economic espionage is the state of relations with Beijing established by the Bush administration and continuing to this day. Privately, FBI agents say that "in the scheme of things these days, it seems to make very little difference to Washington whether the Chinese are spying or not . . . it's almost an annoyance when an actual violation of law surfaces."

      Given the institutional problems involved in altering the focus of U.S. counterintelligence efforts, the MSS will probably continue to penetrate and exploit the United States' and other Western nations' political, academic, industrial, and technological institutions. As the MSS expands its operations globally, its methods can be expected to increase in sophistication as well.