Abstract: The mutually beneficial cooperation between private and quasi-governmental commercial organizations, and government intelligence and security services is a common, valued and expected practice in many countries. This is in marked contrast to the situation in the United States where such relationships are arguably kept at arms length. This American approach has had the effect of reducing the awareness, concern and approach to protective countermeasures on the part of much of America's corporate leadership. Additionally, the sweeping changes in the political landscape have - in many quarters - engendered a false sense of security which further complicates communicating the nature, type and level of economic threat to both government and corporate leadership. In many respects, the industrial community will find itself increasingly unable to rely on any national resources although its opposition will continue to enjoy excellent and mutually beneficial relationships with their nation's collection and enforcement communities.

The linkages between commercial quasi-government economic objectives and their respective intelligence and security services, in many countries of the developed world, are part of the normal course of events. In the estimation of the Chairman of the Senate Select Committee on Intelligence,

"Aggressive acts of espionage pursued by foreign governments - at times in collaboration with their intelligence services - to steal private American commercial secrets to serve their own national interests are a clear indication of this threat."

Senator Boren's statement goes a long way to defining how governments in the rest of the world view cooperation between their intelligence services and their commercial interests. Later, we'll contrast how this compares the case in the United States and the way in which things are viewed in the United States. First, however, it seems appropriate to provide a certain historical perspective to the issue. It may be well to briefly trace the development of such linkages outside the United States by looking at some of the more successful, and representative organizations and countries. Beginning with the former Soviet Union model, which some might consider to be the "granddaddy" of such linkages, and concluding with such an underappreciated actor as Brazil, a representative - but far from inclusive - sampling may help provide that perspective.

Moscow Rules:History tells us that developing nations will go to great lengths to acquire the technology of their advanced rivals. Rarely has there been a society which had been more involved in the continuous acquisition of the technological developments of others than Russia.

Even prior to the reign of Peter the Great, the Russians of the 1500's imported Western Europeans to bring them into the Iron Age; it was the German villages outside Moscow that Peter visited as a child which led to his fascination with emerging technologies that, in turn, led to his modernization program designed to bring Russia into the developed world. He brought European weapons into Russia, along with technicians who could also teach the repair and manufacture of weapons.

Yet, Peter also found that not everything was available. For example, in order to move Russia up to a level of international consequence as a naval power, and unable to obtain direct Dutch or English assistance, his intelligence service was charged with collecting against shipyards and harbors, as well as with the recruitment of Englishmen and Dutchmen to serve his purposes. Some remained as "agents in place" and others such as Cornelius Cruys from Holland and General Patrick Gordon, along with various pilots, doctors and engineers, came to Russia. We see this same process repeated throughout the course of Russian, and later, Soviet history through to today's Commonwealth of Independent States.

Lenin inherited much of the imported American, French, British and German technologies which Nicholas II had brought - through various means - to Russia by 1917. The lessons of Peter the Great's movement toward industrialization had not been lost on him either. Lenin saw the absolute need for Western technology in order to make the infant Soviet Union into a major player on the world scene. Although it was apparently anathema to the more militant of his fellow Bolsheviks, Lenin compromised basic Communist principles in announcing the New Economic Program (NEP), under which a certain degree of autonomy was given to various sectors of the Soviet economy from farming to manufacturing. It was Lenin's hope and expectation that the combination of Russia's great natural resources, coupled with the momentum of industrialization which had brought Western Europe out of the Dark Ages, would do the same thing for the Soviet Union.

By 1922, capitalist elements of his NEP were working and served as the basis for confidence upon which various Western firms re-negotiated technology and industrialization ventures. The Soviets, for their part, founded a few Trade Organizations, two of which will serve as examples: Arcos in London and Amtorg in New York.

One of the first mechanisms put in place by Lenin was the All Russian Cooperative Society, - better known as Arcos Limited. Formed in London as a one million pound limited liability company, and with an Anglo-Soviet board of directors, Arcos grew rapidly to a staff of more than two hundred Russians. Behind Arcos was a cover operation for the Soviet Intelligence Services. Their mission was to conduct industrial espionage. Arcos quickly became the cover organization for the systematic GRU-masterminded theft of Western technology. ARCOS was managed under the auspices of the Commissariat of Foreign Trade, Narkomoneshterg (NKVT) whose trading delegations, nominally offshoots of Arcos in the U. K., sprang up in every European capital by the end of 1921.

Three years later they had opened a sister office in New York, known as the Amtorg Trading Organization (Amerikanskaya torgovaya), or simply Amtorg. From the outset, Amtorg sought to obtain US production processes, engineering expertise as well as training for their engineers, and assistance in establishing applied and basic research institutes. Similar offices, with similar purposes, have since been opened with other countries around the world.

Amtorg serves ostensibly as liaison between Soviet FTO's and American companies, research institutions and various trade associations which also have an interest in developing trade relationships on behalf of their memberships. Additionally, it serves as a market research bureau, studying industries and identifying those companies, products and key personnel with whom the Soviet Union may wish to do business. The transition from market research to intelligence target analysis is a very short one, and the interplay is very easily seen and appreciated in the context of determining how and where an intelligence officer would focus his efforts.

Throughout its lifetime, Amtorg has served as perhaps the longest, continual, and most active intelligence practice of the Soviet Union in the United States. In testimony to various US Government bodies, intelligence officers who have defected to the United States most often cite their relationship with, and often a dependence upon - for support - the Amtorg offices in New York. This history eventually caused a cap to be placed on the number of Amtorg employees in the United States and has also served as the basis for FBI estimates that suggest that anywhere from 30 to 40% of the staff members of Amtorg are professional intelligence officers.

Thus, these technology transfer organizations have operated successfully for well over half a century in a capitalist economic environment. This experience, and linkage with the Soviet intelligence apparatus, is far greater than the resources or experience of most Western business concerns - especially those which are relatively new to the international trade arena, new to an emerging technology area, or both. And, while the mission of the former Soviet intelligence services is changing, it does not necessarily mean good news.

The changing mission of the KGB:

"We are needed to defend democracy....Times have changed and we are assuming new roles under the new conditions. For instance, we are gathering economic intelligence, which we can then sell to Soviet enterprises to help them avoid being hoodwinked by foreign trading partners." (Italics added)

Clearly, the new KGB (or VRR, understands the nature of capitalism. It should. Open source reporting from defector briefings tells us that the illegal technology transfer and scientific and technological collection of the Soviet Union in years past have more than paid for the operations of the KGB.

In the words of Olgov's former Chief, the recently disgraced Vladimir A. Kryuchkov "...espionage against commercial targets will become the great equalizer for the shortcomings of the Soviet economy."

Many in the United States have come to the conclusion that in the era of Glastnost, Perestroika, and the dissolution of the Soviet Union into the Commonwealth of Independent States, there is no longer a threat from the former Soviet intelligence services. Much of this perception derives from the heavy media reporting of conditions in the CIS:

• ex-KGB Chairman Vladimir Kryuchkov is languishing in Cellblock 4 of Matrosskaya Tishina prison awaiting his trial on charges of treason growing out of the August 1991 coup attempt
• the KGB has experienced a dismantling or re-subordination of most of its chief directorates
• republics have taken control of their own local KGB organizations, thereby reducing its monolithic influence
• the people of the former Soviet Union have demanded, and received, assurances from their governments that the role of the KGB in repressive will be eliminated
• the leadership of the CIS is far more desirous of amicable relationships with the West than they are of continuing to develop, or conduct, intelligence collection operations.

Unfortunately, hardly any of these points translate into a diminution of the intelligence collection operations - particularly against economic, high technology or scientific targets in the West. Instead, the intelligence collection operations - particularly HUMINT operations - will be better managed and conducted in a much more focussed way than ever before under the re-structuring of the KGB.

The former First Chief Directorate of the KGB, responsible for foreign intelligence collection operations, has been split off from the KGB, renamed the Central Intelligence Service and retains its old location, missions and structure. Re-subordinated as an independent agency to the President of the Russian Republic, it remains headquartered in the woods at Yasenevo - in a setting not unlike Langley - and keeps its foreign intelligence collection, analysis, offensive counterintelligence and active measures.

A principal characteristic, then, of the newly chartered organization will be its attempts to gather scientific and technological intelligence which will support the CIS' economic and industrial base, or those military systems which have dual-use applications.

GRU - Chief Intelligence Directorate of the General Staff

The Glavnoye Razvedyatelnoye Upravleniye (GRU) has taken its characteristic back seat to the KGB in terms of size, publicity and reputation. Arguably, this organization has enjoyed more long term, successful strategic intelligence collection operations than its better known cousin. This has been particularly true in the case of the GRU's Second Directorate's high technology - particularly military - targets in the United States. This owes in large part to the scientific and technological educations which GRU clandestine officers are more likely to receive than their former KGB counterparts.

Derivatively, since the core of the former Soviet military - to include its intelligence arm -resides in Russian republic territory and under the control of the CIS means that even greater resources than just the newly formed Central Intelligence Service. In turn, this organization's focus will continue to be on those high priority targets such as test and evaluation ranges and research and development centers. With Boris Yeltsin's self-appointment as the "temporary" Defense Minister on March 16, 1992, Russian Republic control over the premier intelligence collection services of the former Soviet Union appears to be complete.

The lessons of the Soviets have not been lost on anyone else, especially not those countries where the intelligence services were set up on the model of the Soviets in the post-war decades. Surrogate services in Poland, Czechoslovakia and East Germany were among the most prolific collectors against Western technical and economic targets during the existence of the East Bloc. In the same way that the foreign collection missions of the former Soviet intelligence services have been largely retained in the interest of national economic development, so too have the former surrogate states' intelligence collection organizations retained their importance - although as national, rather than as bloc assets. As former CIA Director Webster put it:

"It's important to remember that of all the parts of the world in which we find sophisticated espionage and counterintelligence operations, nowhere are they more widely recognized as absolutely essential to a nation as in Eastern Europe."

Or, in the words of Mikel Znatovsky, principal spokesman for the new Czech President Vaclav Havel

"The new government in Prague has moved slowly to dismantle the communist intelligence and security apparatus, a task that has proved much more tricky than we can reveal. There is an obvious situation and then there are wheels within wheels."

Clearly, Znatovsky is saying almost the same thing as Director Webster when Webster refers to

"The current generation of foreign intelligence collection managers - all picked from old Communist loyalists and trained in the Soviet Union - represent a substantial source of expertise that may prove difficult to replace."

Then, to assume that the old linkages between the former KGB and the other East Bloc intelligence services have disappeared would be to misstate the situation. In mid-1991, almost a year after the "Velvet Revolution" in Czechoslovakia, KGB officers were identified in Prague assisting Czechoslovak intelligence officers of the StB (Statni Bezpecnost) in the creation and funding of a front company whose purpose it was to acquire embargoed Western technology. At the same time, former members of the Polish Intelligence Service SB (Sluzba Bezpieczenstwa) were being similarly treated by the KGB. The bottom line with respect to the former surrogates is that they may now have doubled their reasons for continuing in their previous pursuits: national economic development and serving with their former colleagues of the KGB.

A Different Set of Rules:Perhaps the most significant difference in the capitalist West has been in the case of Japan, with France following closely behind. After a review of the interaction between the Japanese and French intelligence services and their respective commercial endeavors, an examination of a few representative emerging countries is in order.

Japan: The restrictions concerning Japanese rearmament in the Post World War II era may have seemed far too stringent to some. Yet, the Japanese - like successful businessmen the world over - saw opportunity where others saw defeat. Proscribed from building more than a nominal defense force, with less than 1% of its Gross National Product ever to be allocated for defense needs, the Japan could focus on developing its economy. By extension, its intelligence service, the Kempei Tai, was similarly proscribed from developing into a significant international intelligence organization to support military operations. Thus, since the end of the War, estimates range from 85% to 90% of all the collection operations of the Kempei Tai are directed towards the support and sustainment of its economic base.

In part, Japan's success as a collector of economic, technical and scientific information can be attributed to cultural issues. Unlike the case in the United States where to a large extent intelligence collection activities are often viewed as a necessary evil, and as we shall see later is considered unconscionable in some quarters if for the purpose of advancing American corporate goals, this type of intelligence work is considered just as patriotic and just as vital as any gathered during wartime. Another aspect is the ability of the corporate world and the government world to work in tandem toward long-term, mutually beneficial goals - in sharp contrast to the arms length relationship between American government and industry which often drives somewhat fitful cycles of reliability and short-range goals.

Aiding the formal government activities of the Kempei Tai are the businessmen who are among the 400 annual graduates of the four month course in business intelligence collection taught at the Institute for Industrial Protection, which was founded in 1962 and led by former military intelligence officers. Companies send their promising young executives to these courses at the Institute in much the same way that American corporations send their promising young men off to the Wharton School or Harvard Business School for periodic training. However, not only do they get an excellent course in tradescraft, they are automatically - upon completion - introduced into the national intelligence gathering program: tasked by both company and government, providing the results of their activities through their established reporting channels, with it ultimately being included in the analytical efforts which are shared throughout the Japanese economic and business intelligence consortia.

Without putting too fine a point on the Japanese conduct of intelligence operations against technical, scientific and economic targets in the United States, a general view of operational activities in Silicon Valley has some instructive value. As the computer industry developed through that region there was a quantum jump in the number of Japanese who took up residence in the ares and developed close personal relationships with many of the engineering as well as upper management personalities. In a more or less classic HUMINT type recruitment approach, these relationships developed to the point that the Japanese could take advantage of the high turnover rates in that industry, which often range from 20-30% per year. Those who are in between jobs are offered consulting positions by their Japanese associates, in which their expertise - or insider knowledge -deriving from their previous position, is the main drawing card. Then, following their employment with a new company, their lucrative consulting arrangements continue.

Other Japanese active measures include the purchase of small, medium and large companies engaged in design or production of those technologies where the Japanese are weakest from a developmental or competitive point of view. Ever mindful of the security ramifications, the Japanese, like others, rarely buy more than 49% of the companies they pursue in this vein if the target technologies have distinctly US Government - especially classified - applications. Obviously, they are well aware of the extent to which foreign ownership of a majority of a company engaged in such work becomes problematic from a Facility Security Clearance point of view. Banks which specialize in financial transactions involving the volatile high technology industries are also high on their list of acquisitions. The reasoning is simple: the riskier the business, the greater the amount of convincing a potential borrower has to do. The way he does it is to provide more and more information about the products he hopes to bring to market. Acquiring the lender means acquiring the market intelligence.

France: Japan is not the only acquisitive country which supplements its intelligence collection activities by buying up major, but not majority, interest in American firms. The French have become the new leaders in American acquisitions. In 1990, for example, France spent over $12 billion in acquiring American businesses, for the first time surpassing the totals of both the British and the Japanese. By May 1991, they were already ahead of the previous year's spending with nearly $8 billion in acquisitions.

On the direct intelligence collection side, and its emphasis on economic collection, the creation of Service 7 of the French intelligence service Direction Générale de la Sécurité Extérieure (DGSE), in 1968 served without interruption or disclosure until the mid-1980's. Even then, the activities of Service 7 were kept on a government to government level when intelligence service rifling of the briefcases of visiting American businessmen was uncovered. By May 1990, the cat was out of the bag, by a French newsmagazine L'Express which reported the attempted recruitment of in-house spies at the European branches of IBM, Texas Instruments and other US electronics firms on behalf of the ailing French computer firm Compagnie des Machines Bull - which, incidentally is owned in large part by the French government Denials were somewhat less than convincing; confirmation eventually came from none other than Pierre Marion, the retired DGSE chief who portrayed the spying as "an essential way for France to keep abreast of international commerce and technology." He went on to note that the organization was founded with the personal knowledge of French President Mitterand and was "not only directed at the United States, but worldwide.

Brazil: As in the case with many other countries about whom one might be less likely to suspect as an economic intelligence collection threat, Brazil nonetheless emerges as a significant player - and one which can be expected to continue to develop as her economic fortunes wax and wane. Brazil (along with rival Argentina) has been chasing the nuclear genie for several decades by piecing together expertise, technology and materials necessary for the production of nuclear weapons through a variety of intelligence collection, technology transfer and some open conduits. In the years since the return of democracy in 1985 to Brazil, there has been a decrement in the funding and attention to both the nuclear program and the intelligence community as the latter evolved from the National Information Service to today's Agency for Strategic Affairs. Many of the former intelligence officers have assumed senior positions in state-run commercial ventures, not the least of which is the state-owned and operated telephone company Telesp.

In a recent set of events, these intelligence officers were found to have tapped the telephones of an American consulting company, Princeton, Ltd and then provided information to Princeton's Brazilian competitors - specifically, the price that Princeton was prepared to pay in Brazil's first major privatization auction for Usiminas, a state-run steel mill. Clearly, Princeton was loathe to remain in the competition, foregoing what had to have been a considerable investment in its market research, analysis and proposal management.

Washington Rules:Two essential questions confront the United States - and its corporations -is "What is the proper role for the US Government in the protection of private sector vital information and technology?" and "What role, if any, should the US Government play in disseminating relevant economic intelligence to private (American) corporations?" Upon these two questions turns the success or failure of an American industrial base in the face of an increasingly competitive world economy - a world economy where the rules of the game are interpreted differently by the major players, as we have seen.

Protection: The question of government's role in the protection of proprietary information in the private sector has been addressed at some of the highest levels of the government. The answer most likely to remain as government policy is that enunciated in a statement by a member of the White House Office of Science and Technology

"I do see the potential for a sort of shared operations security, or OPSEC, responsibility in the government-industry partnership, in which the government would provide threat and vulnerability data. It would be up to the private sector to determine its level of risk ..... and to apply the security and countermeasures required."

Indeed, various programs are underway to aid in extending threat and some vulnerability information to private concerns, although the extent to which that will be disseminated down to specific companies or even industries remains to be seen. Senator Boren of the Senate Select Committee on Intelligence and Senator Sam Nunn, (D-GA), the Chairman of the Armed Services Committee, have begun a series of closed sessions to address the problem. Concurrently, both the CIA as well as the FBI have taken "the first tentative steps" toward formulating new strategies for protecting American firms against foreign espionage.

The overall problem is much more complex than a standard cops and robbers scenario. A host of thorny problems exist just beneath the surface, including such matters as the extent of coordination and consultation which must take place in a case where the offending foreign power is a close ally of the United States - where perhaps political, military or other considerations outweigh those of economics.

Yet, economic and technological prowess are becoming more significant measures of national strength and importance than the traditional measures of military power. In most of the world, though unfortunately not all of it, economic competition is replacing military competition --often waged at just as fierce a pace as military competition ever was.Economics and technology are closely interrelated. But there is a separate governmental concern about technology in general, and in particular about technological breakouts that could have a major economic, political or military impact.

Collection: The views of many advocates of an active role - and the attendant difficulties - for the American intelligence community are summed up quite nicely by George Carver of the Center for Strategic and International Studies:
 

"The place of economics at the intelligence table must now be moved well above the salt. Economic developments, furthermore, can no loner be considered in relative isolation; the web of economic, military and other factors directly affecting America's national interests and security is becoming seamless. In this fact lie some major conceptual, procedural and organizational challenges for American intelligence and the government it serves."

 

Few of America's economic competitors have such barriers, and some of its strongest competitors - notably Japan - consider them absurd. Additionally, foreign governments often employ the full weight of their diplomatic and intelligence resources into the fray for off-shore business. This is best illustrated in the case of the British, with a long tradition of elevating the monarch far above anything so mundane as business. Yet, in the face of this, Queen Elizabeth paid a state visit to Saudi Arabia at a critical juncture in the negotiations between the Saudis and a major British company - which it proceeded to win.

Nonetheless, more is involved here than just the government's role. In addition to the legally mandated distancing between government intelligence services and private organizations, there are also other statutory limits on the degree of cooperation - even information exchange - permitted among private-sector elements.

Furthermore, the matters of implementation are quite knotty as well. Questions associated with disseminating information range from identifying those companies which should be the recipients - without showing any kind of favoritism- to determining which of those companies is actually an "American" firm in these days of the "Stateless Corporation." Additionally, American businessmen are often chary of government participation in business-related activities and a fundamental matter of trust is involved - deriving from a perception in some firms that business interests are often sold down the river in exchange for certain foreign policy goals. Also of concern is the different focus and level of analysis employed by an agency of the US Government when compared with the needs of private organizations. In this context can be seen the cardinal weakness of much of American intelligence analysis - getting large bureaucracies to go out on a limb, staking their reputations on forecasting, with a result that iconoclastic views are often watered down in favor of the conventional wisdom.

However, even before the issue is joined to resolve these matters of protection and collection, there are fundamental differences in the halls of Congress. In terms of protective measures, Senator Bill Bradley (D-NJ) believes that "Economic espionage must not be used a pretext for a new program of counterintelligence surveillance by the FBI of either foreigners or Americans."Proponents of this view argue that

"The existing system of intelligence collection and counterespionage has imposed a significant cost in democratic process and individual liberty. Whether those infringements were ever necessary to protect the country in the Cold War era is debatable. It is absolutely clear, however, that the national security apparatus has no legitimate role in protecting private enterprise from foreign competition."

In terms of collection, perhaps the most vocal Senatorial opponent of such sharing is Daniel Patrick Moynihan (D-NY). In addition to calls for a dismantling of the CIA in certain respects and placing the remnant under the State Department, denigrates any potential efficacy of such shared information on the basis of his perception that "For a quarter of a century, the CIA has repeatedly been wrong about the major political and economic questions entrusted to its analysis."

It seems appropriate to conclude that for the foreseeable future, the security interests of private American corporations rests in the hands of those corporations. Opposition to widespread counterintelligence or intelligence collection support from US Government agencies will surely retard the attainment - even if desired by corporate America - of a relationship which is enjoyed by their foreign competitors with their governments, even if implementation issues are resolved.

In the meanwhile, corporate actors who have carefully appraised their competition and know the magnitude of the problem, will join with many others who have already formed their own defensive counterespionage units and competitor intelligence groups. Those who do not will reap the whirlwind.

About the author: John A. Nolan, III CPP, OCP is Chairman and Managing Director of Phoenix Consulting Group, which provides competitive intelligence, counterintelligence and professional development/training programs across a variety of industries. He is also a co-founder of The Centre for Operational Business Intelligence in Sarasota, FL where corporate intelligence practitioners from around the country and the world learn the tools and techniques necessary to prevail in the marketplace. His newest book, “CONFIDENTIAL”:Uncover Your Competitor's Top Secrets Legally and Quickly - And Protect Your Own was released by HarperCollins Business Books in June 1999. He is frequently featured in national and international media such as Forbes, George, Times of London and CNN, to name just a few. He can be reached at jnolan@intellpros.com, or at 1.800.440.1724.