How China Exploits the Human Factor in IP Theft

The United States and other Western nations are increasingly the target of cyberattacks and corporate espionage by a number of threat actors from around the world. Foremost among these is China. 

Michael C. Casey, director of the US National Counterintelligence and Security Center, recently spoke at the 2024 CNBC CEO Council Summit in Washington, DC. At the summit, Casey revealed that China continues to be the most serious threat in terms of corporate espionage. 

The cost to the US of China's theft of trade secrets, pirated software, and counterfeiting was estimated at between $225 billion and $600 billion annually in 2017. It certainly has risen considerably since then. 

A Long-Term Threat

According to the FBI, "China is the world's principal infringer of intellectual property, and it uses its laws and regulations to put foreign companies at a disadvantage and its own companies at an advantage." 

The Financial Times estimates that roughly 80% of all economic espionage prosecutions brought by the US Department of Justice involve alleged conduct that would benefit the Chinese state. Reportedly, a new counter-intelligence case against China opens in the US, on average, every 12 hours.

In 2020, FBI director Christopher Wray declared that Chinese counterintelligence and espionage represent the "greatest long-term threat" to US economic vitality. These thefts, he said, constitute one of the largest transfers of wealth in human history. 

China has been long known for its cyberattacks to steal IP. It is equally known for the arm-twisting of foreign companies operating within the country to give up their corporate secrets. Now, Beijing appears to be aggressively intensifying its corporate espionage efforts on a global basis. Nonetheless, despite the emphasis in the media on hacking, the most common form of IP theft continues to be theft by company insiders. 

According to Casey, China has become "by far the most prolific actor out there and one coming after us across the board and in the hardest way possible." It does so, he said, because it keeps succeeding and getting what it is looking for. 

China's 'Tech Nationalism'

International lawyer Dan Harris recently wrote an article titled "How to Fight Against China Corporate Espionage." It is published on the China Law Blog (Harris-Sliwoski). In it, Harris wrote, "China's technology acquisition strategy is systematic, driven by government directives that target specific industries."

Under President Xi Jinping, China aspires to become a global superpower, eventually surpassing the US. Moreover, it is not fussy about the means it employs to replace the current reciprocal, open system with undemocratic, authoritarian ideals. 

To that end, China practices technology nationalism. This includes pursuing the creation of a group of "national champions" consisting of state-owned enterprises that are leaders in their industries. In addition, it works tirelessly to give Chinese companies a competitive advantage.

China is especially interested in technology, It is convinced that is where the US advantages in global competition are centered. Indeed, China has even published a list of desired technologies and then set out to acquire them. 

Its interest runs the gamut from biotech, nanotech, aerospace, and agricultural technology to quantum computing and semiconductors. By 2049, the 100th anniversary of the PRC's founding, Beijing hopes to have achieved a dominant position in global markets.

It employs a whole-of-society approach to achieve its goals, leveraging every opportunity available. These range from joint ventures to economic espionage, all aimed at developing and maintaining a strategic economic edge. 

Human Assets

The Chinese Communist leadership sometimes relies on its intelligence agencies to steal intellectual property and trade secrets from foreign companies. Of course, in many cases, it is Chinese commercial competitors that do the actual collection. 

One recent worrying development has been the rise in the recruitment of what Casey terms "human assets." Insiders remain key to IP theft. Much as they do when seeking to recruit foreign government employees to spy for them, the Chinese seek to identify employees with money problems, marital issues, or some other personal weakness they can exploit. Once recruited, they are tasked to collect IP and other data from their own companies. 

"I am stunned by the number of companies that have no concept of their insider threat," Casey told CNBC. 

He added that companies need to hone in on what secrets are in the greatest need of protection. They must then identify who should have access to this information. 

In other words, they need to instill a "need to know" mentality and also prepare themselves for worst-case scenarios through contingency planning. After all, it is no secret that China and Russia are targeting US infrastructure, such as water supply and electricity supply networks. Any outages would naturally severely impact the private sector. 

Using the Ethnic Chinese Card

Another thorny problem, especially for hi-tech companies, is that many of their employees tend to be of Chinese descent. And some of them are vulnerable because they have relatives in China. 

There is, of course, the danger that loyal employees will come under suspicion purely because of their ethnicity. Not only is profiling insidious, but experience has proved it to be counterproductive.  It should not be forgotten that many of the highest-profile cases of US citizens selling classified secrets to China involved individuals with ethnic backgrounds other than Chinese. 

Casey recommends that companies start coordinating more with partners in the public sector, including local offices of the FBI. 

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Author: John Carroll