Even Spies Embrace China's Free Market

Even Spies Embrace China's Free Market
Even Spies Embrace China's Free Market 

By Ariana Eunjung Cha
Washington Post Foreign Service
February 15, 2008

MOUNTAIN VIEW, Calif. -- Engineers Lan Lee and Yuefei Ge had drafted a 
business plan that they promised would roil the U.S. microchip industry. 
Using blueprints they allegedly stole from their Silicon Valley 
employer, the men proposed to reproduce a super-fast chip in China at a 
much lower cost.

The documents, recovered by FBI agents, included a contract with a 
venture-capital firm in Beijing that would bankroll part of the 
estimated $3.6 million the would-be entrepreneurs needed and seek 
additional funding from the Chinese government.

The case of Lee and Ge, who pleaded not guilty in October to charges of 
theft of trade secrets and the more serious charge of economic espionage 
to benefit a foreign government, is one of more than a dozen involving 
the alleged sale or attempted sale of purloined technology to China that 
are making their way through U.S. courts this year.

Stolen from laptop computers and luggage of engineers working for U.S. 
companies en route to China are designs for some of the country's most 
sophisticated technology -- flight-simulation programs, microwave 
devices, electronic propulsion systems for submarines and night-vision 

On Monday, U.S. officials announced arrests in Alexandria and California 
in connection with alleged plots to steal high-tech military secrets for 
the Chinese government. In Alexandria, Assistant Attorney General 
Kenneth L. Wainstein said "there are a number of countries that have 
proven themselves particularly determined and methodical in their 
espionage efforts." China, he said, is one of those.

The plots that prosecutors described on Monday allegedly involved direct 
contacts between the defendants and the Chinese government. But in many 
cases on the books, the question of involvement by the Chinese state is 
tricky to pin down because the line between where the government starts 
and ends is constantly shifting. U.S. officials say there is an 
underground bazaar of people trying to sell information to the Chinese 
government and military but that no one knows how many deals are made or 
whether the government is soliciting such business. Nonetheless, U.S. 
authorities fear the potential consequences.

The Chinese government has repeatedly denied being involved in any 
high-tech theft in the United States. Foreign Ministry spokesman Liu 
Jianchao has called the allegations "insulting" and "misleading."

"The so-called accusation against China on the issue of espionage is 
totally groundless and has ulterior motives," Liu said at a press 
briefing Thursday.

The U.S. government's reports note that many of the thieves caught were 
not Chinese agents in the traditional sense. The Office of the Director 
of National Intelligence says the perpetrators did not come to the 
United States at the direction of the Chinese government to steal 
technology; they were entrepreneurs who figured out that they could make 
quick cash by selling it to China.

There is a "seismic shift toward increasing reliance on the private 
sector in the intelligence world," for information about technology, 
Joel F. Brenner, national counterintelligence executive in the Office of 
the Director of National Intelligence, said in a recent speech.

In the United States, some Chinese Americans have expressed worry about 
racial hysteria, that Chinese Americans and Chinese nationals are being 
targeted in the way Russian emigres were accused of spying for the 
Soviet Union in the 1950s. They say U.S. law enforcement officials have 
unfairly turned what would otherwise be run-of-the-mill charges of 
stealing trade secrets into international espionage cases simply because 
defendants are ethnic Chinese.

"There is a mentality that pervades all of Washington, which is that 
China is our big adversary and enemy -- if not today, then tomorrow -- 
so we need to deal with them on that basis. So there are a lot of heavy 
biases," said George Koo, a business consultant in Silicon Valley who is 
a member of the Committee of 100, a group of influential Chinese 
Americans that was founded by the cellist Yo-Yo Ma and the architect 
I.M. Pei.

While dozens have been caught in recent years illegally sending 
high-tech wares to other countries and are serving sentences for 
violating export laws or stealing trade secrets, only three people have 
been convicted of doing so to help a foreign government under the 
Economic Espionage Act of 1996. All were from Silicon Valley and all 
involved China.

In December 2006, Ye Fei, a U.S. citizen from China, and Ming Zhong, a 
permanent U.S. resident from China, pleaded guilty to stealing designs 
for a microchip from their employer and attempting to take them to China 
to start a competing company.

In August 2007, Xiaodong Sheldon Meng was convicted of stealing computer 
code from Quantum3D for a military flight-simulation program and trying 
to sell it to China's navy. Meng is scheduled to be sentenced this 

China's efforts to become a technology power began with a government 
initiative known as the 863 program. Launched under Deng Xiaoping in 
1986, the program paid for $1.3 billion worth of research and 
development throughout the country. Its goal was to narrow the gap 
between China and the West in a dozen sectors, including space tracking, 
nuclear energy and information technology.

In the beginning, the program boasted of its transparency, issuing 
annual reports detailing where the money went and its major 
achievements. But in 2002, the government abruptly stopped issuing 
updates, and today it won't even reveal how much money it is giving out.

Larry M. Wortzel, a former military intelligence officer who recently 
retired from the Heritage Foundation, a conservative research 
organization in Washington, said the program is part of the climate in 
China that rewards stealing secrets. "The 863 program is related to 
state-directed traditional and economic espionage, but it is only one of 
the actors," Wortzel said.

Wortzel said the connections between government and so-called private 
enterprises seeking to purchase or steal U.S. technology were evident in 
the visa applications he investigated when he worked at the U.S. Embassy 
in China. He said that in a number of cases, he found that the license 
applicants in China had listed no government or military affiliations, 
but when he went to their addresses, he found they belonged to a 
military institute or defense industry research office.

"This implies that organizations or people in China are deliberately 
concealing their defense, military or government affiliation in order to 
get access to technologies that would otherwise be restricted to them in 
licenses by the U.S. government," Wortzel said.

U.S. officials and analysts say that in addition to promoting lawful 
research, the Chinese government is also directly or indirectly 
encouraging economic espionage.

Lee and Ge, for example, pinned their hopes for their new company on 
getting funding from the 863 program, according to the U.S. attorney's 

Ye and Zhong, who were former employees of Transmeta in Santa Clara, 
Calif., also hoped to develop their stolen technology through the 863 
program, according to court records.

Arrested in 2001 at San Francisco International Airport as they were 
about to board a plane for China, Ye and Zhong carried in their luggage 
plans for some of the top integrated-circuit technology in the world, 
stolen from Transmeta as well as Sun Microsystems, NEC Electronics and 
Trident Microsystems.

Ye and Zhong sought to develop the technology through a company called 
Supervision, based in the eastern Chinese city of Hangzhou, according to 
the indictment. It also alleged that the men were working with an 
unidentified university professor "who was assisting in obtaining funds 
from the 863 program."

Contacted by telephone, Yan Xiaolang, who is listed as an investor in 
Supervision in registration papers and is a director of the electrical 
engineering department at Hangzhou University, confirmed that worked 
with Ye and Zhong. But, said Yan, who is head of an integrated-circuit 
expert group within the 863 program, neither the company nor the 
government knew that the plans were stolen. "I did not know them for a 
long time and had little contact with them. I have no idea about their 
activities," Yan said.

In the other case, Lee, a U.S. citizen, and Ge, a Chinese national, 
became targets of law enforcement under circumstances that remain 
unclear, as many of the documents related to the case remain under seal. 
Lawyers for Lee and Ge declined to comment as did officials at their 
former employer, NetLogics Microsystems. Lee and Ge are free on $300,000 
bonds and still reside in Silicon Valley. They are scheduled to appear 
in U.S. District Court in San Jose on Feb. 25, at which time a trial 
date may be set.

Lee and Ge allegedly created a front company, SICO Microsystems, 
registered in Delaware, that would develop and sell microprocessors made 
from the stolen blueprints.

The stolen documents included design plans for a chip that could make 
rapid decisions about information moving through the network and that 
could significantly improve everyday tasks such as searching the 
Internet or securing financial transactions.

SICO in 2003 signed a partnership deal with a company in China run by 
venture capitalist Liu Baisen. Liu's firm agreed to secure funding from 
863 and the General Armaments Department, which is a branch of the 
military, according to the indictment.

On Lee's home computer were documents regarding negotiations with the 
Chinese military, according to the indictment. In one e-mail, an 
unidentified associate assured Lee that the Chinese government and army 
are "not that scary" and that they "are only help and support, and 
satisfy our various needs," the indictment said.

In an interview at his office in Beijing, Liu said he was introduced to 
Lee and Ge through a family friend. He said he had no idea the 
technology was stolen. Liu said the friend told him that he knew some 
smart engineers in the United States who had designed a very powerful 
chip and "if we can make this chip we can make 500 million U.S. 

"I was intrigued. Wouldn't anyone be?" he said. "I didn't understand the 
technology well. All that I understood was that it would make money."

Asked about any ties he has with the Chinese government and military, 
Liu answered with a question: If the government had been involved with 
Lee and Ge's plans, wouldn't they already be making the chips?

One of the four addresses listed in Liu's former company's official 
registration papers is a room in the basement of a heavily guarded, 
unmarked government security complex in Beijing's Zhongguancun 
neighborhood, which is known as China's Silicon Valley. Liu said he 
previously worked there and still had friends who gave him, rent-free, 
an office from which to run his business.


Researcher Richard Drezen in New York contributed to this report.

Copyright 2008 The Washington Post Company

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