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Michigan auto-parts maker Metaldyne was one of just two companies in the world that could turn powdered metal into high-performance engine components — until one of its engineers handed "hundreds of confidential" computer files to potential Chinese competitors, the Justice Department says.

A federal grand jury last year indicted the engineer, Michael Haehnel, 51; his wife, Anne Lockwood, 53, Metaldyne's former vice president for sales; and their Chinese partner Fuping Liu, 42, a former company metallurgist, on 64 counts of stealing trade secrets and related crimes. The three pleaded not guilty and are scheduled to face trial starting Oct. 9.

In his office about 25 miles west of Detroit, Haehnel accessed company computers and copied the details of Metaldyne's proprietary manufacturing process onto compact disks, which he gave to his wife, the indictment charges. Lockwood, who quit Metaldyne in early 2004, quietly plotted with Shanghai-based Liu, according to the indictment, to develop two Chinese companies as Metaldyne competitors in return for a commission on their U.S. sales.

Left unchecked, such economic espionage threatens the foundations of U.S. prosperity, say current and former counterintelligence officials. In an era of globalization, competitors in low-wage developing countries can produce most products less expensively. The United States' economic advantage revolves around the sophisticated technology and unique know-how residing in corporate laboratories and research institutes. So that's where the corporate thieves and foreign spies concentrate their efforts.

"The days when everything that was worth stealing, every secret that was worth stealing in the United States, was a government secret — those days are long done," says Joel Brenner, national counterintelligence executive. "Much of what makes the country tick, much of our strategic advantage in the world is economic."

Now, the FBI, which is responsible for combating economic espionage, wants to awaken Corporate America to the danger. Over the past year, the bureau's 56 field offices each identified the 10 highest-value corporate targets in their areas and spoke with their top executives about the potential threat they confront — mostly from their own employees. Companies such as General Electric, DuPont and Corning — as well as the nation's leading weapons makers — have met with FBI representatives, the bureau says.

"Significant internal and external counterintelligence weaknesses … make U.S. companies easy prey for foreign intelligence services, foreign organizations and foreign competitors," says an FBI briefing document for the private sector.

At seminars, such as a June 7 session in North Carolina's Research Triangle high-tech cluster, G-men tell CEOs about the "insider" danger, especially that posed by their foreign-born employees. A tiny minority could do devastating damage by stealing secrets for either a foreign government or more often as part of a purely commercial scheme.

The FBI is pursuing 143 economic espionage cases, up from 122 the previous year, according to its most recent statistics. "Our message is: There's risk here. You could be giving away the future. … The threat's in-house," says Thomas Mahlik, an FBI counterintelligence specialist who heads the outreach effort.

Daunting challenges

But the bureau's efforts to protect trade secrets face vexing challenges. Some question whether globalized companies really can regard every foreign-born engineer or executive as a potential spy without running afoul of civil liberties or crippling innovation.

High-tech companies depend on open information flows and access to the world's best brains to fuel breakout ideas. Treating every scientist without a U.S. passport as a traitor-in-waiting raises questions of racial profiling — and is unlikely to be effective, says Michael Gelles, a Deloitte consultant who spent 16 years as chief psychologist for the Naval Criminal Investigative Service working on counterintelligence cases.

The FBI insists it doesn't encourage stereotyping and recognizes that spies historically have come from every ethnic background. But "we can only go by what the trends tell us," Mahlik says, referring to several cases in recent years that have involved non-citizens.

Fueling concern: Globalization is giving foreigners "unprecedented access" to U.S. companies while digital technology makes it easier for would-be spies to pilfer secrets with handheld devices such as external hard drives, memory sticks and compact disks, according to the office of the national counterintelligence executive.

It's no longer just classified information that the bureau seeks to protect. Once the nation's most advanced systems belonged to the military, but today, the technological breakthroughs that differentiate American companies from foreign rivals reside in unclassified settings.

Mahlik points to a 2006 collaboration between IBM and Georgia Tech, which produced a silicon-germanium computer chip operating at 500 billion cycles per second — 250 times faster than existing cellphone chips. The team that produced this cutting-edge achievement — expected to have uses in commercial communications, defense electronics and space exploration — included graduate students from China and India.

For now, that research is unclassified, but U.S. officials worry that such breakthroughs are occurring in scores of corporate and university facilities across the country. Determining which advances to protect, and at what stage of their development, is a daunting task.

"You can't expect the government to be perfect at this," Brenner says. "This is what the stock market is trying to do day in and day out. It's what venture capitalists do for a living. It's handicapping technology."

China, which lacks a tradition of protecting intellectual property, represents the most aggressive threat, officials say. The Communist leadership is determined to increase the nation's technological sophistication while fiercely competitive Chinese business executives seek to leapfrog Western rivals by marrying their low labor costs with purloined technology.

"It's a serious problem to Corporate America and our economic interests," says Rudy Guerin, former head of the FBI's East Asia branch. "And it's going to get worse."

The FBI has increased the number of agents assigned to counter alleged Chinese espionage from about 150 in 2001 to more than 350 today, says Bruce Carlson, who leads the bureau's counterintelligence efforts against China.

Wang Baodong, a spokesman for the Chinese embassy in Washington, says: "The allegations made by a handful of people in this country that China is engaged in espionage activities in the U.S. are groundless."

FBI changes its Cold War habits

Countering industrial spies in an era of globalization is forcing the FBI to modify habits acquired battling Cold War spies. Then, there was little ambiguity about the identity and nature of the Soviet enemy. Today, though the FBI links China to about one-third of all economic espionage cases, the country is a major U.S. trading partner. So enormous amounts of technical information and manufacturing know-how flows — routinely and legally — to Chinese factories and suppliers.

To help agents understand the world CEOs face, the bureau two years ago purchased 500 copies of the globalization bible, The World Is Flat, and brought the author, New York Times columnist Thomas Friedman, to headquarters to meet with counterintelligence pros.

The Chinese reach out to ethnic Chinese scientists and executives in the USA, appealing to any latent affinity for their land of origin, according to counterintelligence officials. The FBI says up to 3,000 technology brokers facilitate China's access to sensitive commercial secrets, a figure private experts question. "One sees legitimate Chinese companies sometimes appealed to by a Chinese government agent enlisting its effort. And one also sees front companies. … There are companies established as front companies for this purpose," Brenner insists.

But the notion that China concentrates its recruitment on Chinese-Americans is "heavily overplayed," says James Mulvenon, director of the Center for Intelligence Research and Analysis, a Washington, D.C., think tank. He questions the practicality of scrutinizing foreign-born employees especially closely. "What they're pushing is completely unrealistic," he says.

FBI advice to U.S. businesses

As part of its ongoing effort to boost corporate awareness, the FBI is distributing a 12-page "counterintelligence vulnerability assessment" for companies to assess their internal safeguards. The bureau wants businesses to institute counterintelligence programs that go beyond traditional corporate security practices. All three of the individuals in the Metaldyne case, for example, had signed standard corporate confidentiality agreements, which they allegedly ignored.

Companies should identify the proprietary data that would cause the most damage if stolen or compromised, identify the employees with access to that information and designate a senior official with responsibility for countering any effort to recruit an employee as a corporate spy.

At DuPont, which employs about 2,000 scientists and researchers in 75 global centers, that would be Ray Mislock, the corporation's chief security officer. The Wilmington, Del.-based corporation spends more than $1 billion annually on research and development pursuing advanced materials such as Teflon or Kevlar. This year, every DuPont employee is required to complete a new online training course, which specifically addresses the insider threat.

The company performs almost no classified research, so the overwhelming majority of its sensitive information is protected only by its internal procedures and safeguards. Trade secrets involve both the chemical formulas behind novel materials as well as the step-by-step manufacturing instructions for reliably producing them in commercial quantities. "Innovation really occurs at the unclassified level," says Mislock, who spent 25 years in the FBI and served briefly as the CIA's security director.

Several times each year, DuPont employees are approached by someone outside the company seeking confidential information, he says. Sometimes, the contacts represent legitimate business opportunities. Sometimes, they don't. DuPont alerted the FBI to one suspicious inquiry as recently as last year, Mislock said.

Indeed, the FBI bridge-building to the corporate world already is paying dividends: Tips from executives led the bureau to open 27 cases involving potential theft of trade secrets and related crimes from November 2006 to March.

At least one major prosecution has resulted: a 2006 guilty plea by a former DuPont research chemist, who was charged with stealing technical secrets valued at more than $400 million, according to a statement by Colm Connolly, U.S. Attorney for the district of Delaware.

Gary Min, a specialist in heat- and chemical-resistant polymers, accepted a job with a United Kingdom-based competitor in October 2005 but didn't give notice to DuPont for two months. During that time, he downloaded about 22,000 abstracts and 16,706 technical documents from the company's in-house electronic library — 15 times as many as the next-highest user, according to the Justice Department.

In December 2005, DuPont informed the FBI of its suspicions that Min had stolen "a significant volume of confidential and proprietary" information on a wide variety of sensitive research projects. When FBI and Commerce Department agents raided Min's Ohio home on Valentine's Day last year, they discovered several computers with company documents marked "confidential."

A software erasure program was wiping clean an external hard drive as the agents entered the home, where they found "numerous garbage bags" filled with shredded DuPont documents. In the fireplace were charred fragments of additional company documents that had been burned, the Justice Department says.

Min pleaded guilty in November to one felony count of stealing trade secrets. He faces up to 10 years in prison when he is sentenced on Oct. 18.

Though the incident was disturbing for DuPont, the research giant may have escaped permanent harm. The Justice Department found no sign that Min distributed the secret information beyond uploading it to his new employer's computer, which is in the FBI's possession. Likewise, Metaldyne weathered its brush with alleged in-house betrayal, increasing sales to $1.9 billion in 2005 from $1.7 billion the year before, according to a financial briefing on its website.

Mislock sees a silver lining in the episode's impact on his efforts to get employees to take economic espionage more seriously. "Sometimes having a real-life example," he says, "makes everything you've been saying resonate with people."

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