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U.S. Charges Five Chinese Military Officers With Spying

By Michael Riley, Chris Strohm and Del Quentin Wilber
May 19, 2014 3:43 PM EDT 292 Comments
Press materials are displayed on a table of the Justice Department in Washington, D.C., on May 19, 2014, before Attorney General Eric Holder was to speak at a news conference.
Photographer: Charles Dharapak/AP Photo
Press materials are displayed on a table of the Justice Department in Washington, D.C., on May 19, 2014, before Attorney General Eric Holder was to speak at a news conference.

The U.S. dramatically escalated its battle to curb China’s technology theft from American companies by accusing five Chinese military officials of stealing trade secrets, casting the hacker attacks as a direct economic threat.

The indictment effectively accuses China and its government of a vast effort to mine U.S. technology through cyber-espionage, stealing jobs as well as the innovation on which the success of major global companies like United States Steel Corp. (X) and Alcoa Corp. (AA) depends.

While hundreds of U.S. entities have been penetrated by Chinese military hackers since 2002, the Justice Department focused on five companies specializing in solar panels, metals and next-generation nuclear power plants. Four companies are headquartered or have main offices in Western Pennsylvania and officials calculated the toll in human terms.

“The lifeblood of any organization is the people who work, strive and sweat for it,” David Hickton, U.S. Attorney for the Western District of Pennsylvania, said at a news conference in Washington. “When these cyber-intrusions occur, production slows, plants close, workers get laid off and lose their homes.”

The charges, unsealed today in District Court in Pennsylvania, allege the Chinese officers conspired to steal trade secrets and other information from U.S. companies, including Westinghouse Electric Co. and Allegheny Technologies Inc. (ATI) and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial Services Workers International Union.

Pressure Point

The indictments may add a new pressure point in U.S.-China relations, which are strained by Chinese territorial disputes with U.S. allies such as Japan and the Philippines as well as economic competition around the world. While President Barack Obama has said that he welcomes China’s rise as an economic and military power, his administration has sought to increase U.S. presence and influence in the region.

“It’s going to be explosive,” said Paul M. Tiao, a former senior counselor on cybersecurity to FBI director Robert Mueller. “This will have significant diplomatic implications and will affect our relationship with the Chinese government.”

The Chinese government denied engaging in economic espionage and said it would suspend participation in a U.S.- China cyber working group, which was formed last year to discuss rules for cyberspace and as a mechanism to manage differences between the two countries.

“The U.S. accusation against Chinese personnel is purely ungrounded and absurd,” Geng Shuang, spokesman for the Chinese embassy in Washington, said in an e-mail.

‘Aggressive Response’

U.S. Attorney General Eric Holder called the stolen data significant and said the theft “demands an aggressive response.” Hickton said the cost to companies hacked potentially amounts to billions of dollars in lost research and development.

“This cyberhacking leads directly to the loss of jobs here in the United States,” Hickton said. “This 21st Century burglary has to stop.”

Those indicted were officers in Unit 61398 of the Third Department of the Chinese People’s Liberation Army. The Justice Department identified them as Wang Dong, Sun Kailiang, Wen Xinyu, Huang Zhenyu and Gu Chunhui.

In one of the cases, the Justice Department said Sun stole proprietary technical and design specifications for piping from Westinghouse, the nuclear reactor arm of Toshiba Corp. (6502), as the company was building four power plants in China and negotiating other business ventures with state-owned enterprises.

In another instance, Wang and Sun hacked into U.S. Steel computers as the company was participating in trade cases, according to the department’s statement.

Companies Hacked

The indictment appears to be the first public disclosure of some of the intrusions, raising the question why the companies had not disclosed the events to investors.

“To our knowledge, no material information was compromised during this incident, which occurred several years ago,” Monica Orbe, an Alcoa spokeswoman, said in an e-mail today. “Safeguarding our data is a top priority for Alcoa and we continue to invest resources to protect our systems.”

While being spied upon would be a “big honor” and a sign that Solarworld has developed first-rate photovoltaic technology, “it’s a criminal act to steal what we are developing with a lot of money,” Solarworld Chief Executive Frank Asbeck said in a phone interview today.

Sheila Holt, a spokeswoman for the Pittsburgh-based Westinghouse unit of Toshiba, said the company just learned of the indictment. She declined to say whether the company is cooperating with investigators.

Army Links

China-based hackers with links to the People’s Liberation Army have been conducting commercial espionage on Western companies despite the Chinese government’s denial of the accusation last year, Mandiant Corp. (FEYE), the information security firm, said in a report posted April 10 on its website. Mandiant has since been acquired by FireEye Inc.

The hackers, operating since 2006, also stole sensitive communications that would help Chinese competitors in litigation by providing “insight into the strategy and vulnerabilities of the American entity,” the Justice Department said in a statement.

Holder and Robert Anderson, an executive director at the Federal Bureau of Information, said every effort will be made to bring the indicted officials to court in Western Pennsylvania.

“This is the new normal,” Anderson said. “This is what you’re going to see on a recurring basis, not just every six months, not just every year.”

Confronting China

The Obama administration decided last year to publicly confront China with claims that it is behind a campaign to hack into U.S. agencies and corporations to steal trade secrets and potentially disrupt computer networks operating banks, power grids and telecommunications networks.

“Success in the global marketplace should be based solely on a company’s ability to innovate and compete, not on a sponsor government’s ability to spy and steal business secrets,” Holder said, emphasizing that U.S. surveillance and spying is not used for commercial purposes.

The Pentagon for the first time in May 2013 accused the Chinese military of intruding into U.S. computers to steal sensitive data.

Wealth Transfer

Former Army General Keith Alexander, who headed the National Security Agency and U.S. Cyber Command, has called the hacking of U.S. trade secrets the greatest transfer of wealth in history.

Despite the push by the Obama administration, no charges had been brought against Chinese officials for hacking. The effort also was overshadowed by documents leaked by former government contractor Edward Snowden last year revealing the extent of NSA spying both domestically and abroad. China maintains that it’s a victim of hacking and opposes such activities.

Hacking activities originating in China temporarily dropped after Mandiant’s first report in February 2013, and by the end of summer the groups returned to “consistent intrusion activity” Mandiant’s latest report said. It said the lull could have been an attempt by the Chinese to assess any political damage following the publication of its report and to reorganize its cyber operations to better hide its activities.

To contact the reporters on this story: Michael Riley in Washington at michaelriley@bloomberg.net; Chris Strohm in Washington at cstrohm1@bloomberg.net; Del Quentin Wilber in Washington at dwilber@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net Elizabeth Wasserman

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