Dipping Through Geometries

On September 6, the United Kingdom High Court, in KBR Inc v. The Director of the Serious Fraud Office, [2018] EWHC 2368 (Admin), upheld the use of a notice by the United Kingdom Serious Fraud Office (SFO) to obtain information located outside the United Kingdom from a company incorporated in the United States.  Because this decision appears to have received comparatively little attention to date, this post will summarize the decision and highlight its significance for global enterprises.

Subsection 2(3) of the Criminal Justice Act 1987 vests the SFO Director with broad authority to issue written notices that “require the person whose affairs are to be investigated (“the person under investigation”) or any other person whom he has reason to believe has relevant information to answer questions or otherwise furnish information with respect to any matter relevant to the investigation at a specified place and either at a specified time or forthwith.”  In April 2017, in relation to its ongoing investigation into the activities of Unaoil, the SFO announced that it had opened an investigation into the activities of the United Kingdom subsidiaries of KBR Inc., as well as their officers, employees, and agents, for suspected bribery and corruption offences.

In April 2017, the SFO issued a section 2 notice to a KBR Inc. United Kingdom subsidiary, Kellogg Brown & Root Ltd (KBR Ltd.), seeking documentation.  In response, according to the High Court, KBR Ltd. provided three categories of documents: (1) documents that were already under KBR Ltd.’s custody or control that were located in the United Kingdom prior to the issuing of the April notice; (2) documents located outside the United Kingdom and sent to KBR Ltd. at KBR Inc.’s direction to forward to the SFO; and (3) on a “voluntary basis” in respect of documents located outside the United Kingdom that KBR Inc. had disclosed to the United States Department of Justice and the Securities and Exchange Commission (SEC) as a result of their inquiries into Unaoil.

In July 2017, the SFO issued a section 2 notice, directing KBR Inc. to produce documents that it held outside the United Kingdom, and served that notice on KBR Inc.’s Executive Vice President, General Counsel and Corporate Secretary, Eileen Akerson, who was temporarily present within the jurisdiction (i.e., for a meeting with the SFO concerning the investigation).  KBR then challenged the notice on three grounds.  First, it asserted that the July notice was ultra vires because it requested material held outside the jurisdiction of the United Kingdom from a company (KBR Inc,) that was incorporated in the United States.  Second, it asserted the Director had made an error of law to exercise his section despite the fact that he also had the power to seek Mutual Legal Assistance (“MLA”) under the bilateral MLA treaty from the US authorities.  Third, it asserted that the SFO did not effectively serve the July notice by handing it to Ms. Akerson.

The opinion by Lord Justice Gross considered and rejected each of the three grounds in turn.  On the matter of jurisdiction and ultra vires action, the court, after an extended discussion of various United Kingdom decisions bearing on various aspects of jurisdiction, said regarding the extraterritorial reach of section 2 that:

the legislative purpose and the mischief at which s.2(3) is aimed permits of no such doubt. As already indicated, the SFO’s business is ‘…top end, well-heeled, well-lawyered crime…’. By their nature, most such investigations will have an international dimension, very often involving multinational groups conducting their business in multiple jurisdictions, whether through a branch or subsidiary structure (it should matter not). It follows that the documents relevant to the investigation of a UK subsidiary of such a group may well be spread between the UK and one or more overseas jurisdictions. The simplicity of document transfer and access has of course been massively enhanced by internet and web technology post-dating 1987 but, as already discussed, it cannot be suggested that the international dimension of the SFO’s mandate was unknown or not appreciated at the time of the enactment of s.2(3). For my part, putting to one side for the moment, any questions of MLA, there would be a very real risk that the purpose of s.2(3) would be frustrated . . . if, as a jurisdictional bar, the SFO was precluded from seeking documents held abroad from any foreign company.”

The Lord Justice concluded that “s.2(3) extends extraterritorially to foreign companies in respect of documents held outside the jurisdiction when there is a sufficient connection between the company and the jurisdiction.”  He further stated that he was “amply satisfied that there was here a sufficient connection between KBR Inc and the jurisdiction so as to fall within the extraterritorial reach of s.2(3).”

On the matter of the availability of the MLA process, Lord Justice Gross addressed three main points:

1. The use of the MLA procedure pursuant to the Criminal Justice (International Co-operation) Act 1990 or the Crime (International Co-operation) Act 2003 “is an additional power to that contained in s.2(3), CJA 1987. The availability of MLA gives the Director additional options; it does not curtail his discretion to use the separate power of issuing s.2(3) notices. . . . [A] State is entitled but not obliged to proceed by way of the MLA route. It follows that KBR Inc has failed to demonstrate any error of law on the part of the Director in the exercise of his discretion to issue the July Notice.”
2. “[E]ven where there is an available MLA regime, there may be good practical reasons for the Director preferring to proceed by way of s.2(3) notices” (i.e., the risk of delay in the formal MLA process).
3. The 1994 U.S.-UK MLA treaty “has not been enacted in domestic UK law,” but in any event article 18.2 of that Treaty – which pertains to consultation regarding matters for which assistance could be granted under the Treaty, — “inferentially reinforces the SFO’s case in respect of jurisdiction (Issue I above) – by contemplating extraterritorial action, albeit subject to the terms of the Article.”

On the matter of service, Lord Justice Gross wrote that subsection 2(3) “does not require a notice to be ‘served’ on KBR Inc., KBR Inc. “was plainly present in the jurisdiction through Ms Akerson when the July Notice was given to her,” “it is obvious that the contents of the July Notice were communicated by Ms Akerson to KBR Inc.,” and subsection 2(3) “requires no additional formality beyond the giving of the notice and there is no basis for importing any such requirement.”  As an afterword, he commented that “there are unappealing features of the SFO’s decision to give the July Notice to Ms Akerson in the course of attending a meeting to discuss the investigation – but however those features might impact on the willingness of others to attend such meetings in the future, they do not serve to invalidate the giving of the July Notice.”

Note:  From time to time over many years, certain members of the bar whose practice includes international criminal investigations have complained about (and even formally opposed) the United States’ aggressive assertion of authority to obtain relevant evidence extraterritorially.  After the KBR decision, the United States now finds itself in august company with the United Kingdom.  Other non-UK companies with subsidiaries or operations in the United Kingdom can therefore expect that in the future they may receive section 2 notices for evidence located outside the United Kingdom, even if those companies are not themselves targets of the investigation.

The High Court’s requirement that the SFO must show “a sufficient connection” between a company from which documents are sought and the United Kingdom is sure to be a ground for future challenges to the SFO’s use of Section 2 notices, but is unlikely to be an insuperable obstacle for the SFO in all but rare cases.  In those rare cases, as indicated in the High Court’s decision, the SFO can always avail itself of MLA processes in jurisdictions that are parties to bilateral or multilateral MLA treaties with the United Kingdom.   Finally, the United Kingdom may be able to request further evidence-gathering assistance by certain jurisdictions in which domestic laws – such as 28 U.S.C. §§1782 and 1783 and the Foreign Evidence Request Efficiency Act of 2009 in the United States – provide government authorities in those jurisdictions with broad authority to compel testimony or evidence production through various means to assist the United Kingdom in its investigations.

On November 6, the information technology company ESET disclosed that on November 3, “attackers successfully breached StatCounter, a leading web analytics platform.”  ESET stated that many webmasters use StatCounter to gather statistics on their visitors: for example, StatCounter itself reported that it has more than 2 million member sites and computes statistics on more than 10 billion page views per month.

The main purpose of the StatCounter breach appears to have been to enable the attackers to divert Bitcoins from a highly popular cryptocurrency exchange, Gate.io.  In order to gather statistics on their sites’ visitors, according to ESET, webmasters “usually add an external JavaScript tag incorporating a piece of code from StatCounter  – http://www.statcounter[.]com/counter/counter.js – into each webpage.”  The attackers’ breach of StatCounter enabled them to inject JavaScript code into all websites that use StatCounter.  That code included a script, which targets a specific Uniform Resource Identifier (URI) that, at the time of the breach, appears to have been uniquely associated only with Gate.io, and was apparently designed specifically to steal bitcoins by diverting bitcoin transfers from Gate.io to a wallet that the attackers control.  As the script generates a new bitcoin address each time a visitor loads the malicious script, ESET stated, “it is hard to see how many bitcoins have been transferred to the attackers.”

Because several million dollars, including $1.6 million in just bitcoin transactions, transit Gate.io every day, ESET suggested that “it could be very profitable for attackers to steal cryptocurrency at a large scale on this platform.”  ESET indicated that it did not know how many bitcoins may have been stolen during this attack, but added, “it shows how far attackers go to target one specific website, in particular a cryptocurrency exchange.”

In a November 7 postscript, ESET reported that on November 6, StatCounter had removed the malicious script and Gate.io had “stopped using StatCounter analytics services to prevent further infections,” meaning that both sites could be safely browsed.

Note:  This account (which The Register first reported) provides yet another indication that cryptocurrency exchanges can be as attractive to cyberattackers as websites for financial institutions and other businesses, and therefore need to take their own cybersecurity as seriously as they do their day-to-day business activities.  As ESET correctly noted, “even if your website is updated and well protected, it is still vulnerable to the weakest link, which in this case was an external resource. This is another reminder that external JavaScript code is under the control of a third party and can be modified at any time without notice.”  Information security teams interested in the details of the malicious code should consult the November 6 post on ESET’s blog, welivesecurity^TM.

On October 30, in United States v. Perez-Ceballos, the United States Court of Appeals for the Fifth Circuit reversed the conviction of a defendant who had been convicted at trial of bank fraud based on her defrauding a U.S. bank based solely on her transfer of certain funds to and through an account at that bank.  This post will review the key points of that decision and identify several issues of which corporate compliance officers at financial firms should take note.

The defendant, Silvia Beatriz Perez-Ceballos, is the wife of Jose Manuel Saiz-Pineda, who had been Secretary of Finance and Administration for the State of Tabasco in Mexico until his electoral defeat in 2012. Perez-Ceballos and Saiz-Pineda had a securities account with UBS Financial Services (UBS), which was aware that both were Politically Exposed Persons (PEPs) because of his political office.  In 2013, after Mexico charged Saiz-Pineda with illegal enrichment, a UBS representative informed Perez-Ceballos that she would need to transfer her and her husband’s assets elsewhere.  Perez-Ceballos consulted with an international financial advisor at Chase Investment Services Corporation (Chase Investment), Paul Arnold, about possible investment strategies for her and her husband’s UBS assets.

During that consultation, Perez-Ceballos, who had moved to the United States in May 2013 and opened an account with a Houston branch of J.P. Morgan Chase Bank in June 2013, falsely told Arnold that her primary residence was in Mexico.  That statement was material because only non-resident aliens were eligible for the tax-exempt investments that the Chase investment adviser oversaw.  Based on her false statement, Arnold recommended that she apply for a brokerage account with Sun Life Financial, an insurance company registered in Bermuda.  Neither Chase Investment nor Sun Life were financial institutions that the Federal Deposit Insurance Corporation (FDIC) insured.

In applying for a Sun Life account,  Perez-Ceballos made additional misrepresentations to Arnold and Sun Life Financial: (1) she was separated from her husband; (2) she was not a PEP; and (3) she signed the requisite documents in Mexico where they had been mailed to her (as required) when in fact she signed them in Houston after she had sent her brother to retrieve the documents and bring them back to the United States.  She also gave the Chase Investment adviser a UBS statement from August 2013, from which she had removed her husband’s name as a joint account holder.

After she had obtained a Sun Life Financial account, in October 2013, Perez-Ceballos liquidated her account at UBS and transferred more than $1.9 million to her Chase Bank savings account. At her direction, Chase Bank wired the $1.9 million to Sun Life. Thereafter, in May 2017 Perez-Ceballos attempted to withdraw funds from Sun Life Financial  – likely to return those funds to Chase Bank — and again falsely affirmed that she lived in Mexico.  The 2013 UBS-Chase-Sun Life Financial  transfer of $1.9 million and the 2017 Sun Life Financial – Chase attempted transfer of $1.9 million “formed the heart of Perez-Ceballos’s bank fraud conviction.”

The key conclusion by the Fifth Circuit panel was that “the government failed to produce sufficient evidence to convict Perez-Ceballos of defrauding Chase Bank.  Under 18 U.S.C. § 1344(1), a defendant is guilty of bank fraud if she “knowingly executes, or attempts to execute, a scheme or artifice—(1) to defraud a financial institution.” To sustain a conviction under this statute, the government must prove both intent to defraud and FDIC-insured status.”  The court, however, concisely disposed of the government’s theory:

First, the government failed to adduce evidence that Perez-Ceballos made any false statements to Chase Bank. No Chase Bank witness testified at trial. According to the evidence at trial, Perez-Ceballos’s numerous false statements were all made either to Chase Investment (through [the adviser]) or to Sun Life Financial. Neither the government’s briefing nor oral argument cites evidence that clearly established (or even directly alleged) that Perez-Ceballos fraudulently made Chase Bank believe anything.

Second, the government also failed to prove that Perez-Ceballos intended to “obtain money from the victim institution” or otherwise exposed Chase Bank to “risk of loss.” . . . The $1.9 million that Perez-Ceballos transferred to and through Chase Bank was her money, which she had authority to withdraw freely. . . .

Moreover, neither Arnold nor [an HSBC financial adviser who had handled a prior securities account for Perez-Ceballos and her husband] worked for Chase Bank or spoke specifically to the risks that Chase Bank faced from Perez-Ceballos’s misrepresentations. Their testimony focused primarily on the liability their own employers could face from the false statements Perez-Ceballos made to their institutions.

The court concluded (1) that the government failed to prove that Perez-Ceballos defrauded Chase Bank, absent sufficient evidence that she “had made false statements to Chase Bank or that she made false statements to another party while intending to obtain money from Chase Bank in a way that exposed Chase Bank to a risk of loss”; and (2) there was no FDIC-insured victim.

Note:  Corporate compliance officers, particularly in financial-sector firms, can take away from the Perez-Ceballos decision certain lessons beyond the narrow legal determination:

1. Customer Due Diligence: The decision does not explain why two financial firms apparently did not determine, through their customer due diligence (CDD) processes, that various representations by Perez-Ceballos (e.g., that her primary residence was in the United States and that she was not a PEP) were false. Corporate training on CDD issues can use this case as an example of the importance of consistent adherence to CDD processes, including use of CDD information resources.
2. Suspicious Activity Reports:  The Fifth Circuit’s decision provides some clear indications of the limits of the federal bank fraud statute’s ambit.  Those limits can be factored into a financial institution’s decision process about whether certain conduct warrants the filing of a Suspicious Activity Report (SAR).  Of course, a financial institution that is aware of a fact pattern similar to the facts in this case can always use existing statutory authority, beyond the SAR process, voluntarily to notify federal regulators and enforcement agencies of those facts.  For example, 12 U.S.C. §3403(c) provides authority for a financial institution to notify a federal government authority “that such institution, or officer, employee, or agent has information which may be relevant to a possible violation of any statute or regulation.”

Three developments last week indicated that the U.S. Department of Justice’s investigation into possible crimes relating to the Malaysian state-owned and state-controlled investment development company, 1Malaysia Development Berhad (1MDB), has made substantial progress and is entering a new phase.

First, on November 1, the U.S. Department of Justice stated that a federal indictment was unsealed in the U.S. District Court for the Eastern District of New York, charging wealthy Malaysian businessman Low Taek Jho (also known as “Jho Low”) and Ng Chong Hwa (also known as “Roger Ng”) with conspiring to launder billions of dollars embezzled from 1MDB and conspiring to violate the Foreign Corrupt Practices Act (FCPA) by paying bribes to various Malaysian and Abu Dhabi officials.  As part of the three-count indictment, Ng is also charged with conspiring to violate the FCPA by circumventing the internal accounting controls of Goldman Sachs, which reportedly underwrote more than $6 billion in bonds issued by 1MDB in three separate bond offerings in 2012 and 2013, while Ng was employed at Goldman Sachs as a managing director.

Second, on November 1, a guilty plea relating to 1MDB was also unsealed in the Eastern District of New York.  According to the Justice Department, the former Southeast Asia Chairman and participating managing director of Goldman Sachs, Tim Leissner, pleaded guilty to a two-count criminal information, charging him with conspiring to launder money and conspiring to violate the FCPA by both paying bribes to various Malaysian and Abu Dhabi officials and circumventing Goldman Sachs’s internal accounting controls while he was employed there.  According to court filings, Leissner has also been ordered to forfeit $43.7 million as a result of his crimes.

The information to which Leissner pleaded guilty stated that Leissner,

1. “while acting within the scope of his employment as an agent of [Goldman Sachs], with the intent, at least in part, to benefit [Goldman Sachs], conspired with others, including certain individuals and entities . . . , to obtain and retain business from IMDB for ‘[Goldman Sachs] through the promise and payment of bribes and kickbacks to government officials in Malaysia and Abu Dhabi, and by embezzling funds from, 1MDB for himself and others”; and
2. “together with others, also conspired to launder those bribes, kickbacks and other embezzled funds from IMDB through financial systems in the U.S. and elsewhere.”

The Justice Department press release concerning the indictment and the information stated that

[a]s alleged in court filings, between approximately 2009 and 2014, as 1MDB raised money to fund its projects, billions of dollars were misappropriated and fraudulently diverted from 1MDB, including funds 1MDB raised in 2012 and 2013 through three bond transactions that it executed with [Goldman Sachs].  As part of the scheme, and as alleged in court filings, Low, Ng, Leissner, and others conspired to bribe government officials in Malaysia, including at 1MDB, and Abu Dhabi to obtain and retain lucrative business for [Goldman Sachs], including the 2012 and 2013 bond deals.  They also allegedly conspired to launder the proceeds of their criminal conduct through the U.S. financial system by purchasing, among other things, luxury residential real estate in New York City and elsewhere, and artwork from a New York-based auction house, and by funding major Hollywood films.

According to the Justice Department, Ng was arrested on November 1 in Malaysia, pursuant to a provisional arrest warrant issued at the United States’ request of the United States, while Low remains at large.  In July 2018, Low reportedly had fled Hong Kong for Macau, then China, though an unnamed Chinese official disputed Low’s entry into China.

Third, on November 2, Goldman Sachs filed its Quarterly Report for the Third Quarter of 2018 with the Securities and Exchange Commission.  With respect to the 1MDB investigation, the report briefly mentioned the firm’s receipt of “subpoenas and requests for documents and information from various governmental and regulatory bodies and self-regulatory organizations” as part of their respective 1MDB-related investigations and reviews.  It also summarized the Leissner plea and the Ng and Low indictment, and made a noteworthy set of statements that, in certain respects, acknowledge serious deficiencies in its anti-corruption compliance program:

• “[T]he plea and charging documents indicate that Leissner and Ng knowingly and willfully circumvented the firm’s system of internal accounting controls, in part by repeatedly lying to control personnel and internal committees that reviewed these offerings.
• “The indictment of Ng and Low alleges that the firm’s system of internal accounting controls could be easily circumvented and that the firm’s business culture, particularly in Southeast Asia, at times prioritized consummation of deals ahead of the proper operation of its compliance functions.
• “In addition, an unnamed participating managing director of the firm is alleged to have been aware of the bribery scheme and to have agreed not to disclose this information to the firm’s compliance and control personnel. That employee, who was identified as a co-conspirator, has been put on leave.”

The report further stated that the firm “is cooperating with the DOJ and all other governmental and regulatory investigations relating to 1MDB. The firm is unable to predict the outcome of the DOJ’s investigation. However, any proceedings by the DOJ or other governmental or regulatory authorities could result in the imposition of significant fines, penalties and other sanctions against the firm.”

Note: The U.S. Department of Justice has been intensively engaged in investigating the 1MDB embezzlement and laundering scheme since at least 2016, when it filed civil forfeiture complaints seeking the forfeiture and recovery of more than $1 billion in assets associated with the conspiracy to launder funds misappropriated from 1MDB.  These latest actions by the Department, however, intensify the search for Low, who is the alleged mastermind of the 1MDB embezzlement and laundering scheme.

In announcing the Low-Ng indictment, the Justice Department specifically thanked the Attorney General’s Chambers of Malaysia, the Royal Malaysian Police, and the Malaysian Anti-Corruption Commission, as well as other named authorities in Singapore, Switzerland, and Luxembourg for their assistance in the case.  Malaysia’s active cooperation is to be expected, given its prosecution of former Malaysian Prime Minister Najib Razak on 32 money laundering, graft, and breach of trust charges over transactions linked to 1MDB, and of Razak and former Treasury Secretary-General Irwan Serigar Abdullah on criminal breach of trust charges.  The latter three countries retain an active interest in the various 1MDB investigations, in part because the funds embezzled from 1MDB were allegedly laundered through a series of complex transactions and fraudulent shell companies with bank accounts located in those three jurisdictions.

During the week of October 29, the U.S. Department of Justice announced three significant actions directed at economic espionage by the Chinese government.  First, on October 30, the Justice Department disclosed the unsealing of an indictment in the Southern District of California against ten individuals alleged to be Chinese intelligence officers. The indictment charged the defendants with conspiracy to damage computers and substantive offenses of damaging protected computers, in violation of the Computer Fraud and Abuse Act.  Although foreign intelligence officers ordinarily would be expected to be beyond the reach of U.S. authorities, the Justice Department also announced on October 10 that an officer of the Jiangsu Province Ministry of State Security (JSSD) — a provincial foreign intelligence arm of the People’s Republic of China’s Ministry of State Security — was extradited to the Southern District of Ohio, on charges that he attempted to steal trade secrets related to jet aircraft engines.

According to the indictment, supervising and managing officers at JSSD, including two of the defendants, directed hackers and victim company insiders, including the other defendants,

to hack into or facilitate intrusions into computers of companies based in the United States and abroad for the purpose of gaining and maintaining unauthorized access to those computers, stealing information, and using the computers to facilitate additional computer intrusions.  Members of the conspiracy targeted, among other things, companies in the aerospace and other high-technology industries, and attempted to steal intellectual property and confidential business information, including information that was commercial in nature.

The Justice Department’s press release further stated that the conspirators conducted or otherwise enabled repeated intrusions into private companies’ computer systems in the United States and abroad for more than five years, with their ultimate goal being “to steal, among other data, intellectual property and confidential business information, including information related to a turbofan engine used in commercial airliners.”

Second, on November 1, U.S. Attorney General Jeff Sessions announced the unsealing of an indictment in the Northern District of California against a state-owned enterprise of the People’s Republic of China (PRC), Fujian Jinhua Integrated Circuit Co. Ltd. (Jinhua), a Taiwan company, United Microelectronics Corporation (UMC), and three individuals.  The indictment included counts charging conspiracy to commit economic espionage and to commit theft of trade secrets, as well as substantive counts of economic espionage and theft of trade secrets and criminal forfeiture allegations, pertaining to an alleged conspiracy to steal, convey, and possess stolen trade secrets of an American semiconductor company, Micron Technology Inc., for the benefit of Jinhua.  The United States also filed a parallel civil lawsuit seeking an injunction against further transfer of the stolen trade secrets and to enjoin certain defendants from exporting to the United States any products manufactured by UMC or Jinhua that were created using the trade secrets at issue.

According to the Department of Justice press release about this indictment, the defendants were allegedly engaged in a conspiracy to steal the trade secrets of Micron, which is

a leader in the global semiconductor industry specializing in the advanced research, development, and manufacturing of memory products, including dynamic random-access memory (DRAM).  DRAM is a leading-edge memory storage device used in computer electronics.  Micron is the only United States-based company that manufactures DRAM.  According to the indictment, Micron maintains a significant competitive advantage in this field due in large part from its intellectual property, including its trade secrets that include detailed, confidential information pertaining to the design, development, and manufacturing of advanced DRAM products.

One of the individual defendants, Chen Zhengkun, allegedly

was a General Manager and Chairman of an electronics corporation that Micron acquired in 2013.  Chen then became the president of a Micron subsidiary in Taiwan, Micron Memory Taiwan (“MMT”), responsible for manufacturing at least one of Micron’s DRAM chips.  Chen resigned from MMT in July 2015 and began working at UMC almost immediately.  While at UMC, Chen arranged a cooperation agreement between UMC and Fujian Jinhua whereby, with funding from Fujian Jinhua, UMC would transfer DRAM technology to Fujian Jinhua to mass-produce.  The technology would be jointly shared by both UMC and Fujian Jinhua.  Chen later became the President of Jinhua and was put in charge of its DRAM production facility.

While at UMC, Chen recruited numerous MMT employees, including [defendants J.T. Ho and Wang Yungming], to join him at UMC.  Prior to leaving MMT, Ho and Wang both stole and brought to UMC several Micron trade secrets related to the design and manufacture of DRAM.  Wang downloaded over 900 Micron confidential and proprietary files before he left MMT and stored them on USB external hard drives or in personal cloud storage, from where he could access the technology while working at UMC.

Third, on November 1 Attorney General Sessions also announced that he had ordered the creation of a Justice Department “China Initiative. ” The China Initiative is to be led by the Assistant Attorney General for the National Security Division, John Demers, and is composed of an unnamed senior FBI executive, five United States Attorneys (including the United States Attorney for the Northern District of California, Alex G. Tse), and several other Department of Justice leaders and officials, including the Assistant Attorney General for the Criminal Division, Brian A. Benczkowski.

The Initiative, as the Attorney General described it, “will identify priority Chinese trade theft cases, ensure that we have enough resources dedicated to them, and make sure that we bring them to an appropriate conclusion quickly and effectively.”  It also will address two major responsibilities of the Department’s National Security Division: the Foreign Investment Review Staff’s review of investments and licenses in U.S. infrastructure and telecommunications, and the Foreign Agent Registration Act Unit’s work to counter covert efforts to influence our leaders and the general public.

Note:  These actions, taken together, constitute the most concentrated U.S. law enforcement response to economic espionage by Chinese authorities directed at U.S. companies.  Some may view these actions as merely another salvo in the Trump Administration’s broadsides against what Vice President Mike Pence called China’s “whole-of-government approach” to advancing its economic and political interests.  The U.S. intelligence community, however, has long been aware that China has persistently engaged in systematic economic espionage, through conventional and cyber methods, and is one of the United States’ “most aggressive and capable adversaries using economic espionage.”

The U.S. National Counterintelligence and Security Center’s (NCSC’s) 2018 report, Foreign Economic Espionage in Cyberspace, summarized the current state of affairs as follows:

China has expansive efforts in place to acquire U.S. technology to include sensitive trade secrets and proprietary information. It continues to use cyber espionage to support its strategic development goals—science and technology advancement, military modernization, and economic policy objectives. China’s cyberspace operations are part of a complex, multipronged technology development strategy that uses licit and illicit methods to achieve its goals. Chinese companies and individuals often acquire U.S. technology for commercial and scientific purposes. At the same time, the Chinese government seeks to enhance its collection of U.S. technology by enlisting the support of a broad range of actors spread throughout its government and industrial base.

The NCSC also warned that China “will continue to be a threat to U.S. proprietary technology and intellectual property through cyber-enabled means or other methods. If this threat is not addressed, it could erode America’s long-term competitive economic advantage.”

Even after the September 2015 agreement by the U.S. and Chinese Presidents that neither country’s government would conduct or knowingly support cyber-enabled theft of intellectual property, the Chinese government has continued its economic-espionage cyber activity, although reportedly at lower volumes than before the 2015 agreements, as well as non-cyber measures such as those in the second indictment.  This week’s announcements – especially the deliberately-named “China Initiative” — should be recognized as an enhanced commitment by the Justice Department to use criminal and civil enforcement and regulatory authority against economic espionage by Chinese agencies and state-controlled companies.