    [Senate Hearing 106-892]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 106-892

    S. 798, THE PROMOTE RELIABLE ON-LINE TRANSACTIONS TO ENCOURAGE COMMERCE
                        AND TRADE (PROTECT) ACT OF 1999

    =======================================================================

                                    HEARING

                                   before the

                             COMMITTEE ON COMMERCE,
                          SCIENCE, AND TRANSPORTATION
                              UNITED STATES SENATE

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JUNE 10, 1999

                                   __________

        Printed for the use of the Committee on Commerce, Science, and
                                 Transportation

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                                WASHINGTON : 2002

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           SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                         JOHN McCAIN, Arizona, Chairman
    TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
    CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
    SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West
    TRENT LOTT, Mississippi                  Virginia
    KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
    OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
    JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
    BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
    SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
    SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                           Mark Buse, Staff Director
                      Martha P. Allbright, General Counsel
         Ivan A. Schlager, Democratic Chief Counsel and Staff Director
                   Kevin D. Kayes, Democratic General Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held June 10, 1999.......................................     1
    Statement of Senator Ashcroft....................................     6
    Statement of Senator Burns.......................................     1
        Prepared statement...........................................     2
    Statement of Senator Cleland.....................................    39
    Statement of Senator Dorgan......................................    42
    Statement of Senator Frist.......................................    42
    Statement of Senator Kerry.......................................     3
        Article from New York Times..................................     4
    Statement of Senator Snowe.......................................    16
        Prepared statement...........................................    16

                                   Witnesses

    Aucsmith, David, Chief Security Architect, Intel Corporation.....    45
        Prepared statement...........................................    47
    Bidzos, D. James, Vice Chair, Security Dynamics Technologies,
      Inc............................................................    60
        Prepared statement...........................................    62
    Goodlatte, Bob, U.S. Representative from Virginia, along with
      added material for the record; China: Export of Technology
      Would be Liberating Force......................................     9
        Prepared statement...........................................    14
    Hoffman, Lance, Ph.D., Professor, Department of Electrical
      Engineering and Computer Science, and Director of the School of
      Engineering and Applied Science, Cyberspace Policy Institute,
      The George Washington University,..............................    71
        Prepared statement...........................................    72
    McNamara, Barbara A., Deputy Director, National Security Agency..    30
        Prepared statement...........................................    32
    Reinsch, Hon. William A., Under Secretary of Export
      Administration, U.S. Department of Commerce....................    17
        Prepared statement...........................................    20
    Robinson, Hon. James K., Assistant Attorney General, Criminal
      Division, U.S. Department of Justice...........................    24
        Prepared statement...........................................    27

    S. 798, THE PROMOTE RELIABLE ON-LINE TRANSACTIONS TO ENCOURAGE COMMERCE
                        AND TRADE (PROTECT) ACT OF 1999

                                  ----------

                            THURSDAY, JUNE 10, 1999

                                           U.S. Senate,
            Committee on Commerce, Science, and Transportation,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:32 a.m. in room
    SR-253, Russell Senate Office Building, Hon. Conrad Burns
    presiding.
        Staff members assigned to this hearing: David Crane,
    Republican professional staff; and Gregg Elias, Democratic
    senior counsel.

                OPENING STATEMENT OF HON. CONRAD BURNS,
                       U.S. SENATOR FROM MONTANA

        Senator Burns. We will call the committee to order this
    morning, and thank you for coming. We will try to get started
    on time here.
        Let me apologize for the chairman of the full committee,
    John McCain. He has a bill on the floor, the Y2K bill. I told
    him that he probably put the fox in charge of the henhouse here
    when he lets me chair this hearing, but it is something that I
    have been very much interested in for a long time.
        Today's hearing will focus specifically on the ``PROTECT
    Act of 1999.'' This bill reflects a number of discussions the
    full Committee chairman and I have had about the importance of
    encryption in the digital age. I would also like to thank
    Senator Wyden and Senator Abraham for their instrumental role
    in the creation of this pro-encryption legislation that I am
    confident will be supported by the large majority of this
    committee.
        Along with several other members of this committee, I have
    long advocated the enactment of legislation that would
    facilitate the use of strong encryption. Strong encryption is
    necessary if we are to promote electronic commerce, secure our
    confidential business and our sensitive personal information,
    to prevent crime and to protect our national security by
    protecting our commercial information systems.
        Beginning in the 104th Congress, I introduced legislation
    that would ensure the private sector continues to take the lead
    in developing innovative products to protect the security and
    confidentiality of electronic information, including the
    ability to export such American products, and I believe PROTECT
    accomplishes these important objectives. Specifically, the bill
    does the following:
        It permits the immediate exportability of strong encryption
    products whenever foreign products contain the same strength of
    encryption are generally available. It prohibits domestic
    controls on the use of products using strong encryption. It
    also guarantees that American industry will continue to be able
    to come up with new and innovative products.
        It immediately decontrols encryption products using key
    lengths of 64 bits or less. It permits the immediate
    exportability of 128-bit encryption in all encryption products
    to a broad group of users.
        Today we are in a world that nearly everyone has a computer
    and those computers are for the most part connected to one
    another. In light of that fact, it is becoming more and more
    important to ensure that our communications over these computer
    networks are conducted in a secure way.
        It is no longer possible to say that when we move into the
    information age we will secure these networks, because we are
    already there. We use computers in our homes and our businesses
    in ways that we could not imagine only 10 years ago. These
    computers are connected through networks, making it easier to
    communicate than ever before.
        This phenomenon holds promise for transforming life in a
    bunch of areas in our country and especially in Montana, where
    health care and state-of-the-art education can be delivered
    over networks to people located in remote population centers.
    These new technologies can improve the lives of real people,
    but only if the security of information that moves over these
    networks is safe and reliable.
        The problem today is that our computer networks are not as
    secure as they could be. It is fairly easy for amateur hackers
    to break into our networks. The newspaper has been full of
    those kind of activities for the last year. They can intercept
    information, steal trade secrets and intellectual property, or
    even alter medical records.
        The solution to this problem is to let individuals and
    businesses alike take steps to secure that information.
    Encryption is a vital tool which helps to protect the integrity
    of these electronic networks which have made so many modern
    wonders available in this age.
        I look forward to the testimony of our witnesses today
    because this is a critical issue.
        Now I would like to recognize the Senator from
    Massachusetts, Senator Kerry, and thank you for coming this
    morning.
        [The prepared statement of Senator Burns follows:]

       Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana

        I am pleased to chair today's hearing in the Full Committee, which
    is on a topic critical to the future of this country--reforming our
    country's severely outdated encryption policy. Today's hearing will
    focus specifically on the ``PROTECT Act of 1999.'' This bill reflects a
    number of discussions the Full Committee Chairman and I have had about
    the importance of encryption in the digital age. I would also like to
    thank Sen. Wyden and Sen. Abraham for their instrumental role in the
    creation of this pro-encryption legislation that I am confident will be
    supported by a large majority of this Committee.
        Along with several other members of this Committee, I have long
    advocated the enactment of legislation that would facilitate the use of
    strong encryption. Strong encryption is necessary to promote electronic
    commerce, secure our confidential business and sensitive personal
    information, prevent crime and protect our national security by
    protecting our commercial information systems. Beginning in the 104th
    Congress, I introduced legislation that would ensure that the private
    sector continues to take the lead in developing innovative products to
    protect the security and confidentiality of our electronic information
    including the ability to export such American products. I believe
    PROTECT accomplishes these important objectives.
        Specifically, the bill does the following:
         Permits the immediate exportability of strong encryption
    products whenever foreign products containing the same strength of
    encryption are generally available;
         Prohibits domestic controls on the use of products using
    strong encryption;
         Guarantees that American industry will continue to be able
    to come up with innovative products;
         Immediately decontrols encryption products using key
    lengths of 64 bits or less; and
         Permits the immediate exportability of 128 bit encryption
    in all encryption products to a broad group of users.
        Today, we are in a world where nearly everyone has a computer and
    that those computers are, for the most part, connected to one another.
    In light of that fact, it is becoming more and more important to ensure
    that our communications over these computer networks are conducted in a
    secure way. It is no longer possible to say that when we move into the
    information age, we'll secure these networks, because we are already
    there. We use computers in our homes and businesses in a way that
    couldn't have been imagined 10 years ago, and these computers are
    connected through networks, making it easier to communicate than ever
    before. This phenomenon holds the promise of transforming life in
    states like Montana, where health care and state-of-the-art education
    can be delivered over networks to people located far away from
    population centers. These new technologies can improve the lives of
    real people, but only if the security of information that moves over
    these networks is safe and reliable.
        The problem today is that our computer networks are not as secure
    as they could be. It is fairly easy for amateur hackers to break into
    our networks. Hackers can intercept information, steal trade secrets
    and intellectual property or even alter medical records. The solution
    to this problem is to let individuals and businesses alike to take
    steps to secure that information. Encryption is a vital tool which
    helps to protect the integrity of these electronic networks which have
    made so many wonders of the modern age possible.
        I look forward to the testimony of the witnesses on this critical
    issue.
        Thank you.

             STATEMENT OF HON. JOHN F. KERRY, U.S. SENATOR
                           FROM MASSACHUSETTS

        Senator Kerry. Mr. Chairman, thank you very much for your
    continued efforts in this field.
        I want to say up front, I need to go from here to the
    export regime hearing in the Banking Committee, where we have
    Messrs. Cox and Dicks. So I apologize for not being able to
    stay throughout this, but my staff will.
        Let me begin by saying that last session the Commerce
    Committee became the first Senate committee to forge a
    consensus on this question of some kind, at least, and to
    report out comprehensive legislation. I am glad we are back
    here now and it is my hope that we can make real progress this
    year to develop a sensible encryption framework for the 21st
    century.
        We have been part of this debate for some time now. I serve
    on the Intelligence Committee, the Foreign Relations Committee,
    this committee, and the Banking Committee, all of which touch
    on it one way or the other. I am a former prosecutor, so I have
    been particularly sensitive to some of the warrant issues,
    eavesdropping issues, intelligence-gathering issues, and so
    forth.
        For the past several years, frankly, we have received
    relatively conflicting information from various interests in
    the debate, and I think, to our frustration, at least to my
    frustration, Mr. Chairman, we have been primarily debating the
    current state of export markets. We have debated whether there
    is a mature market abroad for export products and whether we
    can use regulatory controls to shape that market.
        I have adopted a relatively cautious approach, for a lot of
    very obvious reasons. I am sensitive to our national security
    needs and I have been very hopeful that the long and many
    discussions of the White House and various entities on this
    would retard the spread of encryption and actually shape market
    demand abroad.
        I have a change of mind at this point and I want to express
    that. I think it is time to reframe the debate on encryption.
    As time goes on and availability abroad of strong encryption
    products continues to grow, it becomes more and more difficult
    to accept that we alone can control the development of this
    marketplace. If we cannot shape the development of the
    marketplace and have not been able to reach an adequate
    consensus in this country to do so in the last few years, then
    we are forced to a point in time, which I think we are at now,
    where we have to examine in a responsible way how to adjust our
    regulatory regime.
        For a long time we have been debating, Mr. Chairman,
    whether to relax export controls to permit the export of
    stronger encryption products. I think that question has to
    change. It is now time to discuss how we go about creating a
    new scheme that recognizes the realities of the new
    marketplace.
        I ask unanimous consent that an article from today's New
    York Times, ``Encryption Products Found to Grow in Foreign
    Markets'' by John Markoff, be made part of the committee
    record.
        Senator Burns. Without objection.
        [The material referred to follows:]

                               THE NEW YORK TIMES

              ENCRYPTION PRODUCTS FOUND TO GROW IN FOREIGN MARKETS
                                BY JOHN MARKOFF

        Commercial data-scrambling technology that is made outside the
    United States has become significantly more available in the last 18
    months, according to researchers at George Washington University.
        The researchers' report, which is to be presented today in
    testimony before the Senate Commerce Committee, is part of a growing
    body of evidence suggesting that the Government's efforts to restrict
    the spread of ``strong encryption'' technology for secret electronic
    communications have largely failed.
        ``The Government must acknowledge that there are foreign produces,
    and it must concede that they are of comparable quality to U.S.
    technology,'' said Bruce Heiman, legislative counsel for Americans for
    Computer Privacy, the Washington-based computer industry lobbying group
    that financed the study.
        The Government has long imposed export curbs on encryption
    tecnologies, invoking national security and crime prevention concerns.
    Officials have argued that scrambled messages would improve the ability
    of terrorists and other criminals to organize and plan illegal
    operations.
        The new data, though, indicate that 805 encryption products are now
    available in 35 countries outside the United States--a 22 percent
    increase since December 1997. Moreover, 167 products are based on
    encryption algorithms considered too strong to be cracked by even the
    most powerful computers.
        ``In addition to the absolute increase in the number of products,
    we've also found that six new countries have companies that are now
    selling encryption technology,'' said Lance Hoffman, director of the
    Cyberspace Policy Institute at George Washington University.
         He pointed to companies like Cybernetica in Estonia that use the
    United States export restrictions as a marketing tool.
        ``Cybernetica advertises: `Strong crypto. Long keys. No export
    restrictions,''' he said.
        The report also asserts that the United States has lost its
    monopoly on the basic mathematical technologies underlying data
    encryption.
        For example, of the 15 algorithms now being considered by the
    National Institute of Standards for a new American encryption standard,
    10 have been developed outside the United States.
        The report does not offer evidence of actual use of encryption
    systems abroad. But Mr. Hoffman said researchers had compiled material
    suggesting that the most powerful encryption software was now readily
    accessible internationally.
        ``I'm holding in my hands a computer magazine we found on a French
    newsstand,'' he said in a phone interview yesterday. The publication,
    Magazine Dot Net, contained a CD-ROM with encryption programs including
    Pretty Good Privacy and a program called Scramdisk that features
    advanced encryption algorithms like DES, Triple DES, Blowfish and
    Idea--any of which would present formidable challenges to code breakers
    in the Federal Government.

    http://www.nytimes.com

        Senator Kerry. Let me just share very quickly. The new data

    indicates that 805 encryption products are now available in 35
    countries outside the United States, a 22 percent increase
    since December 1997. Moreover, 167 products are based on
    encryption algorithms considered too strong to be cracked by
    even the most powerful computers. In addition to the absolute
    increase in the number of products, we have also found that six
    new countries have companies that are now selling encryption
    technology.
        One of them, Cybernetica in Estonia, uses the U.S. export
    restrictions as a marketing tool: ``Cybernetica advertises
    `Strong crypto, long keys, no export restrictions.' '' The
    article goes on, Mr. Chairman.
        I am pleased to join Chairman McCain as an original co-
    sponsor of the PROTECT Act of 1999. The bill is an important
    first step that recognizes that as the Internet becomes more of
    a presence in global commerce there have to be guarantees and
    assurances that business and personal information remains
    confidential.
        We have to also continue to recognize that U.S. companies
    are leaders in creating encryption technology and these
    companies are integral to our economy. We are debating a great
    deal now about the impact of China stealing secrets and where
    the long-term relationship may go. Mr. Chairman, I am
    persuaded, as I have been for several years, but I think for
    some time we have held out hope about our ability to control
    and shape the market. I am persuaded that the national security
    interest of the country is not only affected by the sort of law
    enforcement/security side of this, but it is also affected by
    the long-term economic side of it.
        It seems to me that it is important for U.S. technology to
    be out there, for people to be using it, and that there are
    certain security values inherent in that happening.
        The U.S. information technology companies have been deeply
    frustrated by what they perceive as excessive stringent
    controls on the export of their encryption products. Although
    the United States is the leader in producing high quality
    strong encryption products, other countries are increasingly
    doing so. We have to recognize that reality and understand that
    export controls are not going to stop the spread of encrypted
    products and, importantly, controls that do not recognize this
    reality put our software industry at a disadvantage as it tries
    to compete in the global marketplace and has the potential to
    put our security at risk.
        Encryption is essential to hundreds of billions of dollars
    of e-commerce. It is crucial to electronically transferred
    funds and to overall use of the Internet, including e-mail, and
    the United States must have a powerful presence in that future
    development.
        So I am open to arguments regarding whether we expand them
    even further than the PROTECT Act, but I believe that is an
    important first step and I am hopeful we can find a responsible
    approach that would allow us to balance some of the other
    interests.
        I would simply ask witnesses to perhaps--I am sure they
    will be asked this and address it: What happens with respect to
    foreign companies filling the gap and what the relationship of
    that is to our national security if foreign encryption is
    produced worldwide and we are outside of that loop?; and also
    whether it makes sense for our policy to work in a way that is
    increasingly putting the United States' interests within the
    field of commerce at a disadvantage.
        Also, there are other articles regarding other types, the
    Quantum code and other approaches to encryption, which raise a
    whole lot of issues about where we may be heading in the long
    run here and what we can control in terms of the market.
        So Mr. Chairman, I think we are at a very important
    juncture and I thank you for having this hearing today and
    proceeding forward.
        Senator Burns. Thank you. We always like conversions.
        Senator Kerry. Beware of the convert. The zeal of the
    convert is always the worst.
        Senator Burns. I know.
        Senator, I appreciate your words today and I think as far
    back as 1994 and 1995, where we had security questions.
        Before I recognize Senator Ashcroft, I want to make it
    pretty clear that we should be as policymakers giving our
    security people the funds and resources that their technology
    can stay maybe a quarter step ahead of the technology that is
    generally accepted around the world. I think there we have
    fallen down a little bit.
        But I think our security people can do the job that they
    are paid to do and do a great job of it, but we have got to
    give them the funds in order for them to adapt, to go into new
    technology, because Moore's Law has taken over here. Our
    technology is going to go. We have got to make sure that we
    take care of our security people and they can stay with it.
    That is where we should be focusing our attention, I think.
        Senator Ashcroft.

                   STATEMENT OF HON. JOHN ASHCROFT,
                       U.S. SENATOR FROM MISSOURI

        Senator Ashcroft. Thank you, Mr. Chairman. I want to thank
    the Senator from Montana for his leadership in this area.
    Leadership is not finding out where people already are and
    going and standing at the front of the line. Leadership is
    finding out where we need to go and helping people understand
    how to get there, and certainly you have done that, especially
    as it relates to this issue.
        I want to thank the chairman of this committee for having
    this hearing today to address an issue that I believe is
    central to the future of our country's ability to remain a
    worldwide leader in electronic technology. That is the
    development and the availability of data encryption technology.
        Encryption of sensitive electronic data is essential to our
    modern economy. State and national infrastructures, financial
    transactions, and of course the burgeoning field of Internet
    commerce all depend on the ability of companies, institutions,
    and individuals to securely transmit electronic data, and
    American products are at the forefront of this industry.
        I might add that if American products are not at the
    forefront of this industry, other products will be at the
    forefront of this industry.
        For years now, since before I first came to the Capitol,
    American manufacturers of encryption technology have been
    hamstrung in their efforts to compete in the global marketplace
    regarding these products by export controls that reflect a
    complete misunderstanding of the incredibly dynamic and fluid
    nature of encryption technology. We have tried for over 4 years
    to remedy that situation.
        I first introduced the E-PRIVACY bill in the last Congress
    and intend to reintroduce it shortly in this Congress. But
    unfortunately, nothing has been accomplished by way of
    assistance to law enforcement and to industry or, most
    importantly, to the users of encryption in this country.
        Unfortunately, a significant barrier to progress on this
    issue has been the Administration, which has taken an active
    and open position against permitting the export of encryption
    technology and indeed a fairly hostile view to the unregulated
    domestic use of encryption. The Administration bases its
    position on the grounds that robust encryption allegedly
    presents risks to law enforcement and national security, a view
    that I think will be shown to be mistaken by today's testimony.
    We certainly have endured national security risks, but it has
    not been from the industry's development of encryption.
        In addition, there has not always been agreement here in
    Congress about the need to free our technology industry from
    these export restrictions. I am happy to note that this appears
    to have changed. The chairman's PROTECT Act which we are here
    to discuss, demonstrates that there is a growing consensus that
    the Administration is mistaken and that deregulation of
    encryption is necessary in order for us to maintain our
    leadership position in this industry, and I want to commend the
    chairman for helping us to build that consensus.
        I think that the PROTECT Act is a big step in the right
    direction on encryption. In fact, it shares many of the same
    principles and provisions included in my E-PRIVACY bill.
    However, I do think that the PROTECT Act needs to go further in
    two ways.
        First, the PROTECT Act needs to reflect the lightning-fast
    nature of development in this industry and institute export
    relief that will not make the products eligible for decontrol
    obsolete by the time the approval process is complete. The
    Administration has long taken the route of regulating
    encryption exports based on the bit length of the product, with
    little regard to the current state of the technology. It began
    with permitting the export of 40-bit technology 7 years ago and
    only agreed last fall to increase the limit to 56-bit
    technology. Of course, the standard for generally available
    products worldwide is already 128-bit technology. That is where
    the competition is. So the Administration's position is already
    sorely outdated.
        In fact, months ago I came to a meeting of this committee
    with an advertisement from the Internet which was from the
    Siemens company in Germany advertising robust 128-bit
    encryption, saying that you cannot get this from a U.S.
    manufacturer, at least someone overseas could not. The
    advertisement also indicated, however, that if you buy this you
    can use it in the United States and you can use it overseas as
    well. So if you want to have robust encryption, buy it from the
    Germans, from Siemens.
        The Administration has decided to tie the hands of the U.S.
    encryption industry. To me that is a disaster. But it is also
    compounded by people beginning to develop relationships with
    foreign software providers as a result of the unavailability of
    128-bit or robust encryption on the part of U.S. providers of
    software.
        To see the Germans eagerly promoting this potential and to
    have people from my own State of Missouri say to me, ``John, we
    have an office in Singapore''--this happened to me--we have not
    been able to speak with them confidentially and communicate
    with them and the government is making it impossible for us to
    send the encryption that we can use domestically. We cannot
    send it to our office in Singapore because we are ineligible to
    export it.
        I do not want that situation to be--well, I just do not
    want the situation to be such that I have to say, ``Well, go to
    Siemens in Germany, from Siemens you can buy the encryption
    that can be sent into the United States and from Siemens in
    Germany it can be sent to Singapore, so you can have your cake
    and eat it, too, by dealing with a non-domestic firm.''
        For us to have a policy which provides for the slitting of
    our own throats in a technology arena that is developing at a
    rapid pace is simply unwise. I think it is foolhardy. If we are
    to mark the next century as an American century, or even to
    celebrate the next week as high technology week in the Senate,
    we must be forward-
    thinking and acting.
        The PROTECT Act deregulates products up to 64 bits. That is
    a good start. The problem is that the Act delays general
    decontrol of 128-bit technology until 2002, by which time it
    will almost certainly be as obsolete as 56-bit encryption is
    today. In the interim, PROTECT permits individual exceptions
    for higher bit technology export, but it creates a regulatory
    approval board and a process that can take up to 60 days to
    determine whether a product is already generally available,
    something that, quite frankly, can be determined by surfing the
    Internet for a little while, I mean moments.
        With all due respect, this process is too long, which is
    why in the E-PRIVACY bill we give the administration a one-time
    15-day review of products that are generally available before
    they are permitted to export them.
        I urge my colleagues to press our panelists on the second
    panel for answers on whether they can remain competitive if we
    wait as long as the PROTECT Act provides.
        The second area where I think the PROTECT Act can go
    farther is the explicit delineation of the rights and
    procedural protections of Americans in their ability to use
    encryption and to be secure in their use of encrypted data.
    While the PROTECT Act clearly affirms this right, it is
    relatively silent on the balance of procedural protections
    between Americans' privacy interests and legitimate law
    enforcement efforts. I do not think we can afford to be silent
    on this issue.
        The administration and the FBI have over time indicated
    support for language that would mandate key recovery for all
    domestic encryption and alternatively support several suggested
    approaches that would make using domestic key escrow a
    practical, although not legal, necessity. Director Freeh has
    gone so far as to mention the need for a new fourth amendment
    that considers the ``realities'' of the digital age.
        I think we need a new and improved approach to domestic
    encryption, not a new updated version of the fourth amendment,
    and I for one am not eagerly awaiting the FBI's new release of
    the fourth amendment 2.0 or first amendment 98. I am, however,
    eager to hear what the Administration's current position is on
    key recovery and key escrow.
        My own E-PRIVACY bill sets out specific procedures for
    balancing the legitimate interests of law enforcement with the
    privacy rights of Americans, and I hope that any final
    legislation passed by the Senate would include such provisions.
    Those are my two observations.
        Again, I want to say that the PROTECT Act is a strong step
    in the right direction toward protecting American privacy
    rights and American industry, but I think it should go further.
        I look forward to hearing from our panelists today and
    engaging them in serious discussion on these issues, and I
    thank the gentleman from Montana, whose leadership in this area
    has been very valuable to America.
        Senator Burns. Thank you very much, Senator. It has been an
    issue that both of us have been around a day or two, so we are
    not complete strangers to it.
        Congressman Goodlatte is on his way. In the meantime--oh,
    he is here.
        Mr. Goodlatte. Hiding.
        Senator Burns. You are still on your way, right?
        Senator Ashcroft. On his way to the microphone.
        Senator Burns. That is right, that is right.
        Congressman, we thank you. You have been a great leader on
    this issue in the House and we appreciate your coming over this
    morning and offering your thoughts on this piece of
    legislation.

     STATEMENT OF HON. BOB GOODLATTE, U.S. REPRESENTATIVE FROM THE
                           STATE OF VIRGINIA

        Mr. Goodlatte. Well, Senator, thank you for the opportunity
    to testify before the Senate Commerce Committee today. I want
    to commend you and Chairman McCain and Senator Ashcroft for
    your hard work in this area. I was delighted to hear the
    comments of Senator Kerry a little while ago. I had brought the
    same New York Times article with me, so I will not need to ask
    that it be made part of the record.
        But I do want to point out that one of the items in here
    that he did not mention is that the United States has lost its
    monopoly on the basic mathematical technologies underlying data
    encryption. For example, of the 15 algorithms now being
    considered by the National Institute of Standards for a new
    American Encryption Standard, 10 have been developed outside of
    the United States. If we do not act on this soon, we are going
    to be left behind in that regard.
        I also would ask that the committee consider making part of
    the record an article by Congressman Chris Cox, who is, as you
    know, the chairman of the committee that just released the Cox
    report and who is a strong supporter of changes in our export
    controls laws related to encryption and a co-sponsor of our
    legislation in the House, the SAFE Act. He has an article that
    was published in the San Jose Mercury News entitled ``China:
    Export of Technology Would be Liberating Force.'' I think it
    makes a very strong case for why, while export controls are
    appropriate in some sectors, liberalizing our export controls
    on encryption would be of great benefit to our nations.
        Senator Burns. That will be made part of the record.
        [The material referred to follows:]

             China: Export of technology Would be Liberating Force

                              (By Christopher Cox)

        American Policy toward the People's Republic of China should
    proceed from this central premise: It is our sincere hope for the
    Chinese people that they will no longer live under a communist
    government.
        To this end, America's--and California's--world leadership in high-
    tech enterprise promises far more than economic benefits. The export of
    these products to the Chinese people can be a great democratizing and
    liberating force.
        In January, the People's Republic sentenced Lin Hai, a 30-year-old
    software executive and Web page designer, to prison for supposedly
    ``inciting subversion of state power.'' His so-called ``crime''
    consisted of exchanging e-mail addresses with an anti-communist group
    in America.
        But if Lin Hai had been able to keep the contents of his computer
    messages away from the prying eyes of the Ministry of State Security--
    using strong encryption in commercially available software--he would be
    a free man today.
        That is why America's companies, the leaders in encryption
    technology, must be able to export their products to China and around
    the world.
        Strong encryption is--as Beijing's communist leadership is well
    aware--a massive threat to totalitarian regimes and their government-
    maintained monopoly on information, because it permits individuals to
    communicate privately without fear of government eavesdropping or
    interception.
        In this and the previous Congress, I have sponsored the Security
    and Freedom through Encryption Act, together with a broad coalition of
    Republican and Democratic lawmakers, I disagree with the Clinton-Gore
    administration, and with Sen. Dianne Feinstein, that the current
    prohibition on American businesses exporting encryption software is
    necessary for our national security.
        Yet the Clinton-Gore administration would go beyond the current
    prohibition, endorsing not just restrictions on encryption exports, but
    also requiring every encryption program sold--even within the United
    States--to have a secret key to permit eavesdropping by law enforcement
    officials or foreign governments.
        The Clinton-Gore administration seems to place a higher priority on
    stopping the export of encryption software to the Chinese people than
    on preventing the theft of our nuclear weapons technology by the
    People's Liberation Army.
        This is exactly backward. Rather than control commercially
    available computers, software and technology, we should safeguard our
    most critical military secrets.

                             TRANSFER OF TECHNOLOGY

        For the past nine months, I've chaired a congressional select
    committee investigating the transfer of militarily sensitive technology
    to the People's Republic of China. The committee's classified report,
    unanimously approved by all five Republicans and four Democrats, found
    overwhelming evidence that such transfers--including theft through
    espionage--have caused serious harm to U.S. national security, and
    continue to this day.
        But some have inferred that this should mean clamping down on
    commercial exports. To the contrary: The committee found that the
    current export-licensing process is riddled with errors and plagued by
    delays. It often does very little to protect our national security--
    while frequently doing a great deal to damage America's competitiveness
    in world markets.
        The committee has therefore recommended streamlining export rules.
    The United States should provide a new ``fast track'' for most items,
    while focusing greater resources and expertise on the limited targets
    that we know from our intelligence are the subject of specific
    collection efforts by the People's Republic of China and others.
        Trade in innovative technologies, goods and services can help
    undermine inefficient state-run industries and bring hope of a better
    life to the Chinese people.
        In areas like transportation, telecommunications and financial
    services, it is the means by which communist China--whose economy is
    smaller on a per capita basis than Guatemala's--can become a developed
    nation.
        In fields such as medicine, biotechnology and farming, U.S. trade
    offers hope for the desperately poor millions who are still China's
    majority that they will be able to each and survive.
        Encouraging exports to China that promote individual freedom and
    well-being is in the United States' national security interest. For
    this reason, in addition to allowing the export of encryption software,
    U.S. policy should focus on unleashing the Internet as an engine of
    freedom in China.
        Among the 1.2 billion people in the People's Republic of China,
    only one in a thousand is an Internet user. But Internet use is growing
    at a rate that threatens the Communist Party's grip on China.
        As Chinese journalist Sang Ye has observed: ``New ways of thinking,
    of communicating, of organizing people and information--the Net takes
    aim squarely at things that since Mao's earliest days have been the
    state's exclusive domain.''
        Today's China's communist dictatorship is working hard to re-route
    its citizens away from the information superhighway and onto the state-
    controlled ``Intranet.'' This new Intranet allows communication only
    among approved users who share communist-approved content. The Ministry
    of Post and Telecommunications supervises and approves all networks,
    and its screens virtually all news and even financial information that
    citizens may receive from foreign sources.
        While the Chinese Communist Party argues, on the Internet home page
    of the People's Daily, that the open flow of communications would be
    destabilizing, Americans know from our own experience that technology
    is best used as a means to an end: a promise of greater freedom.
        The United States should move aggressively to frustrate the Chinese
    government's censorship of the Internet by condemning it as a barrier
    to free trade, an impediment to joining the World Trade Organization,
    and a violation of the several human rights covenants it has signed.
    And we should encourage the construction of an expanded Internet
    architecture that frustrates censorship and control by repressive
    states.
        At the same time, the United States should work with all nations
    for the establishment of the Internet as a global free-trade zone,
    which not only will make it increasingly difficult for governments
    including China's to choke off access but also will pressure them
    further to reduce protectionist trade barriers.
        Finally, we should recognize that while our currently limited trade
    with China's protectionist government may be better than nothing, the
    object of U.S. policy must be a liberalization of trade that is
    fundamentally at odds with the nation's communist system.

                                TRULY FREE TRADE

        Despite America's free-trade policy, we still sell less to the
    billion-plus People's Republic of China than to the 22 million people
    of Taiwan. Instead of business ventures being approved one at a time by
    the Communist Party's Politburo, truly free trade means a billion
    Chinese interacting independently with a quarter-billion Americans.
        A policy toward the People's Republic of China that frustrates this
    objective is both shortsighted and cruel.
        The recent public attention to espionage raises proper concerns
    about our lack of security, but it should not distract us from our
    objective of freedom for China's people--a result that American
    technology exports can help bring about.
        Today, we have the worst of both worlds: Military technology that
    the communist government can use to hold the Chinese people in terror
    is being stolen, while commercial technology that can liberate the
    Chinese people is delayed in the export-
    licensing bureaucracy.
        It's time to focus not on whether to engage--we should all be
    agreed on that--but rather on the terms of engagement. We should have
    no illusions about with whom we are dealing. We should have no doubt
    about where our policy is taking us. Freedom--not engagement and
    possibly marriage to a communist dictatorship--is what our policy
    toward China should be seeking to achieve. U.S. Rep. Christopher Cox,
    R-Newport Beach, is chair of the House Select Committee on U.S.
    National Security and Military-Commercial Concerns with the People's
    Republic of China. He wrote this article for the San Jose Mercury News
    Sunday Perspective section.

        Mr. Goodlatte. Thank you, Mr. Chairman.
        As you know, I have worked for many years on the encryption
    issue in the House. The legislation I have introduced in this
    Congress, H.R. 850, the Security and Freedom Through Encryption
    Act of 1999, currently has 257 co-sponsors, including a
    majority of both the Republicans and Democrats in the House and
    a majority of both the Republican and Democratic leadership.
        The SAFE Act has passed the House Judiciary Committee by
    voice vote and is now pending before the Committees on
    International Relations, Commerce, Armed Services, and
    Intelligence. Each of these additional committees is expected
    to act soon on the legislation and it is my hope that the SAFE
    Act will be considered by the House in the summer or early
    fall.
        Encryption has many benefits. First, it aids law
    enforcement by preventing piracy and white collar crime on the
    Internet. Several studies over the past few years have
    demonstrated that the theft of proprietary business information
    costs American industry hundreds of billions of dollars each
    year. The use of strong encryption to protect financial
    transactions and information would prevent this theft from
    occurring.
        With the speed of transactions and communications on the
    Internet, law enforcement cannot stop thieves and criminal
    hackers by waiting to react until after the fact. Only by
    allowing the use of strong encryption, not only domestically
    but internationally as well, can we hope to make the Internet a
    safe and secure environment.
        As the National Research Council's Committee on National
    Cryptography Policy concluded:

        If cryptography can protect the trade secrets and
    proprietary information of businesses and thereby reduce
    economic espionage, which it can, it also supports in a most
    important manner the job of law enforcement. If cryptography
    can help protect nationally critical information systems and
    networks against unauthorized penetration, which it can, it
    also supports the national security of the United States.

        Second, if the global information infrastructure is to
    reach its true potential, citizens and companies alike must
    have the confidence that their communications and transactions
    will be secure.
        Third, with the availability of strong encryption overseas
    and on the Internet, the Administration's export restrictions
    only serve to tie the hands of American business. Due in large
    part to these export controls, foreign companies are winning an
    increasing number of contracts by telling prospective clients
    that American encryption products are weak and inferior, which
    is robbing our economy of jobs and revenue. I understand you
    are going to hear testimony further in regard to the new report
    mentioned in the New York Times article, which Senator Kerry
    made a part of the record.
        In fact, one study, one noted study, found that failure to
    address the current export restrictions by the year 2000 will
    cost American industry $60 billion and 200,000 jobs. Under the
    current system, America is surrendering our dominance of the
    global marketplace.
        The SAFE Act remedies this situation by allowing the export
    of generally available American-made encryption products after
    a 15-day, one-time technical review. Additionally, the bill
    allows custom-designed encryption products to be exported after
    the same review period if they are commercially available
    overseas and will not be used for military or terrorist
    purposes.
        The SAFE Act enjoys the support of members, individuals,
    and organizations across the entire spectrum of ideological and
    political beliefs, not only because it is a common sense
    approach to solving a serious problem, but also because
    ordinary Americans' privacy and security is being assaulted by
    this Administration.
        Amazingly enough, some in the Administration want to
    mandate a back door into people's computer systems in order to
    access their private communications. In fact, some in the
    Administration have stated that if people do not voluntarily
    create this back door, they may seek legislation forcing them
    to give the Government access to their information by mandating
    a key recovery system requiring people to give the keys to
    decode their communications to a government-approved third
    party. This is the technological equivalent of mandating that
    the Government be given a key to every home in America.
        Mr. Chairman, I would also like to note that we will hear
    from Administration representatives who will say that they do
    not support a mandatory key recovery system. One of the
    problems we have had in addressing this is that the
    Administration has not been speaking with one voice and there
    has been an inconsistency with regard to their policy.
        I would like to note with great appreciation the position
    you and Chairman McCain have taken on this issue in the PROTECT
    Act. I could not agree more with the domestic-related
    provisions of your legislation which, like the SAFE Act,
    prevent the Administration from putting roadblocks on the
    information superhighway by prohibiting the Government from
    mandating a back door into the computer systems of private
    citizens and businesses.
        Additionally, both the PROTECT Act and the SAFE Act ensure
    that all Americans have the right to choose any security system
    to protect their confidential information.
        I would like to encourage you to consider further changes
    in this area with regard to export controls. Certainly the
    immediate decontrol of 64-bit encryption is helpful to our
    industry, as are the provisions allowing the export of strong
    encryption to, as you have called them, legitimate and
    responsible entities or organizations and their strategic
    partners, and the unlimited export of encryption once the new
    AES standard is developed and implemented. These are marked
    improvements over Chairman McCain's legislation contained in S.
    909 from the last Congress.
        Our industry needs export relief now and I do not believe
    that it can afford to wait until the AES standard is adopted a
    few years from now. While the immediate decontrol of 64-bit
    encryption is better than the Administration's current 56-bit
    level, the industry standard is, as has been noted here today,
    128 bits, which consumers and companies alike are demanding to
    protect their communications and transactions.
        So as the PROTECT Act moves through the Senate, I encourage
    you to continue to look for ways to provide further export
    relief to U.S. industry.
        I would also like to note that the SAFE Act does not
    completely eliminate export controls on encryption products.
    Like the PROTECT Act, the SAFE Act allows the President to
    prohibit encryption exports to terrorist states and impose
    embargoes and allows the Secretary of Commerce to stop the
    export of specific products to specific individuals or
    organizations in specific countries if there is substantial
    evidence that they will be used for military or terrorist
    purposes.
        As NSA Deputy Director Barbara McNamara recently testified
    before the House Commerce Committee, ``end uses and end users
    are what the Administration uses to determine whether a product
    should be exported. This is official government policy.'' With
    the millions of communications, transmissions, and transactions
    that occur on the Internet every day, American citizens and
    businesses must have the confidence that their private
    information and communications are safe and secure.
        I want to again thank you for allowing me to testify today
    and I look forward to working with you and Senator Ashcroft as
    you move forward on this legislation. We hope you can pass a
    good bill out of the Senate. We will try to do the same thing
    in the House and work together to resolve this problem.
        Thank you.
        [The prepared statement of Representative Goodlatte
    follows:]

         Prepared Statement of Hon. Bob Goodlatte, U.S. Representative
                                 from Virginia

        Mr. Chairman, I would like to thank you for inviting me to testify
    today on legislation you have introduced--S. 798, the PROTECT Act of
    1999--to encourage the use of strong encryption.
        As you know, I have worked for many years on the encryption issue
    in the House. The legislation I have introduced this Congress, H.R.
    850, the Security And Freedom through Encryption (SAFE) Act of 1999,
    currently has 257 cosponsors, including a majority of both the
    Republican and Democratic leadership. The SAFE Act has passed the House
    Judiciary Committee by voice vote, and is now pending before the
    committees on International Relations, Commerce, Armed Services, and
    Intelligence. Each of these additional committees is expected to act
    soon on the legislation, and it is my hope that the SAFE Act will be
    considered by the House in the summer or early fall.
        Encryption has many benefits. First, it aids law enforcement by
    preventing piracy and white-collar crime on the Internet. Several
    studies over the past few years have demonstrated that the theft of
    proprietary business information costs American industry hundreds of
    billions of dollars each year. The use of strong encryption to protect
    financial transactions and information would prevent this theft from
    occurring. With the speed of transactions and communications on the
    Internet, law enforcement cannot stop thieves and criminal hackers by
    waiting to react until after the fact.
        Only by allowing the use of strong encryption, not only
    domestically but internationally as well, can we hope to make the
    Internet a safe and secure environment. As the National Research
    Council's Committee on National Cryptography Policy concluded, ``If
    cryptography can protect the trade secrets and proprietary information
    of businesses and thereby reduce economic espionage (which it can), it
    also supports in a most important manner the job of law enforcement. If
    cryptography can help protect nationally critical information systems
    and networks against unauthorized penetration (which it can), it also
    supports the national security of the United States.''
        Second, if the Global Information Infrastructure is to reach its
    true potential, citizens and companies alike must have the confidence
    that their communications and transactions will be secure.
        Third, with the availability of strong encryption overseas and on
    the Internet, the Administration's export restrictions only serve to
    tie the hands of American business. Due in large part to these export
    controls, foreign companies are winning an increasing number of
    contracts by telling prospective clients that American encryption
    products are weak and inferior, which is robbing our economy of jobs
    and revenue. In fact, one noted study found that failure to address the
    current export restrictions by the year 2000 will cost American
    industry $60 billion and 200,000 jobs. Under the current system,
    America is surrendering our dominance of the global marketplace.
        The SAFE Act remedies this situation by allowing the export of
    generally available American-made encryption products after a 15-day,
    one-time technical review. Additionally, the bill allows custom-
    designed encryption products to be exported, after the same review
    period, if they are commercially available overseas and will not be
    used for military or terrorist purposes.
        The SAFE Act enjoys the support of members, individuals and
    organizations across the entire spectrum of ideological and political
    beliefs, not only because it is a common-sense approach to solving a
    serious problem, but also because ordinary Americans' privacy and
    security is being assaulted by this Administration.
        Amazingly enough, the Administration wants to mandate a back door
    into peoples' computer systems in order to access their private
    communications. In fact, the Administration has stated that if people
    do not ``voluntarily'' create this back door, it may seek legislation
    forcing them to give the government access to their information, by
    mandating a ``key recovery'' system requiring people to give the keys
    to decode their communications to a government-approved third party.
    This is the technological equivalent of mandating that the government
    be given a key to every home in America.
        Mr. Chairman, I would like to note with great appreciation the
    position you have taken on this issue in the PROTECT Act. I couldn't
    agree more with the domestic-related provisions of your legislation,
    which--like the SAFE Act--prevent the Administration from placing
    roadblocks on the information superhighway by prohibiting the
    government from mandating a back door into the computer systems of
    private citizens and businesses. Additionally, both the PROTECT Act and
    the SAFE Act ensure that all Americans have the right to choose any
    security system to protect their confidential information.
        On the issue of export relief, I would also like to commend you for
    the changes you have made in this year's bill. Certainly the immediate
    decontrol of 64-bit encryption is helpful to our industry, as are the
    provisions allowing the export of stronger encryption to, as you have
    called them, ``legitimate and responsible entities or organizations and
    their strategic partners,'' and the unlimited export of encryption once
    the new AES standard is developed and implemented. These are marked
    improvements over the export restrictions contained in S. 909 from the
    last Congress.
        However, I would like to encourage you to consider further changes
    in this area, along the lines of those contained in the SAFE Act. Our
    industry needs export relief now--I do not believe that it can afford
    to wait until the AES standard is adopted a few years from now. And
    while the immediate decontrol of 64-bit encryption is better than the
    Administration's current 56-bit level, the industry standard is
    currently 128-bit encryption--which consumers and companies alike are
    demanding to protect their communications and transactions. So as the
    PROTECT Act moves through the Senate, I encourage you to continue to
    look for ways to provide further export relief to U.S. industry.
        I would also like to note that the SAFE Act does not completely
    eliminate export controls on encryption products. Like the PROTECT Act,
    the SAFE Act allows the President to prohibit encryption exports to
    terrorist states and impose embargoes, and allows the Secretary of
    Commerce to stop the export of specific products to specific
    individuals or organizations in specific countries if there is
    substantial evidence that they will be used for military or terrorist
    purposes. And as NSA Deputy Director Barbara McNamara recently
    testified before the House Commerce Committee, ``end uses and end users
    are what we use to determine whether a product should be exported--this
    is official government policy.''
        With the millions of communications, transmissions, and
    transactions that occur on the Internet every day, American citizens
    and businesses must have the confidence that their private information
    and communications are safe and secure. Again, thank you for allowing
    me to testify today, and I look forward to working together with you as
    the PROTECT Act moves through the Senate and the SAFE Act moves through
    the House.

        Senator Burns. Thank you very much, Congressman. We
    appreciate your interest and leadership in this issue.
        I am going to call the panel. Any questions for the
    Congressman?
        Senator Ashcroft. May I just commend the Congressman. I
    have had the opportunity and good fortune to work with him, and
    his understanding of the issues related to encryption is
    unsurpassed in the Congress. I appreciate that, and I think,
    frankly, the American people and the data industry owes you a
    debt of gratitude. I know that I do, and I thank you for your
    leadership.
        Mr. Goodlatte. Thank you for your kind words.
        Senator Snowe. Mr. Chairman.
        Senator Burns. The Senator from Maine.

           STATEMENT OF HON. OLYMPIA J. SNOWE, U.S. SENATOR
                               FROM MAINE

        Senator Snowe. Thank you, Mr. Chairman. I want to welcome
    my good friend and former colleague from the House here today,
    and commend you for your leadership on this issue and your
    presentation before the committee.
        Mr. Goodlatte. Thank you, Senator Snowe. I would like to
    tell you that I will be in your State, in fact in your home
    town, tomorrow and Saturday for my 25th reunion at Bates
    College. So I appreciate your kind words.
        Senator Snowe. I wish you good weather and great lobsters.
        Mr. Goodlatte. Thank you.
        Senator Burns. At least they have got a warning up there,
    right?
        Mr. Goodlatte. That is right.
        Senator Burns. We like these warnings.
        I will call the first panel to the table, and while they
    are coming up, Senator Snowe, do you have a statement that you
    would like to make?
        Senator Snowe. No, Mr. Chairman. I have a statement for the
    record.
        Senator Burns. It will be made part of the record.
        [The prepared statement of Senator Snowe follows:]

      Prepared Statement of Hon. Olympia J. Snowe, U.S. Senator from Maine

        Thank you, Mr. Chairman. Today's hearing is extremely important
    because it addresses an issue that will only grow in importance as the
    Global Information Infrastructure (GII) continues to develop and
    evolve: the availability of strong encryption technology.
        Without the knowledge that one's information is private and secure,
    the full potential of the Global Information Infrastructure--and the
    transmission and utilization of information on the Internet in
    particular--will never be realized.
        On the one hand, if one is certain that their proprietary or
    personal information can only be accessed by those for whom it is
    intended, one will be at ease putting business plans, personal medical
    records, and other confidential files ``on-line''. But if security is
    inadequate for the prevention of unauthorized ``browsing'' or outright
    ``piracy,'' one's willingness to utilize the countless benefits of on-
    line commerce will be severely hampered.
        The United States imposes limits on the export of encrypted
    products-- in part--to ensure that law enforcement and intelligence
    agencies have easier access to the information these products contain.
    Presumably, if the products exported by the United States do not allow
    for encryption beyond a certain level, the threat to national security
    will be lessened.
        While I believe we would all agree that national security is of the
    utmost importance--and any policy that protects American citizens from
    ``on-line crime'' is beneficial--it is also important that we be
    realistic in setting these policies. If our policies do not reflect the
    reality of the global marketplace, we will not only fail to accomplish
    the goals we are pursuing, but we may also risk harming businesses and
    consumers in the United States that we are seeking to protect.
        In addition, high-tech industries in the United States have a great
    deal at stake in the ongoing debate on encryption export restrictions.
    If our current export policies are ``behind the times,'' domestic
    producers of computer hardware and software risk being at a competitive
    disadvantage in the global marketplace. At the same time, other U.S.
    companies that rely on the use of these encrypted technologies to
    manufacture consumer products--such as cellular telephones--could also
    be adversely impacted by a poorly conceived export policy.
        Accordingly, today's hearing will give us a chance to review the
    need for, and impact of, S. 798, the PROTECT Act--legislation that
    would fundamentally alter the manner in which encryption export
    restrictions are established. Ultimately, it is my hope that this
    hearing will assist us in determining whether or not our current export
    restrictions are both practical and effective, and if changes such as
    those contained in S. 798 would be a step forward or a step back for
    the United States.
        I would like to thank our witnesses for being with us this morning,
    and look forward to the discussion this hearing will generate on a
    topic that is so fundamental to the development of the world's
    information infrastructure. Thank you, Mr. Chairman.

        Senator Burns. We have William Reinsch, who is the Under
    Secretary of Export Administration, Department of Commerce;
    James Robinson, Assistant Attorney General from the Criminal
    Division; and we have Barbara McNamara, Deputy Director of the
    National Security Agency.
        We appreciate all of you taking time in your busy days and
    your responsibilities and duties to come and visit with us
    today about this very important subject. We will just go in
    order, I guess. So Secretary Reinsch, we look forward to
    hearing from you and some of yours.
        I might add that your complete statement will be made part
    of the record. If you want to consolidate that and offer your
    views, that is perfectly OK, too. We appreciate you coming
    today.
        Mr. Secretary, good to see you again.

    STATEMENT OF HON. WILLIAM A. REINSCH, UNDER SECRETARY OF EXPORT
              ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE

        Mr. Reinsch. Thank you, Mr. Chairman. It is good to be
    back. I do have a shorter statement. We have a lot to say about
    this bill, however, so it is not quite as short as it could be,
    I suppose.
        I want to thank you for the opportunity to be back to
    discuss this difficult subject. I think we made a lot of
    progress since I was here the last time, and that is one of the
    subjects I want to discuss with you.
        It should be obvious from the testimony today that
    encryption is a hotly debated issue. I want to make clear what
    the Administration's policy is. We support a balanced approach
    which considers privacy and commerce, as well as protecting
    important law enforcement and national security equities. We
    have been consulting closely with industry and its customers to
    develop a policy that provides that balance in a way that also
    reflects the evolving realities of the marketplace.
        There is no question about the evolving role of encryption
    in the marketplace and in e-commerce, and my full statement has
    a lot to say about that in terms of details, I will not pass
    that on to this committee at this time because you are already
    well familiar with it.
        But I do want to say that developing a balanced policy is
    complicated because we do not want to hinder encryption's
    legitimate use, but at the same time we do want to protect
    national security and law enforcement. Now, over the last
    several years as we have been studying this problem we have
    learned that there are many ways to assist lawful access beyond
    key escrow or key recovery and that there is no one-size-fits-
    all solution. We believe our policy reflects that, and I would
    like to describe it for you.
        We published a regulation in September 1998, which allows
    the export of unlimited strength encryption to banks and
    financial institutions. This allows U.S. companies new
    opportunities to sell encryption products to a key market for
    encryption products.
        Last September, the Vice President also unveiled an update
    to our policy, and we published regulations implementing it
    last December. It permits the free export of unlimited strength
    encryption products to several key sectors of the market. In
    addition to banks and financial institutions, we now allow
    health facilities and online merchants to purchase U.S.
    encryption to secure their sensitive financial, medical, and
    online transactions in digital form. U.S. companies can now
    export 128-bit or greater encryption products, including
    encryption technology, to subsidiaries located worldwide to
    protect proprietary information and to develop new products.
        Furthermore, this update allows the export of unlimited
    strength recovery-capable or recoverable products. These
    products do not require a third party to hold any key, are not
    key escrow, but allow for law enforcement access under proper
    court authority. They are readily available in the marketplace
    and include general purpose routers, firewalls, and virtual
    private networks.
        We have also made progress with other countries, Mr.
    Chairman, through the hard work of Ambassador David Aaron, the
    President's Special Envoy on Cryptography. We agreed in the
    Wassenaar arrangement last December on several changes relating
    to encryption controls. We removed multilateral controls on all
    encryption products at or below 56 bits and certain consumer
    items regardless of key length.
        We also agreed to amend the General Software Note on this
    issue. Drafted in 1991 when banks, governments, and militaries
    were the primary users of encryption, the General Software Note
    did not give countries the legal authority to require a license
    for the export of mass market encryption software. The note was
    created to release general purpose software used on PCs, but it
    inadvertently also released encryption.
        We believed it was essential to modernize the note and
    close the loophole. Under a new Cryptography Note adopted in
    December, a 64-bit key length threshold has been set for mass
    market encryption software and hardware. This enables
    governments to review export mass market products stronger than
    64 bits.
        I want to be clear. This does not mean that encryption
    products of more than 64 bits cannot be exported. Our own
    policy permits that, as I just made clear, as does the policy
    of most other Wassenaar members. It does mean the products must
    be reviewed by governments consistent with their national
    policies before export.
        Now, let me comment in conclusion, Mr. Chairman, on the
    PROTECT Act. With respect to S. 798, the Administration opposes
    this legislation for a number of reasons. Overall, we believe
    it does not promote the balance that we worked so hard to
    achieve over the last several years and which I have just
    defined.
        Let me discuss several, but not all, of the more
    problematic sections. Under section 505, the removal of export
    controls on publicly or generally available encryption is left
    to an advisory board. We believe such a board would be
    unworkable. The broad definitions used in the bill would give
    the board wide latitude in making its findings on what is
    available. This could place the Secretary in the position of
    having to routinely object to the removal of export controls
    when important national security and law enforcement interests
    are at stake.
        The bill also makes this decision subject to judicial
    review. The Administration does not think it is wise public
    policy for the courts to adjudicate executive branch decisions
    on national security matters like the ones that would be rolled
    into these kinds of decisions.
        Section 501 of the bill removes the Department of Justice
    from the encryption export license consultation process. Since
    law enforcement interests are an important consideration in
    regard to encryption, we cannot support that provision. We do
    support the provisions that require a technical review for
    eligibility for export under a license exception. That is
    consistent with our current regulations. What we cannot
    support, however, is the portion of section 504 that would
    provide automatic eligibility after 15 days if there has been
    no decision from the government.
        That same section also proposes control parameters and
    export liberalizations beyond what we can entertain and which
    would be contrary to our international export control
    obligations. For example, Wassenaar agreed to decontrol
    products up to 56 bits. This bill would decontrol products
    using a key length of 64 bits or less.
        Section 504 also expands the products, end users, and
    countries eligible beyond what we are willing to consider at
    this point.
        Section 102 is also troubling, as it would permit a U.S.
    person located anywhere in the world to develop, manufacture,
    sell or use any type of encryption. This would in effect
    prevent the government from requiring a license for U.S.
    persons to develop and manufacture encryption abroad. As a
    result, U.S. companies would likely move all development and
    manufacture of encryption out of the United States in order to
    take advantage of this loophole. This is not in our country's
    economic or national security interests.
        Section 103 contains a provision that would prohibit the
    U.S. Government from conditioning any approval on the fact that
    a product is recoverable. A fundamental feature of our
    encryption policy is that we provide incentives for companies
    to develop products that provide strong security and also meet
    the needs of national security and law enforcement. The bill
    would eliminate this laudable feature of our policy that
    industry had asked us to include in last year's update. This
    provision is also inconsistent with section 504, which allows
    license exception treatment for recoverable products.
        Now, we have also some problems, Mr. Chairman, with other
    non-export control provisions of the bill. Section 202 requires
    that encryption products used by the Government must
    interoperate with other commercial encryption products. The
    extent to which interoperability is required is unclear in the
    bill as drafted, but we believe that the practical result of
    the bill would be that the Government could not use encryption
    because no single encryption product interoperates with all
    other products.
        It also appears that this provision could prohibit the use
    of encryption developed by the Government for its own internal
    use in closed systems that are purposefully designed not to
    interoperate with other systems, such as those used by the
    Department of Defense or the National Security Agency.
        I want to make clear we do not seek encryption export
    control legislation, nor do we believe that legislation is
    needed. We believe the current regulatory structure is
    sufficient for balanced oversight. As the Senators here today
    know, public debate on this issue has often been lively and on
    some occasions acrimonious, although certainly not in this
    room. We hope to find a middle ground that can meet all of our
    needs.
        Our dialog with industry has gone a long way toward
    bridging that gap and finding that middle ground. We will
    continue this policy of cooperative exchange, which is clearly
    the best way to pursue our policy objectives of balancing
    public safety, national security, and the competitive interests
    of our companies.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Reinsch follows:]

         Prepared Statement of William A. Reinsch, Under Secretary for
               Export Administration, U.S. Department of Commerce

        Thank you, Mr. Chairman, for the opportunity to testify on the
    direction of the Administration's encryption policy. We have made a
    great deal of progress since my last testimony before this Committee on
    this subject.
        Even so, encryption remains a hotly debated issue. The
    Administration continues to support a balanced approach which considers
    privacy and commerce as well as protecting important law enforcement
    and national security equities. We have been consulting closely with
    industry and its customers to develop a policy that provides that
    balance in a way that also reflects the evolving realities of the
    market place.
        One of the many uses of the Internet which will have a significant
    affect on our everyday lives is electronic commerce. The Internet and
    other digital media are becoming increasingly important to the conduct
    of international business. There were 43.2 million Internet hosts
    worldwide last January compared to only 5.8 million in January 1995.
    According to a recent study, the value of e-commerce transactions in
    1996 was $12 million. The projected value of e-commerce in 2000 is
    $2.16 billion. To cite one example, travel booked on Microsoft's
    Website has doubled every year since 1997, going from 500,000 to an
    estimated 2.2 million this year. Many service industries which
    traditionally required face-to-face interaction such as banks,
    financial institutions and retail merchants are now providing cyber
    service. Customers can now sit at their home computers and access their
    banking and investment accounts or buy a winter jacket with a few
    strokes of their keyboard.
        Furthermore, most businesses maintain their records and other
    proprietary information digitally. They now conduct many of their day-
    to-day communications and business transactions via the Internet and E-
    mail. An inevitable byproduct of this growth of electronic commerce is
    the need for strong encryption to provide the necessary secure
    infrastructure for digital communications, transactions and networks.
    The disturbing increase in computer crime and electronic espionage has
    made people and businesses wary of posting their private and company
    proprietary information on electronic networks if they believe the
    infrastructure may not be secure. A robust secure infrastructure can
    help allay these fears, and allow electronic commerce to continue its
    explosive growth.
        Developing an encryption policy has been complicated because we do
    not want to hinder its legitimate use--particularly for electronic
    commerce; yet at the same time we want to protect our vital national
    security, foreign policy and law enforcement interests. We have
    concluded that the best way to accomplish this is to continue a
    balanced approach: to promote the development of strong encryption
    products that would allow lawful government access to plain text under
    carefully defined circumstances; to promote the legitimate uses of
    strong encryption to protect confidentiality; and continue looking for
    additional ways to protect important law enforcement and national
    security interests.
        During the past three years, we have learned that there are many
    ways to assist lawful access. There is no one-size-fits-all solution.
    The plans for recovery encryption products we received from more than
    60 companies showed that a number of different technical approaches to
    recovery exist. In licensing exports of encryption products under
    individual licenses, we also learned that, while some products may not
    meet the strict technical criteria of our regulations, they are
    nevertheless consistent with our policy goals.
        Additionally, we decided that the use of strong non-recovery
    encryption within certain trusted industry sectors is an important
    component of our policy to protect private consumer information and
    allow our U.S. high-tech industry to maintain its lead in the
    information security market. Taking into account all that we have
    learned and reviewing international market trends and realities, we
    made several changes in 1998 to our encryption policy that I will now
    summarize.
        In September 1998, we published a regulation allowing the export,
    under a license exception, of unlimited strength encryption to banks
    and financial institutions located in 46 countries which allows U.S.
    companies new opportunities to sell encryption products to the world's
    leading economy. This policy recognizes the need to secure our
    financial networks, and the history of cooperation which the banking
    and financial communities have with government authorities when
    information is required to combat financial and other crimes.
        More importantly, on September 16th, Vice President Gore unveiled
    an update to our encryption policy. This Policy Update was the result
    of a dialogue with U.S. industry, law enforcement, and privacy groups
    on how our policy might be improved to find technical solutions, in
    addition to key recovery, that can assist law enforcement in its
    efforts to combat crime. At the same time, we wanted to find ways to
    assure continued U.S. technology leadership, promote secure electronic
    commerce, and protect privacy concerns. We believed then and now that
    the best way to make progress on this issue is through a constructive,
    cooperative dialogue, rather than by legislative solutions. Through
    dialogue lasting more than a year, there has been increased
    understanding among the parties and we have made progress.
        On December 31, we published regulations implementing the Vice
    President's policy announcement. These regulations will not end the
    debate over encryption controls, but we believe the regulation
    addresses some private sector concerns by opening large markets and
    further streamlining exports.
        The Update permits the export of 128-bit encryption products and
    higher (with or without key recovery) to several important industry
    sectors. Now, banks, financial institutions, health facilities, and on-
    line merchants can secure their sensitive financial, medical, and on-
    line transactions in digital form. This update also allows U.S.
    companies to export 128-bit or greater encryption products, including
    technology to subsidiaries around the world, to protect its proprietary
    information and to develop new products. Further, this update allows
    the export of 128-bit or greater ``recovery capable'' or
    ``recoverable'' encryption products under an encryption licensing
    arrangement. Such products include those that are readily available in
    the marketplace such as general purpose routers, firewalls, and virtual
    private networks. These recoverable products are usually managed by a
    network or corporate security administrator without any involvement by
    a third party. Since the Update announcement, Industry has been taking
    advantage of this new liberalization and the streamlined process
    awarded to such products.
        Many of the updates permit the export of encryption to these end-
    users under a license exception. That is, after the product receives a
    technical review, it can be exported by manufacturers, resellers and
    distributors without the need for a license or other additional review.
    These license exceptions currently apply to a list of countries or a
    set of end users. We also have a general policy of approval for exports
    to those sectors through encryption licensing arrangements (ELA), a
    kind of bulk license, to allow unlimited shipments of strong encryption
    to the sectors worldwide.
        We also further streamlined exports of key recovery products by no
    longer requiring a review of foreign key recovery agents and no longer
    requiring companies to submit business plans.
        We recognize that the development of our policy is an evolutionary
    process, and we intend to continue our dialogue with industry. Our
    policy will continue to adapt to technology and market changes. We will
    review our policy again this year with a view toward making further
    changes. An important component of our review is input from industry,
    which we are receiving through our continuing dialogue.
        This past year, we also made progress on developing a common
    international approach to encryption controls through the Wassenaar
    Arrangement. Established in 1996 as the successor to COCOM, it is a
    multilateral export control arrangement among 33 countries whose
    purpose is to prevent destabilizing accumulations of arms and
    industrial equipment with military uses in countries or regions of
    concern. Wassenaar provides the basis for many of our export controls.
        In December, through the hard work of Ambassador David Aaron, the
    President's special envoy on encryption, the Wassenaar Arrangement
    members agreed on several changes relating to encryption controls.
    These changes go a long way toward increasing international security
    and public safety by providing countries with a stronger regulatory
    framework for managing the spread of robust encryption. Specific
    changes to multilateral encryption controls include removing
    multilateral controls on all encryption products at or below 56 bit and
    certain consumer items regardless of key length, such as entertainment
    TV systems, DVD products, and on cordless telephone systems designed
    for home or office use.
        Most importantly, the Wassenaar members agreed to remove encryption
    software from Wassenaar's General Software Note and replace it with a
    new cryptography note. Drafted in 1991, when banks, government and
    militaries were the primary users of encryption, the General Software
    Note allowed countries to export mass market encryption software
    without restriction. The GSN was created to release general purpose
    software used on personal computers, but it inadvertently also
    permitted countries to release encryption. It was essential to
    modernize the GSN and close the loophole that permitted the
    uncontrolled export of encryption with unlimited key length. Under the
    new cryptography note, mass market hardware has been added and a 64-bit
    key length or below has been set as an appropriate threshold. This will
    lead governments to review the dissemination of 64-bit and above
    encryption.
        I want to be clear that this does not mean encryption products of
    more than 64 bits cannot be exported. Our own policy permits that, as
    does the policy of most other Wassenaar members. It does mean, however,
    that such exports now can be reviewed by governments consistent with
    their national export control procedures.
        Export control policies without a multilateral approach have little
    chance of success. Agreement among the Wassenaar members on the
    treatment of mass market encryption products is a strong indication
    that other countries share our public safety and national security
    concerns. Contrary to what many people thought two years ago, we have
    found that most major encryption producing countries are interested in
    developing a common approach to encryption controls.

                                THE PROTECT ACT

        With respect to S. 789, the Administration opposes this legislation
    for a number of reasons. Overall the bill does not promote the balance
    that this Administration has worked so hard to achieve over the past
    several years. Let me now discuss some of the more problematic
    sections.
        Under section 505, the removal of export controls on publicly or
    generally available encryption is in effect left to an advisory board
    composed of private sector and government representatives, with the
    concurrences of the Secretary. We believe such a board would be
    unworkable. Although availability is one of the factors we use to
    decide whether an encryption product may be exported, it is not the
    only factor and should not be elevated above the others. We need to be
    able to take all factors, including national security and public
    safety, into account when making export control decisions. Disallowing
    or downgrading important considerations will only serve to weaken our
    export control system. The broad definitions used in the bill would
    give the Board wide latitude in making its findings on what is
    available. This could place the Secretary in the position of having to
    routinely object to the removal of export controls when important
    national security and law enforcement interests are at stake. The bill
    makes this decision subject to judicial review. The Administration does
    not think it is wise public policy for the courts to adjudicate
    Executive Branch decisions on these matters.
        Section 501 removes the Department of Justice from the encryption
    export license consultation process. Since law enforcement interests
    are an important consideration in regard to encryption, we cannot
    support this provision.
        We support the provisions in the bill that require a technical
    review for eligibility to export encryption under a license exception.
    In fact, this is consistent with current regulations. What we cannot
    support, however, is the portion of section 504 that would provide
    automatic eligibility after 15 days if the exporter has not received a
    decision from the government. In all cases, a very careful technical
    review is completed in order to determine that a product is technically
    eligible for a particular license exception. Although we try to perform
    these reviews as quickly as possible, a 15-day automatic approval will
    severely limit our ability to do a careful review.
        Section 504 also proposes control parameters and export
    liberalizations beyond what the Administration can entertain and which
    would be contrary to our international export control obligations. For
    example, Wassenaar agreed to decontrol encryption products up to 56-
    bits whereas this bill would decontrol encryption products using a key
    length at 64-bits or less. Section 504 also expands the set of
    products, end users, and countries eligible to receive encryption under
    a license exception beyond what we believe is prudent.
        Another troubling part of this bill is section 102, which would
    permit a U.S. person located anywhere in the world to develop,
    manufacture, sell or use any type of encryption. If this provision were
    construed to permit U.S. citizens to develop, manufacture and sell
    encryption products overseas, even with the use of non-public
    controlled technology that they had acquired in the United States, it
    would, in effect, prevent the government from requiring a license for
    U.S. persons to develop and manufacture encryption abroad. As a result,
    U.S. companies would likely move all development and manufacture of
    encryption out of the United States in order to take advantage of this
    loophole. This is not in our country's economic or national security
    interest.
        Section 103 contains a provision that would prohibit the U.S.
    Government from conditioning any approval on the fact that a product is
    recoverable. A fundamental feature of our encryption policy is that we
    provide incentives for companies to develop products that provide
    strong security and also meet the needs of national security and law
    enforcement. The bill would eliminate this laudable feature of our
    policy that industry wanted us to include in last year's update. In
    addition, this provision of the bill is inconsistent with section 504
    which allows license exception treatment for recoverable products.
        Section 506 would eliminate any export controls on products using
    the forthcoming Advanced Encryption Standard (AES). We oppose the
    removal of export controls on encryption products simply because they
    implement a government standard. Products incorporating the AES should
    be exportable to the same extent as any other product incorporating
    encryption of similar strength. Under our current policy, AES-based
    products could be exported to banks, large corporations, on-line
    merchants without restriction and to many other safe endusers depending
    on the nature of the product. We do not think it is wise to link
    development of the AES to export controls. Such a linkage might bring
    undue pressure on NIST to complete the AES process faster than planned,
    and may therefore not allow prudent study of the security features of
    the candidate algorithms before selection.
        With respect to the provisions of the bill that do not relate to
    export controls, we have a number of questions and concerns.
        One such provision in Section 202 requires that encryption products
    used by the Government must interoperate with other commercial
    encryption products. The extent to which interoperability is required
    is unclear in the bill, but we believe the practical result of this
    requirement is that the Government could not use encryption because no
    single encryption product interoperates with all other products. It
    also appears that this provision could prohibit the use of encryption
    developed by the government for its own internal use in ``closed''
    systems that are purposefully designed not to interoperate with other
    systems.
        Section 202 also appears to prevent mandatory use of recoverable
    encryption when communicating with U.S. Federal, state and local
    governments. This would appear to preclude an agency from requiring key
    recovery or recoverable products for business purposes. We believe the
    effect of this provision may be much broader than simply preventing
    government from using recoverable encryption when dealing with the
    public. The practical effect would be that Government sites would have
    to be capable of supporting secure communications using all encryption
    methodologies on the market. This is absurd.
        We are concerned that section 302 of the bill may preclude NIST's
    work with voluntary standards organizations because it prohibits the
    Secretary of Commerce from carrying out any policy that establishes an
    encryption standard for use by businesses or other entities other than
    for computer systems operated by the United States Government. The
    Secretary of Commerce is prohibited from establishing standards for
    business; however, when invited by standards organizations to do so,
    NIST does, as a matter of policy, work together with those
    organizations. Cooperation between NIST and standards organizations is
    important for both NIST and industry, and it is consistent with
    government policy to use voluntary standards and to purchase commercial
    off-the-shelf products. If the government cannot have input to the
    standards process, we may end up with less secure products available
    for government agencies. We want to encourage, to the extent possible,
    the development of voluntary standards that meet the needs of the
    government. This reduces costs for both government and industry.
        In regard to section 401 dealing with the ``Information Technology
    Laboratory,'' we have two concerns. First, we do not think it is
    appropriate for NIST to undertake research and development of new
    technologies to facilitate lawful access to communications and
    electronic information. This activity is more appropriately done by the
    FBI. Second, we are concerned that the bill will provide NIST with new
    tasks but no new funding to carry out this work. We have similar
    concerns with section 402. The advisory board, whose correct statutory
    name is ``Computer System Security and Privacy Advisory Board,'' is
    made up of 13 volunteers. Again, any additional tasks assigned to this
    board would require necessary funding.
        The Administration does not seek encryption export control
    legislation, nor do we believe such legislation is needed. The current
    regulatory structure provides for balanced oversight of export controls
    and the flexibility needed to adjust to our economic, foreign policy
    and national security interests to advances in technology. This is the
    best approach to an encryption policy that promotes secure electronic
    commerce, maintains U.S. lead in information technology, protects
    privacy, and protects public safety and national security interests.
        As you know, public debate over encryption policy has been lively
    and often acrimonious. Some of those on both sides of the debate are
    not interested in searching for a middle ground that can meet all of
    our needs. Our dialogue with industry has gone a long way toward
    bridging that gap and finding common ground. We will continue this
    policy of cooperative exchange, which is clearly the best way to pursue
    our policy objectives of balancing public safety, national security,
    and the competitive interests of U.S. companies.

        Senator Burns. Thank you, Mr. Secretary. I want to also
    thank you for the dialog we have had. We are not new to this
    debate. We have been going through it. But we have learned, I
    think, from each other. It is enlightening to know how the
    evolution of the mind set changes as technology moves forward.
        We are pleased to welcome Jim Robinson, Assistant Attorney
    General for the Criminal Division. Thank you for coming this
    morning.

        STATEMENT OF HON. JAMES K. ROBINSON, ASSISTANT ATTORNEY
         GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

        Mr. Robinson. Mr. Chairman, members of the committee: I
    appreciate the opportunity to appear to--
        Senator Burns. Do you want to pull the microphone a little
    closer to you.
        Mr. Robinson. I will, Senator. Thank you.
        I appreciate the opportunity to present the views of the
    Justice Department on the issue of encryption and export
    controls. As you would expect, the Justice Department is
    particularly interested in the important public safety
    interests implicated in the encryption debate. I would like to
    emphasize some of the key points outlined in my written
    statement submitted to the committee and to place those
    thoughts in a more personal context.
        When I took office as the Assistant Attorney General for
    the Criminal Division about a year ago this month, I quickly
    learned how important the encryption debate is to law
    enforcement. I served as the U.S. Attorney for the eastern
    district of Michigan from 1977 to 1980. From a technological
    point of view, the world was a very different place in those
    days, both for our society in general and certainly for law
    enforcement.
        Technological advances have made important new tools
    available to law enforcement for the successful investigation
    and prosecution of criminal activity. These tools have enhanced
    law enforcement's ability to protect public safety and to
    achieve just results. The use of DNA evidence is a prime
    example. DNA evidence can not only provide strong evidence of
    guilt, it can be powerful evidence of innocence.
        Technology has also enhanced law enforcement's capacity for
    early detection and prevention of criminal acts. But
    technological progress has also had its costs. The potential
    dark side of this progress is that well-financed criminal
    elements are also using new technology to commit crimes, avoid
    detection, and to cover their tracks. Traditional highly-
    effective law enforcement techniques are threatened by these
    developments.
        The issue of encryption starkly presents both aspects of
    technological progress. Encryption supports public safety and
    law enforcement by protecting sensitive and personal
    information from unauthorized access. Encryption is therefore,
    as many have said here this morning, an absolutely essential
    tool for preventing crime in the information age.
        The Department is, however, deeply concerned about the
    other side of encryption, the threat to public safety posed by
    the widespread use of nonrecoverable encryption by criminals.
    Thus the Justice Department supports the spread of strong
    recoverable encryption both to protect the privacy and safety
    of American citizens and the security of our information
    infrastructure.
        Assessing the benefits versus the risks of encryption for
    law enforcement in today's world is complex enough, but the
    issue is made even more complex and problematic by the
    expanding use of global information networks like the Internet.
    Technological advances in electronic commerce and
    communication, as we all know, have led to the explosive growth
    of the Internet. This development has made the use of robust
    encryption essential for protecting the privacy and security of
    communications and stored electronic data.
        This new technology, however, has also made it possible for
    international criminals and terrorists to target America in an
    unprecedented number of ways, such as fraud over the Internet,
    computer hacking, economic and governmental espionage, and
    cyberterrorism. We are also seeing a dramatic growth of
    international crime with grave potential consequences for the
    Nation.
        Law enforcement must be concerned not only with the use of
    encryption by domestic criminals, but increasingly we must be
    concerned by the ability of foreign criminals and terrorists to
    target America and use robust encryption to hide their criminal
    activity. Law enforcement agencies in the United States and
    abroad have already begun to see cases where encryption has
    been used in an attempt to conceal criminal activity. The
    number and complexity of these cases will certainly increase as
    increasingly powerful encryption proliferates.
        As this committee considers the issue of encryption, we
    trust that it will consider also, as we know it will, the very
    real cost to public safety that the use of nonrecoverable
    encryption by terrorists, drug dealers, and other criminals
    will pose. Faced with the use of such encryption, agents
    frequently and increasingly will be unable to make effective
    use of search warrants, wiretap orders, and other legal
    processes authorized by Congress and sanctioned by the courts.
    Law enforcement will find it increasingly difficult to obtain
    important evidence of criminal activities. Critical evidence to
    support successful prosecution may simply be unavailable. In
    short, this will mean that fewer crimes will be prevented and
    fewer criminals will be caught, prosecuted, and taken off the
    streets.
        Despite these challenges to effective law enforcement, we
    cannot and must not ignore the significant benefits of
    encryption. That is why the Department supports a carefully
    balanced approach to export controls, an approach that seeks to
    encourage the favorable uses of encryption while minimizing its
    negative effects on public safety and national security. The
    Department believes that the rapid elimination of export
    controls as proposed in the PROTECT Act would upset this
    delicate balance. It is likely that the passage of this act
    would cause in the near term the easy acquisition of robust
    nonrecoverable encryption products, not only by people we want
    to have them, but by terrorist organizations and international
    criminals on a global scale. This development will
    substantially frustrate the ability of law enforcement to
    combat international criminal activity.
        Instead of encryption decontrol, we believe that a
    continuing dialogue offers the best hope of developing workable
    solutions to the encryption dilemma. Law enforcement has been
    engaging industry leaders in a continuing and cooperative
    dialogue in an attempt to work toward voluntary solutions that
    accommodate the needs of privacy, electronic commerce, national
    security, and public safety. We will continue to work hard to
    make sure that these productive discussions will continue to
    bear fruit.
        We are realists. We understand that no matter what
    solutions industry develops and no matter what policy is
    adopted by the Administration and by Congress, some criminals
    will obtain and use robust nonrecoverable encryption that will
    deny law enforcement the ability to obtain useable evidence. We
    cannot afford to stand still while technology passes us by.
    Therefore, in addition to an intensive dialogue with industry
    and continuing to work with the international community on this
    important topic, law enforcement must continue developing its
    own technical expertise to deal effectively with encrypted
    evidence of criminal activity.
        The Department has begun initiatives such as the funding of
    a centralized technical resource within the FBI which will
    support Federal, State and local law enforcement personnel in
    developing a broad range of expertise, technologies, and tools
    to respond directly to the threat to public safety posed by the
    use of encryption by criminals and terrorists.
        In conclusion, we believe that an approach that balances
    the need for secure private communications and data storage
    with the equally important need to protect the safety of the
    public against threats from terrorists and criminals is the
    best policy.
        We appreciate your willingness to consider these important
    public safety concerns and we look forward to working with you
    on this important issue. Thank you very much.
        [The prepared statement of Mr. Robinson follows:]

     Prepared Statement of James K. Robinson, Assistant Attorney General,
                 Criminal Division, U.S. Department of Justice

        Mr. Chairman, thank you for the opportunity to testify about the
    Department of Justice's views on encryption, and particularly the
    proposed Promote Reliable On-Line Transactions to Encourage Commerce
    and Trade (PROTECT) Act, introduced by you as S. 798. As you are aware,
    encryption, and specifically export controls on encryption, presents
    complex and difficult issues that we are attempting to address with our
    colleagues throughout the Administration. In my testimony, I will first
    outline the basic perspective and recent initiatives of the Department
    of Justice on encryption issues, and will then discuss some specific
    concerns with the PROTECT Act.

                  ENCRYPTION, THE LAW ENFORCEMENT PERSPECTIVE

        The Department of Justice supports the spread of strong,
    recoverable encryption. Law enforcement's responsibilities and concerns
    include protecting privacy and commerce over our nation's
    communications networks. For example, we prosecute under existing laws
    those who violate the privacy of others by illegal eavesdropping,
    computer hacking or theft of confidential information. Over the last
    few years, the Department has continually pressed for laws protecting
    confidential information and the privacy of citizens. Furthermore, we
    help protect commerce by enforcing the laws, including those that
    protect intellectual property rights, and that combat computer and
    communications fraud. (In particular, we help to protect the
    confidentiality of business data through enforcement of the recently
    enacted Economic Espionage Act.) Our support for robust encryption is a
    natural outgrowth of our commitment to protecting privacy for personal
    and commercial interests. As the head of the Criminal Division of the
    Department of Justice, I hold these values dear.
        But the Department of Justice protects more than just privacy. We
    also protect public safety and national security against the threats
    posed by terrorists, organized crime, foreign intelligence agents, and
    others. Moreover, we have the responsibility for preventing,
    investigating, and prosecuting serious criminal and terrorist acts when
    they are directed against the United States. We are gravely concerned
    that the proliferation and use of non-recoverable encryption by
    criminal elements would seriously undermine these duties to protect the
    American people. Therefore, we favor the spread of strong encryption
    products that permit timely and legal law enforcement access to
    plaintext.
        The most easily understood example is electronic surveillance.
    Court-authorized wiretaps have proven to be one of the most successful
    law enforcement tools in preventing and prosecuting serious crimes,
    including drug trafficking and terrorism. We have used legal wiretaps
    to bring down entire narcotics trafficking organizations, to rescue
    young children kidnaped and held hostage, and to assist in a variety of
    matters affecting our public safety and national security. In addition,
    as society becomes more proficient in its use of computers, evidence of
    crimes is increasingly found in stored computer data, which can be
    searched and seized pursuant to court-authorized warrants. But if non-
    recoverable encryption proliferates, these critical law enforcement
    tools would be nullified. Thus, for example, even if the government
    satisfies the rigorous legal and procedural requirements for obtaining
    a wiretap order, the wiretap would be worthless if the intercepted
    communications of the targeted criminals amount to an unintelligible
    jumble of noises or symbols. Or we might legally seize the computer of
    a terrorist and be unable to read the data identifying his or her
    targets, plans and co-conspirators. The potential harm to public
    safety, law enforcement, and to the nation's domestic security could be
    devastating.
        I want to emphasize that this concern is not theoretical, nor is it
    exaggerated. Although use of encryption is far from universal, we have
    already begun to encounter its harmful effects. For example, in an
    investigation of a multinational child pornography ring, investigators
    discovered sophisticated encryption used to conceal thousands of images
    of child pornography that were exchanged among members. Similarly, in
    several major computer hacker cases, the subjects have encrypted
    computer files, thereby concealing evidence of serious crimes. In one
    such case, the government was unable to determine the full scope of the
    hacker's activity because of the use of encryption. Finally, criminal
    use of encryption is becoming increasingly international--the United
    Kingdom recently reported that in 1996 it seized encrypted files from a
    Northern Irish terrorist group concerning terrorist targets such as
    police officers and politicians. In that case, law enforcement was able
    to read the data, but only after considerable effort.
        The lessons learned from these investigations are clear: criminals
    are beginning to learn that encryption is a powerful tool for keeping
    their crimes from coming to light. Moreover, as encryption proliferates
    and becomes an ordinary component of mass market items, and as the
    strength of encryption products increases, the threat to public safety
    will increase proportionately.
        Given both the benefits presented and risks posed by encryption,
    the Department believes that encouraging the use of recoverable
    encryption products--which protect business and personal data as well
    as public safety--is an important part of the Administration's balanced
    encryption policy. Recoverable products also fulfill business needs.
    Information technology companies have told us that their customers
    recognize the need to ensure recoverability of their data when using
    strong encryption; otherwise, they risk losing access to their data
    forever. For example, a company might find that one of its employees
    lost his encryption key, thus accidentally depriving the business of
    important and time-sensitive business data. We should point out that
    loss of an encryption key is not theoretical. One company told us that
    employees commonly lose or forget their passwords, which must then be
    restored by system administrators. The same capability must exist for
    encryption systems. Similarly, a business may find that a disgruntled
    employee has encrypted confidential information and then absconded with
    the key. In these cases, a plaintext recovery system promotes important
    private sector interests. Indeed, as the Government implements
    encryption in our own information technology systems, it also has a
    business need for plaintext recovery to assure that data and
    information that we are statutorily required to maintain are in fact
    available at all times. For these reasons, as well as to protect public
    safety, the Department has been affirmatively encouraging the voluntary
    development of ``plaintext'' recovery products, recognizing that only
    their ubiquitous use will provide both protection for data and
    protection of public safety. We also want to underscore that in most
    recoverable systems, businesses will manage their own keys.
        Because we remain concerned with the impact of encryption on the
    ability of law enforcement at all levels of government to protect the
    public safety, the Department and the FBI are engaged in continuing
    discussions with industry in a number of different fora. These ongoing,
    productive discussions seek to find creative solutions, in addition to
    key recovery, to the dual needs for strong encryption to protect
    privacy and plaintext recovery to protect public safety and business
    interests. While we still have work to do, these dialogues have been
    useful because we have discovered areas of agreement and consensus, and
    have found promising areas for seeking compromise solutions to these
    difficult issues. While we do not think that there is one magic
    technology or solution to all the needs of industry, private citizens,
    and law enforcement, we believe that by working with those in industry
    who create and market encryption products, we can benefit from the
    accumulated expertise of industry to gain a better understanding of
    technology trends and develop advanced tools that balance privacy and
    security.
        Furthermore, we believe that a constructive dialogue on these
    issues is the best way to make progress, rather than export control
    legislation. Although export controls on encryption products have been
    in place for years and exist primarily to protect national security and
    foreign policy interests, they are in no sense inflexible, and have
    been updated in recent years in a continuing effort to balance the
    needs of privacy, electronic commerce, public safety, and national
    security. Indeed, largely as a result of the dialogue the
    Administration has had with industry, significant progress has been
    made on export controls. Recent updates were announced by Vice
    President Gore on September 16, 1998, and implemented in an interim
    rule, which was issued on December 31, 1998. The Department of Justice
    supports these updates to export controls, which permit the export of
    products that have a bit length of 56-bits or less, and also permit the
    easy export of unlimited-strength encryption to certain industry
    sectors, including medical facilities and banks, financial
    institutions, and insurance companies in most jurisdictions. These
    changes allow these sectors, which possess large amounts of highly
    sensitive and personal information, to use products that will protect
    the privacy of their clients. The Administration also expanded its
    policy to permit recoverable exports, such as encryption systems
    managed by network administrators, to foreign commercial firms. We
    learned about these systems through our dialogue with industry.
    According to industry, such systems are demanded by the market today
    and are in use. They are also largely consistent with the needs of law
    enforcement.
        The Department, in conjunction with the rest of the Administration,
    intends to continue our dialogue with industry, and will evaluate the
    export control process on an ongoing basis in order to ensure that the
    balance of interests remains fair to all concerned. We agree that there
    are a wide range of national interests that must be supported,
    including U.S. industry competitiveness. Hence, we are committed to
    continued review and dialogue with industry.
        At the same time, we must recognize that market forces will only
    take us so far. To the extent that criminal activity, such as terrorism
    or child pornography, occurs outside the business environment,
    criminals would rather lose data than have it seized by law
    enforcement. Thus, more must be done. Therefore, the Department of
    Justice is also trying to address the threat to public safety from the
    widespread use of encryption by enhancing the ability of the Federal
    Bureau of Investigation and other law enforcement entities to obtain
    the plaintext of encrypted commu-
    nications. Among the initiatives is the funding of a centralized
    technical resource within the FBI. This resource, when fully
    established, will support federal, state, and local law enforcement in
    developing a broad range of expertise, technologies, tools, and
    techniques to respond directly to the threat to public safety posed by
    the widespread use of encryption by criminals and terrorists. It will
    also allow law enforcement to stay abreast of rapid changes in
    technology. Finally, it will enhance the ability of law enforcement to
    fully execute the wiretap orders, search warrants, and other lawful
    process issued by courts to obtain evidence in criminal investigations
    when encryption is encountered. However, we must recognize that these
    efforts--while critical--do not (like market forces) alone provide an
    adequate solution to the encryption problem, as the widespread use of
    non-recoverable encryption by criminals would quickly overwhelm any
    possible law enforcement technical response.

                                THE PROTECT ACT

        In light of the above, the proposed Promote Reliable On-Line
    Transactions to Encourage Commerce and Trade Act raises several
    concerns from the perspective of the Department of Justice. First, the
    Act may impede the voluntary development of products that could assist
    law enforcement in obtaining access to plaintext. The Administration
    believes that the development of such products is important for a safe
    society. For example, the Act might preclude the United States
    government from utilizing useful and appropriate incentives to develop
    or use key recovery techniques, such as purchasing key recovery
    products for its own use and supporting pilot projects that demonstrate
    the viability of key recovery.
        Second, the Act also could impair the government's ability to
    engage in secure electronic commerce. We are concerned that the breadth
    of the language in subsection 202(c) may limit the ability of an agency
    to require a certain type of authentication mechanism for transactions
    between the public and the government. (For example, in the context of
    an electronic filing of a regulatory report, a tax return, or an
    application for benefits, authentication of the filer's identity is
    critical, including for any subsequent enforcement action.) This
    concern is raised because the definition of ``encryption'' includes the
    use of mathematical formulas to preserve not only confidentiality, but
    also integrity or authenticity.
        Third, the PROTECT Act places responsibility for developing
    techniques for obtaining lawful access to the plaintext of
    communications and data in the National Institute for Standards and
    Technology (NIST). As I noted above, the Department of Justice has
    already begun to create a centralized technical resource within the FBI
    to develop a broad range of expertise, technologies, tools, and
    techniques to respond to the use of encryption by criminals and
    terrorists. In my view, the responsibility for developing such tools
    and techniques should in this case lie with law enforcement, because it
    is law enforcement that has the operational expertise to understand the
    requirements for such tools and techniques to be effective. Moreover,
    it is law enforcement that will actually have to put the techniques
    into practice. Instead of conferring this new responsibility on NIST, I
    would request that Congress continue to support our efforts to develop
    technical expertise within the law enforcement community.
        Fourth, we share the deep concern of the National Security Agency
    that the proposed PROTECT Act would harm national security and public
    safety interests through the liberalization of export controls far
    beyond our current policy. Among other decontrols, the proposed Act
    provides that a product is to be exportable if a product of equivalent
    strength or key length will be available outside the United States in
    the next 12 months--even if the product of supposedly equivalent
    strength is intended for different uses, is not user-friendly or widely
    used, is not cost-competitive, or does not present the same threats to
    national security. We are concerned that this considerable decontrol of
    robust encryption will cause in the near term the easy acquisition of
    robust encryption products by terrorist organizations and international
    criminals and frustrate the ability of law enforcement to combat these
    problems internationally. Moreover, the structure and functions of the
    proposed Encryption Export Advisory Board raise concerns under
    separation of powers principles and the Appointments Clause.
        It is also important to consider that our allies concur that
    unrestricted export of encryption poses a significant risk to national
    security, especially to regions of concern. As recently as December
    1998, the thirty-three members of the Wassenaar Arrangement reaffirmed
    the importance of export controls on encryption for national security
    and public safety purposes and adopted agreements to enable governments
    to review exports of hardware and software with a 56-bit key length and
    above and mass-market products above 64 bits, consistent with national
    export control procedures. Thus, the elimination of U.S. export
    controls, as provided by the proposed Act, would severely hamper the
    international community's efforts to combat such international public
    safety concerns as terrorism, narcotics trafficking, and organized
    crime.
        In light of these factors, we believe that the Administration's
    more cautious balanced approach is the best way to protect our
    commercial interests, including our interest in ensuring the success of
    U.S. industry and electronic commerce, while simultaneously protecting
    law enforcement and national security interests. We believe that
    legislation that eliminates or substantially reduces export controls on
    encryption could upset that delicate balance and is unwise.
        The recent decision of the United States Court of Appeals for the
    Ninth Circuit in Daniel Bernstein v. United States Department of
    Justice and United States Department of Commerce has not changed our
    view that legislation eliminating or substantially reducing export
    controls is contrary to our national interests. The Department of
    Commerce and the Department of Justice are currently reviewing the
    Ninth Circuit's decision in Daniel Bernstein v. United States
    Department of Justice and United States Department of Commerce, and we
    are considering possible avenues for further review, including seeking
    a rehearing of the appeal en banc in the Ninth Circuit. In the interim,
    the regulations controlling the export of encryption products remain in
    full effect, even as to Professor Bernstein's own software.
        In sum, we as government leaders should embark upon the course of
    action that best preserves the balance long ago set by the Framers of
    the Constitution, preserving both individual privacy and society's
    interest in effective law enforcement. We should promote encryption
    products which contain robust cryptography but that also provide for
    timely and legal law enforcement access to encrypted evidence of
    criminal activity. We should also find ways to support secure
    electronic commerce while minimizing risk to national security and
    public safety. This is the Administration's approach. We look forward
    to working with this Committee as it enters the markup phase of this
    bill.

        Senator Burns. Thank you very much. We will get into some
    questions this morning in a few moments.
        We welcome this morning Barbara McNamara, Deputy Director,
    National Security Agency. Thank you for coming this morning.

      STATEMENT OF BARBARA A. McNAMARA, DEPUTY DIRECTOR, NATIONAL
                            SECURITY AGENCY

        Ms. McNamara. Thank you, Mr. Chairman, members.
        Senator Burns. Pull up that microphone a little. You have
    such a sweet, soft voice.
        Ms. McNamara. Thank you, Mr. Chairman. There are other
    people in this room who would probably take issue with that
    comment, but I am pleased to hear it.
        Senator Burns. They are not the chairman.
        Ms. McNamara. But thank you very much, and it is a pleasure
    to be here today to talk about this particular bill and its
    impact on national security from NSA's standpoint.
        NSA plays a critical role in our national security. We
    intercept and analyze the communications signals of foreign
    adversaries to produce critically unique and actionable
    intelligence reports for our national leaders and military
    commanders. Very often time is of the essence. Intelligence is
    perishable. It is worthless if we cannot get it to the
    decision-maker in time to make a difference.
        Signals intelligence proved its worth in World War II when
    the United States broke the Japanese naval code and learned of
    their plans to invade Midway Island. This significantly aided
    the U.S. defeat of the Japanese fleet and helped shorten the
    war. Today NSA is providing that same kind of intelligence
    support to our troops in the former Yugoslavia and other
    locations around the world wherever U.S. military forces are
    deployed.
        Demands on NSA for timely intelligence have only grown
    since the breakup of the Soviet Union and have expanded into
    national security areas of terrorism, weapons proliferation,
    and narcotics trafficking. Currently many of the world's
    communications are unencrypted. If not controlled, encryption
    will spread and be widely used by foreign adversaries that have
    traditionally relied upon unencrypted communications. As a
    result, much of the crucial information we are able to provide
    today could quickly become unavailable to U.S. decision-makers.
        As you review the PROTECT Act, it is very important that
    you understand the significant effect certain provisions of
    this bill will have on national security. In particular, NSA is
    concerned about the establishment of an Encryption Export
    Advisory Board heavily weighted to private sector
    representation. This effectively cedes control over U.S. export
    policy to the private sector.
        Furthermore, the board is to base its recommendation for
    export on the foreign availability or public availability of
    comparable products. In the interests of national security,
    encryption export policy should not and cannot be based solely
    on foreign availability.
        The PROTECT Act calls for the export of a product greater
    than 64 bits if it will generally be widely available from a
    foreign supplier within the next 12 months. Any policy based on
    the foreign or public availability of a comparable product,
    especially a year in advance of its actual appearance in the
    marketplace, will force administration policy to be driven by
    unfounded market trends without consideration of national
    security or foreign policy interests.
        Foreign products are often not as widely used as reported,
    as secure as advertised, or as easy to use for lack of an
    infrastructure as represented. In many cases, a foreign
    encryption product is subject to the export controls of the
    country in which it is manufactured. In the case of the other
    32 Wassenaar nations, an encryption product is held to the same
    or similar standards as U.S. products.
        In addition, there are other important concerns that must
    be taken into consideration when deciding if a product should
    be exported, such as to whom the product is exported and for
    what purpose. In that regard, the PROTECT Act also eliminates
    the end user reporting that is so valuable to national
    security.
        The PROTECT Act permits strong encryption products to be
    approved under a license exception for export to so-called
    ``trustworthy entities and regions'' without prior government
    knowledge of intended end users. These include any foreign
    partners of U.S. companies, other governments, and almost any
    foreign commercial firm in any country. Some end users could in
    fact be targets of national security interests, such as
    narcotics traffickers.
        The PROTECT Act also automatically decontrols the export of
    strong encryption in the form of systems using the Advanced
    Encryption Standard to any destination upon adoption of AES,
    but at least by January 1, 2002. While current U.S. policy has
    opened up many sectors in many nations, it has done this in a
    thoughtful manner that miniminizes the risks to important
    national security interests. The PROTECT Act upsets this
    delicate balance by widely expanding exports without due
    consideration to national security.
        Finally, the PROTECT Act's 15-day technical review period
    is too rigid to permit a meaningful technical review. The
    government needs the opportunity to review a proposed export to
    assure it is compatible with U.S. national security interests
    and requires the ability to deny an export application if
    national security concerns are not adequately addressed.
        The ability to know what is being considered for export is
    a key part of U.S. export control policy. In some cases today,
    this process takes longer than 15 days because insufficient
    information is provided as part of the initial application.
        Let me make it clear. We want U.S. companies to effectively
    compete in world markets. In fact, it is something that we
    strongly support as long as it is consistent with national
    security needs.
        In summary, the PROTECT Act will harm national security. It
    will make NSA's job of providing critical actionable
    intelligence to our leaders and military commanders difficult,
    if not impossible, thus putting our Nation's security at
    considerable risk. The United States cannot have an effective
    decision-making process or a strong fighting force or a
    responsive law enforcement community or a strong
    counterterrorism capability unless the information required to
    support them is available in time to make that difference.
        Thank you, gentlemen.
        [The prepared statement of Ms. McNamara follows:]

     Prepared Statement of Barbara A. McNamara, Deputy Director, National
                                Security Agency

        Mr. Chairman, thank you for giving me the opportunity today to
    discuss the important issue of encryption. I will be discussing the
    national security needs for export controls on encryption and why we
    oppose legislation that would effectively lift those controls. I will
    then address specific concerns NSA has with provisions of the PROTECT
    Act. However, I should like to begin by briefly introducing the
    National Security Agency (NSA) and its mission.
        The National Security Agency was founded in 1952 by President
    Truman. As a separately organized agency within the Department of
    Defense, NSA provides signals intelligence to a variety of users in the
    Federal Government and secures information systems for the Department
    of Defense and other U.S. Government agencies. NSA was designated a
    Combat Support Agency in 1988 by the Secretary of Defense in response
    to the Goldwater-Nichols Department of Defense Reorganization Act.
        The ability to understand the secret communications of our foreign
    adversaries while protecting our own communications--a capability in
    which the United States leads the world--gives our nation a unique
    advantage. The key to this accomplishment is cryptology, the
    fundamental mission and core competency of NSA. Cryptology is the study
    of making and deciphering codes, ciphers, and other forms of secret
    communications. NSA is charged with two complementary tasks in
    cryptology: first, exploiting foreign communications signals and
    second, protecting the information critical to U.S. national security.
    By ``exploitation,'' I am referring to signals intelligence, or the
    process of deriving important intelligence information from foreign
    communications signals; by ``protection'' I am referring to providing
    security for information systems. Maintaining this global advantage for
    the United States requires preservation of a healthy cryptologic
    capability in the face of unparalleled technical challenges.
        It is the signals intelligence (SIGINT) role that I want to address
    today. Our principal responsibility is to ensure a strong national
    security environment by providing timely information that is essential
    to critical military and policy decision making. NSA intercepts and
    analyzes the communications signals of our foreign adversaries, many of
    which are guarded by codes and other complex electronic
    countermeasures. From these signals, we produce vital intelligence
    reports for national deci-
    sion makers and military commanders. Very often, time is of the
    essence. Intelligence is perishable; it is worthless if we can not
    provide it in time to make a
    difference in rendering vital decisions.
        For example, SIGINT proved its worth in World War II when the
    United States broke the Japanese naval code and learned of their plans
    to invade Midway Island. This intelligence significantly aided the U.S.
    defeat of the Japanese fleet. Subsequent use of SIGINT helped shorten
    the war. NSA continues today to provide vital intelligence to the
    warfighter and the policy maker in time to make a difference for our
    nation's security. Demands on us in this arena have only gown since the
    break-up of the Soviet Union and have expanded to address other
    national security threats such as terrorism, weapons proliferation, and
    narcotic trafficking, to name a few.
        Because of these growing serious threats to our national security,
    care must be taken to protect our nation's intelligence equities.
    Passage of legislation that decontrols the export of strong encryption
    will significantly harm NSA's ability to carry out our mission and will
    ultimately result in the loss of essential intelligence reporting. This
    will greatly complicate our exploitation of foreign targets and the
    timely delivery of intelligence to decision makers because it will take
    too long to decrypt a message--if indeed we can decrypt it at all.
        Today, many of the worst's communications are unencrypted.
    Historically, encryption has been used primarily by governments and the
    military. It was employed for confidentiality in hardware-based systems
    and was often cumbersome to use. As encryption moves to software-based
    implementations and the infrastructure develops to provide a host of
    encryption-related security services, encryption will spread and be
    widely used by other foreign adversaries that have traditionally relied
    upon unencrypted communications. The decontrol of encryption exports
    would accelerate the use of encryption by many of these adversaries and
    as a result, much of the crucial information we are able to gather
    today could quickly become unavailable to us. National security must
    have an opportunity to conduct a meaningful review of encryption
    products prior to their export. In the past, this review process has
    provide us with valuable insight into what is being exported, to whom,
    and for what purpose. Without this review and the ability to deny an
    export application, it will be impossible to control exports of
    encryption to individuals and organizations that threaten the United
    States. For instance, decontrol will undermine international efforts to
    prevent terrorist attacks, and catch terrorists, drug traffickers, and
    proliferators of weapons of mass destruction.
        Please do not confuse the needs of national security with the needs
    of law enforcement. The two sets of interests and methods vary
    considerably and must be addressed separately. The law enforcement
    community is primarily concerned about the use of non-recoverable
    encryption by persons engaged in illegal activity. At NSA, we are
    primarily focused on preserving export controls on encryption to
    protect national security.
        While our mission is to provide intelligence to help protect the
    country's security, we also recognize that there must be a balanced
    approach to the encryption issue. The interests of industry and privacy
    groups, as well as of the Government, must be taken into account.
    Encryption is a technology that will allow our citizens to fully
    participate in the 21st Century world of electronic commerce. It will
    enhance the economic competitiveness of U.S industry. It will combat
    unauthorized access to private information and it will deny adversaries
    from gaining access to U.S. information wherever it may be in the
    world.
        To promote this balanced approach, we are engaged in an ongoing and
    productive dialogue with industry. The recent Administration update to
    the export control regulations addresses many industry concerns and has
    significantly advanced the ability of U.S. vendors to participate in
    overseas markets. Of equal significance, the Wassenaar nations,
    representing most major producers and users of encryption, agreed
    unanimously in December 1998 to control strong hardware and software
    encryption products. The Wassenaar Agreement clearly shows that other
    nations agree that a balanced approach is needed on encryption policy
    and export controls so that commercial and national security interests
    are addressed. Both are positive developments because they open new
    opportunities for U.S. industry while still protecting national
    security. These are examples of the kinds of advances possible under
    the current regulatory structure, which provides greater flexibility
    than a statutory structure to adjust export controls as circumstances
    warrant in order to meet the needs of Government and industry. We want
    U.S. companies to effectively compete in world markets. In fact, it is
    something we strongly support as long as it is done consistently with
    national security needs NSA supports the recent updates to the
    Administration's policy. The export provisions were carefully designed
    to open up large commercial markers while tying to minimize potential
    risk to national security. We believe significant progress was made.
        As you review the PROTECT Act, it is very important that you
    understand the significant effect certain provisions of this bill will
    have on national security. In particular, NSA is concerned about the
    establishment of an Encryption Export Advisory Board, heavily weighted
    to private sector representation. This effectively cedes control over
    U.S. encryption export policy to the private sector. Furthermore, the
    Board is to base its recommendation for export on the foreign
    availability or public availability of comparable products. In the
    interests of national security, encryption export policy should not be
    based solely on foreign availability or public availability. The
    PROTECT Act calls for the export of a product greater than 64-bits if
    it will be generally or widely available from a foreign supplier within
    the next twelve months. Any policy based on the foreign or public
    availability of a comparable product, especially a year in advance of
    its actual appearance in the marketplace, will force Administration
    policy to be driven by unfounded market trends without consideration of
    national security or foreign policy interests.
        Foreign products are often not as widely used as reported, as
    secure as advertised, or as easy use (for lack of an infrastructure) as
    represented. In many cases, a foreign encryption product is subject to
    the export controls of the country in which it is manufactured. In the
    case of the other 32 Wassenaar nations, an encryption product is held
    to the same, or similar, standards as U.S. products. In addition, there
    are other important concerns that must be taken into consideration when
    deciding if a product should be exported, such as to whom the product
    is exported, and for what purpose. In that regard, the PROTECT Act also
    eliminates the end-user reporting that is so valuable to national
    security.
        The PROTECT Act permits strong encryption products to be approved
    under a license exception or export to so-called ``trustworthy''
    entities and regions without prior government knowledge of intended
    end-users. These include any foreign partners of U.S. companies, other
    governments, and almost any foreign commercial firm in any country.
    Some end-users could, in-fact, be targets of national security
    interest, such as narcotics traffickers. The PROTECT Act also
    automatically decontrols the export of strong encryption in the form of
    systems using the Advanced Encryption Standard (AES) systems to any
    destination, upon the adoption of AES, but at least by January 1, 2002.
    While current U.S. policy has opened up many sectors in many nations,
    it has done this in a thoughtful manner that minimizes the risk to
    important national security interests. The PROTECT Act could upset this
    delicate balance by widely expanding exports without due consideration
    to national security.
        Finally, the PROTECT Act's 15-day technical review period is too
    rigid and too short to permit a meaningful technical review. The
    Government needs the opportunity to review a proposed export to assure
    it is compatible with U.S. national security interests and requires the
    ability to deny an export application if national security concerns are
    not adequately addressed. The ability to know what is being considered
    for export is a key part of U S. export control policy. In some cases
    today, this process takes longer than 15 days because insufficient
    information is provided as part of the initial application.
        In summary, the PROTECT Act will harm national security by making
    NSA's job of providing vital intelligence to our leaders and military
    commanders difficult, if not impossible, thus putting our nation's
    security at some considerable risk. Our nation cannot have an effective
    decision-making process, a strong fighting force, a responsive law
    enforcement community, or a strong counterterrorism capability unless
    the intelligence information required to support them is available in
    time to make a difference. The nation needs a balanced encryption
    policy that allows U.S. industry to continue to be the world's
    technology leader, but that policy must also protect our national
    security interests.
        Thank you for the opportunity to address the Committee.

        Senator Burns. Thank you.
        I will start it off here. I just want to ask the Deputy
    Director, why is it that we have not been very successful in
    our negotiations with other countries to come up with some kind
    of international policy with regard to the use of or the export
    of robust encryption? In other words, we have been talking to
    our, I think he is related to an ambassador, Aaron, and we have
    been told that countries are moving to export controls,
    especially in the European Union and around the country, of
    which no agreement to my knowledge and we have drawn no
    conclusions to move in that direction in the last 4 or 5 years
    ever since we have been doing this.
        Ms. McNamara. I believe we have had success in that, Mr.
    Chairman last December--well, let me begin by saying, last
    September the U.S. Government, the U.S. administration, relaxed
    export controls substantially, to include the 128-bit
    encryption that Senator Ashcroft was addressing earlier and to
    cover the firms in his home State that actually have locations
    overseas, to allow them to be able to use very strong
    encryption, 128-bit, to protect theirs.
        Now, in December we took the U.S. policy to the Wassenaar
    countries. Those are 33 nations who are the principal producers
    of strong encryption around the world. That Arrangement--we
    took the U.S. relaxation strategy to that group of people and
    what we did at the time successfully was to close a loophole
    that the Wassenaar Arrangement had previously opened which was
    providing an unlevel playing field and disadvantaging U.S.
    software companies.
        So last December we sought and got agreement by 33 nations
    to close that loophole. The Arrangement allows for all 33 of
    those nations to put in place, those who already did not have
    in place, export controls that are essentially the same level
    as the controls that the U.S. administration relaxed to last
    September.
        With regard to what is going on in the European Union, we,
    the Administration--and I will turn this over to Secretary
    Reinsch to follow up on--but we are keeping our eye very
    closely on what is going on today in the European Union and
    what those foreign governments are thinking about in terms of
    encryption policies with regard to Europe. It is never our
    intent to allow anything to occur by foreign governments that
    would disadvantage U.S. industry.
        Senator Burns. Senator Ashcroft.
        Senator Ashcroft. Secretary Reinsch, would you say that
    128-bit encryption is widely available and widely used today?
        Mr. Reinsch. No, I would say that it is available. Whether
    it is widely available is a judgment call. If it is not widely
    available today, it will be soon. It is becoming the state-of-
    the-art, if you will, so I think it is a matter of time, and I
    would not have a big argument with you over the adjective.
        Whether it is widely used or not is a more complicated
    question, and I think Ms. McNamara commented on that in her
    statement. We believe that, for the reasons she cited, use is
    significantly less than the existence of the products.
        Senator Ashcroft. Do you know of any case where there has
    been a prosecution or an enforcement action taken against
    people who have, or criminals who have used encryption outside
    the range of encryption that has been provided as acceptable?
    It would be an export, I guess, enforcement because the use
    would be a violation of the export regulations. Have you
    enforced this against anyone?
        Mr. Reinsch. Yes, sir.
        Senator Ashcroft. How many cases have there been?
        Mr. Reinsch. I will have to get you the number. We have a
    number of investigations ongoing, which of course we would not
    want to comment on. We have had a number of--we will have to
    get you the number. I would say single digits at this point.
        Senator Ashcroft. But it is only illegal to export the
    encryption? It is not illegal to import the encryption?
        Mr. Reinsch. That is correct, there are no restraints on
    domestic use or on imports.
        Senator Ashcroft. So that it is a one way? In other words,
    if terrorists conspire overseas to do something, like to effect
    a terrorist act here in the United States, they can send
    material in that is encrypted to the United States?
        Mr. Reinsch. Well, we do not control in any event messages
    or information that is encrypted. What is controlled is the
    encryption that one would employ.
        Senator Ashcroft. Is the sending of an encrypted message
    from the United States to another jurisdiction, does that
    qualify as an export of the encryption?
        Mr. Reinsch. No.
        Senator Ashcroft. It does not. So that--
        Mr. Reinsch. Unless the message contains an encryption
    algorithm which is controlled. But if I sent--if you were in
    Bonn and I sent you an e-mail and it is encrypted, no.
        Senator Ashcroft. So it is true that the person or the
    terrorist organization which buys its encryption from Siemens
    in Germany can operate say in the Middle East and send messages
    back and forth to the United States, having imported the
    algorithm to the United States from Germany and have taken the
    German algorithm to the Middle East, and they can communicate
    back and forth without violating any of our laws currently?
        Mr. Reinsch. Yes. There is no--it was never the intent of
    our policy to try to deal with that.
        Senator Ashcroft. Well, it seems to me that that is the
    threat that you keep saying that we are avoiding by having this
    policy, and yet you just described that it is not our intent to
    stop that threat with our policy. To use that as the basis for
    not allowing our companies to compete, at a time when you say
    we do not care if other companies compete in that way, gets to
    the heart of what confounds me about our policy here.
        We have basically said every other country that wants to
    can go ahead and do this in the world and terrorists can use it
    and have complete access to the utilization of this encrypted
    for all the bad reasons, but American firms cannot be involved
    in exporting it. It just seems that is where the disconnect
    comes with this Senator and that is what I am struggling with.
        You said that section 102 incentives--provides an incentive
    to move the development of encryption offshore in this bill.
        Mr. Reinsch. Yes, sir.
        Senator Ashcroft. It seems to me that we have just
    described the Administration policy as a monumental incentive
    to move encryption offshore because we have indicated that
    offshore-produced encryption can be used both to send and
    receive robust encrypted material from the United States, to
    and from, without violating the policy or the law.
        Mr. Reinsch. Well, if I may comment, you have gone to one
    of the core issues, and I think it is an important dialogue to
    have. Let me make a small point first and then the larger
    point.
        On the small point, the difference between section 102 and
    our policy is that our policy now would not permit a company to
    transfer encryption technology or production technology or
    encryp-
    tion algorithm overseas for production purposes. Section 102
    would, and that is the distinction we are making.
        But the larger point you are making is a more important
    one, and let me say two things about that, if I may. One is
    that I think that, as Director McNamara acknowledged in her
    testimony, this is not a policy and there probably is no policy
    that is going to be air-tight with respect to our ability to
    prevent the kinds of people you cited, terrorists in your
    example, from obtaining and using robust encryption.
        We do not believe that we can deal with every situation.
    The goal of our policy is to try to promote use in the
    marketplace of products that are law enforcement and national
    security-friendly, recognizing that a determined, committed
    terrorist who wants to use encryption can find ways around such
    a policy. But we believe by making, if we can, through market
    forces, the market standard, if you will, products that are
    more friendly to the interests of my two colleagues, what we
    will do over time is have more people, including some of the
    people that you are talking about, using this kind of
    encryption, which gives us some advantages. That is not going
    to happen in every case. We do not believe we can make it
    happen in every case.
        Now, the second point that relates to what you said is this
    question of foreign availability, and I would like to comment
    on that because you commented in your opening statement on this
    as well. I think what Director McNamara said was that we do not
    want foreign availability to be the sole criterion.
        Let me say that if it were the sole criterion for export
    control policy, we would not have controls on machine tools, we
    would not have controls on biotoxins, we would not have
    controls on chemical weapons precursors, semiconductor
    manufacturing technology, or computers at virtually any level.
    There are very few technologies over which the United States
    has a monopoly any longer, and you are quite right in saying
    that encryption is not one of them, but neither are the ones
    that I have mentioned.
        If we are going to say that foreign availability ought to
    be our single standard or it ought to be the dispositive
    standard, the net result of that is I am not going to have very
    much to do in my job. It is our belief that you need to balance
    foreign availability considerations, obviously, and we do weigh
    foreign availability in our judgments without question, and
    Director McNamara just commented on why this is a particular
    issue in the European Union case.
        But at the end of the day--and the Congress has been
    telling me this for 12 months with respect to satellites, with
    respect to computers, with respect to machine tools, that
    foreign availability is not the last word on the subject. Now,
    I think that it is ironic, to say the least, if the Congress is
    going to turn around on encryption and say that foreign
    availability is the last word on the subject.
        Ms. McNamara. May I follow up, please? The fact that one
    terrorist is using strong encryption that they either bought in
    the United States and took overseas with them or bought in
    Europe and is using it to communicate with people in this
    country is not what is of concern to us. On an individual
    basis, the U.S. Government I believe is smart enough to figure
    out a way to solve that particular problem or address that
    particular problem.
        What we are talking about here is the issue of putting in
    place legislation which would allow the ubiquitous use of
    encryption around the world, independent of individuals. We can
    always solve an individual problem with an individual solution.
    But the subject of ubiquitous encryption has dramatic impact on
    our ability to do our national security business, and let me
    offer, if the Senator wishes, a classified presentation on some
    of the subjects that I cannot address in this particular room.
        Thank you.
        Senator Ashcroft. Mr. Chairman, may I just clarify an item
    or two?
        Senator Burns. You may.
        Senator Ashcroft. Because these remarks have been
    extensive.
        Mr. Reinsch. Sorry about that.
        Senator Ashcroft. No, that is all right. I am pleased to
    have these remarks.
        Mr. Reinsch. You wind me up and get me started. These
    things happen.
        Senator Ashcroft. Well, thank you. Especially when I think
    you are supporting my position, I welcome your remarks.
        Mr. Reinsch. Then I misspoke. [Laughter.]
        Senator Ashcroft. The Director just indicated that a person
    could buy and take overseas robust encryption from the United
    States and use it overseas. Is that considered an export?
        Mr. Reinsch. Yes, that would not be permitted.
        Senator Ashcroft. Well then, you disagree with her that a
    person can do that legally?
        Ms. McNamara. I did not say it was legal. I do not think we
    will ever prevent everybody from committing a crime.
        Senator Ashcroft. OK. Well, I thought we were--I would just
    like to indicate that I did not raise the issue of terrorists.
    I am not interested in protecting terrorists here. I am
    interested in protecting our industry. But every time I want to
    protect the industry, one of you guys brings out the terrorist
    card and you throw it on the table and you say: ``We cannot
    protect America because there are these evil people out there
    that are going to encrypt messages.''
        So I am interested in protecting U.S. companies, and I am
    also interested in protecting individuals. I guess some time I
    would like to have an answer why big companies and big business
    should have better, a greater right to privacy than individuals
    should in this country, and that commercial speech should be
    entitled to more integrity and privacy than individual speech.
        So the idea of ubiquitous encryption--which I am charmed by
    that phrase. I mean, I am going to try to use it as often as I
    can.
        Ms. McNamara. May I retract that from the record?
        Senator Ashcroft. I thought it might be a description of
    Senate speeches, but----[Laughter.]
        I think ubiquitous encryption is probably what we are
    headed toward in the marketplace of the world, and I think it
    is likely to be based on software developed outside the United
    States if we make it impossible for our software producers to
    have robust encryption here, because I think people are going
    to prefer to have privacy in their communications. I think most
    of us do. Very few of us like the idea of our calls or our
    communications being intercepted.
        We are aware of technology that makes heard those things
    which were not heard. A whisper is no longer a whisper; it can
    become a shout with the right listening device. What we once
    thought was a secure transmission is now available. We want, we
    yearn for security as individuals, and the idea somehow that
    big business is entitled to encryption and that individuals are
    not in their communication is one of the hurdles that we have
    to kind of come together on somehow to solve this problem.
        Thank you, Mr. Chairman.
        Senator Burns. Senator Cleland, do you have a statement? I
    am sorry. We have had some arrivals here.

              STATEMENT OF HON. MAX CLELAND, U.S. SENATOR
                              FROM GEORGIA

        Senator Cleland. Mr. Chairman, I would just like my
    ubiquitous opening statement to be----
        Ms. McNamara. I think I am going to regret I ever used that
    term.
        Senator Cleland [continuing]. Submitted, without objection.
        Senator Burns. I want somebody to spell it.
        Senator Ashcroft. The National Spelling Bee concluded last
    week.
        Senator Cleland. Thank you all very much.
        I am an old Army signal officer and I am a little bit
    familiar with encryption and the power of encryption, both for
    the good guys and the bad guys. Mr. Robinson, I would like for
    you to help me a little bit. I am just trying to learn some new
    terminology here about recovery. Apparently for law enforcement
    recovery is a key item, so nonrecoverable encryption becomes a
    problem.
        Recovery of what? How can you recover something that is
    encrypted, or is that the issue itself?
        Mr. Robinson. Well, I think it is, Senator, in a sense.
    What we are really interested in is maintaining our ability--
    when we have probable cause and we go to court and get an order
    for electronic surveillance through a careful process that
    Congress has set out--to overhear communications. If what we
    get at the end of the road is encrypted, unrecoverable
    gibberish, we have a serious law enforcement problem.
        I think that is true also of stored electronic data.
    Increasingly, as people store their records in electronic form,
    on laptops and others, we can get a search warrant--and
    frankly, I agree with Senator Ashcroft. I think privacy
    interests are very, very important and I think people have a
    right to privacy. We are not looking for an opportunity to
    evade or invade individuals' or companies' rights to privacy,
    and that is why I said in my statement I think it is important
    to have robust encryption.
        But in those situations in which we have probable cause and
    we have procedures whereby we can go to court and get a wiretap
    order, a search warrant, we are going to be substantially
    handicapped if we do not try to contribute to an infrastructure
    that allows us to get plaintext out of these materials. That is
    our objective.
        The how is a technological question. As the chairman
    indicated, I think we need the resources to try to solve this
    problem of what do we do with encrypted evidence of criminal
    activity. We have got to solve that problem, and we hope that
    there will be an infrastructure, a contribution to an
    infrastructure, that will allow us to get plaintext when law
    enforcement needs to have it to prevent crimes from occurring,
    to investigate them, and then to put the evidence in.
        So that is essentially our equity, I think, in this debate.
        Senator Cleland. Help me out a little bit here. If we ease
    up on controls regarding exports of software, encryption
    software, that expands the bits, namely expands I guess the
    capability of data or information being encrypted, if we ease
    up on controls that allow for those software packages which
    allow for expansion of the bits or expansion of encryption to
    be sold abroad, then what you are saying is that we might get
    that back as a pie in the face. In other words, we might get
    that back in a greater difficulty for law enforcement to
    ``recover'' information; is that what I am hearing you say?
        Mr. Robinson. Yes, I think that is true.
        Senator Cleland. Ms. McNamara, in terms of the pie in the
    face for you, that would be the lesser ability to, shall we
    say, to use the terminology, recover, shall we say,
    intelligence to then pass on to our commanders in the field?
    That is what we are talking about?
        Ms. McNamara. That is an accurate characterization of the
    situation, Senator.
        Senator Cleland. Mr. Reinsch, it seems like to me that this
    dovetails somewhat into the issue that we are all struggling
    with. I am on the Governmental Affairs Committee and the Senate
    Armed Services Committee. We are struggling with the issue of
    American technology, sensitive American technology, winding up
    in the hands of others, the most recent example being the
    Chinese, not just the espionage of our nuclear secrets and
    missile technology, but some of the, shall we say, leaked
    technology on missile and satellite information that wound up
    in the hands of the Chinese.
        I would say that I was one of those who supported the
    licensing of this kind of technology to move from the Commerce
    Department to the State Department. I guess I am glad to see
    your bona fide concern, I think, in the Commerce Department
    about easing up on export controls on this sensitive
    information or this sensitive encryption capability.
        I gather that the Commerce Department is very sensitive to
    this, is that correct?
        Mr. Reinsch. Yes, and we would also say we were very
    sensitive in the satellite case as well, as I think I did say
    before your subcommittee when that first came up.
        But yes, the decisions we make--the export control system
    of the United States is based on, leaving aside short supply,
    which is not on the table, controlling exports for national
    security and foreign policy reasons. That is the filter through
    which every decision we make goes. One might agree or disagree
    with a particular decision, but clearly in this case national
    security is a paramount consideration for us.
        Senator Cleland. Mr. Robinson, could you share with me a
    little bit. Does the Justice Department have some role in being
    involved in improving the U.S. end user verification system for
    supercomputers and strong encryption products? Is that a role
    that you play?
        Mr. Robinson. Not directly, we do not. We are obviously
    concerned about the extent to which these issues interface with
    our ability to do our job.
        Mr. Reinsch. We do that, Senator.
        Senator Cleland. That is through you in the Commerce
    Department?
        Mr. Reinsch. Yes, end user visits, which are both pre- and
    post--that is, we do some in advance of making the decision
    about a license because we want to check out the bona fides of
    the end user, and post because we want to see if the item
    actually went where it was supposed to go and if it is being
    used as it was intended--has been an important enforcement tool
    for us for decades.
        It is not the only enforcement tool we use by any means,
    and it has its imperfections. It is also very expensive. I
    would say that in general Congress has been less than generous
    with the resources that it would take to do more.
        We have also been handicapped, frankly, on computers in
    specific, by a congressional requirement that we visit every
    one of them. This has forced us, for example, to visit
    subsidiaries of American companies who are using them, banks,
    companies that bought one computer and then 6 months later
    bought a second one; we have had to visit them twice. It has
    prevented our agents from doing what they do best, which is
    figuring out what the risks are and spending their
    investigatorial time and talent on the places that problems.
        We have had to check a lot that we think are not problems.
    When you see the report of our inspector general on this
    subject next week, I think that--I should not get into this in
    public, but I think that he will make a distinction between
    visits that are useful and visits that are not useful. We want
    to do more of the former.
        Senator Cleland. Thank you very much.
        In closing out my questions, Mr. Chairman--I know I am out
    of time here--Ms. McNamara, I gather that your message to us is
    that we should tread very softly on this issue of encryption
    and opening up or loosening up export controls because it does
    involve sensitive issues of national security?
        Ms. McNamara. Yes, sir.
        Senator Cleland. Thank you, Mr. Chairman.
        Senator Burns. Thank you.
        Senator Dorgan, you have just joined us. Do you have a
    small statement? I am going to turn the chairmanship over to
    Senator Frist--I have got an 11 o'clock that is sort of very
    important to me--if you would agree to do that. We have got one
    more panel to go, by the way.

            STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR
                           FROM NORTH DAKOTA

        Senator Dorgan. Mr. Chairman, I came late and I have to
    leave in a moment because of some other hearings, but I just
    want to make in 30 seconds a comment about all of this. I, as
    you know, worked with you in the last Congress to try to
    resolve some of these issues. These are very difficult issues.
        You raise questions that I think are very important
    questions. Yet the whole export control area is very difficult.
    What used to be a supercomputer is now a laptop, available to
    anybody, any time, anywhere in the world. So as we try to sift
    through all of these issues and consider national security
    concerns, we also have to deal with the reality of what is
    happening in the world.
        My hope is that we can find a resolution that is a
    thoughtful resolution, protecting our national security
    interests and at the same time recognizing what is happening in
    the rest of the world.
        I appreciate the attention Senator Burns has given to this
    over some long period of time, that this is not an easy issue,
    and he has spent a great deal of time on it.
        So thank you very much.
        Senator Burns. Thank you, Senator.
        Senator Frist, I am going to turn this over to you. I have
    an 11 o'clock. I have tried to wheedle out of that thing two or
    three times and I am not having any more luck now than I had
    yesterday.

              STATEMENT OF HON. BILL FRIST, U.S. SENATOR
                             FROM TENNESSEE

        Senator Frist [presiding]. Thank you, Mr. Chairman. Mr.
    Chairman before you leave, I would like unanimous consent to
    have my opening statement made a part of the record.
        Senator Burns. You are the chairman. You can do anything
    you want to.
        Senator Frist [presiding]. Thank you very much.
        First of all, I thank all three of you for being here. I
    have got a couple of other questions that I would like to just
    run through.
        Director McNamara, do the continued export restrictions on
    U.S. encryption products make sense when Wassenaar partners
    such as the U.K., France and Germany have established new
    policies encouraging their citizens to use strong encryption?
        Ms. McNamara. In terms of the strong use--the use of strong
    encryption by individual nations' citizens, we support strong
    use of encryption by U.S. citizens. We do believe that U.S.
    citizens are entitled to privacy for their own purposes.
        In terms of the export controls, however, there are
    agreements and there is compatibility and comparability between
    those export conditions that the United States has with the
    European partners that you mentioned. Now, there are
    discussions going on in Europe today. We have our eye on that.
    But when we relaxed last September, the European nations along
    with other members of the Wassenaar nations aligned their
    overarching documentation that their export control processes
    should be in line with ours now both in hardware and software.
        Senator Frist. Is progress being made there, if you look
    out?
        Ms. McNamara. Yes, yes. In terms of what we are looking at,
    we still have our eye on Europe. The Administration said last
    year when we did relax to those sectors and encryption bit
    lengths that we would review those again in September, and one
    of the ingredients in that review will clearly be what other
    foreign governments are doing.
        Let me state, though, for the record again, earlier I think
    it was Senator Ashcroft who said that we had--or perhaps it was
    Congressman Goodlatte when he was talking--that we had relaxed,
    the relaxation included going from 40 bits to 56 bits. That is
    clearly true, but in all of the sector relief that was given
    last year there is no bit length, as Secretary Reinsch said. It
    is 128-bits for use in banking, finance, commerce--sorry,
    online commerce, because it was recognition that e-commerce was
    a very important thing for U.S. companies and individuals to be
    able to have access to. So there is a large portion of that
    which is covered by 128-bit encryption.
        Senator Frist. Fine.
        Mr. Robinson, OECD, European Community; could you elaborate
    on our global partners' positions on recoverable encryption
    products and their regulations, and specifically address OECD
    as well as the European Community?
        Mr. Robinson. I think I would defer to the Secretary to
    give you a better answer than I.
        Mr. Reinsch. I can do that.
        Senator Frist. Mr. Secretary.
        Mr. Reinsch. Ambassador Aaron, who is the President's
    special envoy on this subject, has spent a lot of time with
    OECD members, I believe virtually all of whom are also members
    of what is known as the Wassenaar Arrangement, which is a
    multilateral export control regime that controls encryption
    items multilaterally. There are 33 nations in that regime,
    including Russia, including the NATO members, including all of
    the EU members, and a number of others.
        As Director McNamara has said and as I testified, we have
    had a good bit of success in that group harmonizing the export
    control policies of all 33 of those members. At the same time,
    the individual countries are developing encryption policies
    domestically, and they have wrestled with the same issues
    domestically that everybody else has wrestled with: Do we want
    to control imports, do we want to control domestic use, what do
    we want to permit to happen in our countries?
        There is a trend, I think it is fair to say, within the EU,
    which is the first place it would begin after here, away from
    key recovery, certainly away from controls on domestic use and
    in favor of allowing people within each of these countries to
    use whatever they want. There is, then, a trend away from what
    I would refer to as key escrow or key recovery, the idea that
    people mandatorily would have to provide a spare key with some
    third party entity, government or nongovernment.
        We have also taken the position that we do not want to do
    that as a mandatory step. We do see an environment for stored
    data in which people may want to do that voluntarily, and we
    have taken exceptions to provisions in some of the bills that
    we think would discourage it voluntarily.
        Most of our trading partners, whether you say OECD or the
    Wassenaar members or NATO, however you define them, are moving
    away from that kind of government involvement in the domestic
    marketplace. But at the same time they are all, on the export
    front, as near as we can tell, acting in a way that is
    generally consistent both with Wassenaar and with what we are
    doing.
        Senator Frist. Good. When we talk about appropriate
    agencies or parties to serve as key recovery agents, help me.
    What sort of appropriate agents or parties would that be?
        Mr. Reinsch. Well, mostly private parties, in fact I think
    exclusively private parties now. You need to think about it
    from the standpoint of another piece of this issue that is not
    on the table and should not be, which is the question of
    authentication and reliability for authentication. This is not
    a spare key issue, but it is a question of a public key
    infrastructure issue--if I want to send you a message, you want
    to have some certainty that the message you receive with my
    name on it came from me rather than from him or someone else,
    and I want to have some assurance that your response came from
    you and not someone who has intercepted it and is masquerading
    as you.
        That demands some authenticity and some certification that
    your message came from you. What we envision and in fact what a
    number of States have already addressed in their legislation is
    regulating the private entities that will provide that
    authentication function. They will not keep spare keys, because
    the last thing you want for authentication purposes is a spare
    key.
        But what is happening is that private parties are springing
    up that will provide essentially trust services and
    authentication services to warrant that my messages come from
    me and that you can have some confidence in that. In fact, I
    think there are probably some people in that business on one of
    the next panels, and you might want to pursue the technology
    with them.
        Senator Frist. Right. Any other comment on that, Mr.
    Robinson?
        Mr. Robinson. No, Senator.
        Senator Frist. Mr. Secretary, on the issue of research and
    development on computer security, you are against NIST's doing
    that?
        Mr. Reinsch. Not necessarily. I think Justice is.
        Senator Frist. Mr. Robinson.
        Mr. Robinson. Well, we are concerned that law enforcement
    be able to try to develop the techniques necessary to get
    plaintext because, frankly, we are the ones who are going to
    have to use them and we need to have the capacity to do so. We
    think it is critical to public safety and effective law
    enforcement when we encounter encrypted evidence of criminal
    activities to be able to figure out a way to turn that into
    real information, whether it is an audible transmission or
    stored electronic data. Without that capacity, obviously
    encryption in the wrong hands, as many things, can be a
    powerful tool to prevent law enforcement from preventing crimes
    and successfully investigating and prosecuting them. So that is
    a concern that we obviously have.
        Senator Frist. I guess then my question, and feel free to
    comment, is as we look at standardization of an advanced
    encryption system, whoever is doing that, if it is NIST, needs
    to be up to date with state-of-the-art right where we are. I
    guess it is not clear to me how if you put the research and the
    development in computer security with law enforcement, with the
    FBI, and then have NIST looking at the standardization, how
    they are really on top of things. Or is it both?
        Mr. Reinsch. If I could comment, one of my regrets this
    morning, Dr. Frist, was that I did not have an opportunity to
    bring with me a full and complete statement of NIST's views on
    that question. If I may, I would like to have them--what I will
    suggest to them is they might get in touch with you directly,
    knowing of your interest in the issue.
        They do what you are describing. They have an extensive
    computer security laboratory now. They have a lot of
    interaction with the private sector. They validate products
    that they test as a service to the private sector.
        I believe their view is that if the Justice Department
    wants to take the activity on, provided for in this bill, that
    that would be all right. If the committee wants to assign it to
    them, I am sure they would defer to the committee's judgment.
        But what I would prefer is to have them communicate with
    you directly.
        Senator Frist. Fine.
        Mr. Reinsch. I will arrange that.
        Senator Frist. Good.
        Well, thank you. We do have another panel. Would any of you
    like to make any closing statements at all?
        [No response.]
        Senator Frist. Thank you very, very much. We appreciate
    your being with us, and we will ask the second panel to come
    forward.
        I thank all three panelists for being with us. I will go
    ahead and do the introductions and then we will go in
    alphabetical order, I believe: Mr. David Aucsmith, Chief
    Security Architect, Intel Corporation; Mr. Jim Bidzos, Vice
    Chairman of the Board, Security Dynamics Technologies; and
    Professor Lance Hoffman, School of Engineering and Applied
    Science, Cyberspace Policy Institute.
        Welcome to each of you, and let us begin with Doctor--Mr.
    Aucsmith.

     STATEMENT OF DAVID AUCSMITH, CHIEF SECURITY ARCHITECT, INTEL
                              CORPORATION

        Mr. Aucsmith. Thank you, Mr. Chairman, for this opportunity
    to talk to you this morning about the need for fundamental
    reform of America's encryption policy. I am pleased to appear
    today on behalf of the Business Software Alliance, which
    together with ACP has been in the forefront of efforts to
    persuade the Government to adopt a new U.S. encryption policy.
        I am from Intel. Intel is the world's largest semiconductor
    manufacturer and a major supplier of information technology
    building blocks to the global computer and communications
    industry. We provide our customers with chips, printed circuit
    boards, assemblies, software--all the ingredients that you
    typically think of that go into a personal computer, servers,
    and workstations.
        Actually, my being here to speak on behalf of the Business
    Software Alliance should underscore the fact that encryption is
    both a software and a hardware issue. In fact, as a general
    note, 56-bit hardware products are currently excluded from the
    favorable treatment now given by the Administration. That
    applies only to software products.
        In 1998 we employed more than 40,000 people in the United
    States. We are headquartered in Santa Clara, CA, but have
    significant manufacturing facilities in a number of States,
    including Arizona, New Mexico, Oregon, California, and
    Massachusetts.
        We urge the committee to pass the PROTECT Act with further
    amendments that would make the bill more fully comport with
    technical and marketing realities. This morning I would like to
    briefly make five points which I believe should underpin our
    U.S. encryption policy.
        First: In an Internet economy, encryption is essential to
    all businesses, not just encryption business. I want to
    emphasize this point. While private sector interest in
    encryption export reform is generally characterized in terms of
    the competitiveness of American encryption products abroad, it
    has become a much larger issue for all American businesses.
        In this economy, every business is becoming an Internet
    business. It will affect all businesses. Cryptography has
    emerged as the essential building block for building trust in
    the open Internet. Without it, the hundreds of billions of
    dollars of e-commerce currently projected to occur by the year
    2002 will be at risk.
        Second: Encryption is vital to securing America's critical
    infrastructures. I participated in the Defense Science Board
    evaluation of America's critical infrastructures. We focused on
    the vulnerability of five critical infrastructures and
    concluded that encryption is absolutely essential in their
    protection.
        The security of any network is only as good as its weakest
    link. All wires have two ends, if you will. America's
    infrastructures cannot be protected if they are networked, as
    they will be, with foreign infrastructures that use weak
    encryption. That is why permitting exports of strong encryption
    helps to promote the national security.
        Third: The availability of encryption cannot be reasonably
    controlled. Cryptography is just mathematics. Information about
    cryptography is widely available from many sources and in many
    forms. It is the subject of numerous academic conferences. It
    is taught in universities throughout the world.
        Moreover, while developing good algorithms is extremely
    difficult, if you will, rocket science, implementing them is
    relatively easy once someone has developed them.
        Fourth: Government-required or mandated plaintext access
    will not work. While mandated plaintext access offers at first
    glance a solution to the Government's problems, it is not
    technically possible in most circumstances. It does not let law
    enforcement verify compliance with access requirements a priori
    and it does not give national security interests access to
    stored information.
        There is practically no commercial reason for storing
    communications keys and I believe the need for key recovery of
    stored data is overstated. To be blunt, Intel as a corporation
    does not plan to sell products incorporating key recovery, nor
    does it expect to implement a key recovery system for its own
    use.
        Fifth: The Government needs to find technological
    alternatives to meet its requirements for access to
    information. Intel agrees that access to data communications
    and stored data by law enforcement and intelligence communities
    is both legitimate and extremely important. Clearly, Congress
    needs to adequately fund the technical efforts of these
    agencies so they can meet the challenges of the next century.
        Industry supports additional funding. Industry can also
    provide assistance and is willing to do so. BSA has advocated
    that the U.S. Government should work cooperatively with our
    Nation's hardware and software manufacturers to develop the
    technical know-how that they need. Technical innovation is
    predominantly centered in the private sector. Only a
    government-industry cooperative exchange can effectively
    address the challenge of continued technological change.
        In conclusion, let me say that we strongly believe the
    PROTECT Act should be passed, but with further improvements.
    The PROTECT Act does not--I mean, the PROTECT Act does begin to
    realize the realities of mass market products. It eliminates
    reporting requirements for such products and grants export
    relief to those products at all horizontal layers of the
    information technology sector.
        But the Act still does not grant widespread exportability
    of mass market and publicly available encryption products, and
    there is a complicated bureaucratic process which must be
    pursued. Not until 2002 will American industry be able to
    widely export products that are now using what is basically the
    worldwide standard of 128 bits in the form of the Advanced
    Encryption Standard or its equivalent. We believe that it is in
    our national interest to permit such exportability now and we
    urge the committee to amend the bill accordingly.
        Thank you very much.
        [The prepared statement of Mr. Aucsmith follows:]

        Prepared Statement of David Aucsmith, Chief Security Architect,
                               Intel Corporation

        Thank you Mr. Chairman for the opportunity to talk to you this
    morning about the need for fundamental reform of America's encryption
    policy. I am pleased to appear today on behalf of the Business Software
    Alliance which, together with ACP, has been in the forefront of efforts
    to persuade the U.S. Government to adopt a new U.S. encryption policy.
    We urge the Committee to pass the PROTECT Act with further amendments
    that would make the bill more fully comport with technological and
    market realities.
        This morning I would like to briefly make five points that we
    believe should underpin U.S. encryption policy.
        First, encryption is essential to all business in an Internet
    economy. While private sector interest in encryption export reform is
    generally characterized in terms of the competitiveness of American
    encryption products in a worldwide market, it is becoming a much larger
    issue for all American business. The global economy, tied together with
    the Internet, is turning businesses into virtual enterprises, localized
    products into global products, and geographically limited networks into
    worldwide networks. In this environment, American businesses must be
    able to sell and support their products worldwide, must be able to
    securely coordinate with their business partners worldwide, and must be
    able to conduct safe electronic commerce worldwide.
        Quite simply, cryptography has emerged as the only possible
    solution to many of the requirements of commercial security. It is the
    essential building block for building trust onto the open Internet.
    Without it, the hundreds of billions of dollars of e-commerce currently
    projected to occur by the year 2002 will not happen.
        Second, encryption is vital to securing America's critical
    infrastructures. Much of the national economy is at risk from the
    decisions that are made today on the issues of infrastructure
    protection. Increasingly, these critical systems are driven by, and
    linked together with, computers making them vulnerable to disruption.
    The single best way, and sometimes the only way to affect effectively
    these critical networks and systems, is encryption. That's why the
    National Research Council found that encryption promotes the national
    security of the United States. However, the security of any network is
    only as good as its weakest link. America's infrastructures cannot be
    protected if they are networked with foreign infrastructures using weak
    encryption.
        Third, the availability of encryption cannot be reasonably
    controlled. Cryptography is a branch of mathematics. Cryptographic
    technology can be reduced to mathematical formulas and protocols.
    Information about cryptography is available from many sources in many
    forms. It is the subject of numerous academic conferences. It is taught
    in universities worldwide. Moreover, while developing good algorithms
    is tough, implementing them is relatively easy.
        Fourth, government promoted or required plaintext access will not
    work. While required plaintext access offers, at first glance, a
    solution to the government's problem: (1) it is not technically
    possible in most circumstances; (2) it does not let law enforcement
    verify compliance with access requirements; and (3) it does not give
    national security interests access to stored keys. There is simply no
    way that law enforcement can determine, in advance, that particular
    text had not been encrypted with more than one program or product. At
    the same time, targets of national security interests are unlikely to
    design or use a plaintext infrastructure which would allow the U.S.
    government to have secret access to plaintext.
        Moreover, there is practically no commercial reason for storing
    communications keys--if the communication is disrupted or compromised a
    new session will be established. At the same time, the need for key
    recovery of stored data also is overstated--the frequent example is an
    employee hit by a bus. With the exception of personal notes,
    information is not solely possessed by an individual. In addition, most
    mission-critical data is held by the corporate data management system
    that has its own control and protection mechanism. Finally, most
    personal data has a time value and rapidly becomes obsolete.
        If one factors in the additional costs and systemic vulnerabilities
    that result from building in access features, we conclude that there is
    no business or consumer need for key recovery or special plaintext
    access. To be blunt: Intel does not plan to implement a key recovery
    scheme for its own use. .
        Fifth, the government needs to find technological alternatives to
    meet its requirements for access to information. Intel agrees that
    access to data communications and stored data by law enforcement
    intelligence communities is both legitimate and extremely important.
    Clearly, Congress should adequately fund the technical efforts of these
    agencies so they can meet the challenges of the next century. Industry
    supports additional funding. Industry can also provide other
    assistance.
        For example, ACP proposed last year the creation of a ``NET
    center'' to help law enforcement officials understand how to deal with
    encryption and other technological advances. ACP also has advocated
    that the U.S. government should work cooperatively with our nation's
    hardware and software manufacturers to develop the technical tools and
    know-how that they need. Technical innovation is predominantly centered
    in the private sector--only a government/industry cooperative effort
    can address effectively the challenge of continued technological
    change.
        In conclusion, let me say that we strongly believe the Protect Act
    should be passed but with further improvements.
        The Protect Act does begin to realize the realities of mass market
    products, eliminates reporting requirements for such products, and
    grants export control relief to products at all horizontal layers in
    the information technology sector. But the Act still does not grant
    widespread exportability for mass market and publicly available
    encryption products. There is a complicated, bureaucratic process which
    must be pursued. Not until 2002 will American industry be able to
    widely export products using the 128-bit Advanced Encryption Standard
    or its equivalent.
        We believe it is in our national interest to permit such
    exportability now and urge the Committee to amend the bill accordingly.
        Once again, many thanks for this opportunity to testify.

                                  INTRODUCTION

        My name is David Aucsmith, and as Chief Security Architect for the
    Intel Corporation I am responsible for research, development and
    deployment of data and communications security technologies and
    products, both hardware and software. Currently, my work is focusing on
    developing industry standard architectures for the application and
    interoperability of data security technologies for communications,
    electronic commerce, and content protection. I previously worked on
    security matters for two computer companies and as a Lieutenant
    Commander in Naval Intelligence.
        Intel is the world's largest semiconductor manufacturer and a major
    supplier of information technology building blocks to the global
    computer and communications industries. We provide our customers with
    chips, printed circuit board assemblies and software that are the
    ``ingredients'' of PC's, servers and workstations. Our flagship
    business involves the mass production and sale of the Pentium
    family of processors and other microprocessors, which are frequently
    described as the ``brains'' of a computer because they control the
    central processing of data in computers. In 1998, our sales exceeded
    $26 billion, and we employed more than 40,000 people in the United
    States.
        Like most information technology companies, Intel's business model
    is global in scope. The bulk of our production takes place in the
    United States. Our products are sold worldwide to original equipment
    manufacturers of computer systems and peripherals, PC users who make
    purchases through various distribution channels including the Internet,
    and other manufacturers who produce a wide range of industrial and
    telecommunications equipment. Information security plays a prominent
    role in the conduct of our business.
        Intel is headquartered in Santa Clara, California, and we have
    significant manufacturing facilities in a number of states, including
    Arizona, New Mexico, Oregon, California and Massachusetts.
        Intel Corporation is a member of the Business Software Alliance
    (``BSA'') and Americans for Computer Privacy (``ACP''). Both
    associations have been in the forefront of efforts to persuade the
    government to adopt a new encryption policy.
        Since 1988, BSA has been the voice of the world's leading software
    developers before governments and with consumers in the international
    marketplace. BSA promotes the continued growth of the software industry
    through its international public policy, education and enforcement
    program in 65 countries throughout North America, Europe, Asia and
    Latin America. Its members represent the fastest growing industry in
    the world. BSA worldwide members include Adobe, Attachmate, Autodesk,
    Bentley Systems, Corel Corporation, Lotus Development, Macromedia,
    Microsoft, Network Associates, Novell, Symantec and Visio. Additional
    members of BSA's Policy Council include Apple Computer, Compaq, Intuit,
    Sybase and my company Intel. BSA websites: www.bsa.org;
    www.nopiracy.com.
        Intel Corporation takes, as a given, that access to data
    communications and stored data by the intelligence and law enforcement
    communities is both legitimate and extremely important. But, we also
    recognize that there is an inevitable tide of advancing technology that
    renders most conventional intercept methodologies obsolete. We also
    believe that all American businesses need access to strong cryptography
    to remain competitive in an ever increasing global economy.
        We believe that these varied objectives can be met if only
    government does not seek to force solutions on industry that are
    incompatible with the development of technology and market demands. It
    is our view that, given the breathtaking pace at which information
    technology (including cryptography) is developing around the globe, the
    only way to achieve these goals is to adopt policies that will ensure
    American industry leadership in the area of information technology.
        This morning I would like to discuss five points that we believe
    should underpin U.S. encryption policy:

        1. Encryption is essential to conducting all business in an
    Internet economy;
        2. Encryption is vital to securing America's critical
    infrastructures;
        3. The availability of encryption cannot be reasonably controlled;
        4. Government promoted or required plaintext access will not work;
    and
        5. The government needs to find technological alternatives to meet
    its requirements for access to information.
       encryption is essential to conducting all business in an internet
                                    economy
        While the private sector interest in encryption export reform is
    generally characterized in terms of the competitiveness of American
    encryption products in world markets, it is, in reality, a much larger
    issue for American businesses. In an Internet economy, all American
    businesses are affected by encryption export constraints.
        The future of business is fundamentally changing. The Internet
    presents two distinctly different business opportunities.
         Moving existing business to the Internet. Taking our
    existing paper-based commerce models and moving them to the electronic
    world.
         Creating new businesses because of the Internet. The
    Internet provides a ubiquity, connectivity and speed that has never
    existed before. There are many hereto unimagined businesses that will
    arise to capitalize on these capabilities.
        The global economy, tied together with the Internet, is turning
    businesses into virtual enterprises, localized products into global
    products, and geographically limited networks into worldwide networks.
    Taking place on a massive scale, this phenomenon rests on the following
    business principles:
         American businesses must be able to sell and support their
    products worldwide.
         American businesses must be able to securely communicate
    and coordinate with their foreign subsidiaries and business partners
    worldwide.
         American businesses must be able to conduct safe
    electronic commerce worldwide.
        I will address each of these three principles in more detail.
    However, it should be obvious that they all depend on secure
    communications and financial infrastructures. Cryptography is an
    essential component of the security of these critical infrastructures,
    regardless of the nature of the company involved.
        It is easy to underestimate the magnitude of the information
    technology industry in the U.S. and the importance of Internet driven
    electronic commerce. The Department of Commerce reported that:
        Without information technology--and the electronic commerce it
    fosters-- overall inflation would have hit 3.1% last year, more than a
    full percentage point higher than the 2% it was . . . \1\
        By the year 2002, Internet commerce is expected to be $327 billion
    \2\ annually. By the year 2001, the U.S. information technology
    industry will be directly responsible for 5% of the GNP.\3\
    American businesses must be able to sell their products worldwide
        Much has been said about the need for American businesses to be
    able to sell their encryption products worldwide as will be discussed
    later in this testimony. What is not obvious is that encryption
    controls may make it difficult to sell non-encryption products on the
    world market as well. For example, a telecommunications application may
    need to have an integrated cryptographic component to meet an
    international standard.
    American businesses must be able to securely communicate and coordinate
            with their foreign subsidiaries and business partners worldwide
        Business practices demand tight coordination with both a companies
    overseas subsidiaries, their suppliers and their customers. It is
    essential that confidentiality and access control to business
    information be maintained. Frequently companies are suppliers or
    customers on one product and competitors on another. The tightly
    integrated networks required for coordination could rapidly become a
    source of competitive intelligence if not adequately protected. Only
    strong cryptography can offer the level of protection required.

    American businesses must be able to conduct safe electronic commerce
            worldwide
        In the near future, there will now longer be dedicated Internet
    companies--virtually every company will have to be an Internet company
    to survive. This requires that companies have the capability to
    securely sell products over the Internet to markets around the world.
    The ability to prevent fraud and protect intellectual property will
    depend heavily on the use of strong cryptography.
        Importantly, corporate participation in electronic commerce
    includes both business-to-business and business-to-consumer
    transactions.

    There is a need for commercial security
        There has always been some level of need for data security in
    commercial environments. However, the Internet has enabled the
    connected PC and, with it, created both new business opportunities and
    new security vulnerabilities.
        Both the value and volume of on-line information has sharply risen.
    This information includes organizational information such as financial
    data, manufacturing information, customer information, medical and
    legal records, and human resources data. Additionally, there is a
    growing amount of data which has intrinsic value, such as monetary
    instruments (e.g., credit cards, coupons, etc.) and intellectual
    property (e.g., movies, images, etc.).
        In the past, such data was protected by physical and procedural
    controls. The connected PC largely negates those conventional controls
    and requires new security mechanisms, thus creating a need for
    commercial security technology.
        After many years of false starts, commercial data security has
    become a viable business. The Internet has provided the driving force
    for this change. Physical barriers have all but disappeared, and
    security perimeters have become vague.
        The Internet has created needs for security that were not present
    in isolated security domains. This has, in turn, created opportunities
    for vendors of security technologies and has also created a need for
    standards so those technologies can interoperate.
        Cryptography is the only viable solution to most commercial
    security requirements
        Cryptography has emerged as the only possible solution to many of
    the requirements of commercial security. It is the essential building
    block for projecting trust onto the open Internet.
        The modern global commercial information infrastructure is
    characterized by more than 95 million Internet-connected computers,\4\
    most of which are in open environments with little or no physical
    control. They use a wide variety of hardware and software and implement
    no common security policy.
        Only cryptographic technologies are capable of projecting security
    onto a completely open, arbitrary environment. Cryptography, by itself,
    does not guarantee any level of security. It is a necessary component
    but not a sufficient component.
        Privacy, also known as confidentiality, is the characteristic that
    information is protected from being viewed in transit during
    communications and/or when stored in an information system. With
    cryptographically-provided confidentiality, encrypted information can
    fall into the hands of someone not authorized to view it without being
    compromised. It is almost entirely the confidentiality aspect of
    cryptography that has posed public policy dilemmas.
        The commercial use of privacy (or confidentiality) encompasses not
    only the traditional view described above, but also the protection of
    intellectual property such as digital video and digital audio. The same
    technology used to keep communications private are required to ensure
    that a digital movie is not illegally copied.

       ENCRYPTION IS VITAL TO SECURING AMERICA'S CRITICAL INFRASTRUCTURES

        Governments also are recognizing that without encryption, the
    electronic networks that control such critical functions as airline
    flights, health care functions, electrical power and financial markets
    remain highly vulnerable. The U.S. General Accounting Office in its
    report issued in May of 1996 entitled ``Information Security: Computer
    Attacks at Department of Defense Pose Increasing Risks'' found that
    computer attacks are an increasing threat, particularly through
    connections on the Internet, such attacks are costly and damaging, and
    such attacks on Defense and other U.S. computer systems pose a serious
    threat to national security.
        There is an awareness within the government of the vulnerability of
    the national information infrastructure to potential attack. The Marsh
    Report \5\ highlighted the vulnerabilities very well. Much of the
    national economy is at risk from the decisions that are made today on
    the issues of infrastructure protection. Any action that degrades the
    security of Internet commerce or the viability of the industries
    involved must be viewed as a serious risk to the national security.
        As the President said on January 22, 1999, before the National
    Academy of Sciences, ``[w]e must be ready--ready if our adversaries try
    to use computers to disable-power grids, banking, communications and
    transportation networks, police, fire and health services--or military
    assets. More and more, these critical systems are driven by, and linked
    together with, computers, making them more vulnerable to disruption.''
        The President has been so concerned that he established a
    Commission on Critical Infrastructure Protection to provide him with
    guidance and issued two Presidential Directives based on the
    Commission's recommendations.
        In the Report of the President's Commission on Critical
    Infrastructure Protection entitled Critical Foundations: Protecting
    America's Infrastructures (October 1997), the Commission emphasized
    that ``Strong encryption is an essential element for the security of
    the information on which critical infrastructures depend.'' In fact
    ``[p]rotection of the information our critical infrastructures are
    increasingly dependent upon is in the national interest and essential
    to their evolution and full use. A secure infrastructure requires the
    following:
         Secure and reliable telecommunications networks.
         Effective means for protecting the information systems
    attached to those networks . . . .
         Effective means of protecting data against unauthorized
    use or disclosure.
         Well-trained users who understand how to protect their
    systems and data.''
        An earlier blue ribbon National Research Council (NRC) Committee
    similarly concluded in its (May 1996) CRISIS Report (``Cryptography's
    Role in Securing the Information Society'') that encryption promotes
    the national security of the United States by protecting ``nationally
    critical information systems and networks against unauthorized
    penetration.''
        Thus, the NRC Committee found that on balance the advantages of
    widespread encryption use outweighed the disadvantages and that the
    U.S. Government has ``an important stake in assuring that its important
    and sensitive . . . information . . . is protected from foreign
    government or other parties whose interests are hostile to those of the
    United States.''
        In recognition of the risks and threats to information, on January
    15, 1999, the National Institute of Standards and Technology (NIST)
    established a new draft Federal Information Processing Standard (FIPS
    46-3) to require the use of stronger encryption in government systems.
    NIST stated that it ``can no longer support the use of the DES for many
    applications'' and that all new systems must use the significantly
    stronger Triple DES ``to protect sensitive, unclassified data''. Under
    the FIPS, all existing systems are now expected to develop a strategy
    to transition to Triple DES, with critical systems receiving a
    priority.
        The vulnerability of national infrastructures has not been lost on
    other governments. Within the European Union, there is discussion on
    how to encourage companies to develop products to protect national
    infrastructures in their respective countries. Such mutual government
    encouragement will help to grow technical capabilities and fuel a
    viable world market.
        Already the Swiss government is providing 128-bit encryption plug-
    ins for download off the Internet. The SecureNet system is required for
    use in accessing Telegiro, an Internet payment system. The plug-ins
    support SSL connections using IDEA encryption. Several Swiss banks are
    now using on-line banking systems compatible with the Telegiro
    cryptosystem.\6\
        Information security is critical to the integrity, stability and
    health of individuals, corporations and governments. While cryptography
    is but one element of security, it is the keystone of secure,
    distributed systems. Frankly, there is no substitute for good,
    widespread, strong cryptography when attempting to prevent crime and
    sabotage through these networks. The security of any network, however,
    is only as good as its weakest link. America's infrastructures cannot
    be protected if they are networked with foreign infrastructures using
    weak encryption.
        In the long-term, we believe it is in America's best interest to
    protect critical infrastructures and national security by relying on
    strong American encryption products. This will not happen if the U.S.
    Government limits the ability of U.S. companies to provide strong
    encryption to consumers. Indeed, the question is not whether critical
    infrastructures will be protected. Rather it is a question of who will
    protect them--U.S. or foreign companies. With individuals increasingly
    relying on critical infrastructures and governments increasingly
    desiring to safeguard these infrastructures, it is only a matter of
    time before strong encryption becomes a commodity feature of global
    networks and information systems.

    U.S. encryption export controls hurt our national security
        Our current export policy puts at risk America's global leadership
    in information security. U.S. export policy should, therefore, be
    changed so it no longer limits American participation in efforts to
    secure global e-commerce and related information infrastructures and no
    longer cedes the world market for encryption products to foreign
    competitors. Strong, high-quality encryption products already are
    widely available from foreign makers. Foreign producers of IT systems
    are finding that their ability to provide end-to-end systems
    incorporating stronger encryption than U.S. companies are permitted to
    export gives them a decided market advantage. We are concerned that as
    a result America will lose the critical encryption market to foreign
    companies. If that happens, it will be too late to change U.S. policy
    and too late to preserve U.S. leadership in this vital arena.
        What will the loss of that U.S. leadership position mean? It will
    mean that the national security agencies will be confronting ubiquitous
    encryption made not by U.S. companies, but by foreign companies. Where
    then will the national security agencies go for technical help on
    encryption? It also will mean that the protection of our critical
    national infrastructure may depend on foreign-made systems
    incorporating foreign-made encryption--and that's unacceptable.
        America must retain leadership in this vital technology if we are
    to meet our long-term national security objectives. That is why we must
    assess our encryption export policies from a long-term, not a short-
    term, perspective.
        In the long run, U.S. national security objectives are best served
    by an IT world in which U.S. companies are market leaders in all
    aspects, especially encryption. U.S. export controls have had the
    effect of creating an encryption expertise outside the United States
    that is gathering momentum. Unfortunately, every time research and
    development of an encryption technique or product moves off-shore, U.S.
    law enforcement and national security agencies lose. We believe that
    continuing down this path will be ultimately more harmful to our
    national security and law enforcement efforts as American companies
    will no longer be the world leaders in creating and developing
    encryption products.
        In fact, as long ago as 1996, the NRC Committee concluded that as
    demand for products with encryption capabilities grows worldwide,
    foreign competition could emerge at levels significant enough to damage
    the present U.S. world leadership in information technology products.
    The Committee felt it was important to ensure the continued economic
    growth and leadership of key U.S. industries and businesses in an
    increasingly global economy, including American computer, software and
    communications companies. Correspondingly, the Committee called for
    immediate and easy exportability of products meeting general commercial
    requirements--which is currently 128-bit level encryption!
        We recognize this is a difficult balance to strike, but we strongly
    believe that our long term national security objectives can only be
    achieved if the United States realistically acknowledges the
    inevitability of a world of ubiquitous, strong encryption. Trying to
    control the proliferation of encryption is like trying to control the
    proliferation of mathematics. For that is what we are talking about
    here. Encryption algorithms are nothing but sophisticated mathematics.
    And while the United States may realistically hope to remain the leader
    in such a field, it cannot realistically expect to monopolize it.
        We are joined in this view by the Center for Strategic and
    International Studies (``CSIS''). CSIS recently conducted a study of
    our nation's technical vulnerabilities; the study was chaired by
    William Webster, the former director of the FBI and Central
    Intelligence and former U.S. Circuit Judge. The subsequent report,
    entitled Cybercrime . . . Cyberterrorism . . . Cyberwarfare . . .
    Averting an Electronic Waterloo, calls for the ``intelligence gathering
    communities--law enforcement and foreign intelligence--to examine the
    implications of the emerging environment and alter their traditional
    sources and means to address the SIW (strategic information warfare)
    needs of the twenty-first century. Continued reliance on limited
    availability of strong encryption without the development of
    alternative sources and means will seriously harm law enforcement and
    national security.''

        THE AVAILABILITY OF ENCRYPTION CANNOT BE REASONABLY CONTROLLED.

        Cryptography is a specialized branch of mathematics. Cryptographic
    technology can be reduced to mathematical formulas and protocols.
    Information about cryptography is available from many sources and in
    many forms. Implementation of cryptography is no more difficult than
    the implementation of any complicated mathematical technology such as
    digital video or digital signal processing.
    Ease of implementation
        Creation of good cryptographic algorithms that will withstand the
    test of time is amazingly difficult. Recent history is littered with
    failed attempts. Even so, many algorithms have survived and have become
    part of common usage. Inventing good cryptography is the mathematical
    equivalent of ``rocket science.'' Implementing those algorithms is
    comparably ``child's play.''
        Information security is such an important part of information
    technology that it is rare for a graduate level computer science
    student to graduate without having implemented a cryptographic
    algorithm or protocol. Many of these students become competent systems-
    level programmers who could easily fashion a production-quality
    cryptographic application. Many of these students are non-U.S.
    residents.

    Open research
        Cryptography and cryptanalysis are legitimate academic research
    topics. There is a growing, worldwide academic community specializing
    in the subject. Last year alone there were over 30 international
    conferences focusing on cryptography or related topics and over 100
    books and journals. Many of these books include detailed specifications
    and source code of cryptography algorithms and protocols.\7\ As an
    example, Bruce Schneier's popular cryptography text, Applied
    Cryptography, has sold over 100,000 copies world wide.\8\
    Intangible software
        The intangible nature of cryptographic software defies any physical
    controls. In an instant, software, cryptographic or otherwise, can be
    shipped virtually anywhere in the world. As an example, within hours of
    the U.S. release of PGP 5.0, it was available from sites in Western
    Europe.\9\
        Cryptography exists in many uncontrollable forms, such as general
    knowledge, academic research, and network deliverable software.
    Availability of strong encryption products abroad
        Having export controls assumes that they are at least marginally
    effective. Cryptography is basically mathematics. The knowledge is
    inherently uncontrollable. This has led to the worldwide availability
    of strong encryption products and technologies.
        One of the ironies of the U.S. cryptographic export regime is that
    it has fostered a growth in non-U.S. cryptographic technology providers
    who can sell strong cryptography worldwide without the constraints
    imposed by the U.S. government, while U.S. companies can not make the
    same claim.
        The belief that U.S. export regulations enable foreign cryptography
    businesses is held by the European Commission. The EC stated at the
    Copenhagen Hearing:
        The current U.S. export regulations can provide a chance for
    European companies to enter the market for cryptographic products.
    Nevertheless this would require a concentrated effort of European
    industry and governments to prepare the basis for this market.\10\
        Some European companies and governments have turned this belief
    into practice. The following is quoted from a Siemens Nixdorf ad
    regarding a software product of theirs called TrustedWeb:
        By simply downloading the TrustedWeb software from the Internet,
    you can create a highly secure Intranet infrastructure in a matter of
    days. The organization itself can decide on the level of security and
    adapt it in stages in line with needs--Ranging from simple password
    protection to authentication using cryptographic procedures (Public
    Key/Private Key) with full 128-bit key length. TrustedWeb is an
    independent European product and hence is not subject to the export
    restriction imposed by the US government in relation to encryption
    software.\11\
        Siemens Nixdorf runs similar ads covering their hardware products.
    Security products are available worldwide, in spite of, or perhaps
    because of, strong U.S. export controls.
    Wide deployment of strong encryption is inevitable
        There are huge commercial incentives for the spread of
    cryptography. There is a legitimate need for the technology and a sharp
    increase in the amount of money being spent on security technology.\12\
    This has created a viable market for the technology, and there are many
    suppliers worldwide willing and able to meet the market demand.
        The recognition of the importance of security to data
    communications has lead to the inclusion of security protocols within
    international standards. Examples of such standards include the Secure
    Sockets Layer (SSL) and the Internet Packet Security (IPSEC) protocols.
        In most cases, the implementation of security components in
    international standards is optional. However, there is a strong trend
    to make many of these features mandatory. Thus, compliance with
    international communications standards will promote the diffusion of
    security technologies.

         GOVERNMENT PROMOTED OR REQUIRED PLAINTEXT ACCESS WILL NOT WORK

        As the spread of strong cryptography threatens traditional
    intelligence methods, the government has used export control relief as
    an incentive for companies to build plaintext access capability into
    every product. There have also been attempts in Congress to mandate
    plaintext access capability in such products. The overall approach has
    revolved largely, though not exclusively, around key recovery
    requirements. This section primarily addresses specific concerns about
    key recovery issues, but it is applicable to all plaintext access
    solutions that may be promoted or mandated by the U.S. Government
    (hereinafter referred to as ``required plaintext access''). The basic
    point is that non-market driven requirements to build any plaintext
    access mechanism into products will not work.
        Key recovery, as a concept, now applies not only to the initial
    purpose of assuring law enforcement access to encrypted materials, but
    also to possible end-user or organizational requirements for a
    mechanism to protect against lost, corrupted, or unavailable keys. It
    can also mean that some process, such as authority to decrypt a header
    containing a session key, is escrowed with a trusted party, or it can
    mean that a corporation or individual is ready to cooperate with law
    enforcement to access encrypted materials. It may also mean that some
    technical mechanism must be put in place to bypass the use of the key
    entirely (strict ``plaintext access'').
        While required plaintext access offers, at first glance, the
    promises of solving the technical problems of plaintext access, it is
    not technically possible for it to do so in most circumstances. It is
    unlikely to actually meet plaintext access requirements, and its
    deployment as a national strategy is fraught with technical challenges
    and dangers.

    Required plaintext access systems will not satisfy government access
            requirements
        Required plaintext access does not meet either law enforcement or
    national security requirements, but for slightly different reasons. Law
    enforcement can not verify compliance with key recovery requirements,
    and national security interests are unlikely to have access to stored
    keys.

    Compliance can not be verified by law enforcement
        Required plaintext access has a serious technical flaw in the area
    of a priori verification of compliance. Encryption, if applied, is
    likely to be applied at several different levels of the communications
    infrastructure. An example is having link-level encryption applied by
    IPSEC, having session-level encryption applied by SSL, and having
    application-level encryption applied by S/MIME.
        Assuming one could construct a protocol to allow for the monitoring
    of IPSEC key recovery compliance, there is no physical way to verify
    that the other two levels have complied with the required plaintext
    access requirements unless one actually decrypts the IPSEC-data packet.
    If it requires probable cause to get a court order to obtain the IPSEC
    recovered key or mechanism, it would only be after law enforcement has
    probable cause of criminal activity that they would be able to verify
    whether or not the upper-level protocols have complied with the
    required plaintext access requirements.

    Required plaintext access does not address national security
            requirements
        While law enforcement may serve a warrant on a key recovery agent
    or other access mechanism provider to obtain encryption keys or the
    plaintext, national security interests are likely to have that
    opportunity. Required plaintext access does not provide any benefit to
    lawful access unless one is able to actually recover the plaintext.
    Targets of national security interests are unlikely to design a
    plaintext access infrastructure which would allow the U.S. government
    to have surreptitious access to stored keys or stored plaintext. This
    view has been born out by National Security Agency testimony before
    Congress.\13\

    Required plaintext access systems are of limited commercial value
        Product announcements of key recovery companies to the contrary,
    there is not a compelling market for commercial key recovery systems
    and no market for other plaintext access systems. There is no general
    reason to recover communications keys, and the use of key recovery for
    stored data ignores the fundamental properties of information.
        A market for key recovery technology will emerge only when it is
    artificially created by government regulations. Prior to the current
    law enforcement push for key recovery, there were no widespread
    deployments of key recovery mechanisms even though the basic technology
    had been in existence for some time.

                Not required for data communications

        While key recovery may, debatably, be important in certain stored
    data systems, in communications cryptography there is little or no user
    demand for this feature. In particular, there is hardly ever a reason
    for an encryption user to want to recover the key used to protect a
    communication session such as a telephone call, FAX transmission, or
    Internet link. If such a key is lost, corrupted, or otherwise becomes
    unavailable, the problem can be detected immediately and a new key
    negotiated.\14\ There is also no reason to trust another party with
    such a key.

                Ignores the nature of stored data

        Many of the proposed needs for key recovery of stored data operate
    under a false assumption about how data is actually stored and
    utilized. The frequent example is the assertion that a company will
    need to recover the encrypted files of an employee who has been hit by
    a bus.
        There are three problems with this assertion. First, with the
    exception of personal notes, information is not solely possessed by an
    individual. Information is shared among a team of employees or partners
    in order to be of any benefit. Second, most mission-critical data is
    held by corporate data management systems (e.g., data bases) that have
    their own access control and protection mechanisms, which are
    administered by the corporation. Third, most personal data has a time
    value and rapidly becomes obsolete.
        Given the observations above, we conclude that there is no business
    or consumer need for key recovery. Indeed, taking into account the
    observations and risks, Intel does not plan to implement a key recovery
    scheme.

    Key recovery introduces additional vulnerabilities
        Centralizing all of a user's secrets or access controls in a system
    with increased technological and procedural operational complexities
    can only increase the security vulnerabilities of the operation.

                Centralized attack point
        Regardless of the implementation, if key recovery systems must
    provide timely law enforcement access to a whole key or to plaintext,
    they present a new and fast path to the recovery of data that never
    existed before.
        The key recovery access path is completely out of the control of
    the user. In fact, this path to lawful access is specifically designed
    to be concealed from the encryption user, removing one of the
    fundamental safeguards against the mistaken or fraudulent release of
    keys.
        In contrast, non-recoverable systems can usually be designed
    securely without any alternative paths. Alternative paths to access are
    neither required for ordinary operation nor desirable in many
    applications for many users.\15\

                Complexity of implementation
        Key recovery systems must be, in terms of functionally, a secure,
    distributed, open key management system. They have many of the
    properties of both large scale distributed databases and of command and
    control systems. Both types of systems have significant inherent
    complexity. As we have no practical experience, key recovery mechanisms
    represent a system of unknown and potentially daunting complexity.\16\
        Commercial organizations would have to add the cost and risk of key
    recovery systems to their bottom line. Even government agencies
    participating in key recovery pilot programs have found the cost of
    centralized key recovery unacceptable.\17\

    Key recovery mechanisms do not work in the horizontal information
            industry
        The information technology industry is characterized by an open,
    international, horizontal architecture. Microprocessors are sold to
    OEMs who build motherboards, who then contract to have BIOSs and
    operating systems installed. The final product is then sold to an end
    user who adds whatever applications they wish. New capabilities or
    requirements must have an active acceptance within each of the layers
    in order to be widely deployed. Key recovery discussion has focused
    only on the upper, application layer.

                Low-level layers have no visibility into higher-level
                        layers
        The nature of the information technology industry is that it is
    made-up of distinct horizontal architectural layers, from the
    microprocessor up through application programs. The components in each
    of these layers are supplied by different companies, having different
    economic models and different diffusion channels.
        For valid security reasons, cryptography is migrating further
    ``down'' the layers toward the basic hardware. Key recovery, on the
    other hand, is a user-initiated protocol problem and can not be pushed
    down to the hardware. In short, cryptography implemented on hardware
    can not determine how it will ultimately be used.
        Key recovery is under the end user's control and is performed by
    communications protocols or applications programs. The original
    microprocessor could have no knowledge of how its cryptography would be
    used any more than it could know how its multiplication instructions
    will be used.
        Key recovery regulation is envisioned from the perspective of the
    end user. The end user ``sees'' a vertical single product, but the
    reality is that the PC is actually a collection of products from many
    different companies.

                Horizontal interfaces are international standards
        Within the horizontal architecture of the computer industry, the
    interfaces between horizontal layers are defined by established
    international industry standards. None of these interface standards
    currently support key recovery of keys stored in mass market hardware.
    To change these standards would be a slow and difficult process.
    Key recovery does not work in an international setting
        The information technology industry is based on international
    standards. No U.S.-only solution is commercially feasible. Most U.S.
    information technology companies derive a large share of their revenue
    from non-U.S. sources. To restrict their products to only U.S. markets
    would be devastating.

                Not all countries will adopt key recovery
        Very few countries have embraced key recovery to the extent that
    the U.S. government has done. In particular, countries with strong
    privacy laws have generally regarded key recovery schemes as being in
    violation of those laws. As an example, Lotus Notes, which includes a
    key recovery feature, specifically lost a major sale to the Government
    of Sweden when the Swedish press discovered the key recovery
    feature.\18\
        The European Commission has not endorsed key recovery as a solution
    to lawful access problems. It is therefore unlikely that a European-
    wide agreement can be reached. Indeed, the European Committee on
    Banking Standards (ECBS)--a powerful consortium of financial
    institutions--has filed a submission with the European Commission
    arguing against key recovery.\19\
                Requires modification to existing standards
        Data communications and architectural standards are
    internationally-negotiated standards. None of these standards include
    data recovery provisions. Products must be built to conform to these
    standards to become mass market products. Many of these standards are
    not controlled by any government, rather they are controlled by
    commercial or user communities (such as the IETF).
        Negotiating provisions for key recovery into these standards will
    require international--agreement on the form and procedures of key
    recovery technology. Given the current international climate, it is
    unlikely that such negotiations would succeed.\14\

                Interoperability will require a non-recovery mode
        If there is even one major country which prohibits key recovery,
    then all developed systems will have to have a ``non-key recovery''
    mode to facilitate interoperability. There is little that one could do
    to ensure that the ``non-key recovery'' mode was not used in normal
    communications.

                Mutual access to keys opens U.S. companies to industrial
                        espionage
        There is no way to guarantee that other countries will have the
    same level of constitutional safeguards on access to their key recovery
    agents as guaranteed in the U.S. U.S. corporations would be at high
    risk of international economic espionage if forced to deposit
    encryption keys with foreign key recovery agents.
        According to the FBI, U.S. corporations are already targets of
    major industrial espionage efforts. The FBI says foreign spies have
    stepped up their attacks on American companies, and a new national
    survey estimates that intellectual property losses from foreign and
    domestic espionage may have exceeded $300 billion in 1997 alone.\20\
        Governments of at least 23 countries, ranging from Germany to
    China, are targeting American companies, according to the FBI. More
    than 1,100 documented incidents of economic espionage and an additional
    550 suspected incidents that could not be fully documented were
    reported last year by companies in a survey conducted by the American
    Society for Industrial Security.\21\

      THE GOVERNMENT NEEDS TO FIND TECHNOLOGICAL ALTERNATIVES TO MEET ITS
                     REQUIREMENTS FOR ACCESS TO INFORMATION

        Given the global availability of strong, non-recoverable encryption
    and the fast pace of technological advancement, it is clear that
    current U.S. policy is not working. An alternative means to gather
    lawful intelligence is needed by both national security and law
    enforcement interests.
        Clearly, Congress should adequately fund the technical efforts of
    our law enforcement and national security agencies so they can meet
    these challenges. And industry would support additional funding.
        For example, ACP, for example, has advocated that the U.S.
    Government should work cooperatively with our nation's hardware and
    software manufacturers to develop the technical tools and know-how to
    achieve a policy that effectively responds to society's needs for law
    enforcement, national security, critical infrastructure protection,
    privacy preservation, and economic well-being.
    NET center proposal
        Last year, ACP proposed the creation of a National Center for
    Secure Network Communications (``NET Center''). The NET Center (now
    called ``Tech Center'') concept is 15 aimed at helping law enforcement
    officials to understand how to deal with encryption and other technical
    advances when encountered in a criminal setting.
        The Tech Center should be a public-private entity operating within
    a national laboratory for information technology to perform research
    and act as a forum for further discussions on technology trends and
    vulnerabilities. Clearly a Tech Center must operate within a legal
    framework that provides reasonable safeguards.
        Attorney General Janet Reno announced plans for the Federal Bureau
    of Investigation to set up a new $64 million center to protect the
    nation's critical infrastructures, particularly computer networks, from
    both physical and cyber attack.
    Industry cooperation
        The national security is best secured by the American companies
    actively competing for and supplying the fundamental technologies of
    the national infrastructure. Only those companies directly involved in
    the research and development of information technology components can
    assess the security and vulnerabilities of the infrastructures created
    from those components. Technical innovation is predominantly centered
    in the private sector. Only a government/industry cooperation can
    effectively address the challenge of continued technological change.

     CONCLUSION: THE PROTECT ACT SHOULD BE PASSED WITH FURTHER IMPROVEMENTS

    The mass market model
        Mass-market hardware manufacturers and software publishers sell
    products through multiple distribution channels such as OEMs (i.e.,
    hardware manufacturers that pre-load software onto computers), value-
    added resellers, retail stores and the emerging channel of on-line
    distribution. Thus, mass market products are available to the general
    public from a variety of sources.
        The mass-market distribution model presupposes that hardware
    manufacturers and software publishers will take full advantage of these
    multiple channels to ship identical or substantially similar products
    worldwide (allowing only for differences resulting from localization)
    irrespective of specific customer location or characteristics. As mass
    market products are uncontrollable, Intel believes U.S. companies
    should be able to export the current market standard of 128-bit
    encryption. Unfortunately, the Administration only permits easy exports
    of 56-bit encryption even if foreign products exist in the
    marketplace'. And the Administration continues to impose onerous
    controls on 56-bit toolkits and hardware encryption components, notably
    semiconductors.

    The PROTECT Act grants export control relief to products at all
            horizontal levels
        Intel believes that all distinct horizontal architectural layers,
    from the microprocessor up through application programs should be
    treated identically under any encryption export policy. However,
    contrary to the Administration's original announcement regarding export
    relief which included export relief for hardware, the new regulations
    still do not permit 56-bit encryption chips, integrated circuits,
    toolkits and executable or linkable modules to be easily exported
    except to subsidiaries of U.S. companies or otherwise relax export
    controls on stronger mass market hardware. We are pleased that the
    PROTECT Act remedies this problem and treats mass market hardware in
    the same manner as mass market software.

    The PROTECT Act eliminates reporting requirements for mass market
            products
        We are encouraged that the PROTECT Act recognizes the difficulties
    in complying with reporting requirements for mass market encryption
    products and eliminates such reporting requirements. It is virtually
    impossible for mass-market exporters to report the name and address of
    each end-user. Millions of these products are sold through multi-level
    distribution channels (e.g, VAR's and chain stores). Moreover, as
    registration of mass market products is customarily voluntary. This is
    a vast improvement over the Administration's proposed regulations which
    effectively require companies to develop a system to obtain the names
    and addresses for each health and medical end-user of stronger
    encryption products and all foreign online merchants.

    The PROTECT Act's export relief for mass market products and for
            products which face competition from comparable foreign
            products is too complicated and creates an unwieldy bureaucracy
        We are pleased that the PROTECT Act does recognize that mass market
    and publicly available encryption products, and encryption products for
    which comparable foreign products are available, should be treated
    differently under the U.S. export regime. The bill acknowledges the
    futility of trying to control a product that can be bought off of the
    Internet or easily purchased from commercial vendors such as CompUSA or
    from Circuit City by any individual in America regardless of
    nationality, or a comparable product can be easily purchased from
    similar stores in a foreign country. ``Bad guys'' certainly will have
    no problems obtaining the encryption products, and no concerns about
    ``exporting'' the products via telephone lines or the Internet or
    smuggled out on personally pressed CDs. The only impact of the export
    controls will be to stop American companies from selling American
    products to legitimate users.
        Unfortunately, the PROTECT Act establishes a complicated private/
    public board structure for deciding after-the-fact whether or not a
    product is a mass market product or whether comparable foreign products
    are available. The Secretary of Commerce has thirty days to approve or
    disapprove the Board determination, subject to judicial review, and the
    President may override any determination. There is no guarantee of any
    consistency in the Board's decisions. Thus, while the Board procedure
    is an improvement, and the opportunity for judicial review provides a
    mechanism to ensure that exports are not denied in an arbitrary and
    capricious manner, it is not a predictable, clear process giving
    American companies certainty as to whether they can export their
    products. Such predictability is necessary so that American companies
    can have confidence designing and building security features into their
    products.
        The PROTECT Act should, but does not, afford complete and immediate
    export relief for mass market encryption without any complicated
    oversight. The Act also does not recognize that if a comparable foreign
    product is available, any delay in exports provides a significant
    advantage to the foreign product.

    The PROTECT Act supports development of AES, but delays full export
            control relief until 2002
        The PROTECT Act also provides Congressional support for, and sets a
    5-year limit on the selection of, the 128-bit Advanced Encryption
    Standard which is being developed under the auspices of the National
    Institute of Standards and Technology. The 2002 deadline will provide
    impetus for NIST to finish developing the standard in a timely manner
    while providing NIST with sufficient time to study the final standard's
    security features. This is an important process that will result in a
    new standard for government's sensitive, but unclassified, information
    and most likely will serve as the new worldwide standard for strong
    encryption similar to the Data Encryption Standard when it was
    introduced in the 1970's. Once the algorithm is selected, the PROTECT
    Act removes all export controls on encryption products using the 128-
    bit standard or its equivalent strength.
        Unfortunately, because the PROTECT Act limits easy exportability of
    mass market products until the AES is adopted, general distribution of
    these products will have to wait almost three years. Considering the
    current speed of technological change, where Internet products are now
    on three-month product cycle times, and the fact that 128-bit
    comparable foreign encryption is currently available, this is an
    eternity in Internet time. Law enforcement and national security
    interests have known for a long time that ubiquitous use of strong
    encryption by consumers worldwide is just around the corner. They
    cannot hope to continue to delay the world from using strong encryption
    according to their timeframe.

    A new approach
        The preceding has made the argument that:
         Encryption is essential to conducting all business in an
    Internet economy;
         Encryption is vital to securing America's critical
    infrastructures;
         The availability of encryption cannot be reasonably
    controlled;
         Government promoted or required plaintext access will not
    work; and
         The government needs to find technological alternatives to
    meet its requirements for access to information.
        If accepted, these arguments force one to the conclusion that a new
    approach to encryption policy is required.
                                    endnotes
        \1\ Wall Street Journal, Department of Commerce talks about
    Inflation, 16 April 1998.
        \2\ Forrester Research
        \3\ Dataquest
        \4\ Ibid., p. 8.
        \5\ Marsh, R., Chairman, Critical Foundations: Protecting America's
    Infrastructure, The President's Commission on Critical Infrastructure
    Protection, October 1997.
        \6\ See http://www.swisspost.ch/E/21.html
        \7\ Schneier, B., Applied Cryptography, John Wiley & Sons, Inc.,
    New York, NY, 1996.
        \8\ Schneier, B., Private correspondence, June 1998.
        \9\ Hayward, D., Europeans Break Encryption Barriers, TechWire, 17
    June 1997.
        \10\ Ministry of Research and Information Technology Denmark for
    the European Commission Directorate-General XIII Telecommunications,
    Information Market and Exploitation of Research, Report of Day 1 of the
    European Expert Hearing on Digital Signatures and Encryption
    (Copenhagen, April 23, 1998), Copenhagen, Denmark, 23-24 April 1998
        \11\ Siemens Nixdorf, Press Release, http://www.trustedweb.com/
    whats--new/pressrelease.html, Hanover, Germany.
        \12\ Burnahm, B., The Electronic Commerce Report, Piper Jaffray
    Research, p. 75, August 1997.
        \13\ Crowell, W., Deputy Director National Security Agency,
    Testimony before Senate Commerce Committee, 1997.
        \14\ Neumann, P., et.al., The Risks of Key Recovery, Key Escrow,
    and Trusted Third Party Encryption, Final Report of The Cryptographers'
    Working Group, 27 May 1997.
        \15\ Ibid.
        \16\ Ibid.
        \17\ Wayner, P., Administration Gets Sour Taste From Own Encryption
    Medicine, New York Times, 1 July 1997.
        \18\ Laurin, F., and Froste, C., Secret Swedish E-Mail Can Be Read
    by the U.S.A., Svenska Dagbladet, 18 Nov 1997.
        \19\ Computing, Banks Slam Snoops, 26 March 1998.
        \20\ Nelson, J., FBI: Commercial Spying Rises, Los Angeles Times,
    12 January 1998.
        \21\ Ibid.

        Senator Frist. Thank you very much.
        Mr. Bidzos.

      STATEMENT OF D. JAMES BIDZOS, VICE CHAIR, SECURITY DYNAMICS
                           TECHNOLOGIES, INC.

        Mr. Bidzos. Thank you, Mr. Chairman. Let me also thank you
    and the committee for the opportunity to be here and testify
    this morning. At the outset, I want to say that the PROTECT Act
    definitely moves us in the right direction and is a real
    improvement over the current administration policy, but, as I
    will explain in a few moments, the bill could be further
    improved in several important respects.
        I am pleased to be here this morning and testify on behalf
    of Americans for Computer Privacy. ACP is a coalition of over
    4,000 individuals, 40 trade associations, and over 100
    companies representing financial services, manufacturing, high
    tech, transportation industries, as well as law enforcement,
    civil liberty, taxpayer, and privacy groups.
        Currently I am vice chairman of Security Dynamics
    Technologies, but during the last 13 years I served as
    president and chief executive officer of RSA Data Security. RSA
    Data Security is the leading American company producing
    encryption products. It was founded in 1982 and our encryption
    technology is embedded in virtually every mainstream product,
    from things such as Microsoft Windows to Netscape's Navigator,
    also Microsoft's browser Internet Explorer, Intuit's Quicken,
    and Lotus Notes. It is very widespread. Most of it is 128 bits.
        I am also the founder and chairman of a company called
    Verisign, which is the leader in Internet authentication and
    certification, and I am a director of several other security
    companies, including two in Japan and two in Europe. I think
    this has given me unique insight into the global encryption
    issue.
        I have been deeply involved in the debate over encryption
    policy during this time and hope my experience can benefit the
    committee. I testified for the first time about 10 years ago
    before the House Committee on Science, Space, and Technology,
    and made many of the arguments that we are hearing here today.
        I used to joke that encryption, the type of encryption that
    my company developed, was a solution in search of a problem. I
    do not say that any more because the problem is obvious and we
    have discovered it. Quite simply, it is e-commerce. E-commerce,
    however, is not going to reach its full potential unless it
    becomes secure. That would be a tremendous disappointment since
    electronic commerce between businesses alone is expected to
    reach over $300 billion per year by the year 2002. At least 60
    percent of all Americans will be using the Internet and the
    number of worldwide online users is expected to reach 250
    million by the year 2002.
        Without relaxation of export controls, U.S. manufacturers
    remain at a competitive disadvantage and foreign consumers will
    purchase encryption products from foreign suppliers. Just in
    reaction to a comment made on the other panel, I would welcome
    the opportunity after my statement to go into more detail, but
    I think that the Administration underestimates the
    determination and the capabilities of the companies that we
    compete with overseas.
        Foreign products are comparable in capabilities and
    quality, and do not let anyone tell you otherwise. When a
    foreign purchaser cannot obtain an American product, they
    simply purchase it from a foreign supplier. The Siemens example
    we heard about is a good one. There are numerous others.
    Indeed, foreign companies are even testifying against
    relaxation of U.S. export controls.
        Unfortunately, not only are American companies losing the
    sale of an encryption item, but they are also using a sale of
    the program or hardware, such as an Internet server or an
    application browser, that incorporates the encryption
    capability. In fact, companies risk losing sales of entire
    systems because of their inability to provide necessary
    security features.
        Over the last 13 years I have seen security move from
    literally out of nowhere to being No. 1, No. 2, or No. 3 on
    everybody's list of absolutely critical essential features in
    products and systems that they intend to purchase. Companies
    that cannot offer that essential feature are cut out of the
    entire business opportunity.
        Thus, the only impact of the Administration's export policy
    is widespread deployment of foreign-designed and manufactured
    software and hardware.
        But I think it is also essential to understand that full
    deployment of strong encryption is vital to America's national
    interest. ACP and its members are responsible citizens. We have
    no wish to facilitate the commission of crime or hurt national
    security. It is precisely because we hold these views that we
    believe it is in America's best interest to prevent crime and
    promote national security through widespread reliance on strong
    American encryption products both here and abroad.
        We also believe that our law enforcement and intelligence
    agencies must be given the additional resources and technical
    help they need to meet the challenge of the next century. But
    those challenges are far greater if these agencies are forced
    to face a world in which the majority of information and
    communications systems--communications pass over systems and
    networks that are foreign-designed, foreign-built, foreign-
    installed, and incorporate foreign encryption. That may well
    apply to systems here in the United States as well, based on
    the way things are going now.
        The PROTECT Act is an improvement over current
    administration policy. It affirms that Americans may use and
    sell any type of encryption domestically and ensures that the
    U.S. Government may not use its full powers and capabilities to
    compel Americans to use or sell a certain type of encryption.
    The PROTECT Act also provides a broader range of export relief
    for American encryption products and it provides a certain
    timeframe for export reviews. Also, the Act provides
    congressional support for and sets a 5-year limit on the
    selection of the 128-bit Advanced Encryption Standard.
        But even a good thing can be made better. The PROTECT Act
    should be further improved to reflect market and technological
    realities. The PROTECT Act does not permit individual foreign
    consumers to obtain strong non-recoverable encryption, making
    it impossible for them to securely purchase products from
    American companies.
        Also, the Act does not provide immediate export relief for
    encryption sales to small businesses, one of the fastest
    growing worldwide business sectors. Unfortunately, the PROTECT
    Act limits easy exportability of mass market products with
    strong 128-bit encryption until NIST adopts the Advanced
    Encryption Standard. Exportability in the mean time is
    dependent on an unwieldy complex bureaucracy that will
    determine whether American products are generally available or
    compete with comparable foreign products. We believe the
    evidence is already overwhelming regarding these facts.
        I would be happy to answer any questions about the
    significance of this 3-year delay in terms of how our
    competitors will exploit it and how that translates into
    Internet years and what it means for future opportunities.
        In conclusion, Mr. Chairman, ACP strongly urges the
    committee to move forward with the PROTECT Act and to adopt
    amendments to permit the immediate exportability of strong
    encryption to a broader range of businesses and individuals
    abroad.
        Thank you.
        [The prepared statement of Mr. Bidzos follows:]

     Prepared Statement of D. James Bidzos, Vice Chair, Security Dynamics
                               Technologies, Inc.

        Congress must immediately relax export controls on software and
    hardware with encryption capabilities. Widespread deployment of
    American products with encryption capabilities will help to accelerate
    dramatically the growth of electronic commerce by protecting consumers'
    privacy and preventing electronic crime.
        Without relaxation of export controls, U.S. manufacturers remain at
    a competitive disadvantage, and foreign consumers will purchase
    encryption products from foreign suppliers. Foreign products are
    comparable in capabilities and quality. When a foreign purchaser cannot
    obtain an American product they simply purchase it from a foreign
    supplier. Unfortunately, not only are American companies losing a sale
    of an encryption item, but they are also losing the sale of the program
    or hardware such as an Internet server or an application browser that
    uses the encryption capability. In fact, companies risk losing sales of
    entire systems because of their inability to provide necessary security
    features. The only impact of the Administration's export policy is
    widespread deployment of foreign designed and manufactured software and
    hardware.
        The Administration took the first step towards developing a
    sensible long-term encryption policy by permitting exports of select
    products to select users, but they still have not gone far enough.
        The PROTECT Act is an improvement over current Administration
    policy. It affirms that Americans may use and sell any type of
    encryption domestically, and ensures that the U.S. Government may not
    use its full powers and capabilities to compel Americans to use or sell
    a certain type of encryption. The PROTECT Act also provides a broader
    range of export relief for American encryption products and provides a
    certain timeframe for the export review process. Also, the Act provides
    Congressional support for, and sets a 5-year limit on the selection of,
    the 128-bit Advanced Encryption Standard.
        The PROTECT Act should be further improved to reflect market and
    technological realities. The PROTECT Act does not permit individual
    foreign consumers to obtain strong, non-recoverable encryption, making
    it impossible for them to securely purchase products from American
    companies. Also, the Act does not provide immediate export relief for
    encryption sales to small businesses--one of the fastest growing
    worldwide business sectors.
        Unfortunately, the PROTECT Act limits easy exportability of mass
    market products with strong 128-bit encryption until NIST adopts the
    Advanced Encryption Standard. This means individual consumers and small
    businesses will have to wait three years to obtain strong American
    encryption, and foreign companies will have had three more years to
    market their products. Exportability in the meantime is dependent on an
    unwieldy complex bureaucracy that will determine whether American
    products are generally available or compete with comparable foreign
    products. We believe the evidence already is overwhelming regarding
    these facts.

                                  INTRODUCTION

        Good Morning. My name is Jim Bidzos, and I am Vice Chair of
    Security Dynamics Technologies, Inc., a Massachusetts-based security
    firm that is also the parent company of RSA Data Security, located in
    San Mateo, California. For over 13 years, until earlier this year, I
    was the President and CEO of RSA Data Security, the world's leading
    encryption company.
        RSA's technology is embedded in both Netscape and Microsoft
    browsers, and in over 500 other products, all used by hundreds of
    millions of people around the world to secure internet transactions and
    digital data of many types. Over many years, I have personally
    negotiated hundreds of licenses to RSA encryption technology, including
    licenses with companies such as IBM, Microsoft, ATT, Netscape, Oracle,
    and Motorola. These negotiations almost always involve discussions
    about encryption needs, end-user requirements, and export policy. I
    have thus gained unique insights into the needs and concerns of both
    industry and users with respect to encryption.
        I am also founder and chairman of Verisign, Inc., the leader in
    Internet authentication. Verisign is the world's largest Internet
    security products and services company as measured by both customers
    and market capitalization.
        I am a member of the board of directors of several other security
    companies. One specializes in virtual private networks. Another is a
    manufacturer of security tokens. Another offers cryptographically
    secure digital time stamping services. I am also a director of a UK-
    based encryption hardware company, a Dublin-based secure electronic
    payments company, and two Japanese security companies.
        I have been deeply involved in the debate over encryption, from
    many aspects, including US policy on the export of this technology.
    Over the last 13 years, I have testified many times before both the
    House and Senate on encryption policy, and I have participated in
    numerous US and international standards activities.
        I believe that my long and unique history in the encryption area
    allows me to offer testimony today that may help the committee better
    understand industry's concerns over US encryption policy.
        On behalf of Americans for Computer Privacy (``ACP''), thank you
    for the opportunity to testify on S.798, the PROTECT Act, sponsored by
    Chairman McCain and cosponsored by four other committee members
    Senators Bums, Wyden, Abraham, and Kerry.
        ACP is a coalition of over 3,500 individuals, 40 trade associations
    and over 100 companies representing financial services, manufacturing,
    high-tech, and transportation industries as well as law enforcement,
    civil-liberty, taxpayer and privacy groups. ACP supports policies that
    allow American citizens to continue using strong encryption without
    government intrusion, and advocates the lifting of export restrictions
    of U.S. made encryption products.
        But we really are here today to speak on behalf of the tens of
    millions of users of American software and hardware products. The
    American software and hardware industries have succeeded because we
    have listened and responded to the needs of computer users worldwide.
    We develop and sell products that users want and for which they are
    willing to pay.
        One of the most important features computer users are demanding is
    the ability to protect their electronic information and to interact
    securely worldwide. American companies have innovative products which
    can meet this demand and compete internationally. But there is one
    thing in our way--the continued application of overbroad, unilateral,
    export controls by the U.S. Government.
        At the outset, I want to say that the PROTECT Act definitely moves
    us in the right direction and is a significant improvement over the
    Administration's current policy--but it could be further improved in
    several important respects (along the lines of the SAFE Act).
        ACP recognizes a legitimate governmental need to obtain access to
    information and communications when authorized by proper legal
    authority. ACP and its members are responsible citizens. We have no
    wish to facilitate the commission of crime or the spread of terrorism.
    Similarly, we are committed to strengthening the nation's
    infrastructure and promoting national security, enhancing the privacy
    of American citizens and ensuring the security of electronic commerce.
        But we believe that the best way of meeting all these objectives is
    promote the widespread use of encryption!
        Ultimately, any truly successful, sensible encryption policy that
    has America's best interests at heart must be based on technological
    and market realities, and should not create winners and losers in the
    encryption marketplace on a sector-by-sector basis. It would recognize
    that:
         The worldwide encryption standard is 128-bit encryption;
         Mass market software and hardware is inherently
    uncontrollable; and
         It is in America's national and economic security
    interests to have American designed and manufactured encryption
    products deployed worldwide.
        We believe it is preferable for Congress to put encryption policy
    on a statutory basis rather than continuing to leave it up to
    inconsistent Administration regulations--sending a strong message
    around the world that encryption is important for protecting the
    privacy of citizens, for promoting e-commerce, preventing crime and
    protecting our critical infrastructures and national defense.

      THE AMERICAN COMPUTER SOFTWARE AND HARDWARE INDUSTRIES--AN AMERICAN
                                 SUCCESS STORY

        The computer software and hardware industries are American success
    stories, but they are being threatened. America's software and hardware
    industries are important contributors to U.S. economic security.
    Information technology industries now are directly responsible for over
    one-third of real growth of the U.S. economy, and both the computer and
    software industries are continuing to grow. From 1990 through 1996, the
    software industry grew at a rate of 12.5%, nearly 2.5 times faster than
    the overall U.S. economy.
        More than 7 million people work in IT industries. In 1996, the
    software industry provided a total of over 619,000 direct jobs and $7.2
    billion in tax revenues for the U.S. economy. The software industry is
    expected to create an average of 45,700 new jobs each year through
    2005. If piracy were to be eliminated in the United States, the number
    of new software jobs created would double to an average of 93,000 a
    year.
        Moreover, the computer software industry has achieved tremendous
    success in the international marketplace with global sales of packaged
    (i.e., non-custom) software reaching over $118.4 billion in 1996, and
    rising to $135.4 billion in 1997. American produced software accounts
    for 70% of the world market, with exports of U.S. programs constituting
    half of the industry's output.
        The incredible growth of the industry and its exporting success
    benefits America through the creation of jobs here in the United
    States. Many of these jobs are in highly skilled and highly paid areas
    such as research and development, manufacturing and production, sales,
    marketing, professional services, custom programming, technical support
    and administrative functions. In the U.S. software industry, workers
    enjoy more than twice the average level of wages across the entire
    economy--$57,319 versus $27,845 per person.
        All of these revenues and jobs are dependent upon American software
    and hardware producers remaining the market leaders around the world,
    especially as the major growth markets continue to be outside the
    United States. Strong export controls on products with encryption
    capabilities are crippling the ability of these companies to compete
    with foreign providers and are only ensuring that foreign products are
    securing worldwide critical infrastructures, not American products.

     SECURE NETWORKS AND CONFIDENTIAL INFORMATION IN THE INTERNET AGE ARE
                        THE KEY TO PRIVACY AND COMMERCE

        American individuals and companies are rapidly becoming networked
    together through private local area networks (LANs), wide area networks
    (WANs) and public networks such as the Internet. Combined, these
    private and public networks are the economic engine driving electronic
    commerce, transactions and communications. This engine is sputtering
    and threatens to stall.
        Traffic on the Internet doubles every 100 days. Predictions of
    business-to-business Internet commerce for the year 2000 range from $66
    billion to $171 billion, and by 2002, electronic commerce between
    businesses is expected to reach $300 billion. During 1997, one leading
    manufacturer of computer software and hardware sold $3 million per day
    online for a total of $ 1.1 billion for the year.
        More and more individual consumers also are going on line arid
    spending. Five years from today, we anticipate nearly 60 percent of all
    Americans to be using the Internet. More than 10 million people in
    North America alone have already purchased something over the Internet,
    and at least 40 million have obtained product and price information on
    the Internet only to make the final purchase off-line. Altogether last
    year, consumers spent nearly $8 billion online. Nearly 1.5 million
    Americans join the online population every month, and the number of
    worldwide online users is expected to reach 248 million by 2002.
        The incredible participation by American consumers in the Internet
    phenomenon clearly demonstrates that the need for strong encryption is
    no longer merely the purview of our national security agencies
    concerned about securing data and communications from interception by
    foreign governments. Today, every American even merely dabbling on the
    Internet requires access to strong encryption. Imagine the boost in
    volume of e-commerce if all of these consumers had enough confidence in
    the security of the Internet to purchase on-line. Yet in 1996 the
    Computer Security Institute/FBI Computer Crime Survey indicated that
    our worldwide corporations will be increasingly under siege: over half
    from within the corporation, and nearly half from outside of their
    internal networks.
        Network users must have confidence that their communications and
    data--whether personal letters, financial transactions or sensitive
    business information--are secure and private. Electronic commerce is
    transforming the marketplace--eliminating geographic boundaries and
    opening the world to buyers and sellers. Companies, governments and
    individuals now realize that they can no longer protect data and
    communications from others by relying on limiting physical access to
    computers and maintaining stand-alone centralized mainframes. Instead,
    users expect to be able to pick up their e-mail or modify a document
    from any computer anywhere in the world simply by using their Internet
    browsers. Thus, consumers worldwide are demanding to be able to protect
    their electronic information and interact securely worldwide, and
    access to products with strong encryption capabilities has become
    critical to providing them with confidence that they will have this
    ability.

            UNILATERAL U.S. EXPORT CONTROLS HARM AMERICAN INTERESTS

        Currently, there are no restrictions on the use of cryptography
    within the United States. However, the U.S. Government maintains strict
    unilateral export controls on computer products that offer strong
    encryption capabilities.
        American companies are forced to limit the strength of their
    encryption to the 56-bit key length level set late in 1998. The
    recently announced regulations will also permit companies to export
    stronger encryption on a sector-by-sector, user-by-user basis. However,
    this policy ignores the fact that:
         The minimum strength now required by new Internet
    applications is 128-bit encryption;
         American companies cannot export encryption products to a
    vast majority of non-U.S. commercial entities. Foreign manufacturers
    provide 128-bit encryption alternatives and add-ons--filling the market
    void created by U.S. export controls;
         Providing sector-by-sector relief is unworkable for mass
    market products and does not reflect commercial realities for sales of
    custom products;
         56-bit encryption has been demonstrated to be vulnerable
    to commercial let alone governmental attack. (In the beginning of this
    year at the RSA Encryption Conference, a 56-bit DES encoded message was
    broken by private companies and individuals working together in 22
    hours and 15 minutes--imagine what a hostile government with serious
    resources could do); and
         New developments in technology are introduced everyday
    that speed up decryption time. Adi Shamir, the Israeli computer
    scientist who is the ``S'' in RSA, recently announced ``Twinkle'',
    which is a proposed method for quickly unscrambling computer-generated
    codes that have until now been considered secure, at the International
    Association for Cryptographic Research's latest meeting in Prague.

         THE WASSENAAR ARRANGEMENT IS NOT A MULTILATERAL AGREEMENT TO
                               CONTROL ENCRYPTION

        I want to take one minute to discuss the Wassenaar Arrangement at
    this point. Please do not be fooled by any claims from the
    Administration that the Wassenaar Arrangement is the multilateral
    agreement on encryption that they have been touting was just around the
    corner for the past several years.
        The Wassenaar Arrangement replaced the old COCOM regime with a non-
    binding agreement among 30 countries to report on their sensitive
    exports. The December 1998 Wassenaar Arrangement agreement actually
    decontrolled encryption products. Many countries, such as Israel and
    South Africa, who export strong encryption are not signatories to the
    Arrangement. The Wassenaar Arrangement eliminates controls of any sort
    on 56-bit encryption and permits exports of up to 64-bit encryption in
    mass-market software and hardware. It also removed any reporting
    requirements--the sole official means for actually monitoring what
    countries are doing. Although the Arrangement left open the possibility
    that countries might individually control 128-bit encryption, we are
    skeptical that they will do so. There is no penalty for failing to
    control 128-bit encryption, and most countries are actually moving
    towards encouraging the use of stronger encryption. Finally, a country
    could technically comply with the Arrangement, while still permitting
    easy exports of strong encryption.
        Ironically, the U.S. government is a good example of the lack of
    effect of the Wassenaar Arrangement. In its new encryption regulations,
    the Administration is still controlling encryption products with
    greater than 56, not 64, bit keys, and they have imposed reporting
    requirements on mass market products even if they are using 64-bit
    encryption.
        Recently, on June 2, 1999, the German government established a new
    encryption policy seeking to improve protection of German users of
    global information networks and clarifying that any encryption product
    may be developed, produced marketed and used without restrictions in
    Germany. The German government declared its intention to simplify their
    export review process and to strengthen the performance and ability of
    German manufacturers to compete internationally. The German government
    will monitor abuses of encryption for illegal purposes and attempt to
    further improve the technical capabilities of German law enforcement
    and security agencies to handle advances in encryption technology.
        Even France, traditionally the country which placed the greatest
    restrictions on its own citizens by limiting them to the easily broken
    40-bit level of encryption, has recognized that technology has
    progressed. Near the end of 1998, France relaxed controls on the
    domestic use of encryption and is now permitting, and in fact
    encouraging, the use of 128-bit encryption by its citizens.

     WITHOUT EXPORT RELIEF, FOREIGN CONSUMERS WILL PURCHASE THEIR PRODUCTS
      FROM FOREIGN SUPPLIERS, KEEPING U.S. MANUFACTURERS AT A COMPETITIVE
                                  DISADVANTAGE

        Export controls also have made American companies less competitive
    and opened the door for foreign software and hardware developers to
    gain significant market share--decreasing our national and economic
    security.
        As a result of U.S. unilateral export controls, encryption
    expertise is being developed off-shore by foreign manufacturers who now
    provide hundreds of encryption alternatives and add-ons. The
    Administration's export controls are in no way preventing foreigners,
    let alone those with criminal intent, from obtaining access to
    encryption products. In fact, foreign software and hardware
    manufacturers have seized the opportunity to create sophisticated
    encryption products and to capture sales.
        As long ago as 1995, the General Accounting Office confirmed that
    sophisticated a encryption software is widely available to foreign
    users on foreign Internet sites. In 1996, a Department of Commerce
    study again confirmed the widespread availability of foreign
    manufactured encryption programs and products. Professor Hoffman today
    releases the results of his latest survey which shows the continuing
    growth in foreign encryption products in the face of U.S. export
    controls.
        If an encryption product is combined with other applications such
    as Internet browsers and application servers, U.S. companies generally
    will lose both sales. In fact, companies risk losing sales of entire
    systems because of inability to provide necessary security features.
    This permits foreign manufacturers to gain entry into companies as well
    as gain credibility--providing the foreign manufacturers with further
    opportunity to take away future sales in the same and other product
    lines.

    U.S. ENCRYPTION EXPORT CONTROLS HURT AMERICAN COMPANIES WITHOUT HELPING
                      LAW ENFORCEMENT OR NATIONAL SECURITY

        U.S. export controls have had the effect of creating an encryption
    expertise outside the United States that is gathering momentum.
    Unfortunately, every time research and development of an encryption
    technique or product moves off-shore, U.S. law enforcement and national
    security agencies lose. We believe that continuing down this path will
    be ultimately more harmful to our national security and law enforcement
    efforts as American companies will no longer be the world leaders in
    creating and developing encryption products.
        In fact, as long ago as 1996, the NRC Committee concluded that as
    demand for products with encryption capabilities grows worldwide,
    foreign competition could emerge at levels significant enough to damage
    the present U.S. world leadership in information technology products.
    The Committee felt it was important to ensure the continued economic
    growth and leadership of key U.S. industries and businesses in an
    increasingly global economy, including American computer, software and
    communications companies. Correspondingly, the Committee called for an
    immediate and easy exportability of products meeting general commercial
    requirements--which is currently 128-bit level encryption!
        To summarize:
         Foreign competitors not subject to outdated U.S. export
    controls are ready to take sales and customers from U.S. companies
    today.
         Complex and cumbersome U.S. export controls make American
    companies less competitive. They significantly increase the costs of
    developing, marketing and selling products with encryption
    capabilities, delay the introduction of new products or features, and
    encourage foreign customers to purchase from foreign suppliers due to
    the uncertainty and delay in obtaining a comparable American product.
         Current export controls do not keep strong encryption out
    of the hands of foreign customers; they just keep U.S. products out of
    their hands.
         In the future, if export controls on encryption are not
    relaxed, both American and foreign infrastructures will be secured by
    foreign encryption products, creating a significant problem for
    American law enforcement and national security agencies.
        American companies do have exciting and innovative products that
    can meet the demand for 128-bit encryption and compete internationally.
    But unless the current unilateral U.S; export restrictions are changed
    to allow the use of strong encryption, American individuals and
    businesses will not be active participants in this new networked world
    of commerce--let alone continue to be the leaders in its development.
    Furthermore, American companies will no longer be providing the world,
    and its critical infrastructures, with the answers to their security
    problems. Instead foreign companies will. It is unclear how U.S.
    national security or law enforcement will be aided or how our critical
    infrastructures will be secure when foreign encryption products
    dominate the world market.

                               THE BERNSTEIN CASE

        The absurdity of the existing export control regime is further
    highlighted by the recent decision of the 9th Circuit Court of Appeals
    in Bernstein v. DOJ. In that case, the court held that the existing
    restrictions on the export of source code, the language in which
    programmers communicate their ideas to one another, are an
    unconstitutional prior restraint on first amendment rights of free
    speech. So now we have a situation where it is permissible to export
    jobs (because one can export source code to teach foreign programmers),
    but not American products (because one cannot embody that source code
    in a product)!
        More generally, Judge Fletcher's opinion raises some very valid,
    more general questions and points out how important encryption is to
    the mainstream life of Americans rather than merely to obscure
    technologists. Judge Fletcher states:

              In this increasingly electronic age, we are all required in
            our everyday lives to rely on modern technology to communicate
            with one another. This reliance on electronic communication,
            however, has brought with it a dramatic diminution in our
            ability to communicate privately. Cellular phones are subject
            to monitoring, email is easily intercepted, and transactions
            over the internet are often less than secure. Something as
            commonplace as furnishing our credit card number, social
            security number, or bank account number puts each of us at
            risk. Moreover, when we employ electronic methods of
            communication, we often leave electronic ``fingerprints''
            behind, fingerprints that can be traced back to us. Whether we
            are surveilled by our government, by criminals, or by our
            neighbors, it is fair to say that never has our ability to
            shield our affairs from prying eyes been at such a low ebb. The
            availability and use of secure encryption may offer an
            opportunity to reclaim some portion of the privacy we have
            lost. Government efforts to control encryption thus may well
            implicate not only the First Amendment rights of cryptographers
            intent on pushing the boundaries of their science, but also the
            constitutional rights of each of us as potential recipients of
            encryption's bounty. Viewed from this perspective, the
            government's efforts to retard progress in cryptography may
            implicate the Fourth Amendment, as well as the right to speak
            anonymously, . . ., the right against compelled speech, . . .,
            and the right to informational privacy. While we leave for
            another day the resolution of these difficult issues, it is
            important to point out that Bernstein's is a suit not merely
            concerning a small group of scientists laboring in an esoteric
            field, but also touches on the public interest broadly defined.

        THE ADMINISTRATION TOOK A SMALL FIRST STEP TOWARDS DEVELOPING A
    SENSIBLE LONG-TERM ENCRYPTION POLICY, BUT THEY STILL HAVE NOT GONE FAR
                                     ENOUGH

        Progress was made last year in the new Administration policy
    announced by the Vice President in September and contained in the
    interim final regulations of December 31, 1998.
        ACP welcomed the Administration's efforts to relax export controls
    on select products used by select users. We especially appreciated the
    Administration's apparent abandonment of its key escrow policy that
    would have required all encryption exports (except for 40-bit and less
    encryption) to be capable of providing third parties with immediate
    access to the plaintext of stored data or communications without the
    knowledge of the user. Foreign companies and consumers simply would not
    purchase such products as a multitude of foreign products without key
    escrow are readily available.
        However, the Administration's actions are merely a first step. U.S.
    export controls still ignore the realities of mass-market software and
    hardware distribution. Mass-market software publishers and hardware
    manufacturers sell products through multiple distribution channels such
    as OEMs (ie., hardware manufacturers that pre-load software onto
    computers), value-added resellers, retail stores and the emerging
    channel of on-line distribution. Thus, mass market products are
    available to the general public from a variety of sources. (It also is
    why continued reporting requirements about end-uses and end-users make
    no sense.)
        The mass-market distribution model presupposes that software
    publishers and hardware manufacturers will take full advantage of these
    multiple channels to ship identical or substantially similar products
    worldwide (allowing only for differences resulting from localization)
    irrespective of specific customer location or characteristics. As mass
    market products are uncontrollable, ACP believes U.S. companies should
    be able to export the current market standard of 128-bit encryption.
    Unfortunately, the Administration has only proposed permitting easy
    exports of 56-bit encryption even if foreign products exist in the
    marketplace.
        ACP also believes that encryption hardware and software should be
    treated identically. However, contrary to the Administration's original
    announcement regarding export relief which included export relief for
    hardware, the new regulations still do not permit 56-bit encryption
    chips, integrated circuits, toolkits and executable or linkable modules
    to be easily exported except to subsidiaries of U.S. companies or
    otherwise relax export controls on stronger mass market hardware.
        In addition, ACP believes that the new regulations are so complex
    and contain unrealistic requirements that they undermine many of the
    benefits of the Administration's export relief for stronger encryption,
    especially for mass market hardware and software. U.S. companies are
    now required to meet a number of new, unilateral reporting
    requirements. For example, exporters now are required to report the
    name and address of end-users, a virtual impossibility for mass-market
    exporters because registration of end-users is customarily voluntary. A
    system to obtain the names and addresses of each of the millions of
    potential health care end-users, for example, would cost more than the
    profits yielded from many products.
        ACP also is disappointed that the Administration's regulations do
    not clearly provide online merchants with the level of export control
    relief originally envisioned as they do not permit ISPs to provide
    ``services'' as a permissible end-use. This could chill the use by ISPs
    located abroad of U.S.-origin encryption products for billing, payment,
    and delivery purposes, despite the widespread foreign availability of
    such products.

      THE PROTECT ACT IS AN IMPROVEMENT OVER CURRENT ADMINISTRATION POLICY

    The PROTECT Act Establishes The Correct Domestic Encryption Policy
        The PROTECT Act affirms that Americans may use and sell any type of
    encryption domestically. Even more importantly, the PROTECT Act ensures
    that the U.S. Government may not use its full powers and capabilities
    to compel, directly or indirectly, Americans to use or sell a certain
    type of encryption. This will prevent the U.S. Government from
    attempting to achieve domestic controls on encryption through
    regulations or ``incentives''.
        For example, the Act prohibits the U.S. Government from linking the
    ability to electronically sign a document to a requirement that the
    consumer use a particular encryption methodology for ensuring
    confidentiality. Thus, the U.S. Government cannot require Americans to
    use a certain type of encryption (such as key escrow) to engage in
    electronic commerce.
        Also, the PROTECT Act specifically restricts the government from
    requiring any American to use a particular encryption product or
    methodology to communicate with or transact business with the
    government. The U.S. Government may only specify technologies for its
    own internal uses.

    The PROTECT Act Provides Additional Export Relief For Encryption
            Products
        The PROTECT Act provides a broader range of export relief for
    American encryption products than the Administration. We are pleased
    that the PROTECT Act provides immediate export relief after a one-time
    review by the government for:
         All encryption products using key lengths of 64-bits or
    less rather than the less secure 56-bit key lengths proposed by the
    Administration;
         All recoverable encryption products regardless of key
    length, including telecommunications related products; and
         All encryption products using key lengths greater than 64-
    bits to certain legitimate and responsible commercial users, including
    publicly traded firms, firms subject to government regulation, U.S.
    companies' foreign subsidiaries, affiliates and strategic partners, on-
    line merchants who use encryption products to support electronic
    commerce, and foreign governments who are members of NATO, OECD and
    ASEAN.
        We are also pleased that the PROTECT Act recognizes the need for a
    quicker and more certain timeframe for the export review process.
    Businesses simply cannot live with the U.S. Government taking between 3
    to 6 months to determine whether a product is exportable when many
    Internet products have 90 day product cycles and most businesses do not
    want to wait through one or two business quarters to update their
    computer systems.

    The PROTECT Act Begins To Recognize Mass Market Product Realities
        We also are encouraged that the PROTECT Act recognizes the
    difficulties in complying with reporting requirements for mass market
    encryption products and eliminates such reporting requirements. It is
    virtually impossible for mass-market exporters to report the name and
    address of each end-user. Millions of these products are sold through
    multi-level distribution channels (e.g., VAR's and chain stores).
    Moreover, as registration of mass market products is customarily
    voluntary. This is a vast improvement over the Administration's
    proposed regulations which effectively require companies to develop a
    system to obtain the names and addresses for each health and medical
    end-user of stronger encryption products and all foreign online
    merchants.
        The PROTECT Act also provides Congressional support for, and sets a
    5-year limit on the selection of, the 128-bit Advanced Encryption
    Standard which is being developed under the auspices of the National
    Institute of Standards and Technology. The 2002 deadline will provide
    impetus for NIST to finish developing the standard in a timely manner
    while providing NIST with sufficient time to study the final standard's
    security features. This is an important process that will result in a
    new standard for government's sensitive, but unclassified, information
    and most likely will serve as the new worldwide standard for strong
    encryption simiiar to the Data Encryption Standard when it was
    introduced in the 1970's. Once the algorithm is selected, the PROTECT
    Act removes all export controls on encryption products using the 128-
    bit standard or its equivalent strength.

       THE PROTECT ACT SHOULD BE FURTHER IMPROVED TO REFLECT MARKET AND
                            TECHNOLOGICAL REALITIES

    The PROTECT Act Does Not Provide Immediate Export Relief For Indi-
            vidual Consumers
        The PROTECT Act does not go far enough to protect the millions and
    millions of consumers that are now engaging in electronic commerce.
    Foreign consumers still will not be able to obtain an American Internet
    browser with strong, non-recoverable encryption, making it impossible
    for them to securely purchase products from American companies. Also,
    an everyday foreign consumer who wants to protect an on-line diary,
    copies of health care records or a business proposal, may not easily
    obtain strong encryption to do so from American sources if any portion
    of the encryption used by the product is non-recoverable. Under the
    bill, all these individuals must wait until 2002.

    The PROTECT Act Does Not Provide Immediate Export Relief For Small
            Businesses
        We believe the PROTECT Act provides greater export relief for
    larger corporate customers. However, until 2002, small and privately-
    owned businesses face significant difficulty in easily obtaining U.S.
    encryption under any of the License Exceptions established by the
    PROTECT Act. So, for example, if two doctors in private practice
    together in Brazil or a restaurant owner in France or a small shopping
    market in Germany wants to purchase non-recoverable encryption, these
    small businesses probably would purchase a comparable foreign product
    as an American company could not easily export it to them.
        Unfortunately, as companies install the security ``plumbing'' into
    their individual computers and company networks, it becomes
    increasingly difficult for American companies to replace the foreign
    software and hardware that already has been installed. Because the
    small business sector is, and most likely will continue to be, the
    fastest growing business sector, this puts American companies at a
    distinct disadvantage in selling encryption products at a later date.

    The PROTECT Act's Export Relief For Mass Market Products And For
            Products Which Face Competition From Comparable Foreign
            Products Is Too Complicated And Creates An Unwieldy Bureaucracy
        The PROTECT Act does recognize that mass market and publicly
    available encryption products, and encryption products for which
    comparable foreign products are available, should be treated
    differently under the U.S. export regime. The bill acknowledges the
    futility of trying to control a product that can be bought off of the
    Internet or easily purchased from commercial vendors such as CompUSA or
    from Circuit City by any individual in America regardless of
    nationality, or a comparable product can be easily purchased from
    similar stores in a foreign country. ``Bad guys'' certainly will have
    no problems obtaining the encryption products, and no concerns about
    ``exporting'' the products via telephone lines or the Internet or
    smuggled out on personally pressed CDs. The only impact of the export
    controls will be to stop American companies from selling American
    products to legitimate users.
        Unfortunately, the PROTECT Act establishes a complicated private/
    public board structure for deciding after-the-fact whether or not a
    product is a mass market product or whether comparable foreign products
    are available. The Secretary of Commerce has thirty days to approve or
    disapprove the Board determination, subject to judicial review, and the
    President may override any determination. Unfortunately, there is no
    guarantee of any consistency in the Board's decisions. Thus, while the
    Board procedure is an improvement, and the opportunity for judicial
    review provides a mechanism to ensure that exports are not denied in an
    arbitrary and capricious manner, it is not a predictable, clear process
    giving American companies certainty as to whether they can export their
    products. Such predictability is necessary so that American companies
    can have confidence designing and building security features into their
    products.
        The PROTECT Act should, but does not, afford complete and immediate
    export relief for mass market encryption without any complicated
    oversight. The Act also does not recognize that if a comparable foreign
    product is available, any delay in exports provides a significant
    advantage to the foreign product.

    The PROTECT Act's Relief For 128-Bit AES Products Is Too Little, Too
            Late
        I want to make one final comment regarding the general
    exportability of mass market products. We support NIST's efforts to
    establish a new 128-bit Advanced Encryption Standard; however, under
    the bill, it will not be finalized until 2002. Because the PROTECT Act
    limits easy exportability of mass market products until the AES is
    adopted, general distribution of these products will have to wait
    almost three years. Considering the current speed of technological
    change, where Internet products are now on three-month product cycle
    times, and the fact that 128-bit comparable foreign encryption is
    currently available, this is an eternity in Internet time. Law
    enforcement and national security interests have known for a long time
    that ubiquitous use of strong encryption by consumers worldwide is just
    around the corner. They cannot hope to continue to delay the world from
    using strong encryption according to their timeframe.

                           THE TIME FOR ACTION IS NOW

        To keep American vendors on a level international playing field and
    American computer users adequately protected, U.S. export controls must
    be immediately updated to reflect technological and international
    market realities.
        Thank you.

        Senator Frist. Thank you, Mr. Bidzos.
        Dr. Hoffman.

    STATEMENT OF LANCE J. HOFFMAN, PH.D., PROFESSOR, DEPARTMENT OF
     ELECTRICAL ENGINEERING AND COMPUTER SCIENCE, AND DIRECTOR OF
       THE SCHOOL OF ENGINEERING AND APPLIED SCIENCE, CYBERSPACE
           POLICY INSTITUTE, THE GEORGE WASHINGTON UNIVERSITY

        Dr. Hoffman. Thank you, Mr. Chairman. I appreciate the
    opportunity to be here this morning. I will give an abridgment
    of my written statement which has been previously furnished to
    this committee.
        My name is Lance Hoffman. I am a professor in the
    Department of Electrical Engineering and Computer Science at
    The George Washington University here in Washington, DC. I am
    also director of the School of Engineering's Cyberspace Policy
    Institute and the author or editor of five books and numerous
    articles on computer security and privacy. My most recent book
    is a compendium of papers on the encryption policy problem
    entitled ``Building in Big Brother.''
        Our Institute recently produced a report which we are
    releasing today, which I think you have been furnished,
    entitled ``Growing Development of Foreign Encryption Products
    in the Face of U.S. Export Regulations.'' This report is also
    available from the Institute and will be available later on
    this afternoon on our web site, where detailed tables and
    charts supporting the testimony I am giving are available.
        We did this work in cooperation with NAI Labs, the Security
    Research Division of Network Associates in Glenwood, MD. The
    project manager for NAI Labs, Dave Balenson, is with me today.
    We were assisted in this project by three students.
        In our work, we found that the development of cryptographic
    products outside the United States is not only continuing, but
    is expanding to additional countries. With the rapid growth of
    the Internet, communications-related cryptography especially
    has been experiencing high growth.
        We identified 805 hardware and/or software products which
    incorporate cryptography. These were manufactured in 35
    countries outside the United States. Attachment 1 to the
    written testimony provides the details on the countries and
    products.
        These 805 foreign cryptographic products represent a 149-
    product increase, or 22 percent, over the most recent previous
    survey in December 1997. At least 167 of these use strong
    encryption, the kind that one cannot export from the United
    States without applying for and receiving export license
    approval.
        Cryptography product manufacturers have appeared in six new
    countries since December 1997: Estonia, Iceland, Isle of Man,
    Romania, South Korea, and Turkey. In established markets, there
    have been some large increases in the number of products
    offered. For example, the United Kingdom jumped by 20 products
    and Germany jumped by 28 products, going from 76 to 104.
        Mr. Chairman, in 70 countries outside the United States,
    foreign companies are manufacturing or distributing
    cryptographic products. We found 512 of these companies. On
    average, the quality of foreign and U.S. products is comparable
    and there are a number of very good foreign encryption products
    that are quite competitive in strength, standards compliance,
    and functionality.
        A significant number of foreign competitors to U.S.
    manufacturers are developing products with strong encryption
    and have as customers a number of large foreign or
    multinational corporations. Our report gives more detail on
    some of these companies and their offerings.
        We also found some examples of advertising used by non-U.S.
    companies that generally attempted to create the perception
    that purchasing American products may involve significant red
    tape and the encryption may not be strong due to export
    controls. Cited earlier this morning was material from
    Cybernetica's web site in Estonia, and that is also in the
    written testimony.
        Mr. Chairman, companies want to sell encryption products
    that meet certain accepted worldwide standards. To give you
    just two examples, in the case of IPsec, the Internet Protocol
    Security Standard, there are implementations from at least nine
    companies in five foreign countries. One of these is a joint
    effort of several Japanese companies, including Fujitsu,
    Hitachi, Toshiba, and NEC.
        Two years ago NIST solicited algorithms for the Advanced
    Encryption Standard to replace the Data Encryption Standard,
    DES, as the U.S. Government standard. The majority of the 15
    candidate algorithms submitted came from foreign countries. So
    it is very possible that the next U.S. Government encryption
    standard will have been designed outside the United States.
        Finally, Mr. Chairman, our empirical product data could be
    combined with economic measures and economic theories to better
    explain why we are seeing this observed growth in the
    cryptography marketplace and to examine the effects of Internet
    growth, electronic commerce development, and regulatory actions
    on the market over time. With this knowledge, we would be able
    to more easily adjust our national laws for a global economy.
        Thank you.
        [The prepared statement of Dr. Hoffman follows:]

    Prepared Statement of Lance J. Hoffman, Ph.D. Professor, Department of
    Electrical Engineering and Computer Science, and Director of the School
     of Engineering and Applied Science, Cyberspace Policy Institute, The
                          George Washington University

        My name is Lance J. Hoffman. I am a professor in the Department of
    Electrical Engineering and Computer Science at The George Washington
    University in Washington, D.C. I also am Director of the School of
    Engineering's Cyberspace Policy Institute and the author or editor of
    five books and numerous articles on computer security and privacy. My
    most recent book is a compendium of papers on the encryption policy
    problem entitled Building in Big Brother (Springer-Verlag, New York,
    1995).
        Currently, I am the principal investigator for a project entitled
    ``Cryptography Products and Market Survey''. As part of that project,
    we have recently produced a report entitled ``Growing Development of
    Foreign Encryption Products in the Face of U.S. Export Regulations''. I
    am leaving you copies of that report, which is also available from the
    Institute or on our Web site at http://www.seas.gwu.edu/seas/
    institutes/cpi/library/papers.html, where detailed tables and charts
    supporting this testimony are also available. We did this work in
    cooperation with NAI Labs, the Security Research Division of Network
    Associates, Inc., Glenwood, Md. The project manager for NAI Labs, Mr.
    David Balenson, is with me today. We were assisted in this project by
    three students.
        In the project, we surveyed encryption products developed outside
    the United States and found that the development of cryptographic
    products outside the United States is not only continuing but is
    expanding to additional countries; with rapid growth of the Internet,
    communications-related cryptography especially is experiencing high
    growth.
        As of June 8, 1999, we identified 805 hardware and/or software
    products incorporating cryptography manufactured in 35 countries
    outside the United States. As shown in Attachment 1, the greatest
    number of foreign cryptographic products are manufactured in the United
    Kingdom, followed by Germany, Canada, Australia, Switzerland, Sweden,
    the Netherlands, and Israel in that order. Other countries accounted
    for slightly more than a quarter of the world's total of encryption
    products.
        These 805 foreign cryptographic products represent a 149-product
    increase (22%) over the most recent previous survey in December 1997.
    At least 167 of them use strong encryption, the kind that one cannot
    export from the United States without applying for and receiving export
    license approval. The algorithms used in these are Triple DES, IDEA,
    BLOWFISH, CAST-128, or RC5.
        Cryptography product manufacturers have appeared in six new
    countries since December 1997: Estonia, Iceland, Isle of Man, Romania,
    South Korea, and Turkey. There has also been a large increase in the
    number of products produced by certain countries. The United Kingdom
    jumped by 20 products from 119 to 139, and Germany jumped from 76
    products to 104. Also notable was Japan's increase, from 6 products to
    18, and Mexico's, from a single product to six.
        There are now 512 foreign companies that either manufacture or
    distribute foreign cryptographic products in 70 countries outside the
    United States. Attachment 2 lists these countries.
        On average, the quality of foreign and U.S. products is comparable.
    We have encountered poor products both within and outside the U.S., and
    we have encountered good products both within and outside the U.S.
    There are a number of very good foreign encryption products that are
    quite competitive in strength, standards compliance, and functionality.
        A significant number of foreign competitors to U.S. manufacturers
    of software and hardware with encryption capabilities are developing
    products with strong encryption, and have as customers a number of
    large foreign or multinational corporations. The report gives thumbnail
    sketches of some of these companies and their offerings.
        We found some example of advertising used by non-U.S. companies
    that generally attempted to create the perception that purchasing
    American products may involve significant red tape and the encryption
    may not be strong due to export controls. As an example, we show in
    Attachment 3 material from Cybernetica's Web site in Estonia. We give
    several other examples of similar advertising in the report.
        Companies want to sell encryption products that meet certain
    accepted worldwide standards. Encryption experts from all over the
    world have contributed to two important international standards
    efforts, IPsec and the Advanced Encryption Standard. In the case of
    IPsec, there are currently implementations (complete or in the works)
    from at least nine companies in five foreign countries. One effort, the
    KAME Project, is a joint effort of several Japanese companies (Fujitsu,
    Hitachi, IIJ Research Laboratory, NEC, Toshiba, and Yokogawa).
        In 1997, the National Institute of Standards and Technology (NIST)
    solicited algorithms for the Advanced Encryption Standard (AES) to
    replace the Data Encryption Standard (DES) as a U.S. government
    encryption standard. Individuals and companies from eleven different
    foreign countries proposed 10 out of the 15 candidate algorithms
    submitted to NIST. So it is very possible that the next U.S. government
    encryption standard will have been designed outside the United States.
    Details on who submitted what algorithm are given in Attachment 4.
        Finally, our empirical product data could be combined with economic
    measures and economic theories to better explain why we are seeing the
    observed growth in the cryptography marketplace, and to examine the
    effects of Internet growth, e-commerce development, and regulatory
    actions on the international cryptographic market over time, thus
    getting better insights into the implications of various policy
    options. We should be able to combine previous work with studies
    already available on the information technology sector and the data in
    our study to better understand the changes we are seeing in the global
    marketplace, and thus be able to more easily adjust national laws for a
    global economy.

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    Growing Development of Foreign Encryption Products in the Face of U.S.
                               Export Regulations

                               EXECUTIVE SUMMARY

        Development of cryptographic products outside the United States is
    not only continuing but is expanding to additional countries; with
    rapid growth of the Internet, communications-related cryptography
    especially is experiencing high growth, especially in electronic mail,
    virtual private network, and IPsec products. This report surveys
    encryption products developed outside the United States and provides
    some information on the effect of the United States export control
    regime on American and foreign manufacturers.
        We have identified 805 hardware and/or software products
    incorporating cryptography manufactured in 35 countries outside the
    United States. The most foreign cryptographic products are manufactured
    in the United Kingdom, followed by Germany, Canada, Australia,
    Switzerland, Sweden, the Netherlands, and Israel in that order. Other
    countries accounted for slightly more than a quarter of the world's
    total of encryption products. A full summary listing of the foreign
    cryptographic products can be found in an appendix to the report.
        The 805 foreign cryptographic products represent a 149-product
    increase (22%) over the most recent previous survey in December 1997. A
    majority of the new foreign cryptographic products are software rather
    than hardware. Also, a majority of these new products are
    communications-oriented rather than data storage oriented; they heavily
    tend towards secure electronic mail, IP security (IPsec), and Virtual
    Private Network applications.
        We identified at least 167 foreign cryptographic products that use
    strong encryption in the form of these algorithms: Triple DES, IDEA,
    BLOWFISH, RC5, or CAST-128. Despite the increasing use of these
    stronger alternatives to DES, there also continues to be a large number
    of foreign products offering the use of DES, though we expect to see a
    decrease in coming years.
        New cryptography product manufacturers have appeared in six new
    countries since December 1997, and there has been a large increase in
    the number of products produced by certain countries. The new countries
    are Estonia, Iceland, Isle of Man, Romania, South Korea, and Turkey.
    The United Kingdom jumped by 20 products from 119 to 139, and Germany
    jumped from 76 products to 104. Also notable was Japan's increase, from
    6 products to 18, and Mexico's, from a single product to six at the
    present time.
        We identified a total of 512 foreign companies that either
    manufacture or distribute foreign cryptographic products in at least 67
    countries outside the United States. A full summary listing of these is
    given in an appendix to the report.
        On average, the quality of foreign and U.S. products is comparable.
    There are a number of very good foreign encryption products that are
    quite competitive in strength, standards compliance, and functionality.
        We present sketches of some representative competitors to U.S.
    manufacturers of software and hardware with encryption capabilities;
    all are developing products with strong encryption and have as
    customers a number of large foreign or multinational corporations. The
    specific companies highlighted are Baltimore Technologies, Brokat,
    Check Point, Data Fellows, Entrust, Radguard, Seguridata Privada,
    Sophos, and Utimaco.
        We found some examples of advertising used by non-U.S. companies
    that generally attempted to create a perception that purchasing
    American products may involve significant red tape and the encryption
    may not be strong due to export controls. This almost always appeared
    on Web sites.
        We observed that companies vie to have encryption products that
    meet certain accepted worldwide standards. Encryption experts from all
    over the world have contributed to two important international
    standards efforts, IPsec and the Advanced Encryption Standard..
        Finally, we suggested that our empirical product data could be
    combined with economic measures and economic theories to better explain
    why we are seeing the observed growth and to examine the effects of
    Internet growth, e-commerce development, and regulatory actions on the
    international cryptographic market over time, thus getting better
    insights into the implications of various policy options.

                                1. INTRODUCTION

        This project has three main goals: to provide a comprehensive
    survey of foreign encryption products available worldwide; to identify
    specific foreign competitors likely to present a significant economic
    threat to U.S. manufacturers of software and hardware with encryption
    capabilities; and to provide evidence, if found, of potential threats
    to U.S. leadership in information technology as a result of U.S. export
    regulations on encryption products.
        While this work was undertaken within a very short time frame, and
    with limited resources, it still provides much new evidence to support
    the conclusions in Section 7. This evidence can be augmented with
    additional information as time permits. We do not offer opinions or
    analysis of key escrow or recovery policies, do long-term technological
    forecasting, or offer detailed political/social analysis of export
    control policies. Our goal is to provide an accurate, up-to-date survey
    of encryption products developed outside the United States and to
    provide some information on the United States export control regime and
    its effect on American and foreign manufacturers.

                                 2. PRIOR WORK

        One of our first tasks in this project was to examine prior
    relevant work. Several important documents were studied in this regard.

    2.1 U.S. Department of Commerce/National Security Agency Study
        The U.S. Department of Commerce Bureau of Export Administration
    (BXA) and the National Security Agency (NSA) jointly issued a study
    [Commerce/NSA Study 1996] that assessed the then current and future
    market for software products containing encryption and the impact of
    export controls on the U.S. software industry. Quoting from the press
    release that accompanied the study, ``. . . The study found that the
    U.S. software industry still dominates world markets. In those markets
    not offering strong encryption, U.S. software encryption remains the
    dominant choice. However the existence of foreign products with labels
    indicating DES (Data Encryption Standard) or other strong algorithms,
    even if they are less secure than claimed, can nonetheless have a
    negative impact on U.S. competitiveness. The study also notes that the
    existence of strong U.S. export controls on encryption may have
    discouraged U.S. software producers from enhancing security features of
    general purpose software products to meet the anticipated growth in
    demand by foreign markets. All countries that are major producers of
    commercial encryption products were found to control exports to some
    extent. The study found that because customers lack a way to determine
    actual encryption strength, they sometimes choose foreign products over
    apparently weaker U.S. ones, giving those foreign products a
    competitive advantage.'' [U.S. DoC 1996]

    2.2 National Research Council CRISIS Report
        A report [CRISIS 1996] was published in 1996 by the National
    Research Council's Committee to Study National Cryptography Policy. It
    examined a number of issues related to our study. Based on work by a
    committee chaired by former Deputy Secretary of State Kenneth Dam and
    populated by a number of professionals from the law, intelligence, and
    computer science communities, it concluded that the United States
    should promote widespread commercial use of technologies that can
    prevent unauthorized access to electronic information, that the export
    of the Data Encryption Standard (DES) should be allowed to provide
    (what was then considered)-an acceptable level of security, and that
    the United States should progressively relax but not eliminate export
    controls.
        The report also states ``widespread commercial and private use of
    cryptography in the U.S and abroad is inevitable in the long run and
    its advantages, on balance, outweigh the disadvantages''. The committee
    concludes by noting ``the interests of the government and the nation
    would be best served by a policy that fosters a judicious transition
    toward a broad use of cryptography''.

    2.3 President's Export Council Subcommittee on Encryption Report
        The President's Export Council Subcommittee on Encryption (PECSENC)
    is chartered by the Secretary of Commerce to provide the private and
    public sector with the opportunity to advise the U.S. Government on the
    future of commercial encryption export policy. The members of the
    PECSENC consist of representatives from industry, academia, nonprofit
    foundations, state and local law enforcement, and elsewhere in the
    private sector. In Septemberl998, its Working Group on International
    Issues issued a report [PECSENC 1998, included as Appendix D] that
    found ``the difference between U.S. encryption controls and those of
    other nations is a serious--but not the only--factor determining
    success in the computer security market.'' It also concluded that,
    ``the adverse impact of controls on U.S. industry is palpable. For many
    software applications, business customers simply demand security and
    encryption; it is a checklist item, and its absence is a deal
    breaker.''
        The report also highlighted an example of a non-U.S. company using
    the difference in export control regimes as ``leverage'' to ultimately
    attempt to dominate particular applications:

             ``. . . Brokat, a German company that scarcely existed four
            years ago, now has 250 employees and offices in several
            countries including the United States. Brokat's specialty is
            Internet banking and electronic commerce, but it broke into
            that business on the strength of being able to offer stronger
            encryption than German banks could obtain in Netscape or
            Microsoft browsers. It is now a major player in this niche,
            with 50% of the European Internet banking market and enough
            U.S. customers to justify a 20-person U.S. branch office.
            Meanwhile, encryption constitutes 10% or less of Brokat's
            revenue, and it has expanded its initial Internet banking
            offerings to include support for other forms of electronic
            commerce. Loss of U.S. competitiveness in the electronic
            commerce software market obviously raises concerns not just
            about encryption software but other software opportunities.
            Indeed, it foreshadows a weakening of the U.S. position as a
            leader in electronic commerce generally.''

        The report also was concerned that ``the persistent emphasis in
    U.S. export control policy over the past two years on key recovery, or
    ``lawful access,'' has also taken a toll on the credibility of U.S.
    security products. . . . Foreign governments and competitors,
    particularly in Europe, have misinterpreted this U.S. policy, perhaps
    deliberately. In essence, foreign customers are told often by their
    governments as well as local security companies that all U.S.
    encryption products come with a back door allowing the U.S. government
    to read the contents. In part this is the result of outmoded `Recovery'
    supplements to U.S. export rules that demand an unrealistic level of
    U.S. government access to key recovery products.''

              3. SURVEY OF CRYPTOGRAPHIC PRODUCTS OUTSIDE THE U.S.

    3.1 Overview
        The principal investigator and the subcontractor of this current
    project also studied the worldwide availability of cryptographic
    products since April 1993 as part of what has become known as the ``TIS
    Survey'' [TIS 1997]. The results of this earlier work have been
    presented to the Computer Systems Security and Privacy Advisory Board
    (CSSPAB) of the National Institute of Standards and Technology (NIST)
    and presented by Stephen T. Walker, President of Trusted Information
    Systems, to two Congressional subcommittees [Walker 1993, Walker 1994].
    The survey was also provided to numerous government agencies and
    departments as part of their efforts to understand the availability of
    cryptographic products and its impact on U.S. export control policies.
        The TIS Survey continued until December 1997, at which time it
    identified 656 foreign cryptographic products from 29 countries. The
    survey also identified 963 domestic products, for a worldwide total of
    1619 products produced and distributed by 949 companies (474 foreign
    and 475 domestic) in at least 68 countries.
        Our goal for this current study was to update the foreign product
    portion of the TIS Survey. We focused mainly on discovering new
    products from foreign manufacturers and also spent some time updating
    entries for the existing foreign products in the database.
        Information collected by the TIS Survey was assembled into an MS
    Access database. The database includes two tables, one for
    cryptographic products and a second table for companies that either
    produce or distribute cryptographic products. Each entry in the product
    table includes the following information: Name/Version, Manufacturer
    and Country, Platforms:
         PC, Mac, Workstation, Mainframe, DOS, Windows, UNIX, etc.,
    Interfaces;
         RS232, X.21, X.25, V.21, V.24, RJ-11, etc., Type;
         HW, SW, HW/SW combo, What It Encrypts;
         Data, Files, Directories, Disks, Communications, Voice,
    Fax, Tape, Email, etc., Embodiment;
         Program, Kit, Chip, Board, Box, Tokens, PCMCIA, Smart
    Card, Phone, etc. Cryptographic Algorithms;
         DES, Triple DES (3DES), Blowfish, IDEA, CAST, Proprietary,
    RC2/4/5, SKIPJACK, Stream Ciphers, RSA, El Gamal, DH, DSA, ECC, MD2/4/
    5, SHA-1, etc., How Distributed;
         Mass-Market, Direct, Shareware, Internet, etc., Company
    Information;
         Name, Country, Address, Contact Information, etc.

    3.2 Data Collection Methodology
        We used the following methods of data collection: issue a call for
    information and examine the results, plumb existing work available to
    us, and use the World Wide Web to conduct searches for new products and
    information.
        The call for information to elicit information from the computer
    cryptography community regarding new products (Appendix A) was posted
    in the following newsgroups and mailing lists (IETF is the Internet
    Engineering Task Force [IETF]):
         sci.crypt newsgroup: discussion of the science of
    cryptology, including cryptography, cryptanalysis, and related topics
    such as one-way hash functions.
         Risks mailing list: describes many of the technological
    risks that happen in today's environment.
         Cypherpunks mailing list: forum for discussing
    cryptography, privacy, and related social issues.
         Cryptography mailing list: mailing list devoted to
    cryptographic technology and its political impact.
         Firewalls mailing list: discussion of Internet
    ``firewall'' security systems and related issues.
         IETF Web Transaction Security (wts) Working Group mailing
    list: discussion of the development of requirements and a specification
    for the provision of security services to Web transaction.
         IETF Secure Shell (secsh) Working Group mailing list:
    discussion of efforts to update and standardize the SSH protocol.
         IETF IP Security Protocol (ipsec) Working Group mailing
    list: discussion of the standards efforts on IP Security.
         IETF An Open Specification for Pretty Good Privacy
    (openpgp) Working Group mailing list: discussion of extending the
    current PGP protocol.
        The Call and Survey were also posted on the Web site of the
    Cyberspace Policy Institute of The George Washington University [CPI
    1999]. Additionally, project team members sent the survey out to
    individuals who they believed might know of foreign products.
        The existing work available to us included trade magazines,
    journals, buyers guides [CSI, ICSA Survey], and other print material.
        Most of our new information on foreign cryptography products was
    found by using Web search engines and gathering information from Web
    pages.

    3.3 Results of Update to Cryptographic Products Survey
        Our effort to update the cryptographic products survey focused
    mainly on discovering new products from foreign producers, but also
    involved updating information on some of the existing foreign products
    in the database. Since we did not set out to update information on
    cryptographic products produced in the U.S., the number of domestic
    cryptographic products changed only slightly (when we came across
    something and thus updated the information). However, we expect that
    the number of cryptographic products produced in the U.S. has in fact
    also increased. NAI Labs plans to further update the domestic portion
    of the survey in the near future.
        The updated foreign cryptographic product survey (see summary table
    on following page) now identifies a total of 805 hardware and/or
    software products incorporating cryptography manufactured in 35
    countries outside the United States. The most foreign cryptographic
    products are manufactured in theUnited Kingdom, followed by Germany,
    Canada, Australia, Switzerland, Sweden, the Netherlands, and Israel in
    that order. Other countries accounted for slightly more than a quarter
    of the world's total of encryption products. A full summary listing of
    the foreign cryptographic products can be found in Appendix B.
        The 805 foreign cryptographic products resulting from the current
    update represents a 149-product increase over the December 1997 survey.
    A majority of the new foreign cryptographic products are software
    rather than hardware.
        Another notable finding is that a majority of new foreign
    cryptographic products are oriented toward communications rather than
    data storage applications; and these heavily tended towards secure
    electronic mail, IP security (IPsec), and Virtual Private Network (VPN)
    applications. The results also showed a lot of activity in IPsec
    implementation, which is likely prompted by the recent emergence of new
    IPsec specifications from the IETF [IPSEC].
        The updated foreign cryptographic product survey also identified a
    total of 512 foreign companies that either manufacture or distribute
    foreign cryptographic products in at least 67 countries outside the
    United States. A full summary listing of these is given in Appendix C.

                3.3.1 More ``Strong'' Encryption is on the Market
        The updated foreign cryptographic products survey also showed
    increasing use of ``strong'' alternative cryptographic algorithms to
    DES, which uses a 56-bit key. Altogether, we identified at least 167
    foreign cryptographic products that use Triple DES, IDEA, BLOWFISH,
    RC5, or CAST-128, which support larger key lengths. Despite the
    increasing use of these stronger altematives to DES, there also
    continues to be a large number of foreign products offering the use of
    DES, though we expect to see a decrease in coming years.
        We identified at least 123 foreign cryptographic products that use
    Triple DES, which employs either two traditional DES keys, for an
    effective key length of 112 bits, or three DES keys, for an effective
    key length of 168 bits.
        We identified at least 54 foreign cryptographic products that use
    the International Data Encryption Algorithm (IDEA), a Swiss-developed
    symmetric block cipher with a 128-bit key length [Lai 1990, Lai 1991].
        We identified at least 36 foreign cryptographic products that use
    BLOWFISH, a symmetric block cipher developed by Bruce Schneier with a
    variable key length ranging from 32 to 448 bits [Schneier 1993,
    Schneier 1994]. Many of these products appear to use BLOWFISH with the
    full 448-bit key length.
        We identified at least 2 foreign cryptographic products that use
    RC5, a symmetric block cipher developed by Ron Rivest (one of the RSA
    inventors) with a variable length key up to 2040 bits [Rivest 1996].
        We identified at least 12 foreign cryptographic products that use
    CAST-128, a symmetric block cipher developed by Carlisle Adams of
    Entrust Technologies in Canada with a variable length key up to 128
    bits [Adams 1997].

    [GRAPHIC] [TIFF OMITTED] T9984.005

                3.3.2 New Countries and Growth Countries for Cryptographic
                        Products
        The update identified six new countries producing cryptographic
    products. The countries that have started producing encryption products
    since December 1997 are Estonia, Iceland, Isle of Man, Romania, South
    Korea, and Turkey.
        We also noticed a large increase in the number of products produced
    by certain countries, such as the United Kingdom, which jumped by 20
    products from 119 to 139, and Germany, which jumped from 76 products to
    104.
        Japan also showed a large increase, jumping from 6 products in the
    December 1997 survey to 18 products in the updated survey. Most of the
    new products come from Mitsubishi Electronic Corporation, which has
    introduced a number of hardware and software cryptographic products
    that make use of a Japanese cryptographic algorithm known as MISTY,
    which uses a 128-bit key as well as Triple DES [Matsui 1996, MISTY].
        Mexico also increased, from a single ``freeware'' product in the
    December 1997 survey to six products in the updated survey, due to the
    discovery of five new commercial cryptographic products from Seguridata
    Privada S.A de C.V., which is described in greater detail in Section 4.
    [GRAPHIC] [TIFF OMITTED] T9984.006

                3.3.3 Growing Numbers of Foreign Products & Companies
        The TIS Survey was initiated in April 1993 and conducted on an
    ongoing basis through December 1997. Figure 2 depicts the evolution of
    the survey in terms of the increasing numbers of foreign cryptographic
    products and companies (manufacturers and distributors) identified each
    year of the survey effort and after the recent update. Overall, there
    clearly continues to be increasing and expanding development of foreign
    cryptographic Products.

                3.3.4 Quality of Foreign Cryptographic Products
        NAI Labs has obtained a number of foreign cryptographic products
    over the life of the survey effort. The products were all purchased via
    routine channels, either directly from the foreign manufacturer, a
    foreign distributor, or an U.S. distributor. We have also downloaded a
    large number of foreign cryptographic products over the Internet via
    the World Wide Web.
        The quality of cryptographic products varies greatly both within
    and outside the U.S. We have encountered poor quality products both
    within and outside the U.S., and we have encountered good quality
    products both within and outside the U.S. On average, the quality of
    foreign and U.S. products is comparable. There are a number of very
    good foreign encryption products that are quite competitive in
    strength, standards compliance, and functionality. We highlight some of
    these in the next section.

          4. some competitors to u.s. products employing cryptography
        After updating the cryptography product database, based on prior
    surveys and new information, we searched out information on the foreign
    manufacturers that were representative competitors to U.S.
    manufacturers of software and hardware with encryption capabilities. We
    did this by examining traditional sources such as business magazines,
    major newspapers, and trade publications; interviewing industry leaders
    and security professionals; and using various Web-based search methods
    [Lexis-Nexis, ABI/Inform, FirstSearch, Gale] to find appropriate
    combinations of keywords (encryption, U.S., US, United States, foreign,
    overseas, regulation, export, export controls).
        We identified a substantial number of foreign companies that are
    developing a number of products with strong encryption and have as
    customers a number of large foreign or multinational corporations. We
    sketch nine of these in this section to provide a representative
    sampling. All but one already provide strong encryption (as defined in
    Section 3.3.1).
        Some of the material below has references to cryptographic
    algorithms, protocols, and other computer science terms that may not be
    familiar to some readers. More information on these can generally be
    found in [Stallings 1999] and [Rivest 1978].
    Baltimore Technologies Plc, IRELAND/UNITED KINGDOM/AUSTRALIA
        Baltimore Technologies plc. was formed by the merger in January
    1999 of Zergo Holdings plc. (UK) and Baltimore Technologies Ltd.
    (Ireland). Its regional headquarters are located in Dublin (Ireland),
    Plano (Texas) and Sydney (Australia). Corporate headquarters are
    located in London, UK [Baltimore 1999a].
        Baltimore develops and markets security products and services for a
    wide range of e-commerce and enterprise applications. Its products
    include Public Key infrastructure (PKI) systems, cryptographic
    toolkits, security applications and hardware cryptographic devices.
        Baltimore's security toolkits include PKI-Plus, ECS Desktop, C/SSL,
    J/SSL, SMT, CST, and J/CRYPTO. The PKI-Plus toolkit provides clients
    with the functionality to support a Public Key Infrastructure and
    provides encryption capabilities with full strength DES, Triple DES and
    IDEA. ECS Desktop is a high level GSS toolkit that supports 64-bit DES
    and 128-bit Triple DES. C/SSL and J/SSL are cryptographic toolkits for
    developing SSL 3.0 applications written in C and Java respectively. C/
    SSL supports 56-bit DES and 128-bit Triple DES, IDEA and RC4. J/SSL
    supports 56-bit DES, and 128-bit Triple DES and RC4. SMT (Secure
    Messaging Toolkit) provides developers the ability to add security to
    messaging (email) applications. The encryption algorithms supported are
    56-bit DES, 128-bit Triple DES, and 40-bit, 64 bit, and 128-bit RC2.
    CST (Crypto Systems Toolkit) is a set of cryptographic components
    enabling developers to build strong information security systems. It
    contains implementations of a variety of encryption algorithms
    including DES, Triple DES with up to 192 bits key length, IDEA, BSA4,
    BSA5, RC2, RC4, up to 2048-bit RSA, and DSA. J/CRYTPO is a
    cryptographic class library for Java applications that supports 56-bit
    DES, 112-bit Triple DES, and RC4 encryption, and 512-, 1024-, and 2048-
    bit RSA key exchange and digital signature.
        Security application solutions include FormSecure, MailSecure,
    MailSecure Enterprise, and WebSecure. Of its security applications,
    FormSecure which provides PKI security for Web browser forms uses DES
    and triple-DES encryption with 128-bit keys. MailSecure provides secure
    email for MS Outlook, Exchange and Eudora using 128-bit DES, Triple DES
    and RC2. MailSecure Enterprise, a centralized secure email product,
    provides encryption with 128-bit Triple DES. WebSecure enhances web
    server to browser communication in eases where export versions of
    specific browsers are limited to 40 bits of encryption by diverting all
    web traffic to its Java programs that use 128-bit RC4 encryption.
        Baltimore's hardware cryptographic device, HS4000-Assure provides a
    security kernel for high speed servers and workstations and features
    56-bit DES and 112-bit Triple DES data encryption, and up to 4096-bit
    RSA key exchange and digital signatures.
        ``Baltimore has customers in over forty countries including some of
    the world's leading financial, e-commerce, telecommunications companies
    and government agencies. Customers include: ABN-AMRO Bank, Australian
    Tax Office, Bank of England, Bank of Ireland, Belgacom, Digital
    Equipment, European Commission, Home Office (UK), IBM, Lehman Brothers,
    Ministry of Defense (UK), NatWest, NIST (USA), PTT Post (Netherlands),
    S.W.I.F.T., Tradelink (Hong Kong), TradeVan (Malaysia) and VISA
    International'' [Baltimore 1999a] .
        ``Baltimore has also formed alliances with other major global
    providers of information security technology and services, including
    ActivCard, Axent Technologies, CDC, Certicom, Chrysalis, CISCO, Dascom,
    DataKey, GemPlus, Gradient, Hewlett-Paekard, ICL, Isocor, Kyberpass,
    Logica, Netseape, Oracle, Racal and Valicert'' [Baltimore l999a].

    Brokat Infosystems AG, GERMANY
        BROKAT was founded in 1994. Its headquarters is in Stuttgart,
    Germany. Subsidiaries are located in Great Britain, Ireland,
    Luxembourg, Austria, Switzerland, Singapore, Australia, South Africa
    and the United States. Brokat develops secure solutions for Internet-
    banking, Internet-brokerage and Internet-payment by allowing companies
    through the use of its products to develop secure electronic banking
    and electronic commerce solutions [Brokat l999a]. Its main product,
    Brokat Twister, is a software package enabling secure electronic
    business solutions and provides Java-based 128-bit encryption. Brokat's
    X-PRESSO Security Gateway provides Twister with a secure Internet
    channel, using strong SSL encryption. It supports 128-bit IDEA and
    Triple DES for data encryption, and RSA up to 2048 bits for key
    exchange and digital signatures.
        In its press release of May 19, 1999 Brokat claims a sales increase
    of 125% in the third quarter of 1998/1999 compared to the same quarter
    in the previous year [Brokat 1999b].
        More than 100 financial service companies use Twister. Brokat
    customers include Deutsche Bank, Bank 24, Allianz, Fortis Bank
    Luxembourg the Zurich Kantonalbank, Hypo Bank of Munich, and The Swiss
    National Telephone Company [Andrews 1997].
        Brokat's ``Product Partners'' include AOL Bertelsmann Online,
    Corporate Interactive, Inc., Intershop Communications, Micrologica,
    Netscape Communications, Giesecke & Devrient, and Concord-Eracom.
    Check Point Software Technologies Ltd., ISRAEL
        ``Check Point provides secure enterprise networking solutions
    through an integrated architecture that includes network security,
    traffic control and IP address management. Check Point solutions are
    aimed at enabling customers to implement centralized policy-based
    management with enterprise-wide distributed deployment'' [Check Point
    1999a].
        ``The company's integrated architecture includes network security
    (FireWall-1, VPN-1, Open Security Manager and Provider-1), traffic
    control (FloodGate-1 and ConnectControl) and IP address management
    (Meta IP)'' [Check Point 1999b].
        ``Check Point products protect and manage the corporate assets of
    the majority of Fortune 100 companies and other leading companies and
    government agencies across the globe. As of April 1999, the company had
    more than 30,000 registered customers with over 77,000 installations
    worldwide and 17,000+ networks worldwide using its VPN solution. The
    Meta IP and Meta DNS products had some 15,000 installations worldwide''
    [Check Point 1999b].
        The company's international headquarters are located in Ramat-Gan,
    Israel. International subsidiaries are located in the United Kingdom,
    France, Germany, Japan, Singapore, Australia, the Middle East and
    Canada. U.S. subsidiaries are located in northern and southern
    California, Colorado, Georgia, Illinois, Massachusetts, Michigan, New
    York, North Carolina, Philadelphia, Texas, Virginia and Washington.
        In an April 19, 1999 press release, Check Point announced that
    ``revenues for the first quarter ending March 31 were $43,772,000
    compared to $31,956,000 for the same period in 1998, an increase of
    37%. Net income for the quarter was $19,703,000, or $0.49 per share
    compared to net income of $15,149,000, or $0.39 per share in the same
    quarter in 1998, an increase of 30% in net income and 26% in net income
    per share. Check Point experienced growth across all geographic
    regions, particularly in Japan. Revenues from the U.S. accounted for
    45% of revenues, Europe 34% and Rest of World 21%. In addition,
    revenues from Technical Services reached 17% in the first quarter. OEM
    revenues, including those from Nokia and Sun Microsystems, represented
    11% of revenues'' [Check Point 1999c] .
        Based on figures from 1997, Check Point is the leading vendor of
    firewalls with a 23% share in the firewall market--a revenue of $83
    million in firewall sales [Inter@ctive Week 1998].
        Checkpoint's firewall solution, Firewall-1 provides a comprehensive
    set of security solutions which includes VPN through the support of
    encryption algorithms such as 40- and 56-bit DES, 168-bit Triple DES,
    40-bit RC4, 40- and 128-bit CAST, and 48-bit FWZ-1 (FWZ-1 is Check
    Point's 48-bit exportable proprietary symmetric encryption algorithm).
        Check Point's VPN solution products include VPN-1 Gateway, VPN-1
    SecuRemote, VPN-1 Accelorator Card, and VPN-1 Appliance. VPN-1 Gateway
    products are software solutions that provide encryption supporting the
    following algorithms: 40- and 56-bit DES, 168-bit Triple DES, 40-bit
    RC4, 40- and 128-bit CAST, and 48-bit FWZ-1. VPN-1 SecurRemote provides
    VPN support for remote and mobile users. It supports 40- and 56-bit
    DES, 168-bit Triple DES, 40-bit CAST, and 48-bit FWZ-1. VPN-1
    Accelorator Card provides hardware-based data encryption using 56-bit
    DES and 168-bit Triple DES. VPN-1 Appliance uses 40-and 56-bit DES, 40-
    bit RC4, and 48-bit FWZ-1.
        Check Point's Open Platform for Secure Enterprise Connectivity
    (OPSEC) is an alliance that delivers the industry's first enterprise-
    wide security framework. OPSEC provides a single framework that
    integrates and manages all aspects of secure enterprise networking
    through an open, extensible management framework Via the OPSEC
    Alliance, Check Point Software's products seamlessly integrate with
    ``best-of-breed'' products from more than 200 leading industry
    partners. A complete listing of OPSEC partners can be found at http://
    www.opsec.com/.

    Data Fellows Ltd., FINLAND
        ``Data Fellows develops, markets and supports data security
    products for corporate computer networks. Its products include anti-
    virus software, and data security and cryptography software. Its main
    offices are in San Jose, California and Espoo, Finland, and it has
    branch offices as well as corporate partners, VARs and other
    distributors in over 80 countries around the world. Its products have
    been translated into over 20 languages'' [Data Fellows 1999a].
        Data Fellows' F-Secure cryptography products are a family of
    cryptography software to protect the integrity and confidentiality of
    sensitive information. Its family of products include F-Secure VPN+, F-
    Secure VPN, F-Secure SSH, F-Secure FileCrypto, and F-Secure Desktop. F-
    Secure VPN+ provides IPSec protocol based security for secure
    networking between remote offices, business partners and travelling
    salesmen using 56-bit DES, 168-bit Triple DES, 128-bit Blowfish, and
    128-bit CAST. F-Secure VPN (Virtual Private Network) is an SSH security
    protocol based solution for pure LAN-to-LAN encryption using a variety
    of user selectable algorithms including Triple DES, Blowfish, RSA, and
    IDEA (optional). The symmetric algorithms all use at least 128 bits. F-
    Secure SSH Server provides users with secure login connections, file
    transfer, X11, and TCP/IP connections over untrusted networks using
    128-bit Triple DES and 128-bit IDEA. F-Secure SSH Terminal&Tunnel
    provides the user with secure login connections over untrusted networks
    and to create local proxy servers for remote TCP/IP services. F-Secure
    SSH Tunnel&Terminal products support the following cryptographic
    algorithms: 56-bit DES, 168-bit Triple DES, 128-bit IDEA, 128-bit
    Blowfish, 256-bit Twofish, and 128-bit ARCFour (an RC4 compatible
    stream cipher). F-Secure FileCrypto is a product that encrypts and
    decrypts files using 256-bit Blowfish and 168-bit Triple DES. F-Secure
    Desktop provides encryption and decryption of files, directories, and
    Windows 95/NT 4.0 folders using 256-bit Blowfish and 168-bit DES.
        ``The Company's net sales have doubled annually since it was
    founded in 1988. Turnover has reached $3.3 million, $7.6 million and
    $14.1 million in the fiscal years 1995, 1996 and 1997, respectively''
    [Data Fellows 1999a].
        ``Data Fellows has customers in more than 100 countries. These
    include many of the world's largest industrial corporations and best-
    known telecommunications companies; major international airlines;
    several European governments, post offices and defense forces; and
    several of the world's largest banks. Customers include NASA, the US
    Air Force, the US Department of Defense Medical branch, the US Naval
    Warfare Center, the San Diego Supercomputer Center, Lawrence-Livermore
    National Laboratory, IBM, Unisys, Siemens-Nixdorf, EDS, Cisco, Nokia,
    Sonera (formerly Telecom Finland), UUNet Technologies, Boeing, Bell
    Atlantic, and MCI'' [Data Fellows 1999a].

    Entrust Technologies, CANADA
        Entrust is a Canadian company that spun off from Northern Telecom
    (Nortel). It develops cryptographic products in Canada and exports them
    from there. It now has offices across the United States, Canada, the
    United Kingdom, Switzerland, Germany, and Japan.
        Entrust develops products for trusted electronic transactions. Its
    products include solutions for secure Internet transactions including
    digital certificate services and public-key infrastructures (PKI)
    products.
        Entrust File Toolkit delivers a set of application programming
    interfaces (APIs) to add encryption and digital signatures to store-
    and-forward (email, e-forms) applications. It Supports DES, Triple DES,
    RSA and RC2. Entrust Session Toolkit is designed for third-party
    applications that need to protect data communications in real-time. It
    supports DES, Triple DES, and RC2. Entrust/Solo is a product that
    provides data encryption, digital signature and data compression
    functionality for the desktop and e-mail using DES, Triple DES and
    CAST.
        The company's more than 800 corporate customers include J.P.
    Morgan, the Salomon Smith Barney unit of Citigroup, ScotiaBank,
    S.W.I.F.T, FedEx, the Canadian Government and several U.S. government
    agencies.
        Entrust's industry partners include development partners such as
    Hewlett-Packard, Network Associates, Oracle, Nortel Networks and
    others, 25 channel partners including Hewlett-Packard and Compaq OEM
    Partners: IBM, Tandem, Check Point and others, specifiers and referral
    partners such as PriceWaterhouse Coopers, Deloitte & Touche; KPMG Peat
    Marwick, Ernst & Young, and others, and service provider partners such
    as BCE Emergis, EDS, Scotiabank and others [Entrust 1999].

    Radguard, ISRAEL
        RADGUARD was founded in 1994 as a member of the RAD Group of data
    communications companies. Privately held, the company is backed by
    American and foreign corporate investors. The company's international
    headquarters are located in Tel Aviv, Israel; its US headquarters are
    in Mahwah, NJ.
        Radguard is a pioneer and leader in the secure Virtual Private
    Network (VPN) market. Incorporating security technologies and industry
    standards into high-performance hardware architectures, Radguard
    provides solutions to Internet-based
    virtual private networking, secure non-Internet transmission, safe
    Internet connectivity and client encryption. Its VPN and network
    security products include cIPRO, CryptoWall, and NetCryptor. cIPRO is
    an Internet-working security system for VPNs. The cIPRO family uses DES
    and up to 168-bit Triple DES for encryption. CryptoWall is an
    encrypting firewall that supports subnet-to-subnet security in TCP/IP
    environments. It supports DES for data encryption and RSA for key
    exchange and digital signature. NetCryptor is a hardware-based
    encryption device that employs DES.
        Customers include NTT Data, a subsidiary of Japan's Nippon
    Telephone and Telegraph (NTT), Germany's major car makers and component
    suppliers including BMW, Bosch, BEHR, Drexlmaier, Audi, Freudenberg,
    DaimlerChrysler, Volkswagen and Hella.

    Seguridata Privada S.A de C.V., MEXlCO
        SeguriDATA is a Mexican company founded in 1996 with the purpose of
    participating actively in the construction of security standards in
    Mexico and Latin America by means of integration in committees, with
    products in electronic security. It has offices in Peru and Spain as
    well as Mexico. The company provides confidentiality and authenticity
    of electronic documents with applications to electronic commerce,
    financial transactions and confidential systems of communications.
        Its products include SeguriDOC, SeguriEDIFACT, SeguriLIB,
    SeguriPROXY, and SeguriTELNET. SeguriDOC offers Triple DES for
    confidentiality of archived data. SeguriEDIFACT provides security for
    EDI communications using Triple DES. SeguriPROXY provides security
    between web server and web browser sessions using 128-bit RC4.

    Sophos Plc., UK
        Sophos Plc was founded in 1980 and moved into data security in
    1985, producing software and hardware for data encryption,
    authentication and secure erasure. Its virus detection product has
    positioned the company as a leading supplier of enterprise-wide virus
    protection tools. Subsidiaries include Sophos Pty Ltd, Australia,
    established in April 1999, Sophos Plc, France, established in May 1998,
    Sophos GmbH, Germany established in October 1997, and Sophos Inc, USA,
    a wholly-owned subsidiary of Sophos Plc based in Massachusetts, USA
    [Sophos 1999]. Sophos data security products include D-Fence 4 HMG, D-
    Fence 4 SPA, E-DES, and PUBLIC. D-FENCE HMG is a disk authorization and
    encryption system for HMG, providing encryption and authentication of
    floppy and hard disks using SEVERN BRIDGE, a U.K. Government standard
    algorithm. D-FENCE SPA is a data encryption system for PCs and laptops
    using SPA (Sophos Proprietary Algorithm) for encryption of floppy and
    hard disks. SPA is a 64-bit block cipher with 64-bit keys. E-DES and
    PUBLIC are products used for secure file storage and transmission. E-
    DES encrypts files using DES or SPA, while PUBLIC encrypts files using
    512-bit RSA or MDH in combination with DES or SPA.
        Customers include government, financial institutions and multi-
    national corporations.

    Utimaco Safeware AG, GERMANY
        Utimaco Safeware AG has subsidiaries in Belgium, France, Finland,
    Great Britain, Austria, the Netherlands, Norway, Sweden and Switzerland
    and additional distribution partners (Value-Added-Resellers) in almost
    all European countries, in the USA, Australia, Asia and in South
    Africa. Utimaco also has strategic alliances with IBM Deutschland
    Informationssysteme GmbH, SIEMENS AG and Toshiba Europe.
        Utimaco develops IT security solutions for the areas of mobile/
    desktop security (authentication, access control, encryption), network
    security (authentication, encryption), e-commerce security (digital
    signature, encryption) and security infrastructure (smart card reader).
        ``Utimaco has three development centres. The SafeGuard product line
    focussing on the ``Mobile/Desktop Security'' area is developed in
    Munich, Germany. The development of the SafeGuard product family for
    ``Network Security'' and the smart card technology and card reader
    family CardMan is done in Linz, Austria. The third development centre
    near Brussels (Holsbeck), Belgium, is responsible for the SafeGuard
    ``E-Commerce Security'' product line (digital signatures, e-mail
    security) and the CriptWare technology (high-performance
    implementations of standardized basis-crypto algorithms and
    interfaces)'' [Utimaco 1999a].
        Products for mobile/desktop security include SafeGuard Easy, and
    SafeGuard Desktop. SafeGuard Easy is a security program for the online-
    encryption of hard disks and diskettes. It operates with the encryption
    algorithms Blowfish, STEALTH, 56-bit DES and 128-bit IDEA to guarantee
    the confidential storage of sensitive data. SafeGuard Desktop is a
    security solution for OS/2 operating systems offering boot and virus
    protection as well as user logon, and allows online encryption of hard
    disks and floppies with DES, IDEA, STEALTH, Blowfish, and XOR.
        Utimaco network security products include SafeGuard LAN Crypt and
    SafeGuard VPN. SafeGuard LAN Crypt provides protection of selected
    files against access by persons who are physically capable of accessing
    the data carrier. The solution guarantees the security of encrypted
    data through a key length of 128 bits and globally accepted, strong
    algorithms such as IDEA. SafeGuard VPN provides Virtual Private
    Networks with secure data transmission using 168-bit Triple DES and
    128-bit IDEA.
        Utimaco's E-commerce security products include CryptWare Board,
    CryptWare Server, Cryptware Toolkit, and SafeWare Sign&Crypt. Cryptware
    Board comes with a DES chip, but allows any other encryption algorithm
    to be easily installed. The CryptWare Server is a cryptographic black
    box designed for applications with high security requirements and/or
    high-speed cryptographic capabilities. It employs DES and 1024-bit RSA.
    The CryptWare Toolkit is a library that provides all necessary
    cryptographic and administrative functions to build secure electronic
    messaging systems. It supports RSA, Triple DES, IDEA, RIPEMD160, MD5,
    and SHA-1. SafeWare Sign&Crypt offers signing and verification of
    electronic documents. It can provide encryption with 128-bit IDEA.
        The breakdown of Utimaco Group sales by industry in the last
    business year, 1997/98, is as follows: 29.7% for public institutions,
    29.3% for banks, 26.8% for industry and commerce and 14.1% for
    insurance companies. In the last business year 57 percent of sales were
    made outside Germany. Its customers include Bertelsmann (Gutersloh)
    Colonia Nordstern Versicherungsmanagement AG (Cologne), Daimler-Benz
    Aerospace AG (Kiel), Dresdner Bank, Eduscho GmbH (Bremen), Frankfurter
    Sparkasse (Frankfurt), Goldwell GmbH (Darmstadt), Innenministerium
    Mecklenburg-Vorpommem (Schwerin), Landesamt fur Datenverarbeitung,
    (Potsdam), Motorola GmbH (Taunusstein), Otto Versand International GmbH
    (Hamburg), Oberverwaltungsgericht Thuringen (Weimar), Price Waterhouse
    (Frankfurt), Police Forces (Belgium), Isaserver (Belgium), State Police
    (Belgium), Unisys for Christelijke Mutualiteiten (Belgium), The
    European Commission (Belgium and Luxembourg), Danfoss A/S (Denmark),
    ICL Pathway Ltd. (Great Britain), Robert Fleming & Co. Ltd. (Great
    Britain), Standard Chartered Bank (Great Britain), Conseil de I Union
    Europeenne (Luxembourg), KPN Telecom (The Netherlands), ABN AMRO Bank
    N.V. (The Netherlands), Nycomed Amersham Group (Norway), Schweizer Post
    (Switzerland), DDJ, and Justizdirektion des Kantons Zurich
    (Switzerland).

                5. foreign marketing use of u.s. export controls
    5.1 Introduction
        As Under Secretary of Commerce William A. Reinsch noted in recent
    Congressional testimony, ``encryption remains a hotly debated issue.
    The Administration continues to support a balanced approach that
    considers privacy and commerce as well as protecting important law
    enforcement and national security equities. We have been consulting
    closely with industry and its customers to develop a policy that
    provides that balance in a way that also reflects the evolving
    realities of the market place'' [Reinsch 1999]. As the Commerce
    Department struggles to craft and finely tune export regulations to
    satisfy these objectives, many foreign cryptography manufacturers are
    citing these regulations as reasons for their prospects to not ``buy
    American''. Even foreign governments sometimes overtly use these
    regulations. For example, ``In a letter sent [in January 1999] to
    India's Central Vigilance Commission (CVC)--an intelligence agency
    comparable to the United States' National Security Agency--the Indian
    Defense Research and Development Organization said the limits the U.S.
    government places on exported encryption products render the products
    too weak for reliable use. The CVC responded that it might mandate that
    all Indian financial institutions buy security software from India''
    [Dunlap 1999].

    5.2 Advertising Related to Cryptographic Controls
        Trade magazines, industry reports, and news articles were searched
    for consumer preference data, including checklists, ease of use'' and
    ``best buy'' ratings, etc., to try to find anecdotal justification or
    rebuttal of the claim that consumers strongly prefer U.S.-made
    encryption products and systems incorporating U.S.-made encryption, as
    asserted, for example, in [Ernst 1999].
        We did find a reference to a U.S. government study that
    acknowledged that ``in many countries surveyed, exportable U.S.
    encryption products are perceived to be of unsatisfactory quality''
    [Commerce/NSA 1996] (date given as June 1995, page ES-3, possibly a
    draft, in [Olbeter 1998]). We also found some information from
    companies that claimed or implied that their products are more secure
    and/or easier to use than American products burdened by U.S. export
    controls. Descriptions of the various export control regimes are found
    in [Baker 1998, Koops 1999, and GILC 1998].

        Examples of the statements of foreign companies are given below.
                Brokat Infosystems AG (Germany)
        Brokat, on its web page [Brokat 1999c] discusses ``Secure
    Communication using 128-bit encryption'' and states that ``In
    comparison to other solutions, X-AGENT allows very secure
    communication. Highly sensitive information can be exchanged using this
    consultation tool. All data is encrypted with the 128-bit Twister
    security component. Even so-called 'weak' Internet browsers, which only
    use a 40-bit encryption due to US government export restrictions can be
    'topped up' accordingly for the duration of the session.''

                Baltimore Technologies plc. (Ireland/United Kingdom/
                        Australia)
        Baltimore Technologies states that WebSecure, a product designed to
    provide secure web server to browser communication is useful because
    ``US export restrictions dictate that most web servers and browsers
    cannot perform 128-bit encryption for security. Instead, export
    versions of browsers like Internet Explorer and Netscape Navigator and
    export versions of web servers like Netscape Enterprise Server and
    Microsoft Internet Information Server are limited to 40 bits of
    encryption, which is not secure enough for most applications''
    [Baltimore 1999b].

                Cybernetica (Estonia)
        Cybernetica advertises ``. . . full strength cryptographic security
    with long keys and no backdoors'' and its Web pages for their products
    prominently feature this selling point.

    [GRAPHIC] [TIFF OMITTED] T9984.007

        In their Frequently Asked Questions list on the Web, they go on to
    celebrate the differences between their product and U.S. products:
         Strong crypto? What algorithms are supported? And what key
    lengths?
        IDEA. Triple DES. Blowfish. RSA. Diffie-Hellman. The end user has
    the opportunity of selecting the algorithms he trusts. And, if the user
    so requires, support for further algorithms may be added. You can use
    as long keys as the algorithms you have selected allow you to. There
    are no ``political'' restrictions on key lengths to be used in the
    Privador system.
         What about back doors, key recovery etc?
        There are no back doors built into the Privador system. We can--and
    will--prove It if so required.
         How come you don't care about export restrictions?
        Because there are none. The Privador System is entirely developed
    by Cybernetica, the first private-law R&D institution in Estonia. The
    laws of the Republic of Estonia allow us to export strong cryptographic
    technologies to almost any country in the world.
                Utimaco Safeware AG (Germany)
        On its web site, Utimaco states that [Utimaco 1999b] ``. . . As a
    German manufacturer, Utimaco guarantees that no national key depositing
    requirements (ESCROW) exist which could jeopardize the security of the
    solution . . .''

    [GRAPHIC] [TIFF OMITTED] T9984.008

        Note Utimaco's home page, illustrated in Figure 3. It is user-
    friendly for speakers of a number of languages. It makes the point that
    Utimaco has representatives in a number of European countries. If the
    user clicks on his or her country (either on the map or on the country
    abbreviation in the vertical list), he or she is transported to a page
    in their native language that further presents Utimaco and its products
    and services. As an example, Figure 4 shows the homepage of Utimaco
    Norway that the user is transported to when Norway is selected from the
    map.

    [GRAPHIC] [TIFF OMITTED] T9984.009

                Data Fellows Corporation (Finland)
        Data Fellows makes the readers of its web page aware of U.S. export
    restrictions and states that its products are designed with ``much more
    security'' than U.S. products:
             ``. . . The encryption technology used in the F-Secure
            products has been developed in Europe and thus does not fall
            under the US ITAR export regulations. F-Secure products can be
            used in every country where encryption is legal, including the
            United States of America . . .'' [Data Fellows 1999b]
             ``. . . F-Secure FileCrypto uses well-known fast block cipher
            algorithms. You can choose either three-key 3DES or Blowfish.
            Both algorithms have been analyzed by the world's leading
            cryptographers. They are known to be strong and safe. These
            algorithms provide security with a minimum of 168-bit keys.
            They provide much more security than DES-based or U.S. products
            that fall under U.S. ITAR export restrictions.'' [Data Fellow
            1999c].
                JCP Computer Services (United Kingdom)
        JCP takes on U.S. products directly based on export controls [JCP
    1999]:

             ``Many companies are using or considering using
            implementations of these algorithms which originate in the US.
            The US government prohibits export of strong cryptographic
            tools, and, except under specific conditions, only permits the
            export of weak implementations. These 'crippled' cryptographic
            tools do not provide sufficient protection to allow Internet e-
            commerce and communications to proceed securely. In an amateur
            attack on a US export-strength cryptographic routine, the key
            was broken in 56 hours. And such times will decrease markedly
            as computer processing power continues to improve.
             ``JCP has developed full strength implementations outside of
            the US using industry proven standard algorithms. JCP are the
            leading company outside the US producing high performance
            cryptographic tools in Java, which has become the Internet's
            standard programming language. The product provides a set of
            packages that implement specific cryptography algorithms for
            use within any Internet application.''

                SSH Communications Security (Finland)
        SSH states on their web site [SSH 1999] that ``The software from
    SSH is free from strict US export restrictions'' as one of ``six good
    reasons why SSH IPSEC Express is the best choise (sic)''; it goes on
    ``IPSEC is supposed to be an international standard. However, because
    of export restrictions in different countries. (sic) SSH is one of the
    few to deliver full standards compliance and strong security virtually
    anywhere in the world.''

                RPK Security, Inc. (New Zealand, Switzerland, United
                        Kingdom)
        RPK advertises on its web site of its flagship RPK Encryptonite
    Engine [RPK 1999], ``Developed outside the U.S., the RPK Encryptonite
    Engine is not subject to US government regulations. It is available
    with strong encryption worldwide, with dramatically better performance
    at significantly lower implementation cost compared with competing
    technologies.'' Reading further on its web site, one finds that ``RPK's
    cryptographic research and product development is based in New Zealand,
    Switzerland and the U.K, with worldwide sales and marketing operations
    in San Francisco, CA.''

                        6. standards and their influence
    6.1 Pervasiveness of Standards
        From the material above, one can see that companies vie to have
    encryption products that meet certain accepted worldwide standards. If
    the products do not, they often will not interoperate successfully with
    other computer systems. This section highlights two important
    international standards efforts. Note the contribution of encryption
    expertise from all over the world to both.

                6.1.1 IPsec
        Today's widespread and pervasive use of the Internet has
    accentuated the need for security for the underlying Internet Protocol
    (IP). The IETF has developed the IP Security (IPsec) protocol as an
    integral element of internet security. IPsec is a proposed standard
    Internet protocol designed to provide cryptographic-based security,
    including authentication, integrity, and (optional) confidentiality
    services. While the use of IPsec is currently optional, its use will be
    mandatory for the next version of the Internet Protocol, IPv6 [IPsec].
        As a result of the dramatic impact IPsec will have on improving the
    security of the Internet, there has been enormous interest in
    developing implementations of IPsec. This interest has extended
    throughout the entire world, due to the global nature of the Internet
    and need for cryptographic-based security. Many freely available and
    commercial implementations of IPsec are available or are under
    development. Ted Ts'o of MIT, co-chair of the IETF IPsec Working Group,
    maintains a list of companies implementing (or planning to implement)
    IPsec. The list currently cites implementations from 49 companies
    around the world. At least nine of the companies are from outside the
    U.S. There is also one effort, the KAME Project, being conducted by a
    combination of several Japanese companies (Fujitsu, Hitachi, IIJ
    Research Laboratory, NEC, Toshiba, and Yokogawa) [KAME 1999].
        Another important aspect of IPsec is that it supports encrypted
    ``tunnels'', whereby an IP packet is completely encrypted as it travels
    from one point of a network to another. Encrypted tunnels are one of
    the primary means for establishing Virtual Private Networks, or VPNs,
    which emulate private networks over public, shared IP networks, such as
    the Internet.
        IPsec is designed to be independent of any specific cryptographic
    algorithms; it can support several, but it will require one strong
    algorithm, Triple DES; the relatively weak DES will be permitted but
    not required. Specifications have also been developed for the use of
    the IDEA, BLOWFISH, RC5, and CAST strong cryptographic algorithms with
    long key lengths for IPsec [Stallings 1999].

                6.1.2 Advanced Encryption Standard (AES)
        In 1997, NIST solicited algorithms for the Advanced Encryption
    Standard (AES), to replace the Data Encryption Standard (DES) [FIPS PUB
    46-2] as a government encryption standard. Individuals and companies
    from eleven different foreign countries proposed 10 out of the 15
    candidate algorithms submitted to NIST [Smid 1998]:

    ------------------------------------------------------------------------
                                           Candidate
                 Country                   Algorithm         Submittor(s)
    ------------------------------------------------------------------------
    Australia.......................  LOKI97............  Lawrie Brown,
                                                           Josef Pieprzyk,
                                                           Jennifer Seberry
    Belgium.........................  RIJNDAEL..........  Joan Daemen,
                                                           Vincent Rijmen
    Canada..........................  CAST-256..........  Entrust
                                                           Technologies,
                                                           Inc.
                                      DEAL..............  Outerbridge,
                                                           Knudsen
    Costa Rica......................  FROG..............  TecApro
                                                           Internacional
                                                           S.A.
    France..........................  DFC...............  Centre National
                                                           pour la Recherche
                                                           Scientifique
                                                           (CNRS)
    German..........................  MAGENTA...........  Deutsche Telekom
                                                           AG
    Japan...........................  E2................  Nippon Telegraph
                                                           and Telephone
                                                           Corporation (NTT)
    Korea...........................  CRYPTON...........  Future Systems,
                                                           Inc.
    USA.............................  HPC...............  Rich Schroeppel
                                      MARS..............  IBM
                                      RC6...............  RSA Laboratories
                                      SAFER+............  Cylink Corporation
                                      TWOFISH...........  Bruce Schneier,
                                                           John Kelsey, Doug
                                                           Whiting, David
                                                           Wagner, Chris
                                                           Hall, Niels
                                                           Ferguson
    UK/lsrael/Norway................  SERPENT...........  Ross Anderson, Eli
                                                           Biham, Lars
                                                           Knudsen
    ------------------------------------------------------------------------

        ``Of the five submissions likely to be chosen for the next round,
    about half will be from outside the U.S. It is very possible that the
    next U.S. government encryption standard will have been designed
    outside the U.S.'' [Schneier 1999].

                                 7. conclusions
        Based on the research described above, we arrive at two
    conclusions:

        1. Foreign development of cryptographic products is not only
    continuing but is expanding to additional countries.
        2. Communications-related cryptography is experiencing high growth,
    especially in electronic mail, VPN, and IPsec products.

    7.1 Foreign Development of Cryptography Continues to Grow
        There are now 805 cryptography products produced in 35 countries
    outside the United States. In at least 67 countries, 512 foreign
    manufacturers and distributors are involved. In just three weeks, with
    limited resources, we identified 149 foreign cryptographic products new
    to market since the December 1997 TIS survey.
        It is difficult to gauge how many additional products would be
    identified, given sufficient time and resources, but it is safe to
    anticipate that we would identify many more products from the countries
    within the database, and possibly several additional countries.
        Development of cryptographic products in nations around the world
    is increasing. Moreover, as additional nations seize opportunities in
    e-commerce, nation-centric islands of competence develop, as do
    ultimately international markets. Often these islands of competence are
    developed by bright young entrepreneurs and computer scientists who
    have trained elsewhere (often the United States) and then play key
    roles in jump-starting their native countries' e-commerce. This fits
    nicely in the theory of technoglobalization, as espoused by Robert
    Reich, discussed more in Section 8.

    7.2 Communications-Related Cryptography Leads Storage Cryptography
        Within the 149 new products we discovered, communications-related
    products, as opposed to data storage encryption, were predominant. It
    appears that the efforts of the Internet Engineering Task Force (IETF)
    to provide standardized protocols for the Internet has facilitated the
    development of solutions and products to communications related
    problems. We conjecture that this and the expansion of e-commerce have
    resulted in a high growth of communications related cryptographic
    products such as those for electronic mail, VPNs, and IPsec.
        Ipsec's support of encrypted tunnels will greatly improve security
    for private, enterprise-based networks. As the comfort level of users
    (and organizations) grows, and as the potential and actual gains of
    (consumer to business and business to business) e-commerce become
    apparent, there will be increased worldwide need for communications-
    related cryptography.

                               8. future research
        To date there have been only a few efforts to attempt to quantify
    the impact of regulatory measures on the international cryptographic
    market [Olbeter 1998, BSA 1998, CDT 1997]. The TIS survey and this
    effort to update the foreign products inventory of the database have
    been one of the few ways to quantitatively assess the state of the
    market over time. As noted in Section 7, we saw developments both in
    countries already producing cryptographic products and expansion into
    new countries that did not have cryptographic product development as of
    December 1997. We saw a number of firms become multinational.
        In the face of continuing U.S. export controls on encryption
    products, technology, and services, some American companies have
    financed the creation or growth of foreign cryptographic firms. We have
    seen some U.S. companies (e.g., PGP, RSA, Sun) buy some foreign
    expertise, leaving it in place (rather than bringing the talent back to
    the United States). With this expertise offshore, the relatively
    stringent U.S. export controls for cryptographic products can be
    avoided, since products can be shipped from countries with less
    stringent controls. All of these facts indicate that both nations and
    companies see opportunities in this rapidly changing technological
    market, and it could be argued that globalization plays a major role in
    future growth for this market.
        This is not a case of the technology slipping away from the United
    States. The technological expertise is already available in many places
    around the world. Indeed, we noted earlier that the majority of
    submissions for the Advanced Encryption Standard (AES) have been
    designed outside the United States. This may be simply an example of
    the general thesis of economists David Mowery and Nathan Rosenberg
    [Mowery 1989], who argue that, in general, foreign firms' technological
    sophistication has caught up with that of the United States in many
    cases. In those cases, they reason:

             ``Since foreign firms now are more technologically
            sophisticated and technology is more internationally mobile,
            however, the competitive advantages that accrued in the past
            from basic research and a strong knowledge base have been
            eroded. Faster international transfer of new technologies is
            undercutting a major source of America's postwar superiority in
            high-technology markets.'' (p. 218)

        Our empirical product data could be combined with economic measures
    and economic theories to better explain why we are seeing the observed
    growth in encryption products and companies around the world, and to
    examine the effects of Internet growth, e-commerce development, and
    regulatory actions on the international cryptographic market over time.
        Porter [1990], for example, tests his theses by using quantitative
    measures from several nations, by industrial sector. His national
    economic profiles include primary goods, machinery, and specialty
    inputs and services data for each industrial sector. Given appropriate
    quantitative measures, similar work could be done for the international
    cryptography market.
        As the global information-based economy continues to grow, and as
    the nature of industrial research and development continues to shift
    from nation-centric to international collaboration, we will continue to
    witness more rapid technological development and global economic
    growth. We should be able to put together previous economic work
    [Duysters 1996] with material already available on the information
    technology sector [Mowery 1996, Rosenberg [1992] and the data in this
    study to better understand the changes we are seeing in the global
    marketplace and thus be able to more easily adjust national laws for a
    global economy.

                                 9. references
        [ABI/Inform]: ProQuest Direct, http://proquest.umi.com/pqdweb.
        [Acey 1999]: Acey, Madeleine, TechWeb, CMPNet, in New York Times
    Technology, http://www.nytimes.com/techweb/
    TW__Key__Escrow__Bill__Slammed__By__Parliament__Inquiry.html, 5/19/99.
        [Adams 1997]: C. Adams, The CAST-128 Encryption Algorithm, RFC
    2144, May 1997.
        [Andrews 1997]: Andrews, Edmund L., ``U.S. Restrictions of Exports
    Aid German Software Maker,'' New York Times, April 3, 1997.
        [Argentina 1999]: Description of PGP and links to download it, in
    Firma Digital y Documento Electronico, http://www.sfp.gov.ar/
    firma.html, downloaded May 27, 1999.
        [Baker 1998]: Baker, S. and Hurst, P., The Limits of Trust.
    Cryptography, Governments, and Electronic Commerce, Kluwer Law
    International, 1998.
        [Baltimore 1999a]: Baltimore Company Profile, http://
    www.baltimore.ie/corporate/profile.html.
        [Baltimore 1999b]: WebSecure, http://www.baltimore.ie/products/
    websecure/index.html.
        [Brokat 1998]: Brokat Offering Prospectus, http://www.brokat.com/
    int/ir/facts/annual__report.html.
        [Brokat 1999a]: Brokat Company, http://www.brokat.com/int/company/
    index.html.
        [Brokat 1999b]: Brokat Continues Success in Third Quarter, http://
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                                   __________

                                   Appendices

                            a. call for information
        Please forward this message to others who are interested on the
    topic. A WWW-version of this message can be found at http://
    www.seas.gwu Xedu/seas/institutes/cpi/cryptosurveylcall4info.html
        Non-U.S. Cryptographic Product Survey Call for Information
        The George Washington University and NAI Labs, The Security
    Research Division of Network Associates (formerly the research division
    of Trusted Information Systems) are conducting a survey to identify
    cryptographic products manufactured outside the United States and are
    examining product specifications to assess their functionality and
    security.
        We are soliciting input from those with knowledge of cryptographic
    products through the use of this survey form. If you know of
    cryptographic products that are manufactured in countries other than
    the United States, please complete this form and submit it to the
    Cyberspace Policy Institute (CPI) NO LATER THAN TUESDAY MAY 18, 1999.
    You may submit this form via email to cpiWseas.gwu.edu or fax at (202)
    994-5505 in Washington D.C.
        In addition, we ask you to send or post this survey to anyone or
    place that would have knowledge of cryptographic products. Inquiries
    about this survey may be made to the Cyberspace Policy Institute at
    cpi@seas.gwu.edu or (202) 994-5512. This survey may also be found on
    the CPI Web site at http://www.seas.gwu.edu/seas/institutes/cpi.
        Your cooperation is greatly appreciated.
        Professor Lance J. Hoffman, The George Washington University David
    Balenson, NAI Labs, The Security Research Division of Network
    Associates

                     NON-U.S. CRYPTOGRAPHIC PRODUCT SURVEY
        DATE:
        COMPLETED BY:
        Your Name:
        Phone:
        E-mail:

                        NAME AND ADDRESS OF MANUFACTURER

        Name:
        Address:
        City:
        State:
        Zip Code:
        Country:
        URL:

                        MANUFACTURER CONTACT INFORMATION

        Name:
        Phone:
        E-mail:
        Title:
        FAX:
        800#:

                              PRODUCT DESCRIPTION

        Name (including model and version information):
        Product-specific URL:
        Is it software-only, hardware-only, or a software/hardware
    combination?
        What does it encrypt (e.g., disk, file, communications, FAX, voice,
    magnetic tape, electronic mail)?
        If embedded software or hardware, what platforms does it support
    (e.g., PC, Mac, UNIX workstation, IBM mainframe), else if standalone
    hardware, what interfaces does it support (RS-232, telephone, V.24,
    V.35)?
        If software, is it in the form of a kit or as an end-user program,
    else if hardware, what is the embodiment (e.g., chip, board, PCMCIA
    card, smart card, box, phone)?
        What algorithms does it employ for data encryption (including
    proprietary algorithms and key length)?
        If applicable, what algorithms does it employ for key management
    (including proprietary algorithms and key length)?
        If applicable, what algorithms does it employ for data
    authentication (including proprietary algorithms)?
        How is the product sold or distributed (e.g., store front, mail
    order, telephone order, World Wide Web, anonymous ftp over the
    Internet)?
        If applicable, what is the quantity one purchase price?
        (Optional) Approximate number of units sold or distributed?
        (Optional) Approximate date product was first available?
        Please provide a list of the names and relationships of any
    associated companies (e.g., parent company, sister company,
    distributors). Include full address and contact name, title, phone,
    FAX, and e-mail address.Other information:
        Please Provide a Copy of Any Relevant Product Literature.
        Send completed forms and product literature via e-mail to
    cpi@seas.gwu.edu or via fax to the Cyberspace Policy Institute at 202-
    994-5505 in Washington D.C.
        Thank You!
        This survey is part of an ongoing worldwide study of cryptographic
    products started in April 1994 by Trusted Information Systems and Dr.
    Lance J. Hoffman of the George Washington University. The December 1997
    summary results of the survey are available on the World Wide Web at
    http://www.nai.com/products/security/tis__research/
    cryptolCrypt__surv.asp.

              B. SUMMARY LISTING OF FOREIGN CRYPTOGRAPHIC PRODUCTS

        The following table is a summary listing of the foreign products
    currently contained in the cryptographic product database. We cannot
    guarantee the accuracy and completeness of this information. In many
    cases, products may support additional platforms or interfaces, encrypt
    additional types of information, include additional embodiments, or
    support additional encryption algorithms. Additional information will
    be available on the NAI Labs Crypto Products Survey Web page at http://
    www.nai.com/products/security/tis__research/crypto/crypt__surv.asp.

    [GRAPHIC] [TIFF OMITTED] T9984.010

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    [GRAPHIC] [TIFF OMITTED] T9984.020

        C. FOREIGN ENCRYPTION MANUFACTURERS AND DISTRIBUTORS BY COUNTRY

        The following table is a summary listing of the foreign companies
    that manufacture or distribute cryptographic products.
    [GRAPHIC] [TIFF OMITTED] T9984.021

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    [GRAPHIC] [TIFF OMITTED] T9984.027

    D. REPORT OF THE PRESIDENT'S EXPORT COUNCIL SUBCOMMITTEE ON ENCRYPTION,

                     WORKING GROUP ON INTERNATIONAL ISSUES

        The following findings have been adopted by the PECSENC as a
    reflection of conditions of international competition prior to the U.S.
    Government's liberalization of encryption export controls announced on
    September 16, 1998. The liberalization may affect many of these
    findings, and the findings will be used as a baseline for a review of
    the effects of the liberalization in future sessions of the PECSENC.

        1. The difference between U.S. encryption controls and those of
    other nations is a serious--but not the only--factor determining
    success in the computer security market. With or without controls, both
    U.S. and foreign products are likely to continue to coexist, and other
    factors are likely to continue to slow deployment of security products.
    Many foreign companies, for example, especially those influenced by
    governments, will continue to favor domestic security solutions, and
    many computer users will not deploy serious security technology until
    there have been major incidents with losses that can be attributed to
    lack of encryption.

        2. Nonetheless, the adverse impact of controls on U.S. industry is
    palpable. For many software applications, business customers simply
    demand security and encryption; it is a checklist item, and its absence
    is a deal breaker. While simply counting the number of foreign
    encryption software products in the market is not an accurate measure
    of the impact of controls, one particularly serious risk is that non-
    U.S. companies will use their ability to export stronger encryption as
    ``leverage'' to dominate particular applications.
        This has happened in at least one field--Internet banking--and may
    occur in other areas of electronic commerce. Brokat, a German company
    that scarcely existed four years ago, now has 250 employees and offices
    in several countries including the United States. Brokat's specialty is
    Internet banking and electronic commerce, but it broke into that
    business on the strength of being able to offer stronger encryption
    than German banks could obtain in Netscape or Microsoft browsers. It is
    now a major player in this niche, with 50% of the European Internet
    banking market and enough U.S. customers to justify a 20-person U.S.
    branch office. Meanwhile, encryption constitutes 10% or less of
    Brokat's revenue, and it has expanded its initial Internet banking
    offerings to include support for other forms of electronic commerce.
    Loss of U.S. competitiveness in the electronic commerce software market
    obviously raises concerns not just about encryption software but other
    software opportunities. Indeed, it foreshadows a weakening of the U.S.
    position as a leader in electronic commerce generally.

        3. The persistent emphasis in U.S. export control policy over the
    past two years on key recovery, or ``lawful access,'' has also taken a
    toll on the credibility of U.S. security products. Key recovery
    continues to find a market. Business wants to ensure that data are
    available for corporate purposes, including litigation. Key recovery is
    seen as an important feature for stored business data (though not for
    communicated data in transit).
        But the use of export controls to drive the key recovery market
    further than it would go by itself is hurting U.S. industry. Foreign
    governments and competitors, particularly in Europe, have
    misinterpreted this U.S. policy, perhaps deliberately. In essence,
    foreign customers are told often by their governments as well as local
    security companies that all U.S. encryption products come with a back
    door allowing the U.S. government to read the contents. In part this is
    the result of outmoded ``Recovery'' supplements to U.S. export rules
    that demand an unrealistic level of U.S. government access to key
    recovery products. In part it reflects the hostility of many foreign
    governments toward U.S. key recovery and access policies. It also
    reflects the fact that some countries will simply never rely on
    security products that are not home-grown, and misunderstanding U.S.
    key recovery policies may simply be a handy stick to beat U.S. products
    with. But it is unfortunate that the U.S. government has provided such
    a large and easily wielded stick.

        4. U.S. controls are driving many U.S. companies into ``cooperative
    arrangements'' with foreign encryption suppliers. These cooperative
    arrangements allow U.S. companies to provide complete security
    solutions by encouraging their foreign partners to marry foreign-made
    crypto with U.S. commercial applications. These cooperative
    arrangements are highly risky under U.S. Iaw, but they are not unlawful
    per se. Given the stakes, many companies have been prepared to take
    risks under U.S. law, and it is expected that more will do the same.
    The result is that U.S. policy has fostered the development of
    cryptographic software and hardware skills outside the United States.
    German, Swiss, Canadian, Russian, and Israeli cryptography companies
    have all benefited from this unintended consequence of U.S. encryption
    policy.

        5. The U.S. government has made efforts to ``level the field'' of
    disparate export controls for encryption through negotiations under the
    Wassenaar Agreement. The U.S. proposal that 56-bit encryption become a
    new ``floor'' for encryption exports under Wassenaar, while certainly
    better than current policy, is likely to be implemented at least a year
    and perhaps several years too late. In response to the U.S. KMI
    initiative, which conditionally decontrolled 56-bit encryption in
    December 1996, other countries also decontrolled 56-bit DES but more or
    less unconditionally. The countries include Canada and apparently the
    United Kingdom. And by 1996, other countries, such as Germany, already
    were approving the export of 56-bit DES to virtually any country for
    virtually any purpose. Most recently, the exhaustion of a 56-bit DES
    key using a machine built for a quarter million dollars has entirely
    discredited DES as a serious security tool for valuable secrets. Single
    DES remains a useful tool for assuring privacy against a wide variety
    of potential adversaries and snoops, but decontrolling 56-bit
    encryption will not provide a significant boost to the competitiveness
    of U.S. technology for serious security applications.

        6. Process and timing: In 1995, the State Department approved
    routine license applications for the export of encryption in less than
    a week on average. This was when the State Department had jurisdiction
    over encryption and NSA staffed the State Department's office and
    handled all encryption license applications.
        This is no longer the case. The Commerce Department has staffed up
    heavily in the encryption field, but its processes now include parallel
    reviews by the FBI and NSA under a 30-day deadline that can be extended
    further with a simple ``no'' vote by either agency. For whatever
    reason, these agencies are now taking the full 30 days--and often 90
    days. Against a backdrop of continued export liberalization over the
    past four years, this degradation in export control performance strikes
    a jarring note.
        The Commerce Department's performance in this area is not
    necessarily out of line with the performance of other countries. The
    German government often takes two to three months to approve a license
    for a new product and six weeks to approve a license for routine
    shipments. The difference is that German companies know with certainty
    that a license will be issued at the end of the process; and the German
    government imposes no key recovery requirement on exporters. Therefore,
    they can make commitments to deliver products that require a license
    even before they get the license. In the United States, both the FBI
    and NSA have at times cast votes intended to roll back existing
    policies, and they have at a minimum managed to stall licenses that
    seemed to fit existing policy. A key recovery policy, for example, has
    been applied sporadically to U.S. multinationals and with some
    inconsistency to other exports. For this reason, it is not prudent for
    exporters to assume that a license will be issued or to make
    commitments on the assumption that the license will be issued--even
    when existing policy makes it seem likely that a license will
    eventually be granted. Because an RFP by a foreign company may provide
    only 30 days for responsive proposals, and the proposals often must
    include an assurance that an export license will be obtained, some U.S.
    companies lose bidding opportunities simply because the U.S. government
    does not process licenses quickly enough.
        In other respects, of course, Commerce Department practice is a
    large improvement over State's performance. This is particularly true
    for controversial licenses, on which Commerce typically forces a
    decision over a course of months. In contrast, State Department
    licenses could be held up for months without any explanation and there
    were no deadlines for resolving interagency disputes. Nonetheless, it
    seems clear that the Commerce Department and the other participants in
    the encryption licensing process should adopt additional procedures to
    speed the granting of relatively non-controversial licenses.

        Senator Frist. Thank you very much, Mr. Hoffman.
        Let me begin with Mr. Bidzos. You mentioned that the
    Administration probably underestimates--you did not say
    ``probably''--underestimates companies overseas, and you
    mentioned the 3-year delay. Could you comment on both of those?
        Mr. Bidzos. Yes, Mr. Chairman, I would be happy to. When I
    testified almost 10 years ago I was predicting that we would do
    economic harm to ourselves if we continued to control
    encryption, and that turned out to be true. It took 9 years for
    us to really see it. In fact, we warned at the time that by the
    time we could point to the damage--because the Administration
    was saying, ``Show us where the harm is, show us how you are
    being hurt,'' and my response was: ``By the time I can show you
    lost market share, it is probably too late for you to help me
    get it back at that point.''
        So let me now again, 9 years later, look out 3 years and
    see what might happen. First of all, I think the Administration
    underestimates the extent to which foreign competitors wish to
    emulate us. Look at the role that information technology plays
    in the growth of the U.S. economy. It is absolutely the driving
    force. It is the engine that is driving unprecedented economic
    growth, unprecedented in history. The amount of jobs created,
    the amount of revenue generated, the amount of innovation, the
    absolute dollars involved are absolutely unprecedented.
        Our foreign competitors are quite aware of this. They are
    starting to tap public markets for funds to grow. They are
    starting to target opportunities created by U.S. export policy.
    Two quick examples of how they are doing that and what the
    stakes involved are.
        First of all, they are actually starting to identify larger
    products of which encryption is a critical feature and they are
    starting to build products of those types. They are seeing an
    opportunity not only to get the encryption revenue, but to get
    2, 3, 10, or 20 times the encryption revenues by making a
    complete product sale.
        They also, of course, just by virtue of coming into
    business as an encryption company because of the opportunity
    created by U.S. export law, exist and therefore they are able
    to take advantage of opportunities that they see. If not for
    export law, they would not even exist.
        There is a company in Germany called Brokat which now
    employs over a thousand people, has raised money in the public
    market with a very successful public offering, would not exist
    if it were not for the opportunities created by U.S. crypto.
        To go directly to your question, the 3-year timeframe
    before we can export encryption as strong as the AES, well,
    first of all, everybody knows that 3 years today is like 15
    years was 10 years ago. We live in the Internet age and things
    happen very, very quickly. Three years is a lifetime. Those
    companies will exploit opportunities in ways that I mentioned
    and in other ways that we cannot imagine.
        But the real price that we will pay is this. They
    essentially--it is not a national information infrastructure we
    are talking about, as the Vice President used to call it. It is
    a global information infrastructure, there is no question
    whatsoever. If you look in today's papers, you will conclude
    very quickly that around the clock global trading of securities
    is just around the corner. That is not going to happen without
    a secure information infrastructure and that information
    infrastructure will be secured, it will be global. The only
    question is who is going to build it.
        The way things sit today, U.S. companies will not build it.
    U.S. companies will not play the role in building it that they
    might play.
        So these infrastructures that get built are I think
    critically important in ways we cannot appreciate right now.
    The company that gets in and builds the infrastructure will
    have the inside track in selling products and services for 2,
    5, 10, and maybe even 20 years down the road because of that
    early position they stake out for themselves as the
    infrastructure provider. They set the standards, they have the
    relationship, etcetera, etcetera.
        So this 3 years I am afraid is going to cost us
    tremendously.
        Senator Frist. In S. 798 we streamline the procedure for
    receiving an export license by putting a maximum number of days
    in each step, and you argue that is not enough. Are you arguing
    for an alternative or are you saying that there should not be
    these export control policies?
        Mr. Bidzos. Well, maybe I can answer that question by
    referring to something that Secretary Reinsch said. Secretary
    Reinsch compared encryption in one respect to supercomputers,
    machine tools, biotech, and said that if foreign availability
    were the sole criteria we would have no export controls on all
    of those other products. I would submit that encryption does
    not belong in that category.
        If you want to build a supercomputer, if you want to build
    one and build a lot of them in particular, you need to have
    incredibly sophisticated technology to manufacture these
    computers. It is incredibly expensive. You need people with
    tremendous specialized skills. Just building the systems that
    can cool the operating supercomputer is incredibly
    sophisticated. The same is true of manufacturing machine tools.
    The same thing is true of biotech. You need sophisticated
    technology just to build the laboratories, the tools, the
    instruments.
        For encryption all you need is a high school textbook and a
    personal computer. I guess you need Internet access, too, so
    that brings it down to about 100 million people who are
    probably capable of doing it. All you need to get into business
    and duplicate and sell that software is a web site. That may
    bring it down to 80 million, but it does not get much smaller
    than that.
        You have got companies in South Africa, in Estonia and
    other places who advertise the fact that they can simply ship
    you strong encryption that is not subject to U.S. export
    controls. So we are really in a different situation, where the
    technology is available and we are not competitive.
        Senator Frist. Thank you.
        Professor Hoffman, you have been studying the growth of
    foreign encryption products for a long time and I appreciate
    your work very much and your written testimony as well. Do you
    believe that U.S. export controls have been effective in
    controlling the development of encryption overseas?
        Dr. Hoffman. Well, I think you can see from the results of
    our survey they have been, I would say, marginally effective.
    They have had some effect, but I think overall the market has
    had more effect than the U.S. legislation.
        Senator Frist. Mr. Aucsmith, do you have comments on
    anything that has been said?
        Mr. Aucsmith. I would make one slight addition to Jim's
    statement about our 3-year window. That has two parts to it.
    One thing is that the international Internet as we now know it
    exists because there are international standards. That is what
    allows everything to work together. It is the glue that holds
    things together. At this time there are two particular
    standards being defined worldwide that deal with the security.
        IPsec, the Internet Protocol Security Standard, the very
    thing that will secure point to point connections on the
    Internet, is being finalized, and already there are many, many
    countries producing technology that will go into that. If my
    company and others in the United States cannot participate for
    3 years, we will be locked out forever. It is that simple.
        The second is, and this is particular to hardware, while we
    might think we move at an Internet speed, our development
    cycles mean that there is a long lead time on the piece of
    hardware, but in the microprocessor area I am working on a
    microprocessor design that you will not see until the year
    2003. I have to make a billion dollar bet today on whether or
    not I can export that in 2003. It is very, very hard without
    some assurance of what the world will look like in terms of
    legislation at that particular time.
        So we will be held out. Every day that this is delayed is a
    day that we miss products a long time from now.
        Senator Frist. Mr. Aucsmith, could you comment on who
    should be the trusted parties for recoverable, key recoverable
    products?
        Mr. Aucsmith. Actually, as I stated before, I am not in
    favor of key recoverable products, for two primary reasons. One
    is I think that they fundamentally will not work well, for
    communications products I do not think that there is any market
    for that. There is no market need. One could be created
    artificially by government regulation, but there is no market
    need.
        For stored data, I think the majority of data--in order to
    be of any use, information has to be shared. It is a rare
    commodity in information that is valuable and not shared,
    meaning that if the proverbial person is hit by a bus it is
    unlikely that he or she is the only one that has access to that
    information. In fact, in most corporations mission-critical
    information is stored on databases and is kept in separate
    mechanisms that have separate access control. I submit that
    corporations have been dealing with this for quite some time
    already.
        So I would say that in general there should not be trusted
    third parties, at least not for the key recovery or access
    control point of view.
        Senator Frist. Mr. Bidzos, could you tell me a bit more,
    the committee a bit more, about the Internet standards in
    setting security requirements? Is the 128-bit encryption now
    the norm?
        Mr. Bidzos. Yes, it is, Mr. Chairman. There is absolutely
    no question about that. In fact, both in and outside the United
    States that is the case. Now, I know some of the other
    witnesses said that it is not used quite as widely as you might
    be led to believe. I think certainly in the past we have been
    guilty, as people in industry, of trying to look out into the
    future and saying, well, this is what is going to happen to us
    if these export control policies do not change and, sure, maybe
    we have tended to sort of look at the worst case scenario or
    closer to that maybe than the middle. But I think the
    Administration is guilty of some of the same.
        Let me give you a couple of specific examples. If you want
    to bank online with Wells Fargo in California or if you want to
    access your mutual fund account at Fidelity or any other of
    scores of financial services institutions, if you want to buy
    or sell stock online with E-trade, your browser must have 128-
    bit encryption or you cannot do it. Their servers are
    configured such that nothing but a browser enabled at 128 bits
    will work at all.
        So even in cases where some people are using the
    ``exportable'' lower key lengths in some of these browsers, the
    primary reason they are doing it is because they are not aware
    that they are doing it and they have not upgraded. But as soon
    as they try to use one of these services, they find out that
    they need to upgrade. This is in the United States. Only under
    certain conditions can those be sold outside the United States.
        So the standards that David alluded to are being developed.
    They are global standards. The participants in the standards-
    making process are from all over the world. And David is
    absolutely right that companies outside the United States are
    rapidly moving to build products that comply with those
    standards and, as we heard from the earlier panel, those
    foreign competitors of ours will be able to sell worldwide,
    including in the United States, and we will not. And that is a
    competitive disadvantage that we will find it very difficult to
    live with and that we will probably never recover from if we
    have to wait 3 years.
        Senator Frist. With key length clearly being a moving
    target even in one hearing, but also as we project ahead, and
    you are developing products for 3 years from now, and we know
    that technology is going to progress much faster and that is
    sort of the theme of this morning, we have advocates for the
    128-bit encryption products rather than 64-bit products. How do
    you propose that we deal with these technological changes
    legislatively so that we do not have obsolete legislation
    within 6 months of the time we pass it, recognizing the changes
    that are under way?
        Anybody on the panel? Mr. Aucsmith.
        Mr. Aucsmith. There is a fallacy in trying to regulate
    technological advancement in general. If you tie it to specific
    technologies--and in this case, tieing it to specific bit
    lengths I think it is tieing it to specific technologies. We
    cannot anticipate necessarily what the market will want 3 years
    from now in terms of bit length. I would submit that the best
    way to deal with this in a legislative point of view is to deal
    with the effects of the technology rather than the technology
    itself, because I think there is a treadmill that you could get
    on, having to revisit this very issue every 3 years, which I do
    not think would be productive for anyone involved. I think if
    you have it welded to some specific value or some specific
    technology or specific implementation, you are rife with that.
        Dr. Hoffman. Mr. Chairman, I agree with the previous
    witness. It is ill-advised to legislate using bit length only
    or even some other technological mechanisms. What we have seen
    in the last several years on this is people focusing on
    specific things like bit length and avoiding the inevitable,
    which is what is going to happen when we do have, if you will,
    ubiquitous, strong, secure encryption. What kind of world is it
    going to be, how are we going to operate?
        We have seen a lot of government resources devoted towards
    this battle, rather than towards looking at the future and
    trying to shape it in a more reasonable way.
        Senator Frist. Could you, any of the panelists, comment on
    what efforts are being made by industry to address the law
    enforcement agencies' security concerns and develop viable
    schemes? What is being done? Where are we today? Mr. Aucsmith?
        Mr. Aucsmith. Obviously, the majority of industry is
    extremely sensitive to the realities of both law enforcement
    and national security issues. I would submit that I am
    personally scared of what the future could hold. I think we all
    should be along those lines.
        What we are doing to try to prevent a disaster, if you
    will, is if you believe that there is an inevitability of this
    technology being available and its widespread use is inevitable
    and I think that is about the main point that we tend to
    disagree with the Government on, is the speed and
    inevitability, if you will, of that happening the only way to
    deal with this issue is for a very close cooperation between
    the industry that is creating the change and innovating the
    change and the law enforcement and intelligence communities
    that need to be able to on occasion use that change to their
    advantage.
        I think things like the national technical center for FBI's
    competency, I think that is exactly the correct step in the
    right direction. I think closer cooperation between industry
    and the Government in terms of assessing vulnerabilities and
    assessing strengths and weaknesses of various technologies I
    think is also part of that.
        If you will, no commercial product will ever be 100 percent
    secure because it is not really economically feasible for us to
    squeeze that last couple of percent out of it. So there will
    always be vulnerabilities in almost anything that is put out
    there. Currently those vulnerabilities are exploited by what we
    would call hackers, if you will, to coin from recent movies,
    the dark side. What we should be able to do as a government and
    as responsible industry is, if you will, make the Government
    the better hackers. It is relatively that simple.
        Senator Frist. Comments, Mr. Bidzos?
        Mr. Bidzos. Yes, Mr. Chairman. Thank you. Well, I guess
    part of the problem is I think that industry has sort of been
    busy actively rebuffing a lot of proposals from government over
    the last dozen years. For example, in 1993 the so-called
    ``Clipper Chip,'' the first government solution to government
    access--take my product, embed it in all the products that you
    build, and that will give me the access--was rebuffed. It just
    was not something anybody wanted to use.
        Later came key recovery and I think government again failed
    to realize how industry would view key recovery. One simple
    analogy I can offer you from some of my experience in talking
    to people in the end user community in large end user
    organizations, financial companies. One of them described it
    very well to me, why they objected to some sort of government
    access to keys.
        They said: ``Well, darn it, the Government just does not
    understand how things work out here.'' They said: ``Look, if we
    are involved in some sort of litigation or some other form of
    legal dispute, perhaps even being sued by the Government, some
    sort of antitrust action for example, in all these cases the
    way the drill works is as follows: A subpoena is delivered, our
    lawyers review it, and we produce the documents that comply
    with the request.''
        We do not give them a key and say: ``Look, the documents
    are stored in that building; here is the key; find what you
    need and take it, and we will see you later.'' Essentially,
    that is how they viewed the proposal for government access to
    encryption keys, and I think that analogy actually holds up
    very well.
        So you can understand why people resisted it. People do not
    give some third party a copy of all of the physical keys to
    their facilities. They have some small organization, a security
    organization, inside their own company that manages that.
        So again, some close cooperation I think would go a long
    way towards easing, bridging the gap. However, if, as is
    currently happening, all of the people developing this
    technology happen to be located in Israel, Singapore, Japan,
    Ireland, and Germany, it is going to be pretty tough for the
    U.S. Government to interact with them and learn and understand
    and develop products that meet the needs of worldwide industry
    and certainly U.S. industry.
        I think that helps. To me that sort of indicates one of the
    problems with the current policy. It is gambling heavily.
        I do not have a security clearance and I do not know what
    it was that Director McNamara might have been referring to when
    she said she would offer some testimony about the threats of
    ubiquitous encryption, she would offer that in a closed
    session. But after this many years in the business and spending
    a lot of time with people who are in that part of it--in fact,
    I have often awaken at night having dreamed that I was served
    with a clearance for some of the things I have probably heard I
    should not have--I think it is fair to say that more than
    likely it comes down to ubiquitous encryption increasing the
    cost and complexity of intelligence gathering.
        What we have to weigh against that additional cost is the
    cost to industry in the future. I think for the first time
    certainly since I have been in this business for 14 years, we
    are starting to actually be able to see and identify and
    quantify some of the costs to us of maintaining the current
    policies.
        So hopefully we can strike that better balance. I think the
    PROTECT Act with some additional amendments would strike a far
    better balance than we have now.
        Senator Frist. Thank you.
        Clearly, today's discussion centers on the security of our
    Nation, the wellbeing of our Nation, and it is clear that we
    cannot bind the hands of our American businesses in this new
    economy that we have all seen really flourish over the last 10,
    15, 20 years, and especially over the last 3 to 4 years. We
    need to make sure that we can compete nationally,
    internationally. Otherwise we will surrender our global
    leadership position.
        As Federal lawmakers and policymakers, we need to be
    proactive and we need to be educated, and thus I thank all of
    our panelists today for participating in that process in this
    complex policy debate.
        A number of my colleagues, the chairman and Senator Burns
    and Kerry and Abraham and Wyden and a number of others, have
    worked very hard, and I thank them for their dedication to an
    issue that is incredibly important to business, to security,
    and to the national interest.
        I want to thank this final panel today, as well as the
    panels earlier. We will continue to work with you on this very
    complex but very important policy debate.
        With that, we stand adjourned.
        [Whereupon, at 11:45 a.m., the committee was adjourned.]