[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
ECONOMIC ESPIONAGE: A FOREIGN INTELLIGENCE THREAT TO AMERICAN JOBS AND 
                          HOMELAND SECURITY
=======================================================================

                                HEARING

                               BEFORE THE 

                              SUBCOMMITTEE ON 
                              COUNTERTERRORISM
                              AND INTELLIGENCE

                                 OF THE

                     COMMITTEE ON HOMELAND SECURITY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 28, 2012

                               __________

                           Serial No. 112-101

                               __________

       Printed for the use of the Committee on Homeland Security
                                     

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                     COMMITTEE ON HOMELAND SECURITY

                   Peter T. King, New York, Chairman
Lamar Smith, Texas                   Bennie G. Thompson, Mississippi
Daniel E. Lungren, California        Loretta Sanchez, California
Mike Rogers, Alabama                 Sheila Jackson Lee, Texas
Michael T. McCaul, Texas             Henry Cuellar, Texas
Gus M. Bilirakis, Florida            Yvette D. Clarke, New York
Paul C. Broun, Georgia               Laura Richardson, California
Candice S. Miller, Michigan          Danny K. Davis, Illinois
Tim Walberg, Michigan                Brian Higgins, New York
Chip Cravaack, Minnesota             Cedric L. Richmond, Louisiana
Joe Walsh, Illinois                  Hansen Clarke, Michigan
Patrick Meehan, Pennsylvania         William R. Keating, Massachusetts
Ben Quayle, Arizona                  Kathleen C. Hochul, New York
Scott Rigell, Virginia               Janice Hahn, California
Billy Long, Missouri                 Ron Barber, Arizona
Jeff Duncan, South Carolina
Tom Marino, Pennsylvania
Blake Farenthold, Texas
Robert L. Turner, New York
            Michael J. Russell, Staff Director/Chief Counsel
               Kerry Ann Watkins, Senior Policy Director
                    Michael S. Twinchek, Chief Clerk
                I. Lanier Avant, Minority Staff Director

                                 ------                                

           SUBCOMMITTEE ON COUNTERTERRORISM AND INTELLIGENCE

                 Patrick Meehan, Pennsylvania, Chairman
Paul C. Broun, Georgia, Vice Chair   Brian Higgins, New York
Chip Cravaack, Minnesota             Loretta Sanchez, California
Joe Walsh, Illinois                  Kathleen C. Hochul, New York
Ben Quayle, Arizona                  Janice Hahn, California
Scott Rigell, Virginia               Ron Barber, Arizona
Billy Long, Missouri                 Bennie G. Thompson, Mississippi 
Peter T. King, New York (Ex              (Ex Officio)
    Officio)
                    Kevin Gundersen, Staff Director
                   Zachary Harris, Subcommittee Clerk
               Hope Goins, Minority Subcommittee Director
                            C O N T E N T S

                              ----------                              
                                                                   Page

                               Statements

The Honorable Billy Long, a Representative in Congress From the 
  State of Missouri:
  Oral Statement.................................................     1
  Prepared Statement.............................................     3
The Honorable Brian Higgins, a Representative in Congress From 
  the State of New York, and Ranking Member, Subcommittee on 
  Counterterrorism and Intelligence..............................     5

                               Witnesses

Mr. Stuart Graham, Chief Economist, U.S. Patent and Trademark 
  Office, U.S. Department of Commerce:
  Oral Statement.................................................     8
  Prepared Statement.............................................     9
Mr. John P. Woods, Assistant Director, Homeland Security 
  Investigations, Immigration and Customs Enforcement, U.S. 
  Department of Homeland Security:
  Oral Statement.................................................    12
  Prepared Statement.............................................    14
Mr. C. Frank Figliuzzi, Assistant Director, Counterintelligence 
  Division, Federal Bureau of Investigation, U.S. Department of 
  Justice:
  Oral Statement.................................................    16
  Prepared Statement.............................................    18
Mr. Gregory C. Wilshusen, Director, Information Security Issues, 
  Government Accountability Office:
  Oral Statement.................................................    19
  Prepared Statement.............................................    21


ECONOMIC ESPIONAGE: A FOREIGN INTELLIGENCE THREAT TO AMERICAN JOBS AND 
                           HOMELAND SECURITY

                              ----------                              


                        Thursday, June 28, 2012

             U.S. House of Representatives,
                    Committee on Homeland Security,
         Subcommittee on Counterterrorism and Intelligence,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 311, Cannon House Office Building, Hon. Billy Long 
presiding.
    Present: Representatives Long, Higgins, and Hochul.
    Mr. Long. The Committee on Homeland Subcommittee on 
Counterterrorism and Intelligence will come to order.
    The subcommittee is meeting today to hear testimony 
regarding economic espionage and its threat to American jobs 
and homeland security. As most of you know, Chairman Meehan is 
not at today's hearing. Unfortunately, an issue arose that he 
had to attend, and I will be chairing today's hearing.
    I recognize myself for an opening statement. The National 
unemployment rate currently stands at 8.2 percent, and our 
Nation faces economic headwinds. Over the last 2 years, we have 
examined many threats to the U.S. homeland. However, today's 
hearing provides an opportunity, a unique opportunity, for 
Members on the subcommittee to examine an issue that affects 
both National security and American competitiveness and job 
security.
    This is an issue that touches small and medium-sized 
businesses in Congressional districts all across America. 
Foreign economic and industrial espionage against the United 
States represents a significant and growing threat to the 
Nation's prosperity, American jobs, and National security. The 
primary strengths of the private sector in the United States 
are its tangible assets, including research and development, 
intellectual property, sophisticated business processes, and 
enforceable contracts.
    Unfortunately, those assets are being stolen by foreign 
intelligence services, corporations with close ties to foreign 
governments, and non-state actors. According to the U.S. Army 
General Keith Alexander, director of the National Security 
Agency and commander of U.S. Cyber Command, the United States 
currently finds itself the victim of the greatest transfer of 
wealth in history.
    Just this week, the director of the British's international 
security agency, MI5, told a London audience that it is 
investigating cyber attacks against more than a dozen 
companies, and added that one major London business has 
suffered more than $1.2 billion in losses from an attack. He 
called the extent of the espionage activity astonishing, with 
industrial-scale process, involving many thousands of people 
lying behind both state-sponsored cyber espionage and organized 
crime.
    This spring, FBI erected billboards at nine cities around 
the country to highlight the $13 billion in losses suffered by 
U.S. companies as a result of economic espionage in 2012 alone. 
While that number is staggering, my fear is that the $13 
billion represents only the tip of the iceberg. Of even greater 
concern is finding out what lies beneath the surface.
    Due to a number of factors, which will be discussed today, 
the true size of this threat could be massively undervalued 
because this activity often goes unreported to law enforcement. 
Economic espionage can take many forms, including visits to a 
company's website to gather open-source information, and 
employees downloading proprietary information on a thumb drive 
at the behest of a foreign rival. Or intrusions launched by 
foreign intelligence service or other actors against the 
company's network of a private company, Federal agency, or 
individual.
    Unlike 20 years ago, business activity conducted over the 
internet provides opportunities for bad actors to infiltrate 
and steal vital data from the U.S. companies. Cyberspace also 
provides relatively small-scale actors an environment and 
opportunity to become big players in economic espionage.
    In addition, under-resourced governments or corporations 
often build relationships with hackers to steal sensitive 
economic or technological information just as national states 
have done for decades. In many ways, the threat posed by the 
economic espionage is similar to the threat posed by al-Qaeda 
and its affiliate networks, less centralized and more diffuse. 
And making it, often, more difficult to combat.
    Making this an even more complex problem, many bad actors 
often remain anonymous, and determining attribution of attacks 
is difficult for law enforcement in the intelligence community. 
Many actors route operations through computers in third 
countries, or physically operate from third-party countries to 
obscure the origins of a activity.
    Some foreign intelligence services and non-state actors 
have reportedly used independent hackers at times to augment 
their capabilities and act as proxies for intrusions in order 
to provide plausible deniability. Both China and Russia view 
economic espionage as an essential tool in statecraft to 
achieve stated National security and economic prosperity aims.
    It is critical Members of Congress and U.S. businesses 
understand that point; China and Russia have official 
government policies of stealing U.S. assets for economic gain. 
They target sensitive U.S. technology and economic data, 
private-sector companies, academic and research institutions, 
and U.S. citizens on a daily basis.
    According to the National Counterintelligence Executive, 
China and Russia will remain aggressive collectors of sensitive 
U.S. economic information and technology. Both countries will 
certainly continue to deploy significant resources and a wide 
variety of tactics to acquire this information, motivated by 
the desire to achieve economic, strategic, and military parity 
with the United States.
    Unfortunately, many private-sector victims of economic 
espionage are unaware of the crime until years after the loss 
of their information. In addition, many companies that are 
victims of espionage choose not to report the event to the FBI 
because it would negatively affect the company's reputation and 
endanger its relationship with investors, bankers, suppliers, 
customers, and shareholders.
    In many cases, it is difficult for companies to assign an 
economic value to stolen information, thereby decreasing their 
incentive to share information with law enforcement. A few 
examples I would like to point out that illustrate the 
challenge faced by the private sector. The AMSC Corporation, a 
Massachusetts-based maker of computer systems that run wind 
turbines, was victimized by its largest customer, China's C-
Nobel Corporation.
    C-Nobel illegally obtained access to AMSC's proprietary 
source code through an AMSC employee who was paid to aid in the 
theft. C-Nobel, which accounted for two-thirds of AMSC's annual 
revenue of $315 million took AMSC's source code, began 
producing its own computers, and severed its relationship with 
AMSC.
    When this news was made public, AMSC's share price fell 40 
percent in a single day. Over the course of 5 months it plunged 
84 percent. One U.S. metals company lost technology to China's 
hackers that cost $1 billion and 20 years to develop. An 
employee of the Valspar Corporation unlawfully downloaded 
proprietary paint formulas valued at $20 million which he 
intended to take to a new job in China, according to press 
reports.
    This theft represented about one-eighth of Valspar's 
reported profits for 2009, the year the employee was arrested. 
Today's witness--let us see--to get to a better understanding 
of the problem, today we will hear from a panel of Government 
witnesses from the FBI, Immigration and Customs Enforcement, 
and the Department of Commerce about the nature and severity of 
the threat and its cost to the U.S. economy.
    We will also learn what the U.S. Government is doing to 
combat the threat, including its work with small and medium-
sized businesses to prevent the loss of trade secrets and 
intellectual property. I look forward to hearing from today's 
witnesses on this important topic.
    [The statement of Hon. Long follows:]
                      Statement of Hon. Billy Long
                             June 28, 2012
                   national security and job security
    The National unemployment rate currently stands at 8.2% and our 
Nation faces tough economic headwinds. Over the last 2 years, we have 
examined many threats to the U.S. homeland.
    However, today's hearing provides a unique opportunity for Members 
of the subcommittee to examine an issue that affects both National 
security and American competitiveness and job security. This is an 
issue that touches small and medium-sized businesses in Congressional 
districts all across America.
                       economic espionage threat
    Foreign economic and industrial espionage against the United States 
represents a significant and growing threat to the Nation's prosperity, 
American jobs, and National security. The primary strengths of the 
private sector in the United States are its tangible assets, including 
research and development (R&D), intellectual property, sophisticated 
business processes, and enforceable contracts.
    Unfortunately, those assets are being stolen by foreign 
intelligence services, corporations with close ties to foreign 
governments, and non-state actors. According to U.S. Army General Keith 
Alexander, Director of the National Security Agency and Commander of 
U.S. Cyber Command, the U.S. currently finds itself the victim of ``the 
greatest transfer of wealth in history.''
    Just this week, the Director General of Britain's internal security 
agency, MI5 told a London audience that it is investigating cyber 
attacks against more than a dozen companies and added that one major 
London business had suffered more than $1.2 billion dollars in losses 
from an attack. He called the extent of the espionage activity 
``astonishing--with industrial-scale processes involving many thousands 
of people lying behind both state-sponsored cyber-espionage and 
organized crime.''
    This spring FBI erected billboards in nine cities around the 
country to highlight the $13 billion dollars in losses suffered by U.S. 
companies as a result of economic espionage in 2012 alone. While that 
number is staggering, my fear is that the $13 billion represents only 
the tip of the iceberg. Of even greater concern is finding out what 
lies beneath the surface. Due to a number of factors, which will be 
discussed today, the true size of this threat could be massively under-
valued because this activity often goes unreported to law enforcement.
               evolving threat environment & cyber threat
    Economic espionage can take many forms including, visits to a 
company's website to gather open-source information; an employee's 
downloading of proprietary information onto a thumb drive at the behest 
of a foreign rival; or intrusions launched by a foreign intelligence 
service or other actors against the computer networks of a private 
company, Federal agency, or an individual.
    Unlike 20 years ago, business activity conducted over the internet 
provides opportunities for bad actors to infiltrate and steal vital 
data from U.S. companies. Cyberspace also provides relatively small-
scale actors an environment and opportunity to become big players in 
economic espionage.
    In addition, under-resourced governments or corporations often 
build relationships with hackers to steal sensitive economic or 
technological information, just as national states have done for 
decades.
    In many ways, the threat posed by economic espionage is similar to 
the threat posed by al-Qaeda and its affiliate networks: Less 
centralized and more diffuse, often making if more difficult to combat.
                       anonymity and attribution
    Making this an even more complex problem, many bad actors often 
remain anonymous and determining attribution of attacks is difficult 
for law enforcement and the intelligence community.
    Many actors route operations through computers in third countries 
or physically operate from third-party countries to obscure the origin 
of their activity. Some foreign intelligence services and non-state 
actors have reportedly used independent hackers at times to augment 
their capabilities and act as proxies for intrusions in order to 
provide plausible deniability.
                            china and russia
    Both China and Russia view economic espionage as an essential tool 
in statecraft to achieve stated National security and economic 
prosperity aims. It is critical Members of Congress and U.S. businesses 
understand that point: China and Russia have official government 
policies of stealing U.S. assets for their economic gain.
    They target sensitive U.S. technology and economic data, private-
sector companies, academic and research institutions, and U.S. citizens 
on a daily basis. According to the National Counterintelligence 
Executive, China and Russia will remain aggressive collectors of 
sensitive U.S. economic information and technology. Both countries will 
certainly continue to deploy significant resources and a wide array of 
tactics to acquire this information, motivated by the desire to achieve 
economic, strategic, and military parity with the United States.
                       private-sector challenges
    Unfortunately, many private-sector victims of economic espionage 
are unaware of the crime until years after the loss of their 
information. In addition, many companies that are victims of espionage 
choose not to report the event to the FBI because it would negatively 
affect the company's reputation and endanger its relationships with 
investors, bankers, suppliers, customers, and shareholders.
    In many cases, it is difficult for companies to assign an economic 
value to stolen information, thereby decreasing their incentive to 
share information with law enforcement.
                         examples of espionage
    A few examples I'd like to point out that illustrate the challenge 
faced by the private sector:
   The AMSC Corporation, a Massachusetts-based maker of 
        computer systems that run wind turbines, was victimized by its 
        largest customer, China's Sinovel Corporation. Sinovel 
        illegally obtained access to AMSC's proprietary source code 
        through an AMSC employee, who was paid to aid in the theft. 
        Sinovel, which accounted for two-thirds of AMSC's annual 
        revenue of $315 million, took AMSC's source code, began 
        producing its own computers and severed its relationship with 
        AMSC. When this news was made public AMSC's share price fell 
        40% in a single day and over the course of 5 months plunged 
        84%.
   One U.S. metallurgical company lost technology to China's 
        hackers that cost $1 billion and 20 years to develop.
   An employee of the Valspar Corporation unlawfully downloaded 
        proprietary paint formulas valued at $20 million, which he 
        intended to take to a new job in China, according to press 
        reports. This theft represented about one-eighth of Valspar's 
        reported profits in 2009, the year the employee was arrested.
                           today's witnesses
    To get a better understanding of this problem, today we will hear 
from a panel of Government witnesses from the FBI, Immigration and 
Customs Enforcement (ICE), and the Department of Commerce about the 
nature and severity of the threat and its costs to the U.S. economy. We 
will also learn what the U.S. Government is doing to combat the threat, 
including its work with small and medium-sized businesses to prevent 
the loss of trade secrets and intellectual property.
    I look forward to hearing from today's witnesses on this important 
topic.

    Mr. Long. The Chairman now recognizes the Ranking Member of 
the Subcommittee on Counterterrorism and Intelligence, the 
gentleman from New York, Mr. Higgins, for any statement he may 
have.
    Mr. Higgins. Thank you, Mr. Chairman. I would also like to 
thank you for holding this important hearing.
    Tom Friedman, in his book The World is Flat, discusses 
today's global web-enabled world that allows everybody to plug 
in and play, sharing knowledge, work irrespective of time, 
distance, geography and, increasingly, language. This paradigm 
makes the United States a target for economic espionage, where 
other nations work covertly to obtain sensitive technology and 
economic information to undermine our status as a global 
economic leader.
    Economic espionage is not a new concept. It has posed a 
threat to the United States' National security for decades. But 
now it has become an issue for American businesses, as well. 
According to the FBI, the United States' companies suffered 
more than $13 billion in economic losses in fiscal year 2012 
alone.
    This is an appalling figure. What is more astonishing is 
that we cannot value the true long-term cost of theft in 
transfer of intellectual property. But we know it is 
significant. Economic espionage, through cyber attacks 
committed by foreign intelligence services and other criminal 
enterprises is so pervasive that in a recent poll 90 percent--
90 percent--of companies admitted their networks had been 
breached in the past 12 months; while the other 10 percent 
could not say with certainty that they had not been penetrated.
    According to the former White House cybersecurity advisor, 
Richard Clarke, every major company in the United States has 
already been penetrated by China. The Chinese have been linked 
to a wide range of economic espionage in recent years, 
including the theft of blueprints for the next-generation 
stealth fighter from a defense contractor.
    Last month, in a report issued by the Pentagon, officials 
stated that China would continue to be an aggressive and 
capable collector of sensitive U.S. technological information. 
Additionally, in its report to Congress, the Office of National 
Counterintelligence Executive judged that the most active and 
persistent perpetrator of economic espionage is China.
    China is not the only country focused on the United States. 
Russia is also identified as aggressive in their pursuit of 
U.S. trade secrets. Further, just about 2 months ago this 
subcommittee also heard from witnesses that stated that our 
critical infrastructure was vulnerable to attack from Iran. 
Given the wealth of trade secrets in America, I am sure it 
would be possible for it to be vulnerable to espionage from 
other countries aside from those who have been mentioned.
    Knowing these facts, the administration is right to take 
steps to address economic espionage, and I am looking forward 
to learning more from the testimony today. I hope that they can 
give us as much insight as they can in an open setting. 
Although the administration has issued these stern warnings of 
the threat of economic espionage in reports and through 
advertisements, Congress has not responded adequately.
    Key legislation that would have helped protect our most 
sensitive industries and critical infrastructure from cyber 
intrusions were not even allowed to be considered by the House. 
We were disappointed by the Majority's philosophy with respect 
to these issues, and we are hoping that this testimony will 
help pave the way for greater transparency and more decisive 
action.
    Right now, our cybersecurity legislation is lacking with 
respect to critical infrastructure. But it seems as if right 
now is--the Government and companies will deal with resources 
that are currently available. I look forward to learning how 
the agencies are dealing with this issue, and if they are 
cooperating with each other to prevent the devastation of 
economic espionage.
    With that, I will yield back.
    Mr. Long. Thank you, Ranking Member Higgins.
    Other Members of the committee are reminded that opening 
statements may be submitted for the record. We are pleased to 
have a distinguished panel of witnesses before us today on this 
important topic.
    Dr. Stuart Graham is the chief economist at the U.S. Patent 
and Trademark Office, where he manages a team of economists 
researching the impact of intellectual property on the economy. 
Dr. Graham's research focuses on the economics of the patent 
system, intellectual property transactions, and relationships 
of intellectual property to entrepreneurship, and to 
commercialization of new technologies.
    Dr. Graham has testified about the patent system before the 
U.S. Federal Trade Commission, and has served as a scientific 
expert to the European patent office, the European trademark 
office, Industry Canada, and the Organization of Economic 
Cooperation and Development. He is currently serving as the 
chief economist while on leave from his academic post at 
Georgia Tech. Welcome.
    Mr. John Woods currently serves as the assistant director 
of the National Security Investigations Division, which is part 
of the U.S. Immigration and Customs Enforcement Homeland 
Security's Investigations. Mr. Woods has served in this 
position since April 2009, overseeing 450 people and managing a 
$160 million operational budget.
    Mr. Woods has 26 years of experience in law enforcement, 
the majority of that time developing and managing programs for 
the U.S. Immigration and Naturalization Service and HSI. 
Previously, Mr. Woods served as a deputy assistant director of 
the National Security Investigations Division, the unit chief 
of ICE's counterterrorism unit, and the assistant special agent 
in charge of the Miami SAC office.
    During this career with INS, he served as a section chief 
for the Miami district office, and has also served as a 
supervisory agent in Washington, DC and New York City. Mr. 
Woods began his Federal law enforcement career in New York City 
as an INS agent back in 1987. Welcome, Mr. Woods.
    Mr. Frank Figliuzzi is the assistant director of the FBI's 
counterintelligence division. Mr. Figliuzzi has been the 
division's deputy assistant director since November 2010. He 
was appointed as an FBI special agent in August 1987 and 
assigned to the Atlanta division, working on terrorism and 
foreign counterintelligence investigations
    He was promoted to the National Security Division at the 
FBI's headquarters in Washington, DC, with the responsibility 
of oversight of economic espionage matters. Prior to his 
appointment as deputy assistant director, Mr. Figliuzzi served 
as the FBI's chief inspector, the chief unit of the Office of 
Professional Responsibility, at FBI headquarters, and 
supervisory senior resident agent for the FBI's San Francisco 
division. Welcome, Mr. Figliuzzi.
    Mr. Greg Wilshusen is the director of information security 
issues at the Government Accountability Office, GAO, where he 
leads information, security-related studies, and audits of the 
Federal Government. He has over 28 years of auditing, financial 
management, and information systems experience.
    Prior to joining GAO in 1997, Mr. Wilshusen held a variety 
of public and private-sector positions. He was a senior systems 
analyst at the Department of Education. He also served as the 
controller for the North Carolina Department of Environment, 
Health, and Natural Resources, and held several auditing 
positions at Irving Burton Institutes, Incorporated and the 
United States Army Audit Agency. Welcome, Mr. Wilshusen. Just 
hope I am saying that right.
    The Chairman now recognizes Dr. Graham to testify.

 STATEMENT OF STUART GRAHAM, CHIEF ECONOMIST, U.S. PATENT AND 
         TRADEMARK OFFICE, U.S. DEPARTMENT OF COMMERCE

    Mr. Graham. Chairman Long, Ranking Member Higgins, and 
Members of the subcommittee. Thank you for giving me the 
opportunity today to testify on the importance of intellectual 
property protections to the American economy.
    I am currently serving in the United States Patent and 
Trademark Office, or under Secretary David Kappos, as the first 
chief economist in the agency's history. While serving, I am on 
leave from my academic position at Georgia Tech's Sheller 
College of Business.
    My testimony today will focus primarily on the potential 
impact of economic espionage on one of this country's most 
important resources; the valuable, intangible assets held by 
American innovators and safeguarded by intellectual property 
protections both here and abroad. In a real sense, we cannot 
appreciate the scope of the potential espionage problem unless 
we recognize how important IP protections are to U.S. 
businesses and industries.
    Mr. Chairman, on April 11, 2012 the Department of Commerce 
released a report titled Intellectual Property in the U.S. 
Economy: Industries in Focus. This report details how U.S. 
companies in our most competitive industries are using patents, 
copyright, and trade secrets to protect their innovations, and 
trademarks to distinguish their goods and services from those 
of competitors.
    These protections are important supports for the American 
innovation system, enabling companies to capture market share 
and effectively sell and export goods, in turn contributing to 
economic growth and to America's overall competitiveness. The 
report identifies the 75 American industries most intensively 
using IP protections, and uses statistical data from across the 
U.S. Government to examine both the important trends and 
economic characteristics of these highly IP-intensive 
industries.
    There are several important findings contained in the 
report, including the following. First, the entire U.S. economy 
relies on some form of IP because virtually every industry 
either produces it or uses it. During 2010, the IP-intensive 
industries directly accounted for about 27 million American 
jobs, and indirectly supported an additional 13 million jobs in 
the supply chain.
    This totals 40 million American jobs, or just under 28 
percent of all U.S. employment. Jobs in the IP-intensive 
industries pay well compared to other jobs. In 2010, average 
weekly wages for these industries were 42 percent higher than 
wages elsewhere in the economy. That pay differential was an 
impressive 70 percent higher for jobs in the patent- and 
copyright-intensive industries.
    Moreover, the IP-intensive industries accounted for just 
over $5 trillion in value added in 2010, or about 35 percent of 
the United States gross domestic product. Finally, merchandise 
exports of IP-intensive industries totaled $775 billion in 
2010. That accounted for just under 61 percent of total U.S. 
merchandise exports.
    Mr. Chairman, in light of increasing concerns about IP 
infringement and misappropriation, the Department of Commerce 
is emphasizing this area in our domestic and foreign policy 
objectives. At the USPTO, for instance, we are providing 
American businesses with information and training such as our 
China IP toolkit, available to the public on the website 
stopfakes.gov.
    The USPTO is also especially proud of our IP attaches 
program. Currently, we have representatives on the ground in 
each of the BRIC countries, with 2 attaches currently serving 
in China helping U.S. companies to navigate through the IP 
challenges they face there.
    It is important to note that there are many efforts 
underway across the Department of Commerce, ranging from the 
Bureau of Industry and Securities Enforcement activities and 
administrative sanctions against export violators to outreach 
and advocacy across the Department directed at helping U.S. 
companies compete successfully in foreign markets.
    In conclusion, Mr. Chairman, the growth, job creation, and 
success of businesses of all shapes and sizes in the U.S. 
economy are dependent on the effectiveness of IP protection. 
The Department of Commerce is committed to supporting American 
innovation, including the ability of U.S. businesses to compete 
fairly and by protecting our economy from illegal copying and 
theft.
    We appreciate your support for the employees and operations 
of the Department that make that protection possible. Thank 
you.
    [The statement of Mr. Graham follows:]
                  Prepared Statement of Stuart Graham
                             June 28, 2012
                              introduction
    Chairman Meehan, Ranking Member Higgins, and Members of the 
subcommittee: Thank you for this opportunity to discuss the potential 
impact of economic espionage on one of this country's most important 
resources--the intellectual property (IP) protections of our 
innovators.
    It is clear that policies supporting and protecting a higher-
quality IP system are making a difference in our Nation's economic 
recovery. In my testimony today, I will primarily discuss the 
importance of IP protections to U.S. businesses, with particular focus 
on the findings contained in the Department of Commerce's recent report 
titled ``Intellectual Property in the U.S. Economy: Industries in 
Focus.'' Moreover, I will discuss actions the Department of Commerce is 
taking to build capacity in the United States for new and existing 
businesses to protect their innovations. The Department of Commerce is 
keenly aware that America's core strength lies in our ability to 
experiment, innovate, and create new value. It is axiomatic that 
sensible Government policies that encourage and stimulate that spirit 
of innovation and clear that appropriate protection for American 
innovation can demonstrably contribute to job creation, economic well-
being, and better lives for our people.
commerce report overview: ``intellectual property in the u.s. economy: 
                         industries in focus''
    On April 11, 2012, the Department of Commerce released this report 
in a White House press conference. Underlining the importance of this 
topic, speakers included the Secretary of Commerce, the White House 
Intellectual Property Coordinator, the President of the U.S. Chamber of 
Commerce, and the President of the AFL-CIO. The report is a 
collaborative effort by economists in the Economics and Statistical 
Administration (ESA) and the United States Patent and Trademark Office 
(USPTO), both bureaus of the Department. This report has had a large 
impact in helping to educate citizens about the role of intellectual 
property in our economic health--during the first 30 days after the 
report's release it was downloaded from the USPTO website over 82,000 
times.
    The report recognizes that innovation--the process through which 
new ideas are generated and successfully introduced in the 
marketplace--is a primary driver of U.S. economic growth and National 
competitiveness.\1\ U.S. companies' use of patents, copyright, and 
trade secrecy to protect their creations, and trademarks to distinguish 
their goods and services from those of competitors represent important 
supports for innovation, enabling firms to capture market share, which 
contributes to growth in our economy. The granting and protection of 
intellectual property rights is vital to promoting innovation and 
creativity and is an essential element of our free enterprise, market-
based system. Patents, trademarks, and copyrights are the principal 
means used to establish ownership of inventions and creative ideas in 
their various forms, providing a legal foundation to generate tangible 
benefits from innovation for companies, workers, and consumers. Without 
this framework, the creators of intellectual property would tend to 
lose the economic fruits of their own work, thereby undermining the 
incentives to undertake the investments necessary to develop the IP in 
the first place.\2\ Moreover, without IP protection, the inventor who 
had invested time and money in developing the new product or service 
(sunk costs) would always be at a disadvantage to the new firm that 
could just copy and market the product without having to recoup any 
sunk costs or pay the higher salaries required by those with the 
creative talents and skills. As a result, the benefits associated with 
American ingenuity would tend to more easily flow outside the United 
States.
---------------------------------------------------------------------------
    \1\ National Economic Council et al. 2011.
    \2\ Ibid., 11.
---------------------------------------------------------------------------
    The report finds that IP is used everywhere in the economy, and IP 
rights support innovation and creativity in virtually every U.S. 
industry. While IP rights play a large role in generating economic 
growth, too little attention has been given to identifying which 
industries produce or use significant amounts of IP and rely most 
intensively on these rights. The report was written to give policy 
makers and the public more information about the impacts of IP 
protection in the U.S. economy on which to base sound policy.
    This report investigates the economic impact in the United States 
of intellectual property protection by developing several industry-
level metrics on IP use and employs these measures to identify a set of 
the most IP-intensive industries in the U.S. economy. To develop the 
industry-level metrics discussed, several databases were used, some of 
which (for the patent and trademark analyses) are publicly 
available.\3\
---------------------------------------------------------------------------
    \3\ See www.uspto.gov/web/offices/ac/ido/oeip/taf/data/naics_conc/ 
and also www.google.- com/googlebooks/usptotrademarks.html.
---------------------------------------------------------------------------
    The report employs USPTO administrative data to identify the 
industries that most intensively use the protection offered by patents 
and trademarks. For copyrights, the report identifies the set of 
industries primarily responsible for both the creation and production 
of copyrighted materials. The report then uses standard statistical 
methods to identify which American industries are the most patent-, 
trademark-, and copyright-intensive, and defines this subset of 
industries as ``IP-intensive.'' Using data collected from sources 
across the U.S. Government, the report examines both the important 
trends and economic characteristics of these highly IP-intensive 
industries, and their meaningful contributions to the U.S. economy. 
There are several important findings contained in the report.
                        commerce report findings
    Mr. Chairman, the important findings of the Department's report are 
as follows:
   The entire U.S. economy relies on some form of IP, because 
        virtually every industry either produces or uses it.
   IP-intensive industries accounted for about $5.06 trillion 
        in value added, or 34.8% of U.S. gross domestic product (GDP), 
        in 2010. Merchandise exports of IP-intensive industries totaled 
        $775 billion in 2010, accounting for 60.7% of total U.S. 
        merchandise exports.
   IP-intensive industries directly accounted for 27.1 million 
        American jobs, or 18.8% of all employment in the economy, in 
        2010.
   A substantial share of IP-intensive employment in the United 
        States was in the 60 trademark-intensive industries, with 22.6 
        million jobs in 2010. The 26 patent-intensive industries 
        accounted for 3.9 million jobs in 2010, while the 13 copyright-
        intensive industries provided 5.1 million jobs.
   While IP-intensive industries directly supported 27.1 
        million jobs either on their payrolls or under employment 
        contracts, these sectors also indirectly supported 12.9 million 
        more supply chain jobs throughout the economy.
   In other words, every two jobs in IP-intensive industries 
        support an additional one job elsewhere in the economy. In 
        total, 40.0 million jobs, or 27.7% of all jobs, were directly 
        or indirectly attributable to the most IP-intensive industries.
   Jobs in IP-intensive industries pay well compared to other 
        jobs. Average weekly wages for IP-intensive industries were 
        $1,156 in 2010 or 42% higher than the $815 average weekly wages 
        in other (non-IP-intensive) private industries. This wage 
        premium nearly doubled from 22% in 1990 to 42% by 2010.
   Patent- and copyright-intensive industries have seen 
        particularly fast wage growth in recent years, with the wage 
        premium in patent-intensive industries increasing from 66% in 
        2005 to 73% in 2010. And the premium in copyright-intensive 
        industries rising from 65% to 77%.
   The comparatively high wages in IP-intensive industries 
        correspond to, on average, the completion of more years of 
        schooling by these workers. More than 42% of workers aged 25 
        and over in these industries in 2010 were college-educated, 
        compared with 34% on average in non-IP intensive industries.
   Due primarily to historic losses in manufacturing jobs, 
        overall employment in IP-intensive industries has lagged other 
        industries during the last 2 decades. While employment in non-
        IP intensive industries was 21.7% higher in 2011 than in 1990, 
        overall IP-intensive industry employment grew 2.3% over this 
        same period.
   Because patent-intensive industries are all in the 
        manufacturing sector, they experienced relatively more 
        employment losses over this period, especially during the past 
        decade.
   While trademark-intensive industry employment had edged down 
        2.3% by the end of this period, copyright-intensive industries 
        provided a sizeable employment boost, growing by 46.3% between 
        1990 and 2011.
   Between 2010 and 2011, the economic recovery led to a 1.6% 
        increase in direct employment in IP-intensive industries, 
        faster than the 1.0% growth in non-IP-intensive industries.
   Growth in copyright-intensive industries (2.4%), patent-
        intensive industries (2.3%), and trademark-intensive industries 
        (1.1%) all outpaced gains in non-IP-intensive industries.
   Data on foreign trade of IP-intensive service-providing 
        industries is limited. However, this report does find that 
        exports of IP-intensive service-providing industries accounted 
        for approximately 19% of total U.S. private services exports in 
        2007.
            the importance of protections to u.s. businesses
    Mr. Chairman, it is important to point out that the findings 
contained in the Commerce report concerning the positive economic 
impacts of the most intensive users of IP in the economy are consistent 
with previous academic studies finding that secrecy, patenting, and 
other legal protections are important to U.S. businesses in securing 
competitive advantage from their innovations. Notably, in response to a 
survey conducted by scholars at Carnegie-Mellon University in the 
1990s, managers of U.S. businesses reported that various legal 
protections were effective in protecting their product and process 
innovations. Across all industries surveyed, patenting was found to 
effectively protect U.S. business' competitive advantage for over one-
third of their product innovations, while secrecy was found to 
effectively protect competitive advantage on innovations in over one-
half of product and process innovations.\4\
---------------------------------------------------------------------------
    \4\ Cohen, Wesley M., Richard R. Nelson, and John P. Walsh (2000). 
``Protecting Their Intellectual Assets: Appropriability Conditions and 
Why U.S. Manufacturing Firms Patent (or Not).'' NBER Working Paper 
7552, available at http://www.nber.org/papers/w7552.
---------------------------------------------------------------------------
    Given recent evidence from the Kauffman Foundation showing that new 
business creation disproportionately contributes to job creation in the 
United States,\5\ it is important to note that a recent survey 
conducted at the University of California examining only young 
companies in high-technology industries finds results similar to the 
Carnegie-Mellon survey.\6\ Managers at start-up companies told the 
researchers in 2008 that patents, trademarks, copyright, and trade 
secret protections were all important to securing competitive advantage 
from their new product and process innovations. Notably, the most 
important reason that managers cited for seeking patent protection was 
to prevent others from copying their products or services.
---------------------------------------------------------------------------
    \5\ See, e.g., Tim J. Kane (2010). ``The Importance of Startups in 
Job Creation and Job Destruction,'' SSRN working paper, available at 
http://ssrn.com/abstract=1646934; E.J. Reedy & Robert E. Litan (2011). 
``Starting Smaller; Staying Smaller: America's Slow Leak in Job 
Creation,'' SSRN working paper, available at http://ssrn.com/
abstract=1883660.
    \6\ Graham, Stuart, Robert P. Merges, Pamela Samuelson, and Ted M. 
Sichelman (2009). ``High Technology Entrepreneurs and the Patent 
System: Results of the 2008 Berkeley Patent Survey. Berkeley Technology 
Law Journal, Vol. 24, No. 4, pp. 255-327, available at http://ssrn.com/
abstract=1429049.
---------------------------------------------------------------------------
 department of commerce efforts to build capacity and protect american 
                               innovation
    In light of the recent and increasing concerns by U.S. right 
holders on the importance of having effective mechanisms to protect 
their trade secrets from misappropriation, the USPTO is emphasizing 
this area in our domestic and foreign policy objectives, particularly 
as they relate to other countries. USPTO attorneys are undertaking a 
comprehensive study of foreign laws and other legal measures governing 
trade secrets and are discussing with foreign government officials 
changes that can facilitate more effective protection regimes abroad. 
For instance, USPTO is using this information to update the ``China IP 
Toolkit'' on Stopfakes.gov with a section dedicated to trade secret 
protection and enforcement. This component of the Toolkit will provide 
an overview of China's major laws and other measures affecting trade 
secrets and include basic steps a company can consider to protect its 
trade secrets in China, including not only information on judicial and 
administrative enforcement mechanisms but also basic strategies 
companies can employ to help prevent misappropriation from occurring.
    Also, the USPTO is currently developing training modules on trade 
secrets for small and medium enterprises and enforcement officials. 
These modules will include an overview of trade secret law in the 
United States, measures to protect trade secrets, criminal and civil 
enforcement procedures, and international trade secret protection and 
enforcement.
    My presentation today focuses on USPTO efforts in support of the 
administration's innovation goals. I would like to note, however, that 
there are additional efforts underway across the Department of 
Commerce, ranging from BIS's enforcement activities and administrative 
sanctions against export violators, to outreach and advocacy directed 
at helping U.S. IP-intensive industries compete successfully in foreign 
markets.
                               conclusion
    Mr. Chairman, the growth, job creation, and success of businesses 
of all shapes and sizes are highly dependent on the effectiveness of IP 
protection. The Department of Commerce is committed to supporting not 
only the creation of innovation, but also the ability of U.S. 
businesses to compete fairly with these innovations and protect our 
economy from illegal copying and theft. We appreciate your support for 
the employees and operations of the Department that make that 
protection possible.

    Mr. Long. Thank you, Dr. Graham.
    The Chairman now recognizes Mr. Woods to testify.

   STATEMENT OF JOHN P. WOODS, ASSISTANT DIRECTOR, HOMELAND 
 SECURITY INVESTIGATIONS, IMMIGRATION AND CUSTOMS ENFORCEMENT, 
              U.S. DEPARTMENT OF HOMELAND SECURITY

    Mr. Woods. Chairman Long, Ranking Member Higgins, and 
distinguished Members of the subcommittee, I thank you for the 
opportunity to discuss ICE's efforts to combat intellectual 
property and technology fraud by foreign governments. The theft 
of U.S. proprietary technology, including controlled dual-use 
technology and military-grade equipment, from unwitting U.S. 
companies is one of the most dangerous threats to our National 
security.
    By maintaining investigative partnerships with other law 
enforcement agencies both in the United States and 
internationally, ICE is at the forefront of our Nation's 
efforts to investigate these threats. ICE's Homeland Security 
Investigations handles a wide range of trade fraud 
investigations, including IP theft, commercial fraud, and 
export violations.
    I would like to begin my discussion with our counter-
proliferation investigations program, which targets the 
trafficking and/or illegal export of conventional military 
equipment, firearms, controlled dual-use equipment and 
technology, and materials used to manufacture weapons of mass 
destruction, including chemical, biological, radiological, and 
nuclear materials.
    HSI's special agents investigate illegal exports of 
military equipment and dual-use technologies to embargo 
countries, and significant financial and business transactions 
with these proscribed countries and/or groups. We also conduct 
export enforcement training with foreign law enforcement 
agencies, and provide outreach with private industries in the 
United States and internationally.
    HSI's export enforcement program uses a three-pronged 
approach. Detecting the illegal exports, investigating those 
potential violations, and obtaining international cooperation 
to investigate leads abroad. One of the most effective tools 
that we use is our industry outreach program, called Project 
Shield America. Through this program, we conduct outreach to 
manufacturers, exporters of strategic commodities to educate 
them on the U.S. export control laws, discuss export licensing 
issues and requirements, and identify the red-flag indicators 
used in illicit procurement.
    To date, we have delivered over 20,000 outreach 
presentations to private industry and other entities as part of 
the program. As part of the President's export control reform 
initiative, it is to improve law enforcement coordination to 
investigate violations of U.S. export control laws.
    In November 2010, President Obama signed an Executive Order 
creating the Export Enforcement Coordination Center, or the 
E2C2. This multi-agency center is housed within HSI, and serves 
as the primary Government forum for the exchange of 
information, intelligence-related export enforcement.
    The E2C2 enhances the United States' ability to combat 
illicit proliferation by working to coordinate investigative 
enforcement activities related to export control. The E2C2 is 
staffed with full-time personnel from HSI, as well as 
individuals detailed from other departments and agencies, 
including from the Department of State, Treasury, Defense, 
Justice, Commerce, Energy, and the ODNI to name a few.
    There are a total of 18 partners that reside within the 
E2C2. Around their functions include coordinating and 
deconflicting our criminal and administrative enforcement 
actions in resolving interagency conflicts. They act as a 
primary point of contact between the enforcement authorities 
and the licensing authorities. They coordinate public outreach 
activities by law enforcement.
    Finally, they are in the process of establishing a 
Government-wide statistical tracking capability. Additionally, 
as you know, ICE is the leading agency in the investigation of 
criminal intellectual property violations involving the illegal 
production, smuggling, and distribution of counterfeit and 
pirated products as well as the associated money-laundering 
violations.
    The National Intellectual Property Rights Coordination 
Center, or the IPR Center, which is located in Arlington, 
Virginia brings together 20 Federal and international partners 
to provide a comprehensive response to IP theft. Outreach to 
the industry is also an important part of the IPR Center 
strategy.
    To combat the theft of trade secrets, the IPR Center and 
the Department of Commerce have been hosting a series of 
intergovernmental meetings to identify the issues and the 
current U.S. Government response to trade theft. Then they plan 
to engage the industry representatives and obtain their input 
and support for enforcement efforts.
    The IPR Center and Commerce are also providing outreach and 
training at the State and local level for retailers and brand 
owners. Through this effort, we are able to provide local 
rights holders and businesses the valuable insight on best 
practices, resources, initiatives that can help them combat IP 
violations, including trade secret theft.
    HSI is working hard to address the proliferation of U.S. 
proprietary technology by foreign governments, and to ensure 
that the technology does not reach the wrong hands, and 
prosecute those who subvert the rule of law and threaten our 
National security.
    We look forward to continuing our work with this 
subcommittee on this issue, and I thank you for involving me to 
testify today. I would be glad to answer any questions, when 
the time comes.
    [The statement of Mr. Woods follows:]
                  Prepared Statement of John P. Woods
                             June 28, 2012
                              introduction
    Chairman Meehan, Ranking Member Higgins, and distinguished Members 
of the subcommittee: On behalf of Secretary Napolitano and Director 
Morton, I would like to thank you for the opportunity to discuss the 
efforts of U.S. Immigration and Customs Enforcement (ICE) to combat 
intellectual property (IP) and technology fraud by foreign governments. 
The theft of U.S. proprietary technology, including controlled dual-use 
technology and military-grade equipment, from unwitting U.S. companies 
is one of the most dangerous threats to National security. As I will 
discuss today, by maintaining investigative partnerships with other law 
enforcement agencies, both in the United States and internationally, 
ICE is at the forefront of the Nation's efforts to investigate these 
threats.
HSI's Counter-Proliferation Investigations Unit
    ICE's Homeland Security Investigations (HSI) Directorate is the 
largest investigative program within the Department of Homeland 
Security (DHS), with an extensive portfolio of enforcement authorities. 
Notably, HSI special agents possess statutory authority to enforce more 
than 400 Federal laws. Specifically, HSI investigates a wide range of 
trade fraud, including IP theft, commercial fraud, and export 
violations. HSI special agents detect, disrupt, and dismantle cross-
border criminal networks engaged in the smuggling of people, narcotics, 
bulk cash, weapons, and weapons-related components across our borders. 
HSI also has full statutory authority to investigate and enforce 
criminal violations of all U.S. export laws related to military items 
and controlled ``dual-use'' commodities (i.e., items with both 
commercial and military applications). Further, HSI has the capability 
to expand the scope of its investigations to its international offices 
situated throughout the world.
    ICE leads the U.S. Government's efforts to prevent foreign 
adversaries from illegally obtaining U.S. military products and 
sensitive technology, including weapons of mass destruction and their 
components. HSI's Counter-Proliferation Investigations (CPI) Unit 
targets the trafficking and/or illegal export of conventional military 
equipment, firearms, controlled dual-use equipment and technology, and 
materials used to manufacture weapons of mass destruction, including 
chemical, biological, radiological, and nuclear materials. HSI special 
agents investigate illegal exports of military equipment and dual-use 
technology to embargoed countries, and significant financial and 
business transactions with proscribed countries and groups. Our HSI 
special agents also conduct export enforcement training for foreign law 
enforcement agencies, and provide outreach with private industry in the 
United States and internationally.
    The primary goal of HSI CPI investigations is the detection and 
disruption of illegal exports before they, or the actors behind them, 
cause damage to the National security interests of the United States. 
HSI's export enforcement program uses a three-pronged approach: 
Detecting illegal exports, investigating potential violations, and 
obtaining international cooperation to investigate leads abroad. HSI 
relies on specially-trained U.S. Customs and Border Protection officers 
stationed at ports of entry to inspect suspect export shipments. 
Following detection of a violation, HSI special agents deployed 
throughout the country initiate and pursue investigations to identify, 
arrest, and seek prosecution of offenders of the Arms Export Control 
Act of 1976, the Export Administration Act of 1979, the International 
Emergency Economic Powers Act, and other related statutes.
    The international nature of counterproliferation networks and 
schemes requires a global investigative response. The HSI Office of 
International Affairs has 71 offices around the world that work to 
enlist the support of their host governments to initiate new 
investigative leads and to develop information in support of on-going 
domestic investigations.
    In fiscal year 2011, HSI special agents initiated a total of 1,785 
criminal investigations into possible export violations, made over 530 
arrests, and obtained 487 indictments and 304 convictions for export-
related criminal violations, more than any other Federal law 
enforcement agency (as reported by the Department of Justice). In 
addition, HSI agents conducted over 1,200 seizures of arms, military 
weaponry, and other sensitive commodities related to illegal export 
schemes. These efforts contributed to preventing sensitive U.S. 
technologies and weapons from falling into the wrong hands.
Project Shield America (PSA)
    One of the most effective tools HSI special agents use as part of 
HSI's larger counter-proliferation strategy is our industry outreach 
program, Project Shield America (PSA). Through this program, HSI 
special agents conduct outreach to manufacturers and exporters of 
strategic commodities to educate them on U.S. export control laws, 
discuss export licensing issues and requirements, identify ``red flag'' 
indicators used in illegal procurement, and identify the Government 
agencies responsible for the licensing of export controlled commodities 
and technology. As of 2011, HSI agents have delivered over 20,000 
outreach presentations to private industry and other entities as part 
of the PSA program.
Export Enforcement Coordination Center (E2C2)
    A part of the President's Export Control Reform Initiative is to 
improve law enforcement coordination to investigate violations of U.S. 
export control laws. In November 2010, President Obama signed an 
Executive Order creating the Export Enforcement Coordination Center 
(E2C2)--a multi-agency center housed within HSI that serves as the 
primary Government forum for the exchange of information and 
intelligence related to export enforcement. Operational since April of 
this year, E2C2 enhances the United States' ability to combat illicit 
proliferation by working to coordinate investigative and enforcement 
activities related to export control.
    The E2C2 is staffed with full-time personnel from HSI, as well as 
individuals detailed from other departments and agencies including the 
Departments of State, Treasury, Defense (DoD), Justice, Commerce, 
Energy, the Office of the Director of National Intelligence, and other 
Executive Branch departments, agencies, or offices as designated by the 
President. Specifically, the functions of the E2C2 include:
   Coordinating the deconfliction of criminal and 
        administrative enforcement actions and resolving conflicts that 
        have not been otherwise resolved in the field;
   Acting as the primary point of contact between enforcement 
        authorities and agencies engaged in export licensing;
   Coordinating law enforcement public outreach activities 
        related to U.S. export controls; and
   Establishing Government-wide statistical tracking 
        capabilities for U.S. export enforcement activities.
    The E2C2 replaced HSI's National Export Enforcement Coordination 
Network (NEECN), which led coordination among DHS components to address 
challenges inherent with dismantling transnational procurement 
networks. Unlike the NEECN, the Executive Order requires E2C2 
participation by law enforcement and the intelligence community (IC).
CPI Centers
    Faced with increasingly sophisticated global procurement networks, 
HSI has established and implemented CPI Centers throughout the United 
States to utilize CPI resources in the field strategically. The CPI 
Centers are intended to serve as a regional HSI resource for manpower, 
expertise, de-confliction, undercover operational support, and/or other 
CPI assistance that HSI offices may require. This concept allows for 
dedicated and experienced HSI special agents to be strategically placed 
in high-risk domestic areas to improve HSI's ability to combat illegal 
exports and illicit procurement networks that pose a threat to the 
United States.
    Geographically, CPI Centers are selected based on criteria 
including significant cases and statistics, threat assessments in 
respective areas of responsibility, and proximity to DoD and other U.S. 
Government agencies involved in export enforcement. ICE currently has 
12 CPI Centers located throughout the United States.
National Intellectual Property Rights Center
    ICE is a leading agency in the investigation of criminal 
intellectual property violations involving the illegal production, 
smuggling, and distribution of counterfeit and pirated products, as 
well as associated money-laundering violations. Led by ICE, the 
National Intellectual Property Rights Coordination Center (IPR Center), 
located in Arlington, Virginia, brings together 20 Federal and 
international partners to leverage resources, skills, and authorities 
to provide a comprehensive response to IP theft.
    The mission of the IPR Center is to address the theft of innovation 
that threatens U.S. economic stability and National security, 
undermines the competitiveness of U.S. industry in world markets, and 
places the public's health and safety at risk. The entry of goods into 
the United States is an integral part of the economic health of our 
Nation. However, with the growth of international trade comes an 
increased risk of border security compromises, including threats to 
National security and economic crime.
IPR Center Outreach
    Outreach to industry is an important part of the IPR Center's 
strategy. To combat the theft of trade secrets, the IPR Center and the 
Department of Commerce (DOC) have been hosting a series of intra-
governmental meetings to identify the issues and the current U.S. 
Government response to trade secret theft, and then plan to engage with 
industry representatives to obtain their input and support in these 
efforts.
    The IPR Center has further enhanced its collaboration with the DOC 
to provide outreach and training at the State and local level for 
retailers and brand owners. In collaboration with the U.S. Export 
Assistance Centers, these outreach and awareness-raising efforts are 
planned to precede or follow selected IPR Center training events. 
Through this effort, DOC and the IPR Center, along with other U.S. 
Government agencies and industry, are able to provide local rights 
holders and businesses with valuable insight on best practices, 
resources, and initiatives that can help them combat IP violations, 
including trade secret theft.
                               conclusion
    HSI special agents are working tirelessly to combat the 
proliferation of U.S. proprietary technology by foreign governments, 
ensure that this technology does not reach the wrong hands, and 
prosecute those who subvert the rule of law and threaten our National 
security. We look forward to continuing to work with the subcommittee 
on this issue.
    Thank you once again for the opportunity to appear before you 
today. I would be pleased to answer any questions.

    Mr. Long. The Chairman now recognizes--oops. Thank you, Mr. 
Woods.
    The Chairman now recognizes Mr. Figliuzzi to testify.

     STATEMENT OF C. FRANK FIGLIUZZI, ASSISTANT DIRECTOR, 
COUNTERINTELLIGENCE DIVISION, FEDERAL BUREAU OF INVESTIGATION, 
                   U.S. DEPARTMENT OF JUSTICE

    Mr. Figliuzzi. Good morning, Chairman Long and Ranking 
Member Higgins, and Members of the subcommittee. Thank you for 
the opportunity to testify before you today. For the past year-
and-a-half I have had the privilege of leading the FBI's 
counterintelligence division.
    Our mission is to identify, disrupt, and defeat the efforts 
of foreign intelligence services operating inside a United 
States. To put it simply, the FBI is in the spy-catching 
business, and today I can tell you that our business is 
booming. This is an appropriate time to address economic 
espionage: The unauthorized acquisition of business trade 
secrets or proprietary information and the illegal transfer of 
technology.
    With each year, foreign intelligence services and their 
collectors become more sophisticated in their methods to 
undermine American business and erode what gives America our 
leading edge--our ability to innovate. In the FBI's pending 
caseload, just this fiscal year economic espionage has cost the 
American economy more than $13 billion. The health of America's 
companies is vital to our economy, and our economic is a matter 
of National security.
    But the FBI, with our partner agencies, is making strides 
in disrupting economic espionage plots. This year, we have 
surpassed last year's statistics by achieving 10 arrests, 21 
indictments, and 9 convictions for economic espionage-related 
crimes. As the FBI's economic espionage caseload is growing, so 
is the percentage of our cases attributed to an insider threat 
coming from trusted employees and contractors, or former 
employees and contractors.
    This threat, of course, is not new. But it is becoming more 
prevalent. In this time of global economic uncertainty, it is 
lucrative for an employee to steal our technology and offer it 
to the highest bidder. Foreign nations know that it is always 
cheaper to steal U.S. technology than it is to research and 
develop it themselves.
    On May 11, 2012 the FBI initiated a public awareness 
campaign regarding an increased targeting of unclassified trade 
secrets across all American industries and sectors. Our 
website, www.fbi.gov, includes many resources to help counter 
this threat.
    The illegal transfer of U.S. technology is a second grave 
threat to our National security. The FBI is seeing an expansion 
of weapons proliferation cases involving U.S.-acquired 
components. These are components exported from American 
companies initially headed to someplace they are allowed to be 
but, ultimately, destined for someplace they should never be.
    The FBI's counterproliferation center, that identifies and 
disrupts networks of WMD activity, has tripled its disruptions 
of illegal transfers of technology since fiscal year 2011, 
including making more than a dozen arrests in the last year. 
Two case examples illustrate our successes in working alongside 
our U.S. law enforcement and intelligence community partners.
    In the first case, an Iranian proliferator used shell 
companies worldwide to supply Iran with military- and defense-
related equipment. In 4 years, FBI cases helped interdict metal 
shipments headed to Iran which would have been the equivalent 
of more than 80 ballistic missiles.
    In the second case, another Iranian proliferation network 
obtained dual-use equipment from unwitting U.S. companies and 
shipped them to intermediary front companies in Asian nations 
before ultimately rerouting the shipments to Iran. More than a 
dozen of these components have been recovered as part of 
improvised explosive devices used against American 
servicemembers in Iraq from 2008 to 2011.
    The threat of economic espionage and illegal transfers of 
technology are not emerging threats on the horizon; they are 
with us right now. As long as America has what other nations 
want, and as long as there are foreign intelligence services 
working to get it, we will continue to see these types of 
threats.
    We are producing results as a result of our robust 
Government, business, and academic outreach partnerships, 
including partnerships among the agencies represented today at 
this hearing. We are all making it more difficult and less 
lucrative for individuals and entities to carry out the illegal 
taskings of foreign governments, and hardening our defenses 
against those who would so us harm.
    Thank you for the opportunity to speak to you today, and I 
would be happy to answer your questions.
    [The statement of Mr. Figliuzzi follows:]
                Prepared Statement of C. Frank Figliuzzi
                             June 28, 2012
    Good morning Chairman Meehan, Ranking Member Higgins, and Members 
of the subcommittee. Thank you for the opportunity to testify before 
you today. For the past year-and-a-half, I have had the privilege of 
leading the FBI's Counterintelligence Division (``CD''). Our mission is 
to identify, disrupt, and defeat the efforts of foreign intelligence 
services operating inside the United States. In the FBI's pending case 
load for the current fiscal year, economic espionage losses to the 
American economy total more than $13 billion. The health of America's 
companies is vital to our economy, and our economy is a matter of 
National security. But the FBI, with our partners, is making strides in 
disrupting economic espionage plots. In just the last 4 years, the 
number of arrests the FBI has made associated with economic espionage 
has doubled; indictments have increased five-fold; and convictions have 
risen eight-fold. In just the current fiscal year, the FBI has made 10 
arrests for economic espionage-related charges; Federal courts have 
indicted 21 of our subjects (including indictments of five companies), 
and convicted nine defendants. In the current fiscal year so far, we 
have already surpassed the statistics recorded for fiscal year 2011 and 
expect them to continue to rise. With each year, foreign intelligence 
services and their collectors become more creative and more 
sophisticated in their methods to undermine American business and erode 
the one thing that most provides American business its leading edge--
our ability to innovate.
    As the FBI's economic espionage caseload is growing, so is the 
percentage of cases attributed to an Insider Threat, meaning that, 
individuals currently (or formerly) trusted as employees and 
contractors are a growing part of the problem.
    According to a February 2012 indictment, several former employees 
with more than 70 combined years of service to the company were 
convinced to sell trade secrets to a competitor in the People's 
Republic of China (``PRC''). Entities owned by the PRC government 
sought information on the production of titanium dioxide, a white 
pigment used to color paper, plastics, and paint. The PRC government 
tried for years to compete with DuPont Corporation, which holds the 
largest share of a $12 billion annual market in titanium dioxide. Five 
individuals and five companies were commissioned by these PRC state-
owned enterprises collaborate in an effort to take DuPont's technology 
to the PRC and build competing titanium dioxide plants, which would 
undercut DuPont revenues and business. Thus far, three co-conspirators 
have been arrested and one additional co-conspirator has pled guilty in 
Federal court. This case is one of the largest economic espionage cases 
in FBI history.
    The Insider Threat, of course, is not new, but it's becoming more 
prevalent for a host of reasons, including
   The pervasiveness of employee financial hardships during 
        economic difficulties;
   The global economic crisis facing foreign nations, making it 
        even more attractive, cost-effective, and worth the risk to 
        steal technology rather than invest in research and 
        development;
   The ease of stealing anything stored electronically, 
        especially when one has legitimate access to it; and
   The increasing exposure to foreign intelligence services 
        presented by the reality of global business, joint ventures, 
        and the growing international footprint of American firms.
    To address the evolving Insider Threat, the FBI has become more 
proactive to prevent losses of information and technology. CD continues 
expanding our outreach and liaison alliances to Government agencies, 
the defense industry, academic institutions, and, for the first time, 
to the general public, because of an increased targeting of 
unclassified trade secrets across all American industries and sectors.
    On May 11, 2012, the FBI launched a media campaign highlighting the 
Insider Threat relating to economic espionage. This campaign included 
print and television interviews, billboards along busy commuter 
corridors in nine leading research areas Nation-wide, and public 
information on the FBI website. Through this campaign, the FBI hopes to 
reach the public and business communities by explaining how the Insider 
Threat affects a company's operations and educating them on how to 
detect, prevent, and respond to threats to their organizations' 
proprietary information. Perhaps the most important among these is 
identifying and taking defensive measures against employees stealing 
trade secrets.
    A recent case underscores the value of the FBI and private 
companies working together to stop economic espionage and prevent 
financial losses or breaches of National security. An employee at a 
Utah company noticed a co-worker download the recipe for manufacturing 
a proprietary chemical and email it to his personal email account. 
After this suspicious activity was reported, the company opened its own 
investigation into the matter and learned that the employee had shared 
the manufacturing secret with an individual associated with a foreign 
chemical company. Because of an FBI presentation about economic 
espionage, company executives called the FBI, and the employee was 
arrested and charged within 10 days. If businesses, universities, and 
law enforcement continue to partner together, we can track, apprehend, 
and prosecute many more individuals suspected of economic espionage.
    A second grave threat to our National security is the illegal 
transfer of U.S. technology. The FBI is seeing an expansion of weapons 
proliferation cases involving U.S.-acquired components. These are 
components exported from American companies, initially headed to 
someplace they're allowed to be, but ultimately destined for someplace 
they should never be. The FBI's Counterproliferation Center (CPC), 
which identifies and disrupts networks of weapons of mass destruction 
(WMD) activity, is responsible for pursuing cases of illegal technology 
transfer, whether the technology is intended for WMDs or other uses. 
The CPC has tripled its disruptions of illegal transfers of technology 
since fiscal year 2011. We have made more than a dozen arrests since 
the CPC's inception in July 2011, including the arrests of multiple 
subjects on the Central Intelligence Agency's Top Ten Proliferators 
List. The CPC has also surpassed statistics recorded for fiscal year 
2011 and in fiscal year 2012 (to date).
    One example of this sort of case involved an Iranian proliferation 
network with associates in Hong Kong, Taiwan, Singapore, and Malaysia, 
and particularly highlights our partnership with the Department of 
Commerce's Office of Export Enforcement and Homeland Security 
investigations. The network leader targeted dual-use electronic 
equipment including radio frequency modules. The target obtained this 
equipment from unwitting U.S. companies and shipped them to 
intermediary front companies in East Asia before ultimately rerouting 
the shipments to Iran. Over a dozen of these components have been 
recovered in caches of improvised explosive devices (``IEDs'') or 
recovered as part of the remote detonation systems of the pre- and 
post-blast IEDs used against American soldiers in Iraq from 2008-2011. 
Four co-conspirators in Singapore have been arrested and extradition 
proceedings to the United States to stand trial are on-going. One U.S. 
co-conspirator, who worked in research and development at the company 
manufacturing and shipping these items, pled guilty in Federal court 
this January.
    The answer to the threat lies, in part, on the partnerships 
represented at this hearing. Acting together, we are stronger than when 
we act alone and are producing results. As we continue our 
investigative and prosecutorial efforts we make it more painful for 
individuals and entities to carry out missions related to economic 
espionage. And as we strengthen and expand public awareness of the 
threat through our alliances with business and academia, we harden our 
defenses against those who would do us harm.
    Again, thank you for the opportunity to speak with you today. I 
would be pleased to answer any questions.

    Mr. Long. Thank you, Mr. Figliuzzi.
    The Chairman now recognizes Mr. Wilshusen to testify.

   STATEMENT OF GREGORY C. WILSHUSEN, DIRECTOR, INFORMATION 
       SECURITY ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Wilshusen. Chairman Long, Ranking Member Higgins, and 
Members of the subcommittee, thank you for the opportunity to 
testify at today's hearing on the threat of economic espionage 
facing the United States.
    This threat is not new. In April, 1992 we testified that 
the theft of U.S. proprietary information or technology by 
foreign companies has long been a part of the competitive 
business environment. We also testified that the unauthorized 
acquisition of U.S. proprietary and other information by 
foreign governments to advance their country's economic 
position was growing.
    Today, this threat continues to grow. The United States, a 
leader in innovation and technological research and 
development, remains a prime target. In addition, the 
increasing dependence on network IT systems and the use of 
cyberspace have vastly enhanced the reach and potential impact 
of such threats by making it possible for hostile actors to 
quickly steal massive amounts of information while remaining 
anonymous and difficult to detect.
    Mr. Chairman, I will describe some of the cyber threats, 
reported incidents affecting our Nation's systems, IT security 
safeguards available for helping to reduce these risks, and the 
roles of key Federal entities in supporting the protection of 
intellectual property. But before I do, Mr. Chairman, if I may 
I would like to recognize several members of my team who were 
instrumental in developing this statement.
    With me today is Mike Gilmore and Angelique Lawrence. Back 
at the office, Lee McCracken, Brad Becker, and Kush Malhotra 
were very helpful.
    Mr. Chairman, the Nation faces an evolving array of cyber-
based threats from a variety of sources. These sources include 
foreign nations, business competitors, criminal groups, 
hackers, and corrupt insiders engaged in criminal activities 
such as fraud, computer extortion, and economic and industrial 
espionage, among others.
    They vary in their terms of capabilities, willingness to 
act, and motives, which can include seeking monetary gain and 
pursuing economic, political, or military advantage. Moreover, 
they have a variety of attack techniques that can be used to 
view, exfiltrate, and modify valuable information. The 
magnitude of the threat is compounded by the ever-increasing 
sophistication of cyber attack techniques, such as attacks that 
may combine multiple exploits.
    Reported attacks involving private-sector and Government 
systems occur daily and demonstrate that their impact can be 
serious. For example, consumers could suffer privacy and 
financial loss from identity theft and on-line scams. Private 
companies could lose their competitive advantage and market 
value from the cyber theft of an intellectual property or 
business proprietary information.
    Essential Government functions and critical infrastructure 
services could be impaired or disrupted. To protect against 
these threats, a variety of security controls and practices are 
available. These include technical controls such as those that 
manage access to systems, ensure system integrity, and encrypt 
sensitive data.
    Risk management and strategic planning are key practices 
that organizations undertake to improve their overall security 
posture and reduce their exposure to cyber risk. Effective 
public-private partnerships can facilitate information-sharing 
about cyber threats and countermeasures. Multiple Federal 
agencies have roles in supporting the protection of 
intellectual property rights, such as the Departments of 
Commerce, Justice, and Homeland Security.
    For example, components within the Justice Department, 
including the FBI, are dedicated to fighting computer-based 
threats to intellectual property. In addition, both Congress 
and the administration have established interagency mechanisms 
to better coordinate the protection of intellectual property.
    Ensuring the effective coordination among these efforts 
will be imperative for enhancing the economic security of the 
United States. In summary, the on-going efforts to steal U.S. 
intellectual property and other sensitive information are 
exacerbated by the ever-increasing prevalence and 
sophistication of cyber threats facing the Nation.
    Recently-reported incidents show that such actions can have 
serious consequences not only on individual businesses, but on 
private citizens and the economy as a whole. Effective 
coordination among Federal agencies, as well as robust public-
private partnerships, are essential elements of any Nation-wide 
effort to protect America's businesses and economic security 
from cyber-based threats.
    Mr. Chairman, Ranking Member Higgins, this concludes my 
statement. I would be pleased to answer any questions you may 
have.
    [The statement of Mr. Wilshusen follows:]
               Prepared Statement of Gregory C. Wilshusen
    Chairman Meehan, Ranking Member Higgins, and Members of the 
subcommittee: Thank you for the opportunity to testify at today's 
hearing on the threat of economic espionage facing U.S. businesses.
    The threat of economic espionage\1\ is not new. In April 1992, we 
testified that the theft of U.S. proprietary information or technology 
by foreign companies has long been a part of the competitive business 
environment.\2\ We also testified that the unauthorized acquisition of 
U.S. proprietary or other information by foreign governments to advance 
their countries' economic position was growing.
---------------------------------------------------------------------------
    \1\ According to the Office of the National Counterintelligence 
Executive, economic espionage occurs when an actor, knowing or 
intending that his or her actions will benefit any foreign government, 
instrumentality, or agent, knowingly: (1) Steals, or without 
authorization appropriates, carries away, conceals, or obtains by 
deception or fraud a trade secret; (2) copies, duplicates, reproduces, 
destroys, uploads, downloads, or transmits that trade secret without 
authorization; or (3) receives a trade secret knowing that the trade 
secret had been stolen, appropriated, obtained or converted without 
authorization. See Foreign Spies Stealing U.S. Economic Secrets in 
Cyberspace: Report to Congress on Foreign Economic Collection and 
Industrial Espionage, 2009-2011 (October 2011).
    \2\ GAO, Economic Espionage: The Threat to U.S. Industry, Testimony 
before the Subcommittee on Economic and Commercial Law, Committee on 
the Judiciary, House of Representatives, GAO/T-OSI-92-6 (April 29, 
1992).
---------------------------------------------------------------------------
    Today, this threat continues to grow. According to the Federal 
Bureau of Investigation (FBI), the theft of intellectual property 
(IP)\3\--products of human intelligence and creativity--is a growing 
threat which is heightened by the rise of the use of digital 
technologies.\4\ The increasing dependency upon information technology 
(IT) systems and networked operations pervades nearly every aspect of 
our society. In particular, increasing computer interconnectivity--most 
notably growth in the use of the internet--has revolutionized the way 
that our Government, our Nation, and much of the world communicate and 
conduct business. While bringing significant benefits, this dependency 
can also create vulnerabilities to cyber-based threats. Cyber attacks 
are one way that threat actors--whether nations, companies, or 
criminals--can target the intellectual property and other sensitive 
information of Federal agencies and American businesses. According to 
the Office of the National Counterintelligence Executive, sensitive 
U.S. economic information and technology are targeted by intelligence 
services, private-sector companies, academic and research institutions, 
and citizens of dozens of countries.\5\ To help address this threat, 
Federal agencies have a key role to play in law enforcement, 
deterrence, and information sharing. Underscoring the importance of 
this issue, we have designated Federal information security as a high-
risk area since 1997 and in 2003 expanded this area to include 
protecting computerized systems supporting our Nation's critical 
infrastructure.\6\
---------------------------------------------------------------------------
    \3\ Intellectual property is a category of legal rights that grants 
owners certain exclusive rights to intangible assets or products of the 
human intellect, such as inventions; literary and artistic works; and 
symbols, names, images, and design.
    \4\ See the FBI's website on cybercrime and intellectual property 
theft at http://www.fbi.gov/about-us/investigate/cyber/ipr/ipr.
    \5\ Office of the National Counterintelligence Executive, Foreign 
Spies Stealing U.S. Economic Secrets in Cyberspace.
    \6\ See, most recently, GAO, High-Risk Series: An Update, GAO-11-
278 (Washington, DC: February 2011).
---------------------------------------------------------------------------
    In my testimony today, I will describe: (1) Cyber threats facing 
the Nation's systems, (2) reported cyber incidents and their impacts, 
(3) security controls and other techniques available for reducing risk, 
and (4) the responsibilities of key Federal entities in support of 
improving the protection of intellectual property. In preparing this 
statement in June 2012, we relied on our previous work in these areas. 
(Please see the related GAO products in appendix II.) These products 
contain detailed overviews of the scope and methodology we used. We 
also reviewed relevant reports from the Department of Justice and 
Office of the National Counterintelligence Executive, and information 
on security incidents, including those involving economic espionage, 
from the U.S. Computer Emergency Readiness Team (US-CERT), media 
reports, and other publicly available sources. The work on which this 
statement is based was conducted in accordance with generally accepted 
Government auditing standards. Those standards require that we plan and 
perform audits to obtain sufficient, appropriate evidence to provide a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provided a reasonable 
basis for our findings and conclusions based on our audit objectives.
                               background
    As computer technology has advanced, both Government and private 
entities have become increasingly dependent on computerized information 
systems to carry out operations and to process, maintain, and report 
essential information. Public and private organizations rely on 
computer systems to transmit sensitive and proprietary information, 
develop and maintain intellectual capital, conduct operations, process 
business transactions, transfer funds, and deliver services. In 
addition, the internet has grown increasingly important to American 
business and consumers, serving as a medium for hundreds of billions of 
dollars of commerce each year.
    Consequently, ineffective information security controls can result 
in significant risks, including:
   loss or theft of resources, including money and intellectual 
        property;
   inappropriate access to and disclosure, modification, or 
        destruction of sensitive information;
   use of computer resources for unauthorized purposes or to 
        launch attacks on other computers' systems;
   damage to networks and equipment;
   loss of business due to lack of customer confidence; and
   increased costs from remediation.
       the nation faces an evolving array of cyber-based threats
    Cyber-based threats are evolving and growing and arise from a wide 
array of sources. These sources include business competitors, corrupt 
employees, criminal groups, hackers, and foreign nations engaged in 
espionage and information warfare. These threat sources vary in terms 
of the capabilities of the actors, their willingness to act, and their 
motives, which can include monetary gain or political advantage, among 
others. Table 1 shows common sources of cyber threats.

               TABLE 1.--SOURCES OF CYBERSECURITY THREATS
------------------------------------------------------------------------
           Threat source                         Description
------------------------------------------------------------------------
Bot-network operators.............  Bot-net operators use a network, or
                                     bot-net, of compromised, remotely
                                     controlled systems to coordinate
                                     attacks and to distribute phishing
                                     schemes, spam, and malware attacks.
                                     The services of these networks are
                                     sometimes made available on
                                     underground markets (e.g.,
                                     purchasing a denial-of-service
                                     attack or services to relay spam or
                                     phishing attacks).
Business competitors..............  Companies that compete against or do
                                     business with a target company may
                                     seek to obtain sensitive
                                     information to improve their
                                     competitive advantage in various
                                     areas, such as pricing,
                                     manufacturing, product development,
                                     and contracting.
Criminal groups...................  Criminal groups seek to attack
                                     systems for monetary gain.
                                     Specifically, organized criminal
                                     groups use spam, phishing, and
                                     spyware/malware to commit identity
                                     theft, on-line fraud, and computer
                                     extortion.
Hackers...........................  Hackers break into networks for the
                                     thrill of the challenge, bragging
                                     rights in the hacker community,
                                     revenge, stalking, monetary gain,
                                     and political activism, among other
                                     reasons. While gaining unauthorized
                                     access once required a fair amount
                                     of skill or computer knowledge,
                                     hackers can now download attack
                                     scripts and protocols from the
                                     internet and launch them against
                                     victim sites. Thus, while attack
                                     tools have become more
                                     sophisticated, they have also
                                     become easier to use. According to
                                     the Central Intelligence Agency,
                                     the large majority of hackers do
                                     not have the requisite expertise to
                                     threaten difficult targets such as
                                     critical U.S. networks.
                                     Nevertheless, the worldwide
                                     population of hackers poses a
                                     relatively high threat of an
                                     isolated or brief disruption
                                     causing serious damage.
Insiders..........................  The disgruntled or corrupt
                                     organization insider is a source of
                                     computer crime including economic
                                     espionage. Insiders may not need a
                                     great deal of knowledge about
                                     computer intrusions because their
                                     knowledge of a target system often
                                     allows them to gain unrestricted
                                     access to cause damage to the
                                     system or to steal system data. The
                                     insider threat includes contractors
                                     hired by the organization, as well
                                     as careless or poorly-trained
                                     employees who may inadvertently
                                     introduce malware into systems.
International corporate spies.....  International corporate spies pose a
                                     threat to the United States through
                                     their ability to conduct economic
                                     and industrial espionage* and large-
                                     scale monetary theft and to hire or
                                     develop hacker talent.
Nations...........................  Nations use cyber tools as part of
                                     their information-gathering and
                                     espionage activities, including
                                     economic espionage directed against
                                     U.S. businesses. In addition,
                                     several nations are aggressively
                                     working to develop information
                                     warfare doctrine, programs, and
                                     capabilities. In his January 2012
                                     testimony, the Director of National
                                     Intelligence stated that, among
                                     state actors, China and Russia are
                                     of particular concern.
Phishers..........................  Individuals or small groups execute
                                     phishing schemes in an attempt to
                                     steal identities or information for
                                     monetary gain. Phishers may also
                                     use spam and spyware or malware to
                                     accomplish their objectives.
Spammers..........................  Individuals or organizations
                                     distribute unsolicited e-mail with
                                     hidden or false information in
                                     order to sell products, conduct
                                     phishing schemes, distribute
                                     spyware or malware, or attack
                                     organizations (e.g., a denial of
                                     service).
Spyware or malware authors........  Individuals or organizations with
                                     malicious intent carry out attacks
                                     against users by producing and
                                     distributing spyware and malware.
                                     Several notable destructive
                                     computer viruses and worms have
                                     harmed files and hard drives,
                                     including the Melissa Macro Virus,
                                     the Explore.Zip worm, the CIH
                                     (Chernobyl) Virus, Nimda, Code Red,
                                     Slammer, and Blaster.
Terrorists........................  Terrorists seek to destroy,
                                     incapacitate, or exploit critical
                                     infrastructures in order to
                                     threaten National security, cause
                                     mass casualties, weaken the
                                     economy, and damage public morale
                                     and confidence. Terrorists may use
                                     phishing schemes or spyware/malware
                                     in order to generate funds or
                                     gather sensitive information.
------------------------------------------------------------------------
* According to the Office of the National Counterintelligence Executive,
  industrial espionage, or theft of trade secrets, occurs when an actor,
  intending or knowing that his or her offense will injure the owner of
  a trade secret of a product produced for or placed in interstate or
  foreign commerce, acts with the intent to convert that trade secret to
  the economic benefit of anyone other than the owner. See Foreign Spies
  Stealing U.S. Economic Secrets in Cyberspace.
Source.--GAO analysis based on data from the Director of National
  Intelligence, Department of Justice, Central Intelligence Agency,
  National Institute of Standards and Technology, and the Software
  Engineering Institute's CERT Coordination Center.

    These sources of cyber threats make use of various techniques, or 
exploits, to adversely affect an organization's computers, software, or 
networks, or to intercept or steal valuable or sensitive information. 
Table 2 provides descriptions of common types of cyber exploits.

                    TABLE 2.--TYPES OF CYBER EXPLOITS
------------------------------------------------------------------------
          Type of Exploit                        Description
------------------------------------------------------------------------
Cross-site scripting..............  An attack that uses third-party web
                                     resources to run script within the
                                     victim's web browser or scriptable
                                     application. This occurs when a
                                     browser visits a malicious website
                                     or clicks a malicious link. The
                                     most dangerous consequences occur
                                     when this method is used to exploit
                                     additional vulnerabilities that may
                                     permit an attacker to steal cookies
                                     (data exchanged between a web
                                     server and a browser), log key
                                     strokes, capture screen shots,
                                     discover and collect network
                                     information, and remotely access
                                     and control the victim's machine.
Denial-of-service.................  An attack that prevents or impairs
                                     the authorized use of networks,
                                     systems, or applications by
                                     exhausting resources.
Distributed denial-of-service.....  A variant of the denial-of-service
                                     attack that uses numerous hosts to
                                     perform the attack.
Logic bombs.......................  A piece of programming code
                                     intentionally inserted into a
                                     software system that will cause a
                                     malicious function to occur when
                                     one or more specified conditions
                                     are met.
Phishing..........................  A digital form of social engineering
                                     that uses authentic-looking, but
                                     fake, e-mails to request
                                     information from users or direct
                                     them to a fake website that
                                     requests information.
Passive wiretapping...............  The monitoring or recording of data,
                                     such as passwords transmitted in
                                     clear text, while they are being
                                     transmitted over a communications
                                     link. This is done without altering
                                     or affecting the data.
Structured Query Language (SQL)     An attack that involves the
 injection.                          alteration of a database search in
                                     a web-based application, which can
                                     be used to obtain unauthorized
                                     access to sensitive information in
                                     a database.
Trojan horse......................  A computer program that appears to
                                     have a useful function, but also
                                     has a hidden and potentially
                                     malicious function that evades
                                     security mechanisms by, for
                                     example, masquerading as a useful
                                     program that a user would likely
                                     execute.
Virus.............................  A computer program that can copy
                                     itself and infect a computer
                                     without the permission or knowledge
                                     of the user. A virus might corrupt
                                     or delete data on a computer, use e-
                                     mail programs to spread itself to
                                     other computers, or even erase
                                     everything on a hard disk. Unlike a
                                     computer worm, a virus requires
                                     human involvement (usually
                                     unwitting) to propagate.
War driving.......................  The method of driving through cities
                                     and neighborhoods with a wireless-
                                     equipped computer--sometimes with a
                                     powerful antenna--searching for
                                     unsecured wireless networks.
Worm..............................  A self-replicating, self-
                                     propagating, self-contained program
                                     that uses network mechanisms to
                                     spread itself. Unlike computer
                                     viruses, worms do not require human
                                     involvement to propagate.
Zero-day exploit..................  An exploit that takes advantage of a
                                     security vulnerability previously
                                     unknown to the general public. In
                                     many cases, the exploit code is
                                     written by the same person who
                                     discovered the vulnerability. By
                                     writing an exploit for the
                                     previously unknown vulnerability,
                                     the attacker creates a potent
                                     threat since the compressed time
                                     frame between public discoveries of
                                     both makes it difficult to defend
                                     against.
------------------------------------------------------------------------
Source: GAO analysis of data from the National Institute of Standards
  and Technology, United States Computer Emergency Readiness Team, and
  industry reports.

    Cyberspace--where much business activity and the development of new 
ideas often take place--amplifies these threats by making it possible 
for malicious actors to quickly steal and transfer massive quantities 
of data while remaining anonymous and difficult to detect.\7\ For 
example, cyber attackers do not need to be physically close to their 
victims, technology allows attacks to easily cross State and National 
borders, attacks can be carried out at high speed and directed at a 
number of victims simultaneously, and cyber attackers can more easily 
remain anonymous. Moreover, the use of these and other techniques is 
becoming more sophisticated, with attackers using multiple or 
``blended'' approaches that combine two or more techniques. Using such 
techniques, threat actors may target individuals, resulting in loss of 
privacy or identity theft; businesses, resulting in the compromise of 
proprietary information or intellectual property; critical 
infrastructures, resulting in their disruption or destruction; or 
Government agencies, resulting in the loss of sensitive information and 
damage to economic and National security.
---------------------------------------------------------------------------
    \7\ Office of the National Counterintelligence Executive, Foreign 
Spies Stealing U.S. Economic Secrets in Cyberspace.
---------------------------------------------------------------------------
  reported cyber-incidents illustrate serious risk to the security of 
     intellectual property and other sensitive economic information
    Reports of cyber incidents affecting both public and private 
institutions are widespread. The U.S. Computer Emergency Readiness Team 
(US-CERT) receives computer security incident reports from Federal 
agencies, State and local governments, commercial enterprises, U.S. 
citizens, and international computer security incident response teams. 
In its fiscal year 2011 report to Congress on implementation of the 
Federal Information Security Management Act of 2002, the Office of 
Management and Budget reported that US-CERT received over 100,000 total 
incident reports in fiscal year 2011. Over half of these (about 55,000) 
were phishing exploits; other categories of incidents included virus/
Trojan horse/worm/logic bombs; malicious websites; policy violations; 
equipment theft or loss; suspicious network activity; attempted access; 
and social engineering.
    Private-sector organizations have experienced a wide range of 
incidents involving data loss or theft, economic loss, computer 
intrusions, and privacy breaches, underscoring the need for improved 
security practices. The following examples from news media and other 
public sources illustrate that a broad array of information and assets 
remain at risk.
   In March 2012, it was reported that a security breach at 
        Global Payments, a firm that processed payments for Visa and 
        Mastercard, could compromise the credit- and debit-card 
        information of millions of Americans. Subsequent to the 
        reported breach, the company's stock fell more than 9 percent 
        before trading in its stock was halted. Visa also removed the 
        company from its list of approved processors.
   In March 2012, it was reported that Blue Cross Blue Shield 
        of Tennessee paid out a settlement of $1.5 million to the U.S. 
        Department of Health and Human Services arising from potential 
        violations stemming from the theft of 57 unencrypted computer 
        hard drives that contained protected health information of over 
        1 million individuals.
   In April 2011, Sony disclosed that it suffered a massive 
        breach in its video game on-line network that led to the theft 
        of personal information, including the names, addresses, and 
        possibly credit card data belonging to 77 million user 
        accounts.
   In February 2011, media reports stated that computer hackers 
        had broken into and stolen proprietary information worth 
        millions of dollars from the networks of six U.S. and European 
        energy companies.
   A retailer reported in May 2011 that it had suffered a 
        breach of its customers' card data. The company discovered 
        tampering with the personal identification number (PIN) pads at 
        its checkout lanes in stores across 20 States.
   In mid-2009 a research chemist with DuPont Corporation 
        reportedly downloaded proprietary information to a personal e-
        mail account and thumb drive with the intention of transferring 
        this information to Peking University in China and also sought 
        Chinese government funding to commercialize research related to 
        the information he had stolen.
   Between 2008 and 2009, a chemist with Valspar Corporation 
        reportedly used access to an internal computer network to 
        download secret formulas for paints and coatings, reportedly 
        intending to take this proprietary information to a new job 
        with a paint company in Shanghai, China.
   In December 2006, a product engineer with Ford Motor Company 
        reportedly copied approximately 4,000 Ford documents onto an 
        external hard drive in order to acquire a job with a Chinese 
        automotive company.
    These incidents illustrate the serious impact that cyber threats 
can have on, among other things, the security of sensitive personal and 
financial information and proprietary information and intellectual 
property. While these effects can be difficult to quantify monetarily, 
they can include any of the following:
   For consumers or private citizens: Identity theft or 
        compromise of personal and economic information and costs 
        associated with lower-quality counterfeit or pirated goods.
   For business: Lost sales, lost brand value or damage to 
        public image, cost of intellectual property protection, and 
        decreased incentive to invest in research and development.
   For the economy as a whole: Lower economic growth due to 
        reduced incentives to innovate and lost revenue from declining 
        U.S. trade with countries that have weak IP rights regimes.
  security controls and other techniques can reduce vulnerability to 
                          cyber-based attacks
    The prevalence of cyber threats and the risks they pose illustrate 
the need for security controls and other actions that can reduce 
organizations' vulnerability to such attacks. As we have reported, 
there are a number of cybersecurity technologies that can be used to 
better protect systems from cyber attacks, including access control 
technologies, system integrity technologies, cryptography, audit and 
monitoring tools, and configuration management and assurance 
technologies.\8\ In prior reports, we have made hundreds of 
recommendations to Federal agencies to better protect their systems and 
cyber-reliant critical infrastructures. Table 3 summarizes some of the 
common cybersecurity technologies, categorized by the type of security 
control they help to implement.
---------------------------------------------------------------------------
    \8\ GAO, Technology Assessment: Cybersecurity for Critical 
Infrastructure Protection, GAO-04-321 (Washington, DC: May 28, 2004).

                                   TABLE 3.--COMMON CYBERSECURITY TECHNOLOGIES
----------------------------------------------------------------------------------------------------------------
              Category                             Technology                           What it does
----------------------------------------------------------------------------------------------------------------
Access control:
    Boundary protection............  Firewalls............................  Control access to and from a network
                                                                             or computer.
    Authentication.................  Biometrics...........................  Uses human characteristics, such as
                                                                             fingerprints, irises, and voices,
                                                                             to establish the identity of the
                                                                             user.
    Authorization..................  User rights and privileges...........  Allow or prevent access to data and
                                                                             systems and actions of users based
                                                                             on the established policies of an
                                                                             organization.
System integrity...................  Antivirus software...................  Provides protection against
                                                                             malicious code, such as viruses,
                                                                             worms, and Trojan horses.
Cryptography.......................  Digital signatures and certificates..  Use public key cryptography to
                                                                             provide: (1) Assurance that both
                                                                             the sender and recipient of a
                                                                             message or transaction will be
                                                                             uniquely identified, (2) assurance
                                                                             that the data have not been
                                                                             accidentally or deliberately
                                                                             altered, and (3) verifiable proof
                                                                             of the integrity and origin of the
                                                                             data.
                                     Virtual private networks.............  Allow organizations or individuals
                                                                             in two or more physical locations
                                                                             to establish network connections
                                                                             over a shared or public network,
                                                                             such as the internet, with
                                                                             functionality that is similar to
                                                                             that of a private network using
                                                                             cryptography.
Audit and monitoring...............  Intrusion detection systems..........  Detect inappropriate, incorrect, or
                                                                             anomalous activity on a network or
                                                                             computer system.
                                     Intrusion prevention systems.........  Build on intrusion detection systems
                                                                             to detect attacks on a network and
                                                                             take action to prevent them from
                                                                             being successful.
                                     Computer forensics tools.............  Identify, preserve, extract, and
                                                                             document computer-based evidence.
Configuration management and         Policy enforcement applications......  Enable system administrators to
 assurance.                                                                  engage in centralized monitoring
                                                                             and enforcement of an
                                                                             organization's security policies.
                                     Network management...................  Allow for the control and monitoring
                                                                             of networks, including management
                                                                             of faults, configurations,
                                                                             performance, and security.
                                     Scanners.............................  Analyze computers or networks for
                                                                             security vulnerabilities.
                                     Continuity of operations tools.......  Provide a complete backup
                                                                             infrastructure to maintain
                                                                             availability in the event of an
                                                                             emergency or during planned
                                                                             maintenance.
                                     Patch management.....................  Acquires, tests, and applies
                                                                             multiple patches to one or more
                                                                             computer systems.
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis.

    In addition, the use of an overall cybersecurity framework can 
assist in the selection of technologies to protect an organization 
against cyber attacks. Such a framework includes:
   determining the business requirements for security;
   performing risk assessments;
   establishing a security policy;
   implementing a cybersecurity solution that includes people, 
        process, and technology to mitigate identified security risks; 
        and
   continuously monitoring and managing security.
    Risk assessments, which are central to this framework, help 
organizations determine which assets are most at risk and to identify 
countermeasures to mitigate those risks. Risk assessment is based on a 
consideration of threats and vulnerabilities that could be exploited to 
inflict damage.
    Even with such a framework, there often are competing demands for 
cybersecurity investments. For example, for some companies, mitigating 
physical risks may be more important than mitigating cyber risks. 
Further, investing in cybersecurity technologies needs to make business 
sense. It is also important to bear in mind the limitations of some 
cybersecurity technologies and to be aware that their capabilities 
should not be overstated. Technologies do not work in isolation. 
Cybersecurity solutions make use of people, process, and technology. 
Cybersecurity technology must work within an overall security process 
and be used by trained personnel. We have also emphasized the 
importance of public-private partnerships for sharing information and 
implementing effective cybercrime prevention strategies.\9\
---------------------------------------------------------------------------
    \9\ GAO, Cybercrime: Public and Private Entities Face Challenges in 
Addressing Cyber Threats, GAO-07-705 (Washington, DC: June 22, 2007).
---------------------------------------------------------------------------
    Similarly, the Office of the National Counterintelligence Executive 
has identified a series of ``best practices in data protection 
strategies and due diligence for corporations.''\10\ These include 
developing an information strategy; insider threat programs and 
awareness; effective data management; network security, auditing, and 
monitoring; and contingency planning.
---------------------------------------------------------------------------
    \10\ Office of the National Counterintelligence Executive, Foreign 
Spies Stealing U.S. Economic Secrets in Cyberspace.
---------------------------------------------------------------------------
key federal agencies have responsibilities for protecting intellectual 
                                property
    Multiple Federal agencies undertake a wide range of activities in 
support of IP rights. Some of these agencies are the Departments of 
Commerce (including the U.S. Patent and Trademark Office), State, 
Justice (including the FBI), Health and Human Services, and Homeland 
Security; the U.S. Trade Representative; the U.S. Copyright Office; and 
the U.S. International Trade Commission. In many cases, IP-related 
efforts represent a small part of the agencies' much broader missions.
    A smaller number of agencies and their components are involved in 
investigating IP violations and enforcing U.S. IP laws. For example, 
the Department of Justice's (DOJ) U.S. attorneys offices, Criminal 
Division, and the FBI investigate and prosecute Federal IP crimes. DOJ 
established the Computer Hacking and Intellectual Property program, 
which consists of specially-trained assistant U.S. attorneys to pursue 
IP cases. Each of the 93 U.S. attorneys offices throughout the country 
have assistant U.S. attorneys designated as Computer Hacking and 
Intellectual Property coordinators, who are available to work on IP 
cases. In addition, DOJ has created Computer Hacking and Intellectual 
Property units in 25 U.S. attorneys offices with histories of large IP 
case loads. DOJ's Computer Crime and Intellectual Property Section--
based in Washington, DC--consists of prosecutors devoted to enforcing 
computer crime and IP laws. Computer Crime and Intellectual Property 
Section attorneys prosecute cases, assist prosecutors and other 
investigative agents in the field, and help develop and implement an 
overall criminal enforcement strategy. The FBI's Cyber Division 
oversees the bureau's IP enforcement efforts; though not all of its IP 
investigations are cyber-related.
    Over the years, Congress and the administration have created 
interagency mechanisms to coordinate Federal IP law enforcement 
efforts. These include the National Intellectual Property Law 
Enforcement Coordination Council (NIPLECC), created in 1999 to 
coordinate U.S. law enforcement efforts to protect and enforce IP 
rights in the United States and abroad and the Strategy for Targeting 
Organized Piracy initiative, created by the President in 2004 to target 
cross-border trade in tangible goods and strengthen U.S. Government and 
industry IP enforcement action. In December 2004, Congress passed 
legislation to enhance NIPLECC's mandate and created the position of 
the Coordinator for International Intellectual Property Enforcement, 
located within the Department of Commerce, to lead NIPLECC. In November 
2006 we reported that NIPLECC continued to face persistent 
difficulties, creating doubts about its ability to carry out its 
mandate.\11\ We also noted that while the Strategy for Targeting 
Organized Piracy had brought attention and energy to IP efforts within 
the U.S. Government, it had limited usefulness as a tool to prioritize, 
guide, implement, and monitor the combined efforts of multiple 
agencies.
---------------------------------------------------------------------------
    \11\ GAO, Intellectual Property: Strategy for Targeting Organized 
Piracy (STOP) Requires Changes for Long-term Success, GAO-07-74 
(Washington, DC: Nov. 8, 2006).
---------------------------------------------------------------------------
    In 2008, Congress passed the Prioritizing Resources and 
Organization for Intellectual Property Act (PRO-IP Act), which, among 
other things, created the position of the Intellectual Property 
Enforcement Coordinator (IPEC) to serve within the Executive Office of 
the President. The duties of the coordinator outlined in the act 
include specific efforts to enhance interagency coordination, such as 
the development of a comprehensive joint strategic plan. The act also 
required the Attorney General to devote additional resources to IP 
enforcement and undertake other IP-enforcement-related efforts. In 
October 2010, we noted that DOJ and FBI officials and Office of the 
IPEC staff reported taking many actions to implement the requirements 
of the PRO-IP Act.\12\ Moreover, the IPEC coordinated with other 
Federal entities to deliver the 2010 Joint Strategic Plan on 
Intellectual Property Enforcement to Congress and the public. We 
reported that the plan addressed the content requirements of the act, 
but that enhancements were needed, such as identifying responsible 
departments and entities for all action items and estimates of 
resources needed to carry out the plan's priorities. Accordingly, we 
recommended that the IPEC take steps to ensure that future strategic 
plans address these elements. IPEC staff generally concurred with our 
findings and recommendations.
---------------------------------------------------------------------------
    \12\ GAO, Intellectual Property: Agencies Progress in Implementing 
Recent Legislation, but Enhancements Could Improve Future Plans, GAO-
11-39 (Washington, DC: Oct. 13, 2010).
---------------------------------------------------------------------------
    In summary, the on-going efforts to steal U.S. companies' 
intellectual property and other sensitive information are exacerbated 
by the ever-increasing prevalence and sophistication of cyber-threats 
facing the Nation. Recently reported incidents show that such actions 
can have serious impact not only on individual businesses, but on 
private citizens and the economy as a whole. While techniques exist to 
reduce vulnerabilities to cyber-based threats, these require strategic 
planning by affected entities. Moreover, effective coordination among 
Federal agencies responsible for protecting IP and defending against 
cyber-threats, as well as effective public-private partnerships, are 
essential elements of any Nation-wide effort to protect America's 
businesses and economic security.
    Chairman Meehan, Ranking Member Higgins, and Members of the 
subcommittee, this concludes my statement. I would be happy to answer 
any questions you have at this time.

    Mr. Long. Thank you, Mr. Wilshusen for your testimony 
today, and also for acknowledging your coworkers. I know that 
that is where a lot of the work gets done up here, and they go 
unrecognized. So I appreciate that because I know, on a 
personal level, that it is very important in my office and most 
offices around here. Like I say, a pat on the back never hurts 
anybody.
    I now recognize myself for a round of questioning. Dr. 
Graham, in April the Commerce Department released a report 
showing that intellectual property-intensive industries 
contributed $5 trillion and 40 million jobs to the economy in 
2010. Can you speak to the threat that economic espionage poses 
to various sectors of the economy, and provide some examples of 
industries that are targeted by foreign actors?
    Mr. Graham. Thank you, Mr. Chairman. I am happy to do so. 
Indeed, what this report does and why I came here today to 
testify was to essentially set the stage, and to speak to what 
is at stake here.
    So, you know, indeed the report did identify the most 
intellectual property-intensive industries in the U.S. economy, 
with the statistics that I cited earlier; 35 percent of GNP, 
approximately 28 percent of employment throughout the economy.
    It stands to reason that the threats associated with, 
created by, espionage would be particularly biting in these 
industries, since so much of their competitive advantage is 
built upon and based upon these intangible assets that they are 
building.
    There has been significant study before, particularly on 
the area of how important these intellectual property 
protections are for U.S. companies in capturing and maintaining 
competitive advantage. What we see time and time again, from 
the way in which these companies innovate and what they do with 
their innovations and the economic fruits and the economic 
benefits that flow to Americans and American employees from 
these innovations--are disrupted when those companies, when 
those firms, can't get access to these intellectual property 
protections.
    So at the end of the day we have to say that, you know, 
when we are looking at industries--from pharmaceuticals to 
machinery to chemicals to semiconductors to electronics--widely 
throughout the economy the threat associated with the 
undermining of the ability of these companies to maintain those 
rights and expect that those rights are going to be adequately 
protected will be significant to the economy.
    The estimates that have been put out of $13 billion, they 
seem to be perfectly appropriate estimates. But, of course, 
what those estimates must be, ultimately, are an under-count. 
Because what we can never count are the benefits associated to 
innovation that never happened because innovators are less 
likely to create their innovations, to expend those resources 
and investments, because they fear that what they are going to 
get at the end is an unprotectable product.
    So, you know, indeed, at the end of the day, these are real 
threats. They have a real impact on what is going on. The pie, 
as I have said before, is incredibly larger.
    Mr. Long. Okay, thank you.
    Assistant Director Figliuzzi, in an interview with the San 
Francisco Chronicle you stated that the economic espionage has 
never been a more significant issue than it is right now. Can 
you elaborate on this? Also in the article you stated that the 
Bay Area and Silicon Valley is a target-rich environment for 
espionage activity.
    Are there certain areas of the country where the FBI and 
ICE find this activity to be pervasive? Or can we characterize 
this as pretty much a Nation-wide problem?
    Mr. Figliuzzi. Mr. Chairman, with respect to your first 
question, as to whether this is increasing, whether it is more 
prevalent, whether it is on the increase, the answer is yes. 
The factors involve things like the global economic crisis.
    What we are seeing--as I can talk about in this 
unclassified session--is that foreign nations and their 
intelligence services are understanding more than ever before 
that it is cheaper to steal our technology than to use their 
precious budget resources, in this time of global economic 
crisis, to research and develop it.
    It is cheaper and it is faster to simply steal it. So we 
see nations, including in some cases some of our allies even 
willing, when it is in their economic interest, to steal 
intellectual property for their own economic benefits. With 
regard to your question about certain areas of the country, 
there is no question that certain parts of our country have a 
bulls-eye on them.
    Those would include areas like the research triangle in the 
Raleigh-Durham area of North Carolina; Silicon Valley in 
California; the Boston area, with a lot of research, cutting-
edge research, going on there. But here is the risk in singling 
out areas. The risk in singling out specific areas is that it 
tends to put everybody at ease if they are not in those areas.
    Our caseload shows that the real problem today is the 
unclassified-preclassified--what I call the Mom & Pop shop--
research that is going on everywhere in this country, that is 
extremely vulnerable to targeting. We see them being targeted 
like never before.
    Mr. Long. Thank you.
    With that, I would like to recognize Ranking Member Higgins 
for your questions.
    Mr. Higgins. Thank you, Mr. Chairman.
    Mr. Woods, according to your testimony the Immigration and 
Customs Enforcement leads the Government's efforts to prevent 
foreign adversaries from illegally obtaining U.S. military 
products and sensitive technology through its 
counterproliferation investigations unit. How does that unit 
work with other components, both within the Department of 
Homeland Security and outside of the agency, to identify 
potential vulnerabilities?
    Could you go into as much detail as possible in an 
unclassified setting so that we can better understand the 
effectiveness of the collaborative efforts?
    Mr. Woods. Ah, yes. Thank you, Ranking Member Higgins.
    ICE counterproliferation investigations works hand-in-hand 
with our partners in law enforcement, specifically the FBI and 
Department of Commerce. We also work with the Department of 
Defense Criminal Investigative Service on many cases involving 
military articles going overseas and going to the wrong hands.
    I could say categorically this has been increasing over the 
last number of years, where we see our defense articles being 
routed to locations where they shouldn't be, through third 
countries. We combat this through several ways.
    Most notably, we have a robust undercover operations 
program, where we engage the procurement networks that have 
been seeking these armaments and arms to go to these third 
countries. We use our undercover operations to move forward in 
investigating these sort of illicit procurement networks.
    We also, in working with our partners, deconflict through 
the E2C2 to ensure that we are talking to the right people. We 
are making sure that we are not blue-on-blue. That we are 
making sure that if there is an effort by a state sponsor--we 
are working in close hands with the FBI to ensure that--that 
the sponsor is identified. Or whether it is an espionage type 
of case, that they are included in our investigation.
    At the same note, if we identify a list of procurement 
networks that are going through to South America, we work on 
working with our partners overseas to ensure that we identify 
the networks that they are in source.
    Mr. Higgins. Dr. Graham, according to your testimony the 
entire United States economy relies on some form of 
intellectual property. You also stated that every two jobs in 
intellectual property-intensive industries support an 
additional one job elsewhere in the economy.
    Given those numbers, can you explain to us the importance 
of protecting trade secrets in America, and can you further 
explain the true economic impact of espionage, economic 
espionage?
    Mr. Graham. Thank you, Mr. Higgins. Happy to comment on 
both those issues.
    On the first issue, actually our report tends to undercount 
the employment impacts here. So while we found that there were 
on the order of 27 million American jobs in direct employment 
in these industries and 13 million in supply chain jobs, those 
are the upstream supply chain jobs--those jobs that were 
associated with those industries that were supplying into the 
IP-intensive industries.
    There, of course, are other jobs in the downstream 
economy--distribution systems, retail systems--associated with 
these industries. So, you know, it really is a very large 
impact in the economy.
    On the second question associated with the importance of 
trade secrecy protection, it is clear to us from everything we 
know--and many academic studies bear this out, surveys that 
have been done of American business managers, R&D managers at 
companies--that secrecy is among the most important protections 
that industries use to protect their innovations.
    It tends to be much more effective than many of the other 
types of intellectual property. Of course, these different 
types of intentional property work together in very 
sophisticated and interesting ways because they complement one 
another. Trademarks will support, you know, a competitive 
advantage in marketing and sales, while the patents will 
protect the associated technological elements that go into the 
product.
    So these things work together. But one thing that we 
fundamentally know is that secrecy is extremely important at 
maintaining competitive advantage. Which, of course, says 
something I mentioned earlier. It says something not only about 
what we have today--and the ability of the companies selling 
and engaging in business in the United States to sell and 
compete with those goods--but it also says something about the 
incentives to do innovation in the first place, right?
    You know, we must be robust and focused on these issues. 
Because without that, of course, we tend to undermine the 
incentives of innovators that are looking for future profits in 
making a decision today to whether to do innovation.
    So maintaining that important protection, and ensuring that 
the people at this table are doing the important work that they 
are doing is, of course, fundamental to supporting our system 
of innovation, which drives so much of the economic growth and 
the ability to give better lives to our people in the U.S. 
economy.
    Mr. Long. Thank you.
    Thank you all for being here today and for your valuable 
testimony, and Ranking Member Higgins for his questions. The 
Members of the committee may have additional questions for the 
witnesses, and we will ask you all to respond to those in 
writing within 10 days for which the hearing will be open.
    Without objection, the committee stands adjourned.
    [Whereupon, at 10:55 a.m., the subcommittee was adjourned.]

                                 
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