Tag: Industrial Espionage

Posted on by

The Short Tenure and Abrupt Ouster of Banking’s Sole Black C.E.O.

Last November, Urs Rohner, the chairman of the board of Credit Suisse, had a party at a Zurich restaurant to celebrate his 60th birthday. Among the scores of friends, family and business associates who gathered, attendees say, there was a single Black guest: Tidjane Thiam, the bank’s chief executive.

The festivities had a Studio 54 theme, with 1970s costumes and hired entertainers. Mr. Thiam watched as a Black performer came onstage dressed as a janitor, and began to dance to music while sweeping the floor. Mr. Thiam excused himself and left the room. His partner and another couple at his table, including the chief executive of the British drug company GSK, followed.

Eventually they returned to the party, only to be astonished again. A group of Mr. Rohner’s friends took the stage to perform their own musical number, all wearing Afro wigs. (Mr. Rohner declined to comment on the events, which were described by three guests.)

For Mr. Thiam, now 58, the party was just one in a series of painful incidents that shaped his five years atop Credit Suisse, when he was the only Black chief executive in the top tier of banking. Some moments were shocking, others disturbing; most had to do with tensions around being Black in a predominantly white industry and an overwhelmingly white city.

A tall, reserved, bespectacled polyglot, Mr. Thiam did the job he was hired to do: He made Credit Suisse profitable again after a long decline. But he never had to stop fighting for acceptance and respect, both within the bank and in Switzerland generally. At a shareholders meeting, his background was denigrated as “third world.” A subordinate purchased the home next to his, which was taller and looked directly into Mr. Thiam’s windows. The Zurich press rode him for not appearing sufficiently Swiss.

Image
Credit…Bloomberg

Now the number of Black chief executives at the highest level of banking is back to zero. In February, Credit Suisse’s board forced Mr. Thiam’s resignation, after a deeply embarrassing surveillance scandal erupted on his watch. When Mr. Thiam’s No. 2 admitted he had ordered investigators to spy on employees, the chief executive found himself with few allies and no leverage to survive.

His ouster attracted remarkably little notice outside Zurich, coming as it did months before a global reckoning with systemic bias, and occurring 4,000 miles from Wall Street. But interviews with 11 people who worked closely with Mr. Thiam at Credit Suisse, and five other close contacts — including clients, friends, family and investors — suggest that race was an ever-present factor throughout his tenure, and that it helped create the conditions for his startlingly swift departure.

Whether it’s labeled racism, xenophobia or some other form of intolerance, what’s clear is that Mr. Thiam never stopped being seen in Switzerland as someone who didn’t belong.

Credit Suisse declined to comment.

After Mr. Thiam’s resignation, he gave a news conference at the bank’s headquarters. “Every second, I’ve done the best I could,” he said. “I am who I am. I cannot change who I am.” He added: “It’s the essence of injustice to hold against somebody what they are.”

Tidjane Thiam (pronounced tee-JOHN tee-YAHM) was born in Ivory Coast to an elite family active in politics. One relative led the country’s successful bid for independence from France in 1960 and became its first president. Another became the prime minister of Senegal.

The youngest of seven, Mr. Thiam was raised Muslim. His mother, Marietou, could not write but parented with perfectionist standards. “Be gallant, respect the staff that worked for us — on this, she was ruthless — do not lie, be punctual, do not say bad words, show solidarity,” said Yamousso Thiam, Mr. Thiam’s youngest sister, in an interview.

Their father, Amadou, was a journalist, a cabinet minister and an ambassador to Morocco. When Mr. Thiam was an infant, Amadou was incarcerated for three years on charges of plotting against the Ivorian government. The allegations were later invalidated, and the Thiam children would long remember the injustice — as they did the lesson their father took from narrowly surviving a coup attempt in 1971, with a gunshot wound to the hand. “The most important thing in life,” Amadou would joke, “is not to die.”

When Mr. Thiam was 6, and conspicuously uninterested in school, one of his brothers asked the Ivorian president to intervene. He summoned Mr. Thiam and his parents and reamed them out. “I remember it as if it were yesterday,” Mr. Thiam recalled in a 2015 interview. “There was a kind of family court, where there was an indictment: ‘He must go to school. The era of illiterate African princes and lazy kings, it is over.’”

Mr. Thiam quickly excelled, and in 1984 he became the first Ivorian to graduate from Paris’s prestigious École Polytechnique. After earning a degree in engineering and a master’s in business, Mr. Thiam worked at the World Bank, then in the Paris office of McKinsey.

In 1994, Mr. Thiam returned to Ivory Coast to work in public service. A few years later, he was promoted to minister of planning and development — but when a military coup deposed the president, he refused a role in the new government, and, fearing for his life, he returned to Europe and the private sector.

He ran the European operations of Aviva, a British insurer, and in 2009 was named chief executive of the British financial services firm Prudential — the first Black person to run one of the London Stock Exchange’s hundred largest companies. During his tenure, Prudential’s profits doubled and its stock price tripled, and a BBC host described Mr. Thiam as having “soared through top-flight institutions with a heady cocktail of crystal-clear intellect, fizzing ambition, and a healthy dash of charm.”

Mr. Rohner, the chairman of Credit Suisse, approached Mr. Thiam about the possibility of running the bank in 2014. Mr. Thiam was skeptical, he later told Euromoney magazine: It was a daunting role, and he wasn’t sure the bank was serious about hiring him. (Earlier in his career, he’d told a headhunter that he wouldn’t travel for a job interview unless the prospective employer knew he was “Black, African, Francophone and 6 foot 4.”) He insisted on lengthy discussions with Mr. Rohner before agreeing to take the job.

“The chairman tells me we had 19 meetings,” Mr. Thiam said in the Euromoney interview, adding: “I actually said no twice.”

At the time, Credit Suisse was in a deep funk. Years after the financial crisis, it was still heavily dependent on costly trading strategies, and its wealth management unit trailed UBS, the bank’s archrival in Zurich. Investors were impatient with its languishing stock price. On the March 2015 day when Mr. Thiam’s hiring was announced, Credit Suisse shares rose 7 percent.

His restructuring plan involved thousand of layoffs and paring back sales and trading, making many employees nervous for their jobs. It was an executive he promoted, however, who gave Mr. Thiam one of his first unsettling experiences in Switzerland.

To bolster Credit Suisse’s private wealth management business, he had tapped Iqbal Khan, 39, who had been born in Pakistan but moved to Switzerland as a child. The two were discussing strategy one day late in 2015, according to people familiar with the incident, when Mr. Khan announced that he’d bought the house next door to Mr. Thiam’s in Herrliberg, a suburb with lofty prices and views of Lake Zurich. Mr. Thiam asked Mr. Khan if he was serious. Mr. Khan said yes.

Later, Mr. Thiam told friends and colleagues that the news disturbed him. Fiercely private, he was going through a divorce, and he was leery of a subordinate having a view of his low-slung property. As a C.E.O., he didn’t relish the idea of being literally looked down upon.

Image

Credit…Arnd Wiegmann/Reuters

Mr. Thiam made an effort to embrace Zurich society. He visited Swiss business leaders, spoke on panels convened by Swiss media and attended an annual spring festival in traditional Swiss garb: a Napoleon-style hat and matching navy cloak. But before long, aspects of his lifestyle began to irritate the locals. With Credit Suisse making a show of cutting costs, the Swiss press began to catalog Mr. Thiam’s first-class air travel and stays in presidential suites. One column accused him of taking helicopters to events and traveling with an entourage, calling him “King Thiam.”

In a country nearly synonymous with wealth — the home of the Swiss bank account and six-figure wristwatches — such anti-elitism is a little difficult to parse. Expatriates who have long worked in Switzerland say the Swiss have a fine-grained aversion to public displays of wealth, and regard those who flaunt it as outsiders. One foreign billionaire in the country, who did not want to be named discussing the issue, said he had banned luxury cars from his company garage.

Others were more direct about labeling Mr. Thiam an outsider. At Credit Suisse’s annual investor meeting in 2016, a shareholder named Ingeborg Ginsberg, a 94-year-old Holocaust survivor, questioned Mr. Thiam’s background.

“The bank is called Suisse — Credit Suisse,” Ms. Ginsberg said in German. Referencing Brady Dougan, Mr. Thiam’s American predecessor, she added: “I asked him last year if he doesn’t have a conflict of interest. I ask the same question of Mr. Thiam, if he can understand me: Does he not have a conflict of interest? I heard him mention the third world — is that really what we want? That a good, solid, Swiss bank sinks to the level of the third world?”

On the dais, where Mr. Thiam sat next to Mr. Rohner, their shock was evident.

Mr. Rohner interrupted. “You should not make such accusations, without declaration, into the room,” he said, adding: “We do not always take foreigners, we always choose the best man for the job, and we have found that man.”

Image

Credit…Bloomberg

By 2018, Credit Suisse’s business had improved substantially. The bank was again solidly profitable, and the wealth division had overtaken UBS in some areas. Mr. Thiam had resolved legal issues that preceded his tenure, settling a major U.S. case for an amount less than Credit Suisse had expected. Euromoney named him banker of the year.

Mr. Thiam was by now well-known in Zurich, where pedestrians on the Bahnhofstrasse would sometimes shake his hand or ask for selfies. Much of the attention was innocuous, but people who worked with him at the time say the constant exposure wore him down.

In predominantly white Zurich, a city of just 400,000, his powerful role and his skin color made him stand out. Mr. Thiam stopped driving his Porsche Cayenne to work, fearing that any run-in with another motorist, even over a parking spot, would turn into a media incident. On the tram, his adult sons were often the only Black riders — and the first to be asked for their tickets. Merely by appearing at a local nightclub, they could trigger gossip. Mr. Thiam felt that he was under a microscope; when his sister planned a surprise visit, an overeager Zurich hotel worker noticed her booking and shared the details with Mr. Thiam’s office, ruining the occasion.

At another point, during a business trip from Zurich to Geneva, he was held up by a customs worker who demanded to see his passport, even after Mr. Thiam protested that he was traveling within Switzerland. He produced the document and was permitted to leave the airport, but instructed a staffer to lodge a formal complaint about the experience. (Each of these incidents was described by multiple people.)

Things were beginning to sour inside Credit Suisse, too. Despite an improved balance sheet, Credit Suisse’s shares were down, hurt by stock offerings Mr. Thiam had deemed necessary to strengthen capital reserves. He told associates he felt underappreciated by board members, some of whom faulted him for Credit Suisse’s lack of growth in China.

In August 2018, a local financial publication wrote that Mr. Thiam was “feted abroad, unloved in Switzerland,” adding: “Prone to imperious behavior and prickly to criticism, Thiam has lost grasp of the Swiss sense of proportionality.” News articles often drew belittling comments. One reader of an especially critical Zurich blog called him a “fruit salesman” and added, “Go home, fool!” Another wrote: “I hope he sends his money home. Then we can classify it as development aid.”

Mr. Thiam would often say that given his family’s brushes with military insurrections, he wasn’t bothered by bad press and corporate drama. But as the year wore on, Mr. Thiam confided to associates his fear that the board wanted him out. Their unspoken message, he said, was: You cleaned up the mess. Now leave. It’s a pattern known as the “glass cliff” — the tendency of institutions to install women and minorities as leaders only when there’s big trouble, and then shunt them aside.

Image

Credit…Arnd Wiegmann/Reuters

Mr. Thiam was closer to the precipice than he knew. In early 2019, he hosted a holiday party at his home. Mr. Khan had by then moved in next door, and Mr. Thiam had planted trees to obstruct the view. At the party, Mr. Khan got into a heated discussion with Mr. Thiam’s partner about the landscaping, upsetting her, and the two men stepped downstairs for a private word. Mr. Khan quickly left the scene.

Neither executive will say exactly what transpired. But later that year, Mr. Khan shocked Zurich by decamping to UBS. Wealth management had been the most successful aspect of Mr. Thiam’s tenure, and now his star executive would be working for the bank’s biggest competitor.

That September, Mr. Khan and his wife were driving to lunch at a Zurich restaurant when they noticed they were being followed. Mr. Khan parked and confronted the man, who turned out to be a detective from a Swiss firm called Investigo. An argument ensued, during which each party has since accused the other of becoming physically aggressive. Mr. Khan filed a police report, and both Credit Suisse and the canton opened investigations.

“Spygate,” as the Swiss media called it, was a sensation. At Credit Suisse, the chief operating officer, Pierre-Olivier Bouée, admitted to ordering the surveillance, saying he had suspected Mr. Khan of trying to poach employees. He resigned. Mr. Thiam, who denied any knowledge of the spy games, was cleared. But Mr. Bouée was not just his No. 2; he had followed Mr. Thiam to the bank from Prudential, and the chief executive’s name was deeply tarnished by association.

The incident was a debacle for all of Credit Suisse, an institution that was a source of great national pride. A contract worker who had been involved in hiring Investigo died by suicide. Mr. Rohner felt obliged to publicly apologize to the Khans and the Swiss public.

Soon, more accusations surfaced, including that Credit Suisse’s H.R. chief had also been surveilled. Late in December, the Swiss Financial Market Supervisory Authority — known as Finma — started an inquiry into Credit Suisse’s use of investigators to monitor employees.

The repercussions of the scandal progressed with remarkable speed. On Jan. 31, 2020, Bloomberg reported that Mr. Rohner was looking for a new chief executive.

Three large shareholders — two American, one British — publicly came to Mr. Thiam’s defense. David Herro, a top executive at Harris Associates, a Chicago fund, suggested that the opposition to Mr. Thiam was racially motivated. Appearing on Bloomberg Television, Mr. Herro attributed the strife to “envy from competitors — or perhaps something else, given that Mr. Thiam looks a little bit different than the typical Swiss banker. Either one of these two rationales behind these attacks against him, to me, are extremely distasteful.”

But Mr. Thiam had too little support in his corner. On Feb. 7, he resigned. A Swiss member of his executive team was named his successor.

As chief executive, Mr. Thiam was responsible for everything at Credit Suisse, and the surveillance activity was widely viewed as despicable. But it’s an open question whether a C.E.O. from a different background might have survived. Other bank leaders have dodged far greater scandals.

In 2012, Jamie Dimon, the chief executive of JPMorgan Chase, failed to rein in a trader, nicknamed the London Whale, who lost the bank more than $6 billion and triggered more than $1 billion in fines. Last week, in a different matter, the bank agreed to pay nearly $1 billion in fines for illegally manipulating the markets for precious metals and Treasury products. Mr. Dimon remains Wall Street’s longest-serving C.E.O.

Image

Credit…Evan Agostini/Invision

In 2016, in a case with striking similarities to what transpired at Credit Suisse, the chief executive of Barclays tried to unmask a whistle-blower, at one point asking an internal security team to intervene. British regulators fined the C.E.O., James E. Staley, with little fanfare. Separately, in 2019, Mr. Staley was revealed to have had ties to Jeffrey Epstein, the financier accused of sex trafficking young girls, including a visit to Mr. Epstein while he was incarcerated. Mr. Staley is still at the top of Barclays.

Before he departed Credit Suisse, Mr. Thiam had a chance to present his final set of earnings results to the press. Toward the end of the question-and-answer session, a local reporter spoke up.

“The strategy was good,” the reporter said, but the style “did not speak to Swiss mentality. This is my question: Would it be different in England or another —”

“I am who I am,” Mr. Thiam interrupted. “The same way I was born with a right hand, I cannot change being right-handed.” He added, “If people don’t like right-handed people, then I’m in trouble. That’s all I can say, because I can’t become left-handed.”

Colleagues sitting near him swore they saw Mr. Thiam’s eyes glistening.

Image

Credit…Fabrice Coffrini/Agence France-Presse — Getty Images

Mr. Thiam remained in Zurich, awaiting a formal interview with Finma. It was a time of anguish, say close associates, because he urgently wanted to visit his son, Bilal, who was suffering from cancer in a Los Angeles hospital. Late in April, he flew to Bilal’s bedside. He died in early May, at 24.

Since then, Mr. Thiam has been consulting on virus relief efforts in Africa, where he serves as special envoy of the African Union on Covid-19. He has also re-engaged with politics in Ivory Coast. In August, Mr. Thiam stoked rumors that he was considering a presidential bid with a video message commemorating the country’s 60th year of independence, in which he urged Ivorians to embrace a “reconciled and fraternal” spirit.

On Sept. 2, having concluded that Credit Suisse’s surveillance activities may have violated Swiss “supervisory law,” Finma announced that its inquiry had been escalated from an investigation to an enforcement matter. An agency spokesman said that the focus was on the bank itself, not individuals.

For his sister Yamousso, one question about the Swiss still lingers. “I would be curious to know,” she said, “if today they’d finally have the honesty to recognize that seeing a Black man at the top of one of their most prestigious companies was unbearable.”

Angus MacKenzie contributed reporting from Bern, Switzerland. Thomas Rogers and Kitty Bennett contributed research.

Read More

Posted on by

TikTok Deal Exposes a Security Gap, and a Missing China Strategy

WASHINGTON — President Trump has declared victory in his latest confrontation with China, saying that he headed off a looming national security threat by forcing the sale of the social media app sensation TikTok to a consortium of American, European and — though he does not say so — Chinese owners.

But it is far from clear from the details released so far that Mr. Trump’s deal resolves the deeper TikTok security problem — which has less to do with who owns the company and more with who writes the code and the algorithms. The code and algorithms are the magic sauce that Beijing now says, citing its own national security concerns, may not be exported to to a foreign adversary.

And the deal certainly doesn’t resolve the broader problem in the expanding technology wars between Washington and Beijing: how the United States government should deal with the foreign apps that are now, for the first time, becoming deeply embedded on the screens of Americans’ smartphones, and thus in the daily fabric of American digital life.

TikTok illuminated the scope of the new competition. The United States wants to have it all. It seeks to reap the benefits of a global internet yet limit its citizens to made-in America products, ensuring that the data that flows through American networks is “clean.” In fact, the State Department has begun what it calls “the clean network initiative,” making sure that data is not tainted by adversaries, starting with China.

“This is a really hard problem and bashing TikTok is not a China strategy,” Amy Zegart, a senior fellow at the Hoover Institution and Stanford’s Freeman-Spogli Institute. “China has a multi-prong strategy to win the tech race,” she said. “It invests in American technology, steals intellectual property and now develops its own technology that is coming into the U.S.,’’ as TikTok did with remarkable success in just two years.

“We don’t have to guess what their intentions,” she said. “They have written what their intentions are, and it’s called ‘Made in China 2025,’” the country’s strategy of becoming a peer competitor of the United States in all major technological arenas in the next five years. “And yet we think we can counter this by banning an app. The forest is on fire, and we are spraying a garden hose on a bush.”

If American politicians seem to be behind on this one, perhaps it is because technological progress has once again outpaced the political debate. On Capitol Hill, the China problem many politicians still fume about is cheap Chinese goods, ignoring the fact that China’s labor is no longer inexpensive. Others call for crackdowns on intellectual property theft, a problem that George W. Bush tried to tackle with his Chinese counterpart in the Great Hall of the People 15 years ago, and that Barack Obama and President Xi Jinping, then new as China’s president, declared they had solved five years ago.

Of course, they didn’t. China shifted its hacking operations from units of the People’s Liberation Army — some indicted by the Justice Department — to the Ministry of State Security. In recent days, the F.B.I. has warned of broader surveillance and theft operations on American campuses, much of it aimed at coronavirus vaccines.

TikTok presented an entirely new problem, one that most policymakers in the United States had not contemplated before.

For the first time, a genuine Chinese app — not a knockoff of something invented in the United States or Europe — captured the hearts of American teenagers and millennials. On one level, it was harmless: TikTok is mostly jammed with one-minute dance videos. By many measures, it was a bigger parenting problem than a national security problem. Whatever it was, it clearly wasn’t on Washington’s radar the way that the expansion of China’s nuclear arsenal, or its actions in the South China Sea, dominate the China debate.

Yet as Brad Smith, the president of Microsoft, which competed with Oracle to buy TikTok’s operations in the United States, noted, “there is a potential threat.” To make TikTok tick, the company collects vast amounts of data on Americans’ viewing habits. And the same algorithm that picks your next dance video could, in the future, pick a political video. (There is already more than a whiff of political content on the app.)

Like Oracle, Microsoft would have taken over the storage of all data on Americans, keeping it in the United States. (TikTok currently has a major data server in Virginia, but backs up data in Singapore.) But Microsoft’s bid went further: It would have owned the source code and algorithms from the first day of the acquisition, and over the course of a year moved their development entirely to the United States, with engineers vetted for “insider threats.”

So far, at least, Oracle has not declared how it would handle that issue. Nor did President Trump in his announcement of the deal. Until they do, it will be impossible to know if Mr. Trump has achieved his objective: preventing Chinese engineers, perhaps under the influence of the state, from manipulating the code in ways that could censor, or manipulate, what American users see.

“If Oracle is providing hosting with the majority of engineering and operations staying with ByteDance, then the only effect of this deal was to swing billions of dollars of cloud revenue,” said Alex Stamos, who runs the Stanford Internet Observatory. “The details of the deal will really matter, and so far the public has not been provided with enough information to have an educated opinion.”

Without that issue resolved, it is unclear how Mr. Trump could declare that the security issues are solved, much less how he could say that the new entity “will have nothing to do with China.”

The longer-run issue, however, is that there will be more TikToks, companies around the world that develop apps that Americans love — or see as a hedge against their own government. Already, many Americans use encryption apps, like Telegram, that are based outside the United States, so that the United States would have a more difficult time issuing subpoenas for the content. Attorney General William P. Barr has already called for greater scrutiny — and perhaps abolition — of any such app that does not allow the United States a legal “back door.”

It seems unlikely that any administration — Democrat or Republican — could actually succeed at banning foreign apps whose code they found suspicious or difficult to access. It would be as problematic to enforce as Prohibition, which lasted 14 years in the United States before it was repealed, by constitutional amendment.

But the bigger issue is that the movement to ban Chinese apps — the next target is WeChat, which was going to be cut off by executive order on Sunday until a federal judge intervened, at least temporarily — defeats the original intent of the internet. And that was to create a global communications network, unrestrained by national borders.

“The vision for a single, interconnected network around the globe is long gone,” Jason Healey, a senior research scholar at Columbia University’s School for International and Public Affairs and an expert on cyber conflict. “All we can do now is try to steer toward optimal fragmentation.”

Read More

Posted on by

Trump Effort to Keep U.S. Tech Out of China Alarms American Firms

WASHINGTON — The Trump administration’s push to prevent China from dominating the market for advanced technologies has put it on a collision course with the same American companies it wants to protect.

Firms that specialize in microchips, artificial intelligence, biotechnology and other industries have grown increasingly alarmed by the administration’s efforts to restrict the flow of technology to China, saying it could siphon expertise, research and revenue away from the United States, ultimately eroding America’s advantage.

The concerns, which have been simmering for months, have taken on new urgency as the Commerce Department considers adopting a sweeping proposal that would allow the United States to block transactions between American firms and Chinese counterparts. Those rules, on top of new restrictions on Chinese investment in the United States and proposed measures that would prevent American companies from exporting certain products and sharing technology with foreign nationals, have the tech industry scrambling to respond.

The Trump administration’s crackdown has already prompted foreign firms to shun American components and technology over concerns that access to parts they need could be abruptly cut off. American companies are watching warily as the United States considers restricting export licenses for companies that sell products or share intellectual property with China, including General Electric, which sells aircraft parts to China as part of a joint venture with Safran, a French firm.

Top administration officials plan to meet on Feb. 28 to discuss further restrictions on China, including whether to block G.E.’s license to sell jet engines and whether to further curtail the ability of Huawei, the Chinese telecom giant, to have access to American technology.

There is growing bipartisan consensus in Washington that China poses a security threat and that the United States must protect domestic industries to retain a technological edge. While President Trump’s trade war with China was aimed at forcing Beijing to end practices that gave Chinese industries an advantage, the initial deal signed last month did little to address the security concerns.

The tech industry has warned that limiting access to China, both in terms of selling and buying products, could cripple American companies and end up undercutting the United States as the biggest global hub of research and development.

Companies, along with the lawyers and consultants who advise them, say firms increasingly have no choice but to locate more research and development outside the United States, to ensure that they have uninterrupted access to China, a fast-growing consumer market and the center of the global electronics supply chain. New investment dollars are being funneled to research hubs near University of Waterloo in Canada, as well as Israel, Britain and other places beyond the reach of the American government, they say.

“Anyone who thinks our concerns are exaggerated should talk to the U.S. semiconductor industry workers who are already losing their jobs due to walling off our largest market,” said John Neuffer, the president and chief executive of the Semiconductor Industry Association, which represents chip makers. “Revenue from that big market fuels our big research investments, which allows us to innovate and drive America’s economic growth and national security.”

The RISC-V Foundation, a nonprofit that has created an open-source software standard for the chips that power smartphones and other electronics, acknowledged in recent months that it had chosen to move its incorporation from Delaware to Switzerland because of concerns from its members about more stringent regulations in the United States.

“If this administration proceeds with the current trajectory, we’ll see more defections of companies, of scientists,” said Scott Jones, a nonresident fellow with the Stimson Center. “They’ll take their toys and they’ll go elsewhere, and other economies will be the beneficiary of that.”

The most recent source of concern stems from a Commerce Department plan to vet and potentially block technology transactions that pose a risk to the United States. The proposed rule would allow the commerce secretary to block transactions involving technology that was tied to a “foreign adversary” and that posed a significant risk to the United States.

The rule grew out of an executive order Mr. Trump signed last year to try to shut out Huawei by authorizing the commerce secretary to bar any purchase of technology designed by a “foreign adversary” that put America at risk. American companies say the regulations are written so broadly that they could give the United States authority to block transactions or unwind existing ones in areas far afield from telecom gear.

While tech companies say they support efforts to protect U.S. national security, dozens of companies and industry lobbying groups have expressed concerns about the proposal.

IBM, in a January comment letter, told the Commerce Department to “go back to the drawing board” and said the rules “will lead to a broad disengagement of U.S. business from global markets and suppliers.”

“Its reach, breadth and vagueness are unprecedented,” IBM said.

The Internet Association, which counts Google and Facebook among its members, said the proposal lacked “substantive safeguards.” The Motion Picture Association warned that it could affect Hollywood’s ability to pursue transactions around special effects or animation.

The Commerce Department said in a statement that the process would ensure that “all points of view have been considered and the U.S. national security considerations are balanced against corporate commercial interests.”

The tougher measures have come in response to what the administration and even the tech industry view as a rising economic and security threat. China is gaining ground in a range of technologies that experts say could give the country an economic and military edge, including artificial intelligence, facial recognition, microchips and quantum computing.

To try to dominate these advanced industries, China has deployed subsidies, targeted acquisitions of American firms and created industrial plans like Made in China 2025 to leap ahead. The administration has repeatedly accused China and its companies of engaging in corporate espionage, hacking and intellectual property theft.

Last week, the U.S. government charged Huawei and two of its subsidiaries with federal racketeering and conspiracy to steal trade secrets from six American companies. It also charged four members of China’s military with hacking into Equifax, one of the nation’s largest credit reporting agencies, and stealing trade secrets and the personal data of about 145 million Americans in 2017.

Beijing’s actions have created an overwhelming fear in Washington that China will come to dominate advanced industries and put American competitors out of business, in the same way it did for steel, furniture and solar panels. But the stakes are even higher this time, given that many of these new technologies are critical for the military.

“The Chinese have long been a commercial people, but for China, purely economic success is not an end in itself,” Attorney General William P. Barr said in a speech this month. “It is a means to wider political and strategic objectives.”

The Trump administration’s response has been to offer a new definition of national security, one that encompasses economic threats. The distinction has allowed the United States to enact powerful rules restricting commercial exchanges with China.

Mr. Trump has cited national security in his decision to tax foreign metals, propose new limits on the technology that can be transferred outside the United States and bar Chinese companies like Huawei from buying American components.

While tech companies found a way around the initial Huawei ban, the administration is considering much more severe restrictions. A new proposal would extend the reach of the U.S. government to regulate products made around the world, prohibiting companies from using American components and technologies in foreign-made products that are then supplied to Huawei.

The proposals have set off panic within the technology industry, which fears the new restrictions will hamper its ability to tap into the Chinese market. Industry lawyers and trade groups have begun warning that, unless the administration can persuade its allies to adopt similar restrictions, companies will decide the safest course is to try to limit their use of American technology.

Critics point to past incidents where tight regulation pushed American industries offshore — including machine tool makers in the 1990s, and commercial satellites in the 2000s. While it is illegal for companies to move existing operations abroad to try to circumvent export control rules, there are no such constraints on new investments.

“Their incentive is shareholder value and making money,” Jim McGregor, the chairman of greater China for APCO Worldwide, said of America’s biggest technology companies. “It’s not defending what is good for America. You can say that’s terrible, but that’s the way our system works.”

Mr. McGregor said the economic incentives of the Chinese market would encourage companies to “decouple from America.”

Chinese companies are also working to weed American components out of their supply chains — a long-running effort toward self-sufficiency that has accelerated under the threat of harsher U.S. measures.

In recent months, some Chinese companies have begun asking their suppliers to certify that their products are made with a minimal amount of American content, so they are not at risk from American export controls, people familiar with the conversations say.

Chinese telecom companies have been asked to find an alternative to using Oracle’s software in their systems. And CITIC Capital, a giant investment management firm with deep links in China, has embraced helping Chinese companies find alternatives to American technology as an investment theme for this year.

Some who favor tougher China rules say companies are exaggerating the potential impact in an attempt to influence new regulations. They say that the United States retains big advantages in research and development, and that companies are trying to scare the government into loosening rules by saying they will leave.

Others say the national security threat from China is so serious that some short-term revenue loss is warranted.

“You can’t avoid paying that price,” said Clyde Prestowitz, a former Reagan administration official who led trade negotiations with Japan and China. “Your only choice is to pay it now or later. Now, you still have a cutting-edge industry that will take a hit, but that can survive and prosper if high tech does not become a Chinese playground.”

The administration’s view is not monolithic. Within the Commerce Department, some are pressing for stricter rules while others say crippling American business will do more to endanger national security.

The Pentagon is also split, with some officials calling for tighter regulations and others saying the government should not put innovation at risk, given that military technologies typically draw on commercial products.

Some China experts say that American companies are deluding themselves and that, without safeguards, China will eventually steal their technology and drive them out of business.

“We’ve seen what happens to many foreign firms who ‘have to be there’ in steel, telecom, et cetera,” Derek Scissors, a resident scholar at the American Enterprise Institute, said of China. “They get progressively more desperate, until they die.”

Source:

NYT > Business

Posted on by

U.S. Charges Chinese Military Officers in 2017 Equifax Hacking

WASHINGTON — Four members of China’s military were charged on Monday with hacking into Equifax, one of the nation’s largest credit reporting agencies, and stealing trade secrets and the personal data of about 145 million Americans in 2017.

The charges underscored China’s quest to obtain Americans’ data and its willingness to flout a 2015 agreement with the United States to refrain from hacking and cyberattacks, all in an effort to expand economic power and influence.

The indictment suggests the hack was part of a series of major data thefts organized by the People’s Liberation Army and Chinese intelligence agencies. China can use caches of personal information and combine them with artificial intelligence to better target American intelligence officers and other officials, Attorney General William P. Barr said.

“This was a deliberate and sweeping intrusion into the private information of the American people,” he said.

Video

bars
0:00/0:59
–0:59

transcript

Barr Announces Charges Against Chinese Military Officers

Attorney General William P. Barr said the U.S. charged four Chinese military officers in the 2017 hacking of Equifax, which included the personal data of about 145 million Americans.

I’m here to announce the indictment of Chinese military hackers, specifically foreign members of the Chinese People’s Liberation Army for breaking into the computer systems of the credit reporting agency, Equifax, and for stealing the sensitive personal information of nearly half of all American citizens, and also Equifax’s hard-earned intellectual property. Today’s announcement comes after two years of investigation. According to the nine-count indictment handed down by the grand jury in Atlanta, four members of the Chinese People’s Liberation Army are alleged to have conspired to hack Equifax as computer systems and commit economic espionage. This kind of attack on American industry is of a piece with other Chinese illegal acquisitions of sensitive personal data.

Video player loading
Attorney General William P. Barr said the U.S. charged four Chinese military officers in the 2017 hacking of Equifax, which included the personal data of about 145 million Americans.CreditCredit…Sarah Silbiger/Getty Images

The information stolen from Equifax, which is based in Atlanta, could reveal whether any American officials are under financial stress and thus susceptible to bribery or blackmail.

Though not as large as other major breaches, the attack on Equifax was far more severe. Hackers stole names, birth dates and Social Security numbers of nearly half of all Americans — data that can be used to access information like medical histories and bank accounts.

“This kind of attack on American industry is of a piece with other Chinese illegal acquisitions of sensitive personal data,” Mr. Barr said at a news conference announcing the charges, citing China’s theft of records in recent years from the government’s Office of Personnel Management, Marriott International and the insurance company Anthem.

The biggest of those breaches was the theft in 2015 of roughly 22 million security clearance files from the government personnel office, which keeps track of federal employees and contractors.

It quickly became clear that the data was of significant value to the Chinese government: American officials with security clearances — including some of the most senior members of the government — had to reveal foreign contacts, relationships including extramarital affairs, health histories and information about their children and other family members.

The breach was so severe that the C.I.A. had to cancel assignments for undercover officers planning to go to China; though the agency did not submit its employees’ information to the personnel office, those individuals were often undercover as State Department or other government officials.

Then it got worse. Hacks into Anthem’s database and Starwood hotels — later taken over by Marriott — appeared to be orchestrated by the same or related Chinese groups. The United States assessed that China was building a vast database of who worked with whom in national security jobs, where they traveled and what their health histories were, according to American officials.

Over time, China can use the data sets to improve its artificial intelligence capabilities to the point where it can predict which Americans will be primed for future grooming and recruitment, John C. Demers, the assistant attorney general for national security at the Justice Department, said in an interview.

The charges were only the second time that the Justice Department has indicted Chinese military officers on suspicions of hacking. In 2014, five Chinese military officers were indicted in data thefts from a labor union, critical infrastructure and companies including U.S. Steel.

The Justice Department rarely secures indictments against members of foreign militaries or intelligence services, in part to avoid retaliation against American troops and spies, but Mr. Barr said it has made exceptions for state-sponsored actors who hacked into American networks to steal intellectual property or interfere in United States elections.

In 2015, President Barack Obama and President Xi Jinping of China agreed to rein in economically motivated cyberattacks in order to cooperate with requests to investigate cybercrimes and to avoid targeting critical infrastructure in each other’s countries.

While Justice Department officials do not believe economic espionage was the primary goal of the Equifax hacking, Mr. Demers said the attack could be seen as a violation of the spirit of that deal.

“China sees economic interests and intelligence interests as one and the same,” he said. “Commercial benefits are national security benefits in China.”

The indictment shows that in addition to signing treaties and adopting certain conventions, the United States must also be willing to publicly identify and indict state actors in criminal cases, said Megan Brown, the leader of the cyber and privacy practice at the law firm Wiley Rein.

“This is how we will drive international norms: by indicting people, not solely by negotiating treaties and adopting conventions,” she said.

The nine-count indictment accused the Chinese military of hacking into Equifax’s computer networks, maintaining unauthorized access to them and stealing sensitive, personally identifiable information about Americans.

Months before the attack, the government warned Equifax that its network contained a vulnerability, but the company did not patch it, according to government documents. The hacking was “entirely preventable,” a congressional study concluded in 2018.

The defendants — Wu Zhiyong, Wang Qian, Xu Ke and Liu Lei, all members of the People’s Liberation Army — exploited that weakness in May 2017 to break into the network, conduct weeks of surveillance and steal Equifax employee login credentials before filching trade secrets and data. They masked their activity by using encrypted communications and routing their internet traffic through 34 servers in nearly 20 countries, including Switzerland and Singapore, according to prosecutors.

For the most part, they managed to erase their tracks inside of the Equifax network. But investigators eventually traced their activity to two China-based servers that connected directly to Equifax.

Investigators identified the four indicted officers by reviewing forensic data, analyzing the malware used in the attack and establishing a digital footprint that linked them to the intrusion, David Bowdich, the deputy director of the F.B.I., said at the news conference.

In the months after Equifax was hacked, security researchers concluded that criminals, not state actors, had siphoned information over a few months after gaining access to the network. That alone was enough to force the resignation of the company’s chief executive.

But that explanation appeared increasingly suspect over time because the Equifax data — like the information gleaned from the Office of Personnel Management — did not appear broadly for sale on the so-called dark web, where illicitly obtained information is often sold for use in cybercrime.

Law enforcement officials have not yet found evidence that the Chinese government has used the data from the Equifax hacking, Mr. Bowdich said.

The company reiterated on Monday the difficulty of warding off state-sponsored attacks. Companies often fall back on that explanation; Senator Mark Warner of Virginia, the top Democrat on the Senate Intelligence Committee, pushed back after the indictment was made public.

“A company in the business of collecting and retaining massive amounts of Americans’ sensitive personal information must act with the utmost care — and face any consequences that arise from that failure,” he said in a statement.

The hackers’ encryption of their operations inside Equifax’s networks is a common technique and has raised new questions about why such sensitive data in American databases is not legally required to be encrypted, experts noted. Many companies have resisted such regulation, in part because encrypted data can be harder for them to search.

China has “pioneered an expansive approach to stealing innovation,” Christopher A. Wray, the director of the F.B.I., said last week at a conference on the threats posed by China.

He said China was racing to obtain information about sectors as diverse as agriculture and medicine to advance its economy, using a mix of legal means like company acquisitions and illicit acts like spying and cyberattacks.

“They’ve shown that they’re willing to steal their way up the economic ladder at our expense,” Mr. Wray said.

The outcry from consumers and lawmakers after the Equifax breach and the company’s clumsy response was strong: Its executives were chastised, and Equifax eventually settled with regulators for up to $700 million.

But of the 147 million consumers affected, only a little more than 10 percent had filed for some type of compensation as of Dec. 1.

Of those, more than 4.5 million filed claims for a cash payment of up to $125, one of the settlement options. But the company had set aside only $31 million for that option, which amounts to less than $7 a person.

While the thefts present a national security risk, Americans have “almost become as a country immune to these breaches,” Mr. Bowdich said.

“You hear about it in the news and you think, ‘Well there goes my credit card number, my Social Security number, my bank account information,’ and you sign up for another year of free credit card monitoring information,” he said. “We cannot think like that in this country.”

David E. Sanger contributed reporting from Washington, Nicole Perlroth from San Francisco and Tara Siegel Bernard from New York.

Posted on by

Trump’s China Deal Creates Collateral Damage for Tech Firms

WASHINGTON — Among the corporate titans recognized last week by President Trump during a White House signing ceremony for his China trade deal was Sanjay Mehrotra, the chief executive of Micron Technology, whose Idaho semiconductor company is at the heart of Mr. Trump’s trade war.

Micron, which makes memory chips for computers and smartphones, is precisely the kind of advanced technology company that the Trump administration views as crucial to maintaining a competitive edge over China. After Micron rebuffed a 2015 takeover attempt by a Chinese state-owned company, it watched with disbelief as its innovations were stolen and copied by a Chinese competitor and its business was blocked from China.

China’s treatment of American companies like Micron fed Mr. Trump’s decision to unleash a punishing trade war with the world’s second-largest economy, a fight he said would halt Beijing’s use of unfair practices to undermine the United States. But that two-year conflagration may wind up being more damaging to American technology companies.

The initial trade deal announced last week should make operating in China easier for companies like Micron. The deal contains provisions meant to protect American technology and trade secrets and allow companies to challenge China on accusations of theft, including older cases like Micron’s that precede the agreement.

But Mr. Trump’s aggressive trade approach has also accelerated a technology arms race between the two countries, putting American companies like Micron at risk as the two nations try to decouple their economies. In an effort to reduce its reliance on American components, China has expedited efforts to produce its own semiconductors, driverless cars, artificial intelligence and other technologies. Those efforts, along with the Trump administration’s desire to restrict the sales of American tech products to China, could hurt the very companies Mr. Trump set out to protect.

“Let’s be clear, the trade war has been very bad for the semiconductor industry in several ways,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a think tank funded by the tech industry. “It’s like China woke up and said, ‘We’ve relied too much on the United States.’”

The trade deal does nothing to curtail China’s use of subsidies, industrial plans and state-owned companies, which have helped it build formidable industries in steel, wind turbines and solar panels. Those state-directed efforts, which put many American manufacturers out of business, are now being harnessed for high-tech industries.

The Trump administration is constructing its own walls around American technology, reducing access to the lucrative Chinese market out of security concerns. It is restricting exports of sensitive technologies, barring sales to certain Chinese companies and blocking Chinese entities from investing in the United States.

The administration is considering further restricting sales to Huawei, the Chinese telecom company that relies on components from Micron and other American suppliers. And the China trade deal leaves tariffs on more than $360 billion in Chinese goods in place as Mr. Trump tries to push American companies to bring manufacturing back home.

Semiconductor sales to China, which represent more than half the global chip demand, have fallen, and semiconductor stocks have been whipsawed by the trade war.

Mr. Trump and his supporters say that conflict is no longer avoidable, and that the president’s unconventional approach is necessary to take on a growing threat from China. Officials across the administration look with suspicion on Chinese industrial plans, including Made in China 2025, which called for $300 billion in financing and other support for 10 advanced industries, including semiconductors.

American officials worry that gaining an advantage in semiconductors would give China both a commercial and military edge.

Chips, which serve as the tiny sensors, brains and memories of all high-tech devices, are crucial to next-generation telecom networks, supercomputers, artificial intelligence and driverless cars, as well as military ships, satellites and aircraft. They are also one of the United States’ largest exports, along with airplanes, oil and cars.

While China’s ability to make chips is still far behind the United States’, the Chinese government, its state-owned enterprises, and provincial and private equity funds have been pumping billions of dollars into the industry, particularly the kind of memory chips that Micron makes. In areas where Chinese companies cannot develop or buy technology, companies say, some will simply steal their intellectual property.

For the Trump administration, which was looking for a fight with China, Micron’s story proved a formative one. As officials prepared an investigation into Chinese intellectual property theft that would ultimately spiral into the trade war, Micron provided a “camera ready” case that fit everything the administration was looking for, one industry executive said.

In 2015, Micron was the target of a $23 billion takeover attempt by a Chinese state-owned company, but the overture was withdrawn over United States national security concerns. In 2016, another Chinese state-owned company, Fujian Jinhua Integrated Circuit, allegedly worked in concert with a Taiwanese company to steal the American company’s designs and market them as their own.

According to Taiwanese authorities, Fujian Jinhua used Micron’s proprietary designs to build an enormous $5.7 billion microchip factory in China. In 2018, the Department of Justice charged the Chinese company and others with stealing trade secrets from Micron, and the Commerce Department blacklisted it for national security concerns.

The same year, a Chinese court temporarily blocked Micron from selling some products in China, after Fujian Jinhua and another company accused Micron of patent infringement.

Through 2017 and 2018, Micron employees met repeatedly with administration officials, sometimes with the National Security Council and National Economic Council. The company’s case was discussed in internal planning meetings attended by Robert Lighthizer, the United States trade representative, and Peter Navarro, a top Trump trade adviser.

In July of last year, Mr. Trump met at the White House with Mr. Mehrotra of Micron, as well as the chiefs of Intel, Google and Broadcom, to discuss the trade clash with China and the administration’s policies toward Huawei.

Two months later, in an address to the United Nations, Mr. Trump described the Micron theft as a rationale for the trade war.

“To advance the Chinese government’s five-year economic plan, a company owned by the Chinese state allegedly stole Micron’s designs, valued at up to $8.7 billion,” the president said. “Soon, the Chinese company obtains patents for nearly an identical product, and Micron was banned from selling its own goods in China. But we are seeking justice.”

“For years, these abuses were tolerated, ignored or even encouraged,” Mr. Trump added. “But as far as America is concerned, those days are over.”

Chip makers initially supported the Trump administration’s willingness to take on China. Companies had long grumbled about intellectual property theft and unfair treatment in the Chinese market, but they had little recourse: Going public about their troubles could spook investors and invite Chinese retaliation.

Then, in April 2018, the administration announced $50 billion in tariffs that would directly hit semiconductor companies by raising prices for imported equipment and materials. A chip finished in China would be subject to a 25 percent tariff, even if its components had been made in America.

The tariffs caught the industry by surprise. The Semiconductor Industry Association, a trade group, pushed back, telling the United States trade representative in July 2018 that the tariffs would “undermine U.S. technological leadership, cost jobs, and adversely impact U.S. consumers of semiconductor products and the U.S. semiconductor producers.”

Some industry executives grew more nervous as Mr. Trump escalated his trade fight and the prospect of an economic rupture between the United States and China became more real. Chinese customers shifted their purchases to suppliers in South Korea, Taiwan and elsewhere.

Mr. Trump’s trade pact did ink some victories — it includes greater protections for companies like Micron, including preliminary injunctions and expanded legal recourse for theft of trade secrets. It also contains new promises from China to refrain from pressuring American businesses to transfer their technology to Chinese companies, and it allows American companies to sue individuals, including former employees and hackers.

Semiconductor companies said they would press the administration to make more gains in the next phase of negotiations, including subsidies, which Mr. Trump said he plans to address. Just getting China to acknowledge and agree to forgo unfair practices was progress, they said.

In a statement, Micron said it applauded the deal. “We look forward to additional discussions between the countries on significant issues that are important to Micron and the semiconductor industry, such as intellectual property protection and subsidies,” said Jon Hoganson, Micron’s managing director of global government affairs.

But the fight has spilled over into more damaging areas. Last May, the Commerce Department placed Huawei, which makes handsets and telecom equipment, on a national security blacklist that bans it from buying some American products. Other Chinese technology companies were added to the list, and the government began planning which types of advanced technologies it would no longer allow companies to export overseas.

Micron had so far experienced limited effect from Mr. Trump’s tariffs since it does not ship the products it makes in China to the United States. But Huawei’s blacklisting was potentially devastating — 13 percent of Micron’s microprocessor sales are to the Chinese company.

In its fourth-quarter earnings call with investors last September, Micron warned that the clash could damage its bottom line.

“We see ongoing uncertainty surrounding U.S.-China trade negotiations. If the Entity List restrictions against Huawei continue and we are unable to get licenses, we could see a worsening decline in our sales to Huawei over the coming quarters,” Mr. Mehrotra said. Micron’s stock sank 11 percent after his remarks.

Micron, Intel and other companies with global operations initially found a way to keep selling to Huawei since the rule did not restrict products containing less than 25 percent of certain types of American content. But the Commerce Department is considering lowering that threshold and expanding the number of goods subject to the ban, according to five people with knowledge of the plan.

Like other Chinese companies, Huawei has worked to curtail its dependence on America. By substituting parts from Japan and other countries, the company has recently produced handsets and telecom equipment that do not contain any American components.

Its internal semiconductor unit, HiSilicon, has also developed replacements for advanced chips that Huawei once bought from American companies. Huawei said its 2019 sales topped $120 billion, representing 18 percent growth over the year before — less than its initial target, but not by much.

American companies say they are sympathetic to the administration’s complaints about China. But they must compete globally, and they are not willing to forgo access to China, the hub of the global electronics supply chain and probably one of the world’s fastest growing markets for decades to come.

Jim McGregor, the chairman of Greater China for APCO Worldwide, said the trade war and other restrictions were already shaping investment decisions by American technology companies. When deciding where to put their money next, many companies have quietly been looking to invest outside the United States to secure access to China.

“You’ve got to be there, no matter what the president says,” he said.

Raymond Zhong contributed reporting from Beijing.

Source:

NYT > Business > Economy