China's Criminal Economic Activity

With new indictment, U.S. launches aggressive campaign to thwart China’s economic attacks

By Ellen Nakashima

Attorney General Jeff Sessions announced a new initiative to combat mounting criminal economic activity by China. 

The Justice Department on Thursday unveiled a broad new initiative to combat mounting criminal economic activity by China, announcing the plan as U.S. officials unsealed charges against several individuals and Chinese and Taiwanese companies for trade-secret theft.
Thursday’s actions follow a series of moves meant to put Beijing on notice. 

The Trump administration has prioritized countering threats to U.S. national and economic security as China seeks to supplant the United States as the world’s dominant economic power. 

The administration already has imposed tariffs on $250 billion worth of Chinese goods, and since September federal prosecutors have brought charges in three intellectual property theft cases involving Chinese spies and hackers.
“Chinese economic espionage against the United States has been increasing — and it has been increasing rapidly,” said Attorney General Jeff Sessions. 

“Enough is enough. We’re not going to take it anymore.”
The initiative is significant in that it fuses ongoing efforts within the FBI, Justice Department and other federal agencies into a single coordinated initiative, and sends a clear message to Beijing that Chinese economic espionage — whether by cyber or human means — will not be tolerated, officials said. 

The Chinese embassy did not respond to a request for comment.
As both countries place greater emphasis on competition and security, the big question, analysts say, is whether the two governments can maintain commercial engagement despite increasing tensions over the quest for technological supremacy. 

In the meantime, Washington is signaling that the gloves are off.
Under the initiative, Sessions said, the department will aggressively pursue trade-secret theft cases, and develop a strategy to identify researchers and defense industry employees who’ve been “co-opted” by Chinese agents to transfer technology to China.
“China wants the fruits of America’s brainpower to harvest the seeds of its planned economic dominance,” Assistant Attorney General John Demers said. 

With this new initiative, he said, “we will confront China’s malign behaviors and encourage them to conduct themselves as they aspire to be one of the world’s leading nations.”
The indictment alleges the defendants conspired to steal trade secrets from Micron, an Idaho-based semiconductor company with a subsidiary in Taiwan. 

Micron is worth an estimated $100 billion and is the only company in the United States that makes “dynamic random-access memory,” or DRAM, high-capacity data storage used in computers, mobile devices and other electronics. 

The company has a 20 to 25 percent share of the world’s supply of DRAM, prosecutors said.
According to the indictment, the Chinese government set up a state-owned company, Fujian Jinhua Integrated Circuit Co. Ltd., for the express purpose of developing DRAM technology and sought to learn trade secrets through the criminal acts of former employees of Micron’s Taiwan branch.
In July 2015, the president of Micron’s Taiwan subsidiary, Chen Zhengkun, also known as Stephen Chen, left to join United Microelectronics Corporation, a semiconductor foundry headquartered in Taiwan. 

Some months later, in early 2016, Jinhua, the Chinese company, began discussions with United Microelectronics to forge a technology cooperation agreement, according to the indictment. 

Chen helped negotiate the agreement, and in early 2017 became president of Jinhua in charge of its DRAM factory, prosecutors said.
It was Chen, who orchestrated the theft of trade secrets from Micron worth up to $8.75 billion.
Chen is said to have recruited former colleagues, including defendant He Jianting, or J.T. Ho, a Taiwanese national, who before leaving Micron stole confidential DRAM materials.

Chen also brought on defendant Kenny Wang, a Micron manager and Taiwanese national who stole more than 900 files, some containing confidential DRAM designs.

Wang downloaded secrets from Micron’s servers in the United States and stored them on his Google Drive account, the indictment said.
“This was,” said U.S. Attorney for the Northern District of California Alex Tse, “some of the most advanced semiconductor technology in the world.”
If convicted, the defendants face up to 14 years in prison and $5 million in fines. 

The two companies, United Microelectronics and Jinhua, could face fines worth more than $20 billion. 

The three men charged Thursday are in China, U.S. officials said.
This week, the Commerce Department added Jinhua to its “entity list” to prevent it from buying goods and services in the United States, effectively cutting it off from the U.S. market. 

Without equipment sold only in the United States, Jinhua cannot build the DRAM chips.
The Justice Department on Thursday also filed a civil suit in San Francisco seeking to stop the further transfer of these stolen trade secrets and to prevent the defendants from exporting to the United States any products resulting from the theft.
“We are not just reacting to crimes — we are acting to block the defendants from doing any more harm to Micron,” Sessions said.
The attorney general outlined a number of laws that prosecutors would use, including the Foreign Agents Registration Act, to identify unregistered agents seeking to advance China’s political agenda.
Congress in August passed the Foreign Investment Risk Review Modernization Act to expand the government’s power to review investments from foreign countries — a response to China’s efforts to obtain U.S. technology through mergers, acquisitions and takeovers. 

Last month, the Treasury Department released interim rules to implement the new law. 

Sessions said the Justice Department will work with Treasury on further developing those regulations.
The Justice Department also will target Chinese threats to U.S. companies that provide components for sensitive technologies, especially those in the telecommunications sector as it readies for the transition to 5G networks.
“This is consistent with the state of confrontational actions over the last couple of weeks taken by the administration to tackle everything China’s trying to do,” said Samm Sacks, a senior fellow at the Center for Strategic and International Studies. 

“It’s bigger than intellectual property theft. It’s supply chain risk. It’s China’s efforts to be global leaders in 5G. It’s traditional espionage. It’s influence operations. This is part of a much broader whole-of-government approach to countering China’s efforts to gain strategic advantage, particularly in emerging technology.”
Sessions noted that earlier this year, U.S. Trade Representative Robert E. Lighthizer found that Chinese sponsorship of hacking into American businesses has gone on for more than a decade. 

By some estimates, the cost to the U.S. economy is $30 billion annually. 

Chinese pledge

In September 2015, Chinese dictator Xi Jinping pledged that China would not target U.S. companies for the economic benefit of nonmilitary Chinese companies.
“Obviously that commitment has not been met,” Sessions said.
Dmitri Alperovitch, a cyber expert and chief technology officer at the cybersecurity firm CrowdStrike, said the Chinese military curtailed its commercial hacking in 2016 but that over the past year, operatives affiliated with China’s Ministry of State Security have increasingly taken up the slack, stealing military, medical, agricultural, high-tech and other secrets.
For months, the Trump administration has been considering ways to decouple the U.S. and Chinese tech sectors: restricting visas for Chinese students in the scientific, engineering and math fields, banning Chinese telecommunications equipment companies from U.S. 5G networks, expanding export controls on U.S. tech firms, and increasing official scrutiny of Chinese investments and joint U.S.-Chinese research, Sacks said.
“This initiative is an important set of hammer blows against China’s efforts to disadvantage American companies, steal their intellectual property, and exercise unwanted influence in our universities and political system,” said James Mulvenon, a China expert and general manager of SOS International’s Special Programs Division, which provides consulting services to intelligence and defense agencies.

Nation of Thieves

Inside a Heist of American Chip Designs, as China Bids for Tech Power
By Paul Mozur

JINJIANG, China — With a dragnet closing in, engineers at a Taiwanese chip maker holding American secrets did their best to conceal a daring case of corporate espionage.
As the police raided their offices, human resources workers gave the engineers a warning to scramble and get rid of the evidence. 

USB drives, laptops and documents were handed to a lower-level employee, who hid them in her locker. 

Then she walked one engineer’s phone out the front door.
What those devices contained was more valuable than gold or jewels: Designs from an American company, Micron Technology, for microchips that have helped power the global digital revolution. According to the Taiwanese authorities, the designs were bound for China, where they would help a new, $5.7 billion microchip factory the size of several airplane hangers rumble into production.
China has ambitious plans to overhaul its economy and compete head-to-head with the United States and other nations in the technology of tomorrow. 

The heist of the designs two years ago and the raids last year, which were described by Micron in court filings and the police in Taiwan, represent the dark side of that effort — and explain in part why the United States is starting a trade war with China.
A plan known as Made in China 2025 calls for the country to become a global competitor in an array of industries, including semiconductors, robotics and electric vehicles. 

China is spending heavily to both innovate and buy up technology from abroad.
China is veering into intimidation and outright theft to get there. 

And they see Micron, an Idaho company whose memory chips give phones and computers the critical ability to store and quickly retrieve information, as a prime example of that aggression.
Three years ago, Micron spurned a $23 billion takeover offer from a state-controlled Chinese company. 

Today it faces a lawsuit and an investigation in China, which accounts for about half its $20 billion in annual sales.
Then Micron was the target of the heist in Taiwan, according to officials there and a lawsuit the company has brought against the Taiwanese company that employed the engineers, UMC, and the Chinese company it says wanted access to the technology, Fujian Jinhua Integrated Circuit Company.
Other companies may face similar predicaments to Micron.
One state-backed factory in the city of Wuhan, owned by Yangtze Memory Technology Company, or YMTC, will be turning out chips that look similar to those made by Samsung, the South Korean chip maker, said Mark Newman, an analyst at Sanford Bernstein.

Micron memory chips. The chips give phones and computers the critical ability to store and quickly retrieve information.

“The YMTC one is virtually identical to Samsung’s, which makes it pretty clear they’ve been copying,” Mr. Newman said.
A Samsung spokeswoman declined to comment, and YMTC officials did not return calls for comment. 

Earlier this year, Xi Jinping visited YMTC’s production facilities, one way China’s leaders show their endorsement for projects.
China defends Made in China 2025 as necessary for its economic survival. 

It still depends on other countries for crucial goods like chips and software, and China is offering funding for homegrown labs and for entrepreneurs who hope to grab a piece of the future.
But Trump administration officials in a report earlier this year recounted how Chinese officials have at times helped local companies get intellectual property from American firms, including in the energy, electronics, software and avionics sectors.
American business groups worried about Made in China 2025 point to Micron. 

The account of its struggles was based on Taiwanese and American legal documents.
In 2015, representatives from Tsinghua Unigroup, a Chinese chip maker with major state backing, approached Micron with an acquisition offer, which the company rejected. 

It later also turned down several partnership offers from Chinese companies out of concern for protecting its technology, said a person with knowledge of the situation, who asked not to be identified because the person lacked authorization to speak publicly
That was when one Chinese company resorted to theft, Micron said in documents filed last December in the Federal District Court for the Northern District of California.
Micron’s accusations focus on efforts by Fujian Jinhua Integrated Circuit, a state-backed chip maker, to build a $5.7 billion factory in China’s Fujian Province. 

Two years ago, Jinhua tapped UMC, a Taiwanese company, to help it develop technology for the factory. 

Instead of going through the lengthy steps required to design the technology, UMC and Jinhua decided to steal it.
A UMC spokesman denied the allegations and declined to comment further. 

Jinhua did not respond to requests for comment.
First, UMC lured away engineers from Micron’s Taiwan operations with promises of raises and bonuses.

Then, it asked them to bring some of Micron’s secrets with them.

The engineers illegally took with them more than 900 files that contained key specifications and details about Micron’s advanced memory chips.
Micron grew suspicious after discovering one of its departing engineers had turned to Google for instructions on how to wipe a company laptop.

Later, at a recruiting event in the United States aimed at Micron employees, Jinhua and UMC showed PowerPoint slides that used Micron’s internal code names when discussing future chips it would make.
Micron’s campus in Boise, Idaho. The state’s two senators worry that a patent lawsuit brought against the company in China could block Micron from selling some products there.

Alerted by Micron, the Taiwanese police tapped the phone of one Micron engineer, Kenny Wang, who was being recruited by UMC. 

According to an indictment in Taiwan against Wang and others, UMC reached out to Wang in early 2016 using Line, the smartphone messaging app, while he was still working for Micron. 

UMC explained it was having problems developing its memory chip technology. 

Wang then grabbed the information it needed from Micron’s servers, and later used it to help UMC’s design. 

The police said Wang received a promotion at UMC.
When investigators showed up at UMC’s offices early last year, employees rushed to hide what they had taken from Micron. 

Wang and another former Micron employee gave laptops, USB flash drives and documents to an assistant engineer, who locked them in her personal locker. 

She then left the office with Wang’s phone — the one that the police had tapped, which was quickly tracked down.
UMC filed its own criminal complaint against Wang last year, which Taiwanese prosecutors rejected. Wang and other engineers who were charged said they had taken the trade secrets for personal research. 

Wang did not respond to emails and phone calls for comment.
In January, Micron was hit with a patent infringement suit by Jinhua and UMC over several types of memory. 

As part of the suit, the companies requested the court ban Micron from making and selling the products and pay them damages. 

The case is being heard by a court in Fujian Province. 

The Fujian provincial government is an investor in Jinhua.
In a letter sent to President Trump, Senators James Risch and Mike Crapo, Republicans of Idaho, expressed concern about the entire case and specifically the rapid pace with which the patent lawsuit has proceeded. 

The case could block Micron from selling some products in China.
“If the case against Micron moves forward, and the Chinese government once again rules in favor of itself, it would cause substantial damage to Micron and the U.S. tech industry as a whole,” said the letter, which was viewed by The New York Times.
In May, China’s market regulator opened a price-fixing investigation into Micron, along with South Korean memory makers SK Hynix and Samsung Electronics. 

Memory prices have jumped over the past year, because of spiking demand and limited production by the three companies, which dominate the market. 

Another China regulator, which has said it is also monitoring the price jump, also gave a multimillion-dollar grant to Jinhua.
Jinhua and other Chinese chip makers face hurdles in catching up. 

Production of semiconductors involves a highly complex and automated production process that controls everything down to the atomic level.
Jinhua and others are spending big to get there. 

In Jinjiang, a city in Fujian Province once known as a shoe-manufacturing center, Jinhua’s new factory is almost finished. 

Rising five stories and stretching several football fields long, the structure boasts 100,000 square feet of new office space.
Economic planners in Jinjiang said they were hoping to attract more talent from Taiwan. 

In addition to adding more flights there, the town was in the process of building out a bilingual international school, a hospital with international accreditation, and new upscale apartments. 

The new plant is just a short drive from the airport.
“Most of Made in China 2025 is likely to succeed. Not all technologies are rocket science,” said Dan Wang, a technology analyst in Beijing with Gavekal Dragonomics, a research firm. 

“With enough subsidies, Chinese firms have a good shot at catching up to the technological frontier.”