By J. Michael Waller
May 02, 2022
China’s “whole-of-society” strategy of spying makes it almost impossible to detect the difference between common criminal activity and espionage against American companies.
The abrupt closure of an aggressive interagency counterespionage program is making it even harder.
The Department of Justice’s China Initiative, launched under the Trump administration, hauled in suspected spies at the nation’s most prestigious universities, medical research centers, military contractors, and civilian tech companies.
Those efforts ended on February 23, when the Biden administration, alleging prejudice against Asian-Americans, terminated the program. The administration claims it will continue under standards that do not single out China.
Chinese Communist Party-connected businessmen and companies have been implicated in a range of schemes to purloin secrets from American innovative companies, especially those specializing in financial tech or disruptive technologies.
Silicon Valley is a main target of the Chinese spy networks. Nick Shenkin, an FBI special agent in northern California’s high-tech hub, warns that the biggest vulnerability is the insider threat: employees who steal intellectual property that is passed to mainland China.
“What’s concerning about that is a trend that we’ve seen of more and more aggressive intellectual property acquisition by the Chinese Communist party,” Shenkin said in a recent Financial Times podcast. “If you look at their five-year plan, the breadth of the technologies that they intend to acquire is really breathtaking…. It is part and parcel of their attempt to build a siege economy in technology.”
Beijing is vacuuming up blockchain and other financial technologies, known as fintech.
Shenkin says that economic damage to the United States is estimated at up to $850 billion per year.
Some companies are starting to fight back against theft. Venture capitalist Adam Struck and his firm, Struck Capital Management in Los Angeles, have taken a case to federal court. They allege that a former employee defrauded the enterprise, stole proprietary data, and used it to set up a “shell game” of companies based in Delaware, Puerto Rico, and the Cayman Islands – the latter in partnership with an executive formerly with an investment firm connected to the Chinese government.
The former employee, Yida Gao, is a 31-year-old Massachusetts Institute of Technology (MIT) graduate.
Gao says on his LinkedIn page that he is a general partner of Shima Capital. Shima describes itself as “an early-stage global venture firm focused on supporting cutting edge blockchain startups.” Shima lists 98 startup companies with which it claims involvement. Shima Capital is also a defendant in the suit.
Gao did not respond to a request for comment to give his side of the story.
The lawsuit alleges that Gao used “stolen information from Struck Capital” to set up several companies, and ultimately a “Cayman Islands-based blank-check company that Gao co-operates” with a colleague who worked for another company that had “close ties to the Chinese government.”
The suit describes the Cayman company as “an affiliate of a Beijing-based asset management company that invested in American companies which increased Chinese access to US financial institutions and customers.” According the suit, the firm “divested its US portfolio investments in 2019 under scrutiny from the US Committee on Foreign Investment in the United States,” known as CFIUS.
CFIUS is an interagency group that screens, investigates, and prevents or reverses foreign investments that present national security threats.
“Anybody who is subject to the jurisdiction of any person, entity or company, they must yield all information to which they have access to the CCP on demand,” Shenkin said. “Would they refer to that as a whole of society approach to intelligence gathering? That’s what the Chinese government refers to it as.”
Struck’s lawsuit came to light in a recent Newsweek story about “Chinese-funding sources in government-backed investment funds” being “at the heart of the technological rivalry between the U.S. and China.
It makes no allegation of spying as traditionally understood.
Even so, because of Communist China’s whole-of-society approach to pressure its citizens to steal secrets while abroad, the case alleged common theft is of interest to spy-watchers.
J. Michael Waller is Senior Analyst for Strategy at the Center for Security Policy.
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