Epidemic of economic espionage takes huge toll on L.A. companies.

Foreign competitors, like information-craving vampires, are sucking the economic lifeblood out of L.A. companies by engaging in economic espionage. Specifically, they are stealing trade secrets, product designs, patents, and all other types of proprietary information.

The epidemic is national in scope, prompting FBI Director Louis J. Freeh on Feb. 28 to ask Congress to grant the bureau more authority to fight the problem. The FBI is currently investigating some 800 cases of economic espionage against U.S. companies, double the number of two years ago.

And Los Angeles, with its burgeoning field of high-tech industries and research and development firms, has become a prime target for this type of espionage, according to Chuck Middleton, assistant special agent in charge of the L.A. field office of the FBI.

Middleton said economic espionage comes in three basic varieties: the James Bond-type theft by other countries of "secret rocket formulas" (or other defense technologies); the theft of corporate, proprietary information by a foreign source with no government involvement; and the theft of proprietary information from domestic companies by other domestic companies.

"Since the end of the Cold War, we are looking at a broader scope of possible compromises. Some of our allies were stealing from us while we were busy with Russia," Middleton said. "Many of these countries have substituted research and development with espionage. By the time they do their own R&D, they're still behind. (Engaging in espionage) is catch-up."

Gene Heck, a former U.S senior commercial attache for the U.S. Embassy in Saudi Arabia who is now a private-sector consultant for multinational firms operating in the Middle East, concurred. "This has been going on since time began, but it's become more acute in the '90s. All our prime competition is engaged in it."

American corporations are more attuned to the problem, out of necessity. Cynthia Taylor, a spokeswoman for the Autonetics and Missile Systems Division of Seal Beach, Calif.-based Rockwell International Corp., said, "Our company-sensitive information is a valuable asset and it's protected by a combination of special markings, access restrictions, storage requirements and restrictions on dissemination outside the company."

Threats from within

It is not enough, cautioned Middleton, that businesses have a security guard at the entrance. They must be alert to conditions within their company - a disgruntled employee, passed over for a promotion, or a vulnerable employee, swayed by greed.

"Which employees have access? How vulnerable are they?" Middleton said. "These days, cellular phone calls are easily intercepted. Another weakness could be in the company trash - are they throwing out their market analyses?"

For smaller companies, with less-sensitive products, such as custom wheels manufacturer American Racing Equipment of Rancho Dominguez, foreign espionage is a frustrating annoyance.

Anthony Munoz, director of international operations for American Racing, helped the company establish distributorships in 68 countries in seven years, generating accumulated sales of $30 million. "We're in the styling business, so we register our trade name in each country where we do business," Munoz said. (American Racing manufactures wheels with distinct alloy compositions). "But there is really no way to enforce that (trade name registration)," he added. "It's futile and exasperating because-we have to fight it in the locality, the country, where it happens."

John O'Malley - whose company, O'Malley International Associates, advises businesses on international trade - said companies such as American Racing "should report any illegal activity to law enforcement, particularly the FBI. They're really not serving their own company or other companies if they're losing their intellectual property," O'Malley said. "They should make use of the government. That's what it's there for - to protect U.S. interests."

Protective steps

Middleton offered a recipe for businesses that want to protect themselves. First, educate employees about the sensitivity of their knowledge. Next, ensure employees report any unusual contacts.

"Managers should also be alert for the disgruntled employee," he said. "And if a company feels they have been approached or that their proprietary information has been stolen, they should contact the FBI. If there is any federal jurisdiction in the case, the agency will be able to determine that right away."

Federal laws themselves are not as well-formulated as some in the protection business would like. FBI Director Freer complained to Congress last month that no federal statute exists to deal specifically with economic espionage, forcing federal law enforcement officials to rely on mail fraud laws and other statutes. Both O'Malley and Middleton said there is currently a bill pending before the U.S. Senate, called the Economic Espionage and Protection of Proprietary Information Act, which would put more force in the enforcement against foreign and domestic economic espionage.

Heck, as an international consultant and businessman, asserted that fewer, not more, U.S. anti-espionage laws are needed. "The question now has become one of leveling the playing field," he said. "American businesses abroad have two strikes against them. The Foreign Corrupt Practices Act limits what a U.S. company can engage in and, second, other countries are already targeting (U.S. companies') technology."

Middleton countered that having anti-espionage federal statutes in place is critical. He cited statistics in a recent issue of Profiles Magazine that show the annual cost of economic espionage to U.S. companies is estimated to reach $150 billion by the year 2003.