LETTER TO STANLEY SPORKIN FROM WILLIAM J. CASEY TRANSMITTING NEWS CLIPPINGS ON TECHNOLOGY SPYING AND TECHNOLOGY THEFT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88B00443R001003880163-5
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 17
• Document Creation Date: December 20, 2016
• Document Release Date: March 6, 2007
• Sequence Number: 163
• Publication Date: May 1, 1981
• Content Type: LETTER

Approved For Release 2007/03/06: CIA-RDP88B00443R001003880163-5
The Director of Central intelligence ?
Washington. D. C 20505
1 May 1981
Stanley Sporkin, Esquire
Securities and Exchange Commission
500 forth Capitol Street, N.W.
Washington, D.C. 20549
Dear Stanley:
This is an area in which I would like to see your
imagination and resourcefulness. Take a look at these
papers and I will talk to you when I see you.
Yours,
4-OD c/
//a3
Enclosures:
Various news clippings
re technology
 Approved For Release 2007/03/06: CIA-RDP88B00443R001003880163-5
I SAN JOSE NEWS
5 March 1981
By Pete Carey
t.
~
Staff Wrrtts%:
The Soviet Union ra 3agging be=
bind the Silicon Valleys electronic
technology. and bent on. catc} g
up, anyway it c-aa
The Soviets bup.the valley's. best
ideas on. the ope3s mars whenev
er possible. When they can't {obtain
the technology legally, se t fed=
eral investigations show;.:they deal
with companies that.expoct:it_ille
gally. ; --,: ? r:...:., . - s~
it
During ant. investig.ation~n--in
Southern California? -eight agents
of the KGB, the-Soviet -version of
the CIA, -.were- photographed-.tak
sag delivery,-of:=highly sensitive.
military equipment.---
FBI Director.,William a Webs''
ter said recently that the KGahas
been active in t_he-l i'.r. for 10'
years, during. .which .tit e - SWcoii.
.Valley has become. the world's
leading research and.deveiopment
center forsolid'stateelee mate,....
In a talk to=theeCommonwealti'a.
Club in San Francisco,. Webster:
warned that""
ligence operations-
cifically assigne :o;a+teat.this?:
technology. Ede=year employ-;
ees. who - don't :- thinks - this- sort, of
thing exists This is important for;
the self-interest of the company .
and for our national well-being?'
Investigators, are probing a net=-
work of -foreign: agents and busi=
n esses who have helped unfriendly
nations-avoid : U.S.. embargos-_on'
the export -of. teehny .. ..: ? `'
The Customs and Commerce de'
partments -stepped up investiga-
tion and pro.,.on of such cases
last year. In September, a "work-
ing group" was for>:7ed of several.
federal agencies to. deal with ex :1
A pattern has emerged of Amer-
scan and foreign businessmen buy-
ing technology, exporting it to neu-
tral countries such as Switzerland
and, Austria, and then -transship.
ping it into. the Soviet Union.
A. current case involves Conti-'
nental Technology Corp. of Torr-
ance. Run by two people,. a West
-German. and a Russian. who- be--
came a- naturalized U.S. ' citizen,
Continental,is suspected of buying.
advanced electronics technology.
from.. contractors in Santa: Clara:
County and sending it to the Soviet
Union No charges have been filed
but the case- is before a federal
grand jury. :r.
Cases resolved in the past year.
/ A Belgian citizen, Marc
`Andre DeGeyter, was jailed` after
'search warrants showed his firm'
.was shipping a secret Intel Corp.
computer chip to the Soviet Union.
Search warrants in the, case
showed DeGeyter's company,
Computer Engineering and Se'r-
vices Accounting, Brussels, had a .
contract with Techgmashimport, a
Soviet international trading -com-
an
/ Walter J. Spawr, president ofi,
Spawr Optical Research, Inc., Co-
rona, was.found guilty of shippinb
.laser mirrors that could be used on
satellites to the Soviet Union via a
Switzerland export "drop.'' Spawr.
received a five-year sentence, with-
all but six months suspended, and'
the company. was fined $100,000
/ Otto Poeschl, a West German
trading as?Arga Warenhandelge-
'sellschaft-and Tewifa Investment
.Corp., -was denied export privi-
leges for 10 years after he was.
'-found sending illegally purchased
-computer parts and memory cores
to Warsaw Pact nations. The cov,--..
er-destinations were in Austria-
A Montreal an
d a Tel Aviv-`
company :.DeVimy Test Lab'
ELtd. and Excel Industries - were-
-denied;' export privileges after
sending computer - equipment -to-,'
the Soviet bloc through a complex
network .of "cover" routes. Ship=-
'ments would go to Amsterdam
and other intermediate points-
from which they were sent to-Vi-j
enna. From there, the material
was shipped into the Soviet Uniods
/ A South African, Joan P.
Taylor of Taylor Enterprises,, was.
:caught .illegally routing $205,000.
worth of arms from Olin-Winches
,ter Corp- to South Africa..with,
::phony export- destinations. She was A
barred: from exporting from-, the
United States for. , 10years.=Y-.~.
Underground channels
-In -Silicon Valley, underground,
channels sometimes take advan.-
Cage of thieves to obtain material,::
accord-ho to one authority.
"It'slsimilar to what the valley,
has -with parts. being stolen for
their gold," said John Shea, a San
Jose technical - consultant to de-, i
fense and intelligence agencies.. - :z
Shea;.whose Technology Analy
sit Group analyzes Soviet electron-,
ics equipment for various govern-
meat agencies, put.together a "So=
viet shopping'l.ist". for the Mercury,
News. _.. : ,
The list,- Shea . says, 'should in-`
elude locally manufactured high-
speed microprocessors used in
missiles,- radiation-hardened cir=
cuitry, circuits that: can store vid-
eo signals; and the latest technolo-
gies in manufacturing the dense,
high-speed integrated circuits that
have made Silicon Valley famous.
Also on the list are. advanced J
techniques . -for making.- microcir
cuitry such as -complimentary metal oxide semiconductors and
scon-on-sapphire methods.
"They are trying to.pick-up on I
the latest high technology in inte-j
grated circuit areas," Shea said-
"Responsible government
sources report concern within the-1
ce may be inadvertently or
co sciously making significant
hi technology available to the
Sovi is eitL r in commercial or
para. .tart' products,'.' he said.
Sh said the French recently.
show an interest'-in high-speed
comput applications to military
aerospa a systems-and eleetro->:
mechanic technology...
'Prime
get'
"When u' couple these two
. technologies, you get applications
in electrons countermeasures,
electronic _ w are and communi_. {{
cations and onnaisance sate]-
- lites. ..
"You can be that Silicon'
Valley is a. prime get for overt
-and covert intellig ce-gathering,"
Shea 'said. . =. -
On the other hand, a noted that
;U.S. manufacturers th overseas
/distribution outlets, ca make it
easy for unfriendly na ns to ac-
quire commercially, vailable
products.
Often, he said, :-'The
can buy what they, want
the United-States."., a;;:4.Rr
 Approved. ForRelease 20071W1% :.CIA-R DP88B00443R001003880163-5
. i e[iant l pvelonmen in 1.11 ._ _ _ - t _ ` . - i" - 4
T
three years behind the -United .I Anothe'rq'mvestigator said that;
States in solid state technology.\ "the laws are a problem.-The ,
'A good copy'
(exporters) don't have to file -on
shipments which leave the country
by ship until five days; after the
ship sails. They can file then, say
ing it's anything -= ` jellybeans;
washing machine parts or whatev-
er. How are we going to check?.:
Although stolen circuitry appar
?ently is not the primary-source of
dvanced American technologyy
fo unfriendly nations, investiga..
torsuspect it is a factor.:.
" Il - our - information indicate
that some of these (stolen or co
terfeit)>devices are ending up JiX
the Soviet Union;' reports Ways
Brown, a . nta Clara County sher-
iff's depu who investigates elee-
'tropics thefts-
Police are looking at a recent.
$64,000 loss reported by Advanced
Micro Devices\Corp. to the Sung--
vale Department of 'Public Safety-
. AMD is - missing some of . its
most advanced circuits;, which, sell
for $36 to $50 apiece. The circuits
are capable of storing ..video-en-
coded information.
AMD declined comment.`;.
Doug Southard, who prosecutes
electronics cases ?for the- district
attorney's office, says, "We want
to break this thing up because it's.
hurting the economy of this area-
.and it has possible international
First, the CIA obtained a Rus
sian microprocessor from a ;ni%-'%'
sile captured by the Israelis. It is a
copy of the 8080 microprocessor,
introduced by Intel Corp. in 1977.
The 8080? has been superceded by.
more advanced Intel microproc?es-
sors.
The Soviet version of the 8080 is -
a much larger chip than Intel's,
but, remains.. what sources de-,
scribed as "a good, copy"' of the
The second development came.
when the Carter administration.:.
froze an export license, preventing
Control Data Corp. from selling an
advanced- computer to the Soviet
news agency.. Tass.- The Carter ad-
ministration- said the. computer:
contained too high a level of vital
technology "a
Iq response; the `Union
sent bne of its. own integrated cir-
ctiits?to the United States to-show
they already had the technology.
Analysts say the Soviet-made
chip is a copy--of a Mostek Corp
microprocessor. It hasi more liber-
al timing and voltage parameters,
which increases the yield and sim-
plicity of manufacturing, but it--is
a good copy, 'sources say. _ .
During arare spot check of high
technology leaving-tbe-.country
last year,. the 4Customs Depart-
ment in Long-Beach-turned up:28
major violations 'in three weeks..
The violations ranged from mis-
labelling packing crates and bx:
porting without- a-license to. f%ip-
ments by sasspected;"front compa -
nies" diverting. U.4. technology td
unfriendly nationsy F. Seven- companies are being aii-
vestigatedd as - the , result. The sus-
pect exports included; among. oth=
er things, aircraft design material
valued at $5 million;; two $250,000
.shipments of. machine: ?.guns. and
silencers,':a. $400,000, shipment= of
computer parts and'; large ship-
ment of space satellifie. systems.
"Three weeks of spot-checks
will keep us busy for ix months of
investigation, said Ken. . Ingieby,
special agent - in charge. of Cus-.
toms'. Terminal Island officein.
Los-Angeles. !: ~_
 pgvfir Release 2001(g1SCDP88B00443R001003880163-5
o PAGI_-1.Z --- ? 27 April 1981
forcement of Cocom guidelines. A U. S.
trade official notes that many Cocom
members "have been reluctant partners,
at best." And since the U. S. imposed its
embargo, he adds, some Cocom govern-
ments-notably France-have encour-
aged their domestic companies to grab
business from U. S. companies.
Many U. S. businessmen are confused
by Washington policy. Although the
blanket embargo was lifted a year ago,
U. S. business continues to be penalized
?w R& zi sn -ye secrets
A key element of America's post-Af-
ghanistan sanctions against the Soviet
Union-the sweeping ban on virtually
all U. S. high-technology exports-has
rot,only failed to influence the Kremlin
but'may even b< backfiring. Moscow is
making more illicit deals that circum-
vent international trade controls, as well
as taking greater :'.vantage of the legal
loopholes that exist abroad.
As a result, the eegan Administra-
tion will soon p, a the Western allies to
put more muse behind
their restrictions cot Soviet
trade. The immediate. goal
is to stem the flow semi-
conductor and cc),-.Muter
technology, much of wi ich
has military potential.
Longer term? madly
members of the Reagan
camp, including Secretary
of State Alexander M.
Haig Jr., are calling for a
tightening of trace policy.
They believe the ti, estern
allies must mobilize their
economic strength to put
effective pressure on the
Soviets. "We need to ser-
iously consider developing,
in concert with o:.,,- allies,
the capability to wage lim-
ited economic war against
the Soviet Union." says
one ranking Reaganite.
The organization for
such an under taking alrea-
dy exists in the Coordinat-
?
be made to work," adds Brady, "if we sit
down with our allies and determine
where we are going."
But putting effective controls on tech-
nology transfer has never been easy. In
an age of handheld microcomputers and
a host of consumer products cont".fining
little bits of silicon that can provide
intelligence experts with important clues
about technological progress, it may be
impossible. Security at many small
semiconductor producers-or users-is
often rather lax, says a
U. S. Customs Service in-
spector in Europe. And
once a Soviet agent has
in,, Committee on Export Controls. Co-
com was formed during the cold war era
to help contain Soviet expansionism by
restricting trade. It has compiled a foot-
thick list of product. that cannot be
exported to Communist countries with-
out first obtaining a license. After Af-
ghanistan, President Carter never asked
the other Western allies to emulate his
U. S. chip and computer
skills leak via illicit deals
and legal loopholes
blanket embargo on high-technology
goods, but the Cocom nations-the
members of the North Atlantic Treaty
Organization, minus Iceland, plus Ja-
pan-did agree to grant no more licenses
for listed products destined for Russia.
Given the economic plight of Western
Europe, there is scant chance of agener-
al accord that wou:d significantly reduce
trade with the Soviet bloc, so the Reagan
Administration will insist on strict en-
by Washington's overzealous enforce-
ment of Cocom rules. Other nations thus
are often wrongly blamed for ignoring
the rules. Sometimes the rules are bent,
but most countries strictly control ship-
ments of strategic items.
To the Reagan Administration,
though, the issue is more fundamental
than whether specific rules are bent or
broken. Reagan's advisers want the Co-
com countries to formulate a consistent
policy to replace the ad hoc, shoot-from-
the-hip approach that characterized the
Carter team. The Reaganites believe
that the inconsistency of their predeces-
sors sapped the cohesion of Cocom.
Disintegration. "I don't know at what
point Cocom began to disintegrate, but I
concede that it has," says Lawrence J.
Brady, the new Assistant Secretary of
Commerce-designate for trade. Brady is
an avowed critic of high-technology sales
to the Soviets, and his appointment is a
clear signal that the U. S. position is
hardening. "Multinational controls can
stolen samples or bribed
an employee to do so, notes
a European intelligence
specialist; "you can easily
take 20,000 semiconductors
out in a diplomatic suit-
case." Sources in Washing-'
ton say that the KGB has 30
agents in California's Sili-'
con Valley, plus others in
Phoenix and Dallas-all
charged with obtaining
data on microelectronics
technology.
Once the Kremlin ob-.
tains a semiconductor chip,
the Soviets are adept at
"reverse engineering"- in-
dustry jargon for shaving
the chip down by hair-thin
layers and photographing
the circuitry exposed in the
process. This yields a
three-dimensional schematic of the mi-
crocircuits. Control Data Corp. late last
year obtained a Soviet-made micropro-
cessor and, after reverse engineering and
analysis, the Minneapolis computer
maker estimates that Russia's semicon-
ductor technology lags behind that of the.
U. S. by only about three years.
Long lags. In practice, says John D.
Shea, president of Technology Analysis
Group Inc., a consultant for the Defense
Dept., Soviet spies might do better in
Macy's or some other department store.
Shea asserts that the Soviets can learn
more about semiconductor technology by
buying commercial products than by
stealing defense data. By the time the
Pentagon nails down specifications for a
new chip, calls for bids, and gives a con-,
tract to the lowest bidder, the semicon-
ductor companies are turning out the
next generation of chips for commercial
applications. "The microelectronic de-
vices in toys, automobiles, appliances,'
and industrial tools are more sophisu- 1
COi:.TI;.U?~D ~
 Approved For Release 2007/03/06: CIA-RDP88B00443R001003880163-5
cated than tames in our weapons and assistant U. S. atti , they remain im-
satellites," S1 maintains. mune from restric s: "There is noth-.
According to a position paper just
published by the Computer & Business
Equipment Manufacturers Assn., a
trade organization, the government's
methods of controlling technology trans-
fer have not adjusted to this accelerating
rate of change in the technological con-
tent of commercial products. The paper
'Front' companies score.
Smuggling in a suitcase,
or simply buying in a store
also argues that the U. S. embargo had
no chance of succeeding because what
the Soviets cannot obtain from U. S.
companies can almost invariably be pur-
chased elsewhere.
Many trade experts doubt that illicit
shipments have even unofficial sanction
of Comm governments. Instead, they
hold that businessmen, especially small
businessmen in both Europe and the
M S., are the culprits-and are more
yr ling to risk violating export controls
during economic slumps. "Then the prof-
it motive supersedes the sense of patrio-
tisim," sighs a federal official. Philip R.
Boive,n, regional director of investiga-
tions for the U. S. Customs Service in
San Francisco, points out that unli-
ceased exports of embargoed goods in-
creased significantly during the 1975 re-
cession, and the same thing seems to be
happening now. Allegations of export-
control violations in the U. S. climbed
last year to 350, up from 200 in 1979.
Violations. Bowen says that since 1976
his office has handled about 25 cases
involving high-technology violations,
and he expects perhaps 10 more this
year. Recent examples include:
e Continental Technology Corp., a Tor-
rance (Calif.) company jointly run by a
West German and a naturalized-U. S.
citizen born in Russia, is suspected of
buying about $15 million worth of ad-
vanced electronics equipment and laun-
dering it through 11 front companies to
the Communist bloc. The case is before a
Los Angeles grand jury.
^ Two executives of Quest Electronics, a
Santa Clara (Calif.) electronics distribu-
tor, were arrested last October and
charged with conspiring to export ille-
gally some $10,000 worth of computer-
circuit chips stolen from Intel Corp.
^ Last January, Walter J. Spawr, presi-
dent of Spawr Optical Research Inc., in
Corona, Calif., and his wife were con-
victed of shipping mirrors for high-ener-
gy lasers to the Soviet Union by way of
Switzerland. The mirrors sold to Moscow
were identical to those purchased by the
U. S. Air Force Weapons Laboratory.
The company was fined $100,000, but
the Spawrs are appealing. During the
appeal process, notes Theodore W. Wu,
ing to keep them from doing it again."
Pressure. Small companies can be easy
prey for KGB agents. One common tactic
is for a Russian agent to set up a local
business as a front and begin buying
nonsensitive products from a supplier of,
say, equipment for making semiconduc-
tor chips. Gradually, the agent increases
his purchases until the point where the
Kremlin indirectly accounts for a sub-
stantial portion of the vendor's sales.
Then the agent uses that leverage to per-
suade the supplier to sell the.export-con-
trolled equipment, and the equipment is
diverted to a "drop" in Austria or such
non-Cocom countries as Liechtenstein,
Switzerland, or Sweden. From there, it
is reexported to one or more countries,
ultimately ending up in Russia. A trade
expert in Scandinavia notes that Finland
is another funnel for a lot of high-tech
goods, "but you'll never find it in their
export statistics-unless you happen to
notice the unusual volume of shipments
to such places as Swaziland."
"Canada is an excellent location for
front companies," says a Customs Ser-
vice official, "because it's the only coun-
try where you don't need an export
license, if the shipment is for use in Can-
ada." The Reagan Administration is
considering various methods to crack-
down on such practices. One proposal is
to raise the reward fcr information lead-
ing to the conviction of violators from
the current $50,000 to $250,000.
Troubling ties. James Brewster, a London
consultant on Soviet trade, points to a
"very strong French presence" in the
Soviet Union since the Carter embargo.
Shea of TAG is clearly troubled by the
close ties between the two countries. He
points out that Harris Corp., a Florida-
based company, and France's Matra
have formed a joint venture, Matra-Har-
ris, to design and produce semiconduc-
tors in France-and, in April, Matra-
Harris got another partner, Intel Corp.,
a California company that has pioneered
microprocessor technology. What wor-
ries Shea is that Harris is among the
leading producers of semiconductors
that are resistant to radiation damage.
"This is leading-edge technology with
massive military applications," says
Shea, adding that his U. S. intelligence
contacts figure that once the French get
their hands on this knowhow, the So-
viets will field it in military systems
within two or three years.
As a result, Shea asserts that it is
"very probable" that all joint-venture
agreements involving high-technology
transfer and any foreign company will in
the future require federal approval. Key
personnel at Defense and Commerce
want such deals to be reviewed just as if
they involved military hardware. ^
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N.;- i ZONAL AFFA1 S
. - 12 November 1979
IVP
OL, U.
W., A
Asia most real-life espionage stories, the
details are hazy even now. But sometime in
the early 1970s, U.S. intelligence officials
say, a train carrying an 113M 370 computer
sold to Poland by a E' ropean firm myste-
riously broke down along the border be-
tween Poland and the Soviet Union. When
the train began rolling again, the computer
was no longer aboard. In March 1973,
o f~,icials say, Soviet authorities contacted a
European computer ffii K ra to buy spare
parts for an IBM 370. The parts were
available, they were told, but the firm
needed to know the serial number of the
computer. Sure enough, the serial number
turned out to be that of .the missing
IBM 370-then amongtlae' most so-
phisticated computers in Elie world.
The computer's apparent: diversion
into Russian hands is an extreme
ca;-but in many less dramatic ways,
L.S. officials believe, the Sovi t Union -
is stepping up its attempts to steal U.S.
military and technological secrets by
penetrating American industry. "We
can lock up everything in the Penta-
gon," says FBI chiefWilliam Webster,
"but the same information may be in a
saf in acompany building" where it is
"much more vulnerable." Safeguard
i.g those secrets is a gargantuan task:
some 11,000 firms have access to clas-
sined defense information, and about
000 of their employe have top-
120
,
secret clearances. Both theFBI and the
-Central Intelligence Agency intensi-
fied security checks of industrial
firms-but CIA director StansfleId
strings attachedmay not be obvious at first,"
an FBI official says. "Nevertheless, the busi-
nessman is slowly drawn into a foreign intel-
ligence network."
Knowledgeable spies can reap a rich
harvest of advanced technical data without
resorting to skulduggery. The Soviets, for
example, subscribe to a biweekly report on
-current scientific research published by the
government-run National Technical Infor-
mation Service. It collates only unclassified
research, but some of the papers provide
valuable technical clues-"a running ac-
count of the level of U.S. technology on a
very, very timely basis," says one U.S.
Turner termed the CIA's findings "' 1' `?e'
0
and lasers. Federal export regulations re-
strict the sale of products that could be of
military value to the Soviet bloc-but the
rules can be difficult to apply, forcing case-
by-case evaluations. "We will license [the
export of] computers ofa certain size," says
aU.S. Commerce Department official. "But
we will absolutely not license ... the tech-
nology to produce them." Some American
firms dodge the regulations in order to make
a sale. Last month, two former executives of
I.I. Industries pleaded guilty to the ille
gal sale of semiconductor-manufacturing
equipment worth S300,000 to East Ger-
many. Similar sales by other firms could
total as much as S35 million.
EQUIPMENT: The Soviet espionage cam-
paign now aims to copy both the product
and the manufacturing process. The CIA
has found, for example, that the microcir-
cuitry inside a Soviet electronic calculator
"discouraging," Soviet snoops are as- An IBM 370 disappears in Poland-Steppedup efforts to steal U.S. technological secrets
med to monitor communications at
sli
major defense plants, and last Febru-
ary six Boeing Co. employees lost their expert- The Soviet Union has a standing
security clearances because they carelessly request to receive microfilm copies of all
sent information about. the MX missile over documents relating to such fields as "mis-
an ordinary phone line-. sile technology" and "optics and lasers."
a;zisE&TheSoviet?bloccountresemploya Inevitably, a document or two turns out to
vide range of techniques to crib American have been improperly declassified_.:
technological innovations. FBI agents in Similarly, participants in scientific meet
Chicago, for example, are investigating a ings that routinely include Soviet experts
case inwhich thePolishGovernment appar- often seem "lax . _. about the protection of
ently setup a dummy corporation to acquire militarily significant technologies," com-
industrial data that had been embargoed for plains J. Fred Bucy, president of Texas In-
export toCorn=rnn.istcountries. And a Res- struments. And Websterisconcernedby the
ton, Va., computer firm told the FBI. in influx of visiting scientists and businessmen
September that one of its executives had from the Communist bloc. One Hungarian
been offered a 5500,0400 bribe by a Soviet physicist was allowed to study magnetic-
agent for a copy of an unclassified birof bubble memories for computers-until a
defectorrevealedtheHungarianhadadead-
software used to program thecomputersofa
number of major corporations, including: line for delivering a prototype to Moscow.
Gulf Oil and Citibank. Companies in finan- i Controlling the spread of sophisticated
cial trouble are special targets for foreign! Americanitechnology becomes more diffi-
agents, who offer much-needed contracts, cult when: scientific breakthroughs enter
then demand help in circumventing U.S. commercial production, as they have in
export regulations."Theimplicatioasofthe computers, microelectronics,. fiber optics
duplicated that of an American-made mod-
el--a relatively simple bit of "reverse engi-
neering." But U.S. experts were disturbed
that the Soviets had also obtained advanced
American-made equipment to manufac-
ture the microcircuits, probably through a
legal sale to Yugoslavia.
Stemming the steady leakage of Ameri-
can technology poses a series of policy
dilemmas for U.S. officials. It is one thing to
crack down on espionage or illegal sales.
But many American advances are there
for the asking. Sophisticated technology is
America's most competitive export on the
world market, and the free exchange of
technical information is highly valued by
scientists. The Soviet bloc's access to scien-
tific research can be eliminated only by
suppressing scientific debate and business
enterprise-and so far no one seems willing
to go that far. ' . -
TOM MORGANTHAU with DAVLD C MARTIN
and ELAINE SHANNON in Wathingtan
 Approved For Release 2007/03/06: CIA-RDP88B00443R001003880163-5
$TICLE APPL:t,?~,a HE WALL STREET JOURNAL
ON PIGS A / 28 April 1981
The Silica - Spies :
Semiconductor Firrris
?
That there is! a hunger for these "hi-tech" Husband and Wife Convicted
goods -behind. 'the Irorr? Curtain is. unques-
tioned. Although-.the Soviet Union. I! well y. ? Producers themselves are
ahead of the U.S. in conventional military involved ui-violations of the federal ban on
firepower, it is believed to tag behind in its shipments to the Soviets. Last December,
electronic arsenal. To protect this technolog- Spawr Optical. Research Inc., ? a Corona, I
ical edge;. the-U.S. government. has made it Calif. company; and its husband and wife
illegal to export certain- high-technology Los Angeles convicted by a federal jury in
equipment to, the Soviet Bloc. and, other un-
friendly- nations without a'Commerce De- nology laser mirrors, now being.testeJ for
use ' kill
t
Are Plagued :by Thefts
Of ` i-Tech' Materials
Federal, State `Lawmen Say
Soviet Blocs Getting
Many Ilteg-ai. Shipments
Intel` Corj Pi s
By MARILYN CHASg and.JIJi DRINKHALL
Staff Reporter, 071m t'y'.4LL3T' sSrJooRYA1..
S NNYVALE, 'Calif.-it looked like
simple larceny when- S&t;C4) of serhiconduc-
tor chips disappeared-from Advanced Micro
Devices Inc.-an increasingly common oc-
currence here jn. the . technology-rich
"Silicon Valley."
"Somebody just walked 1w off the street-
and took the parts right out of inventory,"
says W.J. Sanders; the president of the com-
pany. "It was embarrasssinn."
What gives a sinister dimension to-the"
heist is that the stolen circuits had been de=
signed to military, specifications for use in
the nation's missile- and aerospace pro-
grams. Where these chips- are now is a
S?4,000 question. The fear is that they'll turn-
up in somebody else's missiles, possibly the
Russians'. It wouldn't be the first time.
Says Assistant U.S.' Attorney Theodore
Wu, who is conducting a federal grand-jury
investigation in Los Ange_tes of technological
espionage, "The Silicon Valley and Southern
California are the. cradles oi=- the= illegal and
clandestine shipment of strategic goods to
the Soviet Blec." In San Jose:. in the heart of
the "valley," the Santa C:~ara-Coilnty sher-
iff's office is conducting its own.investiga-
lion of the. disappearance of sophisticated
electronics equipment- - .
A Race With the Soviets
Thefts and diversion of electronic compo-
nents have occurred at such major produc-
ers as Intel Corp.,- Texas Instruments Inc:
and National Semiconductn. Corp- as well
as many 'smaller--colnp .cries. The cost of
thefts to Silicon Valley wrrpanies. alone is
running about $20 million a year, industry
sources say-
ellites;: to the Soviet Union
'partment ' license. . Some equipment is sa
banned _ altneether"4'frnm export , to those via agents Ge anY and Switzerland.. The
Breaches in. this security walt.are. coming
hot' only from outright thefts : of strategic
equipment".-but: "also from?-.its- diversion
through transshipments by seemingly legiti-
mate middlemen and distributors.
.:. At the moment; both the Los Angeles fed-
eral grand jury ' and . Santa Clara County
:sheriffs- investigations are focusing on the
activities of:two international businessmen
and onetime. partners: Werner Bruchhau-
sen, 41, a German national who-now lives in
Monte Carlo, and Anatoli Maluta, 46, a Rus-
sian-born naturalized U.S. citizen who lives
Using-"Shell": Companies, '
Search-warrant affidavits filed'in state
lion to ship the mirrors by the Commerce
bepartment for national: security reasons.
Their conviction-fsbeing appealed.
'How strategic merchandise is moved to
Russia was well illustrated by the 1979 pros
'ecution of Lt-Industries; .a Sunnyvale com-
pany, in federal court-in San Francisco: The
company and its then-owners were' con-
victed of shipping semiconductor-processing
equipment to the Soviets without a govern
ment license. (I.I.. Industries has since been
old- to new owners.)? - _ '..
Court records . show' that the -company
mislabeled. the equipment as goods that
didn't need. an- export license, - such'. as
"commercial washing "machines" and
"industrial ovens." It then' shipped the
this year described. Messrv. Bruchhausen 11 equipment to Canada, which doesn't require
and Maluta as "major outlets" for allegedly. 11 a license. From there, the equipment was
stolen chins tfirouah.anvwhere frnm ii ra sn ;1 transshipped to Russia via Switzerland. -:. ,
corporate;-'shells" theycontrol.
In one recent . incident, U.S. Customs
agents in Los,Angeles.seized a missile-guid-
ance system manufactured by - Watkins-
Johnson Co. of Palo Alto, Calif. and awaiting
shipment to the Soviet Union. Details of the
seizure were sealed by a federal judge in
Los Angeles. But investigators say the mili-
tary contractor had sold the guidance sys-
tern to Continental Technology Corp., a com-
pany allegedly controlled by Mr. Bruchhau-
sen_ and Mr. -Maluta. Corporation papers
show that Continental's officers are Mr.
Maluta and two West Germans, the latter
described as "associates" of Mr. Bruchhau-
?sen, according to.law-enforcement sources.-.4
Watkns'Johnson declines all comment on
the incident Mr. Maluta's lawyer says- that
when hewas told that Mr. Bruchhausen had.
set up the sale to the Soviets through asso- !
ciates in West Germany, his client severed
his business relationship with Mr. Bruchhau-
sen.-. Mr: Bruchhausen couldn't be reached
for comment.. :. -_ >. .,
identified as Richard Mueller, a German na-
tional. Customs investigators' reports-.on
file at the agency, identify Mr. Mueller as,
working for another German... Eugena
Schwartz-Nitzska, who is described as hay
ing "strong ties" to the Soviet Trade minis-,
try. Although indicted in the case, Mr.
Mueller never returned to the U.S..?_ .;. '.
-Just before the-government investigators
closed in on the operation. Customs. agents
sabotaged -a- final shipment bound for Rus
sia;'taking ouC the electronic. equipment and
substituting six tons' -dfW'sandbags, which
were duly shipped on to'Moscow. What hap-
pened when- the crates - were opened has
never been verified; but a Customs agent
says, "We never ran into Mueller again.".. .
The search warrants filed in the Bruch-
hausen-Maluta case by the orognhized.crime
unit-of the Santa-Clara County sheriff's de-
partment provide a detailed overview of the
workings of the vast gray market in high-
technology electronic materials.
In November 1979, about -10,000 chips
(then selling for about $100. each) disap-
peared from Intel Corp.'s Santa Clara ware-
house.- They were- tiny memory circuits,
called "2732s," capable of storing.32,000 bits
of data on their fingernail-sized surfaceA
building block of the rapidly expanding mi-
croprocessor technology,.,,2732s were hotly!
demanded for all. manner of products, from
electronic games and Xerox machines to ra-
dar-jamming.-.equipment'and 'missile-guid-
ance,~-systems = Customers' couldn't-get:
enough of-:thein ~:~ =`'=~:f::::~;}? -..'~s;:i~:::
 -marker
PicaWrth~
.a. a gence agents or former agents
11
no, -e: rior to gaining is ci ens
the IanDorn _ r.. uta work or
U.S Air Force intelligence in rman
e
"pe ormin sensitive uses , aw-en orce-
ment sources say. is awyer con irms that
e e a -seem c earance.
- To Silicon Vale v awmen, the involve-
ment of a former U.S. intelligence operative
with aman who ea re uarywi e
vies Board o Trade gives fie invesuganon a
enin am i i
$ ku ry
"14 uta s a wi card," says Douglas
Sout epu
hard d ty distr attorney
i ct or Santa
ara unty, w o is prosecuting the e
"We don't know w at e s saying to e
era! nd ' It
7 rY. gets very amen n
is .: t scares me, on ge any a acs
m e s at a Loc s e s epu-.
es wonder aloud w ,ic sloe . r. u i
really on... .,.; r.~. _
Rio er mtetligence connection clouds
the cac f 1 1 In rr~ ~a --~-ps res in,
c., partner YYlul 1Y:6.. 1YLUCUCI,; we'~erman
W o i e y s i semiconductor ma-
c nery
to Russia, had wor to 23 years in
the U.S. Arill I lin
p
ence enc , accordm rec o sin
San Francisco federal--court. A Dub ,
Breslin was the ea o a comany used by
W. Mueller to evade usromc ,n t p
for comment.
Size-"Loa ?r American;know-how'and equipment have.coptributed . to .S6vl6(r, 3NgIi~>'~ -
j
military might. This is- the ".first 'bof. a? three-part series. 'exarning~ how ,the
Russian military has taken adv?ntade' of . U.S. ;technology `): ,t;. r .:.
 Approved For Release 2007/03/06: CIA-RDP88B00443R001003880163-5
S . ?
spy war in.which Western intelligence
n WICH Mew Soviet
rc
counterparts tram tile oar rooms o
i icon era ley toheiac - alleys of on g
ong'
... ,
"One thin; rd haym to say," said Fran.
cis W. "Bud' Dluiien: deputy..FBI Direc-
tor, "is that a lot -. the thin
gs we.ac
-
complish are things you will-
never
hear.
about: transactions ti~at.never occurred
because we stopped them.
"I think you will appreciate;, that often
it is- not in tha,(Amerlcan~ national. inter,
est to,-broadcast -what - we~ know `abio;iit
what they-(theeFtl3) aredoing"
COSTICK. %VHOV operates tinderfewer
restraintsthan, Mullen. told::insa> recent
report~. of;,-&~ dramatic-,
= B , i
in an'apparent, eliort.tii:obtain damaging
'data
'
In this case; a-. man:- calling.
himself-,
Dawe approacheofficials' of the:
Peninsula National; inc- 3xill Burlingame .
`
-with, an. offer.-_ta~buy thi*-
b
Costick said:_that'Daw e: p resen t edl et-
tern of credit worth s" million: as part of
his offer. The-,, cr N-fik~*is-,fou.nd t6
na yacl. VV Laid>JVo4rw?wacL ?a,rc- .
veer.~r.,,ti,.~-a,a-~e;.-ti,.,,.n_-;a,r,.r_va r,..: -'198a.after"-the Carter- administrationr:'
ceived- a:.la-year.-jail term- 'Even though
us," the- officials said.'
obal a viers
3ewsng LYLacn-ne t.o.: 11aa? nuiuiu .. , '.. -,- . __.: .. .... _ .. :..., ,
tvnrth more 4he..` C1M nM IZY.?1979"; ~ U:Sr - goods-'sokT to-the?-
noted, for example, that. in:1914 Singer
this
century, even before the 1917 Bol-.. That :amount.: is- roughly one-third, of
shevik Revolution: A 198Q Senate study the. tradean 197a between the U.S.. and-:.
guaranteed through,;tbe Moscaw-Narodnlr INTERNAL COMMERCE Department
Bank.... ; I nd CIA studies have concluded tnat he.
The CIA discover ed 'that=?Dawe. was= Soviets can use the Spawn laser mirrors'.
xea y Law eng i -xi from
ong ong to burn holes in U.S. spy and early warn.
-
ri is inteui?
LILLY i in? a e i es.
information about. awe Soviet engineers apparently are study
no a .. 1 7 .
anking investigation was auncee _
"MY INFORMATION"is that; Law-
Sheng Moh-was trying to buy. atleast two'
.other California banks because bank own-
--era
people. whocanof Commerce's National Technical
-Information Service'
_