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Originally published Saturday, December 17, 2011 at 10:00 PM

China is the No. 1 hacker threat to U.S. firms

China has made industrial espionage an integral part of its economic policy, stealing company secrets to help it leapfrog over U.S. and other foreign competitors to further its goal of becoming the world's largest economy, U.S. intelligence officials have concluded.

Bloomberg News

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Google and Intel were logical targets for China-based hackers, given the solid-gold intellectual property data stored in their computers. An attack by cyberspies on iBahn, a provider of Internet services to hotels, takes some explaining.

iBahn provides broadband business and entertainment access to guests of Marriott International and other hotel chains, including multinational companies that hold meetings on site. Breaking into iBahn's networks, according to a senior U.S. intelligence official familiar with the matter, may have let hackers see millions of confidential emails, even encrypted ones, as executives from Dubai to New York reported back on everything from new-product development to merger negotiations.

More worrisome, hackers might have used iBahn's system as a launchpad into corporate networks that are connected to it, using traveling employees to create a backdoor to company secrets, said Nick Percoco, head of Trustwave's SpiderLabs, a security firm.

The hackers' interest in companies as small as Salt Lake City-based iBahn illustrates the breadth of China's spying against firms in the U.S. and elsewhere.

The networks of at least 760 companies, research universities, Internet service providers and government agencies were hit over the last decade by the same group of China-based cyberspies.

The companies, including firms such as Research in Motion and Boston Scientific, range from some of the largest corporations to niche innovators in sectors like aerospace, semiconductors, pharmaceuticals and biotechnology, according to intelligence data obtained by Bloomberg News.

"They are stealing everything that isn't bolted down, and it's getting exponentially worse," said U.S. Rep. Mike Rogers, a Michigan Republican who is chairman of the Permanent Select Committee on Intelligence.

China has made industrial espionage an integral part of its economic policy, stealing company secrets to help it leapfrog over U.S. and other foreign competitors to further its goal of becoming the world's largest economy, U.S. intelligence officials have concluded in a report released last month.

"What has been happening over the course of the last five years is that China — let's call it for what it is — has been hacking its way into every corporation it can find listed in Dun & Bradstreet," said Richard Clarke, former special adviser on cybersecurity to former President George W. Bush, at an October conference on network security. "Every corporation in the U.S., every corporation in Asia, every corporation in Germany. And using a vacuum cleaner to suck data out in terabytes and petabytes. I don't think you can overstate the damage to this country that has already been done."

Spy vs. spy

China has consistently denied it has any responsibility for hacking that originated from servers on its soil. Geng Shuang, a spokesman for the Chinese Embassy in Washington, D.C., didn't respond to several emails and phone calls requesting comment. Wang Baodong, another Chinese government spokesman in D.C., also didn't respond to requests for comment.

U.S. cyberspies go after foreign governments and foreign military and terrorist groups, Clarke said.

"We are going after things to defend ourselves against future attacks," he said.

Such accusations intensified when a Nov. 3 report by 14 U.S. intelligence agencies fingered China as the No. 1 hacker threat to U.S. firms. While the Obama administration took the unprecedented step of outing China by name, the White House, U.S. intelligence agencies and members of Congress are struggling to assess how much damage is being done during such attacks and what to do to stop them beyond public rebuke.

For now, the administration is concentrating on raising awareness among company executives and seeking a commitment to improve security against such attacks. Rogers, the lawmaker, has a bill pending in the House that would permit the government to share secret information that would help companies spot hacker intrusions, such as signatures of malicious Chinese software.

Based on what is known of attacks from China, Russia and other countries, a declassified estimate of the value of the blueprints, chemical formulas and other material stolen from U.S. corporate computers in the last year reached almost $500 billion, said Rogers, a former agent for the Federal Bureau of Investigation.

U.S. officials are grappling with how stolen information is being used, said Scott Borg, an economist and director of the U.S. Cyber Consequences Unit, a nonprofit research institute. Calculating the damage depends on hard-to-know variables, such as how effectively and quickly thieves can integrate stolen data into competing products, the senior intelligence official said.

While a precise dollar figure for damage is elusive, the overall magnitude of the attacks is not, Borg said.

"We're talking about stealing entire industries," he said. "This may be the biggest transfer of wealth in a short period of time that the world has ever seen."

Byzantine Foothold

The public evidence against China now being rolled out by the Obama administration, Rogers and others in Congress have been collected by the intelligence community over several years. Many of the details remain classified.

The hackers who attacked iBahn are among the most skilled of at least 17 China-based spying operations the U.S. intelligence community has identified, according to a private security official briefed on the matter who asked not to be identified because of the subject's sensitivity.

The hackers are part of a massive espionage ring code-named Byzantine Foothold by U.S. investigators, according to a person familiar with efforts to track the group. They specialize in infiltrating networks using phishing emails laden with spyware, often passing on the task of exfiltrating data to others.

Segmented tasking among various groups and sophisticated support infrastructure are among the tactics intelligence officials have revealed to Congress to show the hacking is centrally coordinated, the person said.

U.S. investigators estimate Byzantine Foothold is made up of anywhere from several dozen hackers to more than one hundred, said the person, who declined to be identified because the matter is secret.

"The guys who get in first tend to be the best. If you can't get in, the rest of the guys can't do any work," said Richard Bejtlich, chief security officer for Mandiant Corp., an Alexandria, Va.-based security firm that specializes in cyber espionage. "We've seen some real skill problems with the people who are getting the data out. I guess they figure if they haven't been caught by that point, they'll have as many chances as they need to remove the data."

U.S. and other companies have been secretive about the details of their computer security. When Google announced in 2010 that China-based hackers had raided its networks, it was a rare example of a U.S. company publicly revealing a cyberburglary aimed at its intellectual property — in this case, its source code.

Google, the world's largest search-engine firm, said at the time that at least 34 other major companies were victims of the same attack. However, only two — Intel and Adobe Systems — stepped forward, and they provided few specifics.

Google vastly underestimated the scope of the spying. Intelligence documents obtained by Bloomberg News show that China-based hackers have hunted technology and information across dozens of economic sectors and in some of the most obscure corners of the economy, beginning in 2001 and accelerating over the last three years. Many of the victims have been hacked more than once.

An informal working group of private-sector cybersecurity experts and government investigators identified the victims by tracing information sent from hacked company networks to spy group-operated command-and-control servers, according to a person familiar with the process. In some cases, the targets aren't aware they were hacked.

Such tracing is sometimes possible because of sloppiness and mistakes made by the spies, said another senior intelligence official who asked not to be named because the matter is classified. In one instance, a ranking officer in China's People's Liberation Army, or PLA, employed the same server used in cyberspying operations to communicate with his mistress, the intelligence official said.

Many of the cyberattacks have been linked to specific China-related events, a pattern noted by secret diplomatic cables published by WikiLeaks, the anti-secrecy website. During the five-year period beginning in 2006, a second group of China- based hackers ransacked the networks of at least 71 companies, government entities, think-tanks and nonprofit groups, said McAfee, which analyzed information from servers used in the attacks.

The approval of China's most recent five-year economic plan provides another possible link between Chinese government policy and cyberespionage. The plan, approved by the National People's Congress in March, identifies seven priority industries that mirror the most prominent targets of China-based cyberspies, according to the two senior U.S. intelligence officials who have knowledge of the victims.

KPMG International, the auditing firm, said the five-year plan's priorities include clean energy; biotechnology; advanced semiconductors; information technology; high-end manufacturing, such as aerospace and telecom equipment; and biotechnology, including drugs and medical devices.

Tracking activities

U.S. counterintelligence authorities have been tracking China's cyberspies for years under the classified code name Byzantine Hades, which a March 27, 2009, secret State Department cable published by WikiLeaks calls "a group of associated computer network intrusions with an apparent nexus to China."

Byzantine Foothold, Byzantine Candor and Byzantine Anchor represent subsets, or various groups, of the overall Chinese cyber-espionage threat, the person familiar with the secret tracking effort said.

Among the victims of Byzantine Foothold are Internet service providers in more than a dozen countries, including Canada, Switzerland, Bangladesh, Venezuela and Russia. The ISPs are used as platforms to hack other victims and disguise spying activity.

An Oct. 30, 2008, State Department cable described China-based hackers accessing several computer networks of a commercial Internet provider in the U.S. They used the company's systems to extract "at least 50 megabytes of email messages and attached documents, as well as a complete list of usernames and passwords from an unspecified" U.S. government agency, according to the cable.

U.S. government officials considering whether major corporate networks should be protected as a national-security asset face opposition even from some victims protective of the Internet's laissez-fair culture, said Richard Falkenrath, a senior fellow for counterterrorism and national security studies at the Council on Foreign Relations.

"The situation we are in now is the consequence of three decades of hands-off approach by government in the development of the Internet," Falkenrath said.

For now, administration officials have correctly assessed that they lack the leverage to compel China to change its alleged criminal behavior, he said.

"The Cold War is a pretty good analogy," Falkenrath said. "There was never any serious effort to change the internal character of Soviet state."

At a minimum, the November intelligence agency report does throw down a marker in that conflict, said Estonian Defense Minister Mart Laar. Estonia, which suffered a massive cyberattack in 2007 it said originated from Russia — is pushing for a NATO cyber-defense alliance.

"I remember how the Cold War was changed, and you could for the first time feel the Soviet defeat coming when Ronald Reagan called the Evil Empire evil," Laar said.

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