The Technobandits

By Nancy R. Gibbs

Corporal Danny Fudge of the Royal Canadian Mounted Police stopped for coffee in a Yukon fishing village one day last summer and proceeded to make the catch of his life. In the Yukon Motel restaurant in Teslin (pop. 350), the ruddy, barrel-chested Mountie eyed a 300-lb. stranger sitting nearby. He thought he might have seen the man before -- on a wanted poster. The stranger, it turned out, was Charles McVey, a particularly notorious smuggler sought by U.S. Customs officials for illegally exporting millions of dollars' worth of computer equipment to Moscow. The sharp-eyed Corporal Fudge got his man, and is now a decorated hero. McVey sits in a Vancouver jail awaiting extradition proceedings next month.

For years, savvy smugglers, complicit businessmen and well-heeled Soviet officials managed to stay out of sight as they ferried America's technological secrets from West to East. No longer. A string of scandals, beginning with last spring's Toshiba affair, has pushed the issue of high-tech banditry squarely into the spotlight. The stories, many of which lack the happy ending supplied by Corporal Fudge, have strengthened the resolve of U.S. officials to track down and punish those who traffic in the nation's secrets. Earlier this month Commerce Secretary William Verity announced that officials from the NATO allies and Japan will meet early next year to discuss different ways to stop sensitive technology from reaching the Soviet Union.

By working together, Western officials hope to fortify an export-control system that is clearly overloaded, underfunded and outdated. Since World War II, Western countries have jointly agreed on which products should be restricted through the Paris-based Coordinating Committee for Multilateral Export Controls (COCOM). But as new items proliferate, regulatory agencies face what one observer calls a "world of grays," a mass of technical detail required for every licensing decision. Officials are finding it harder to monitor thousands of proscribed exports, as the line between military and civilian products becomes blurred and the potential uses of new products keep changing.

Businessmen are frustrated by the complex regulations that seem to do nothing except complicate their sales. A study by the National Academy of Sciences estimates that U.S. restrictions on high-tech exports cost American firms more than $11 billion annually in lost business. As the U.S. works to reduce its trade deficit and recapture overseas markets, those restrictions amount to a self-imposed trade barrier the U.S. can scarcely afford. Furthermore, maintains Harvard's Lewis Branscomb, former chief scientist at IBM, the scope of restricted items, from straitjackets to wind tunnels, is unnecessarily broad. "It would be nice to ensure that the Russians didn't learn anything important," he says, "but there's just no way to do that."

The U.S. has found itself locked in a philosophical battle with its allies over trade with the Communist world. It is virtually impossible, many Europeans observe, to clench fists and shake hands at the same time. In an era of economic interdependence, they argue, Soviet economic growth could lead to a more sophisticated, more consumer-oriented and ultimately more peaceful U.S.S.R. Some allies resent what they feel is heavy-handed pressure from Washington to keep up cold war suspicions at the precise moment when many nations are working to ease tensions with the Soviet Union.

That conflict between caution and commerce is mirrored within the U.S. Government. The Pentagon and the Commerce Department have battled over the proper level of high-tech sales to the Soviets. Defense officials are acutely aware that the U.S. relies on the technological superiority of its weapons to offset Soviet numerical advantages, and they occasionally snipe at Commerce for missing Moscow's subterfuges. At the same time, Congressmen representing ^ districts dominated by high-tech industries disagree with regulators concerning the levels of control.

Yet the case for relaxing controls is hard to sustain, as new security breaches come to light almost every week. The Toshiba affair, more than any other, focused the West's attention on the scope of the leakage problem. The scandal broke last March, after the U.S. learned that a subsidiary of the Japanese electronics giant had shipped to the U.S.S.R. advanced machines that have enabled the Soviets to build submarines quiet enough to escape U.S. naval detection.

Other alarming cases have since surfaced. Earlier this month two Japanese businessmen and two Hungarian diplomats were indicted in Asheville, N.C., and charged with diverting to Hungary an advanced U.S. laser trimming system used to manufacture semiconductors. The product had been shipped from Charlotte, N.C., to Tokyo as an ordinary "carpet trimmer." From there it was smuggled to Budapest as part of a diplomat's "household goods." The Hungarians, according to the indictment, paid the Japanese $380,000 for their trouble.

One of the most controversial disclosures involved a British subsidiary of a New Jersey firm, Consarc Corp. U.S. officials discovered in 1985 that Consarc had been shipping vacuum furnaces to the Soviet Union for two years, with the approval of British authorities. The high-temperature furnaces had the potential of producing an extremely light and durable fiber, carbon-carbon, used to improve the accuracy of intercontinental ballistic missiles. When the U.S. learned of the case, officials rushed to halt the deal. Though most of the order had already been filled, U.S. authorities prevailed on the British government to stop shipment of the vital heating elements that the Soviets would need to operate at least some of the equipment properly. When informed of the fiasco, the Thatcher government ordered the heating elements destroyed.

Pentagon officials were especially frustrated by the Consarc case because the technology breach was potentially devastating and perfectly legal. Consarc even managed to persuade the British Trade Ministry to insure the project for $11 million. Growled Stephen Bryen, who heads the Pentagon's export-control program: "This was an instance of really bad licensing by the British. It was an absolutely squalid case."

British trade officials are not alone in provoking the wrath of U.S. authorities. In May 1985, according to the French newsmagazine L'Express, five cases of industrial materials were shipped via Air France from Paris to Luxembourg, where the crates were to be placed aboard an Aeroflot plane bound for Moscow. French customs agents had not bothered to check out the cases, but Luxembourg officials demanded they be opened. Inside they found equipment for the manufacture of so-called bubble memory chips, a U.S.-made state-of-the-art semiconductor ideally suited for storing guidance information in missiles. A French firm named Les Accessoires Scientifiques had signed a $7 million contract to provide the Soviets with an entire factory for producing the precious chips.

Of the reigning technobandits, none was more brazen or accomplished than McVey, who had been shipping technology to the Soviet Union and arranging computer-training classes for Soviet engineers since the early 1970s. The equipment transferred reportedly included high-capacity computer disk drives, as well as imaging systems that could be used in the study of satellite photographs. McVey had obtained the products through four companies he controlled in California's Orange County.

U.S. Customs officials finally managed to outwit McVey in early 1982, when he tried to smuggle a Memorex computer out of California on a private plane. When the plane stopped in Houston, Customs inspectors replaced the computer with a load of sand. The sand was duly shipped to the Institute of Space Research in Moscow. McVey's capture last summer foiled his latest scheme: a plan to steal the designs for a new supercomputer being developed by the Saxpy Computer Corp. in Silicon Valley. The computer can be used to track satellites and missiles.

The McVey case highlights the problem of protecting secrets in an open society. The free exchange of information is vital to continued progress in fast-changing fields like computers and lasers. But such openness provides the Soviets with valuable opportunities. For years, the large Soviet consulate in San Francisco has served as an intelligence center from which Moscow monitors Silicon Valley. Soviet agents routinely intercept scientists' telephone calls, sift through unclassified technical publications and, on occasion, plant moles in U.S. industries. For the most part, however, the transfer of technology takes place along quasi-normal lines: through firms in Europe, Japan or elsewhere that are used to transship the pilfered goods to Eastern Europe. For that reason, Western authorities are concentrating their efforts on plugging leaky borders and beefing up enforcement.

Almost everybody agrees that an important step is to simplify the mission of COCOM, which, in an effort to do too much, is letting too many important products slip through. By limiting the number of restricted items, the U.S. could insist on tighter enforcement and higher penalties for violators than under the present system of comprehensive controls. "Higher walls around fewer items" has become a rallying cry for businessmen and Government officials searching for ways to protect truly vital technology without relying on blanket controls.

Some officials point to signs of progress since the scandals of the summer and fall. After years of criticism from Washington, Austria changed its trade laws and promised it would do its best to stop the flow of high-tech goods through Vienna, which is regarded as a major transshipment point. Japanese officials are investigating some 20 cases of technology transfers that may violate COCOM regulations.

For its part, the U.S. announced last month that it will offer to eliminate all licensing requirements for the export of militarily sensitive technology to its Western allies, provided that those countries will tighten their controls governing the export of goods to the Soviet Union. The goal is to allow products to move more freely within the walls of COCOM, even as those walls grow higher and harder for outsiders to breach. That might help American firms reduce what is now a trade deficit in high-tech goods, without doing so at the expense of the country's security.

With reporting by Christopher Redman/Paris and Elaine Shannon/Washington