COVER

THE NEW SPY WARS

Canada is a key target in the global race for economic secrets

NOMI MORRIS September 2 1996
COVER

THE NEW SPY WARS

Canada is a key target in the global race for economic secrets

NOMI MORRIS September 2 1996

THE NEW SPY WARS

COVER

Canada is a key target in the global race for economic secrets

NOMI MORRIS

We have slain a large dragon, but we now live in a jungle filled with a bewildering variety of poisonous snakes.

—Then-CIA director R. James Woolsey in a 1993 agency mission statement for the post-Cold War era

On the roof of the Chinese Embassy in Ottawa, just down the road from the Prime Minister’s residence on Sussex Drive, there are two grey huts of the type intelligence services commonly use to conceal sophisticated eavesdropping equipment. The embassy is located on high ground so the huts cannot be seen from the main road. What can be seen spiking upwards all along the roof’s perimeter is a series of lightning rods, metal posts that can conduct electricity during a storm to prevent sensitive electronic gadgets from short-circuiting. Not far away, on the top of the Japanese Embassy, a type of antenna designed for intercepting communications reaches blatantly skyward. Even the embassy of the United States, directly across from Parliament Hill’s Centre Block, has a concrete hut on its roof similar to those U.S. intelligence agents are known to use to disguise embassybased surveillance operations. The roof has an unobstructed view straight into the cabinet’s meeting

While the Cold War may be over, the spy game certainly is not. And Canada, as demonstrated by two major spying incidents within the past year, is a key player—both as a target of foreign espi-

onage and, more controversially, as a clandestine collector of international intelligence. Many Canadians were surprised when ex-employee Jane Shorten revealed last fall that Ottawa’s top-secret foreign surveillance agency, the Communications Security Establishment (CSE), had spied on Canada’s supposed friends Japan, South Korea and Mexico (page 32). Then in May, the Canadian Security Intelligence Service (CSIS), responsible for domestic counterespionage, exposed a Russian couple who had stolen the names Ian Lambert and Laurie Brodie from the graves of dead Canadian children in order to build identities—known in spy circles as “legends”—that would allow them to carry out intelligence activities in Canada or in other countries. Although officials made few comments about either development, both incidents pointed to the new growth area in espionage: economic secrets.

“Once the Cold War came to a somewhat abrupt halt, people naively thought you could get a peace dividend, declare a victory, hold a parade and go into retirement,” says Reg Whitaker, a political science professor at Toronto’s York University who is writing a book about CSIS.

“But none of the conditions that led to spying have changed. It is a world of

states with their own interests and their own secrets to protect. Economic interests are coming to the fore.”

So much for all the predictions that spy novelists could retire along with Red Army generals after the Soviet Union collapsed in 1991. In the industrialized world, terrorism has replaced communism as the greatest perceived threat to national security. And with the globalization of trade, economic strength rather than military might have become the new buzzwords of national interest. Security and intelligence services are pledging to better co-operate on issues of terror, organized crime and drug smuggling. But regional trading blocs have redrawn the old maps of who is allied with whom, while new economic competitors from Eastern Europe and Asia are hungry for industrial secrets as they strive to catch up with the West. Perhaps most unsettling, there has been a deterioration of the traditionally friendly intelligence relationship between longtime allies such as Canada and the United States.

Today, American insiders say that Washington covertly targets Canada over a range of issues, including the North American Free Trade Agreement, business with Cuba—and domestic politics. “Quebec has certainly caught our attention and the western provinces are a real question mark,” says Roger Robinson, a Washington consultant who was a senior director of the U.S. National Security Council during part of the Reagan administration. “Western Canada may become a good deal closer to the United States than the balance of Canada in the early 21st

race for economic secrets

century. These are economically important provinces. Our intelligence services have to watch them and what is happening with them, very carefully.”

Another senior U.S. intelligence source, who spoke to Maclean’s on condition he not be named, confirmed that intelligence ties between the two countries have become much more adversarial in recent years. “There are many intelligence studies being conducted right now on the dismemberment of Canada and the opportunity for the United States to acquire additional states,” says the source, an expert at a major think-tank who acts as an adviser to the White House and the CIA. “It is conceded within the intelligence community that Ontario would never come in but the feeling is that there are very good chances for British Columbia, Alberta and possibly Saskatchewan.” Canadians, he adds, are naïve about the “imperial American mind” and continuing U.S. expansionism. “It is very possible that some time in the next century some of the Canadian provinces will become American states. It is the task of the American intelligence agencies to prepare the ground, and that is what is happening.”

Robinson also sees rifts over global politics as a factor in the decline of the North American intelligence relationship. “Canada does not side with us in efforts to economically isolate rogue states,” he says. ‘We see that with Cuba now, and I suspect we will see it in a much more significant way with China in the future.”

Officially, of course, there is nothing unfriendly going on. Andrew Koss, spokesman at the American Embassy in Ottawa, said it is standard policy not to comment on intelligence matters. But he dismissed as “ridiculous” suggestions that there is interception equipment on the roof of the embassy building that is used to acquire information on Canada and other countries. Jacques Simard, Ottawa’s spokesman on intelligence, simply pointed to an agreement that Canada and the United States will not target each other. “I’m convinced the Americans are respecting this agreement,” he said. The Japanese and

Chinese embassies denied spying in Canada.

Yet if the covert behavior between friends in North America has become less courteous, it is even more hostile on the global level. Last year, Japan lodged a formal complaint after CIA agents eavesdropped on Tokyo officials during sensitive auto-trade negotiations. At June’s economic summit of the world’s seven biggest industrial nations in Lyon, France, American security officers advised all members of the U.S. delegation to expect espionage. When Charlene Barshefsky, the acting U.S. trade representative, and Laura Tyson, chairman of the National Economic Council, took time out for an elegant dinner at the gourmet restaurant Le Passage, they lugged all of their bulky documents along, stuffing them awkwardly under the table and chairs. As one member of the delegation explained: “The French are notorious for economic espionage and spying on their friends.”

But according to Japanese officials, it was the Americans who were scooping up all the electronic communications leaving the G-7 summit. Every classified message that the delegations sent home was almost certainly intercepted by the massive arrays of antennas of the U.S. National Security Agency. Ottawa’s own electronic

'We have lost a sense of who is a good guy, who is

surveillance group, the CSE, also monitors messages from G-7 summits and other global conferences, says ex-employee Shorten.

The plots constantly thicken. In August, security experts at the European Union’s Luxembourg offices said they had found evidence that American agents had penetrated—by way of the Internet—the electronic mail that links 5,000 EU elected officials and bureaucrats. The Americans reportedly used some of that information to help them in last year’s negotiations on the General Agreement on Tariffs and Trade.

Yet U.S.—and Canadian—intelligence officials still claim a higher moral ground. The only recipients of North American trade intelligence are governments, they say, not private firms. In Europe and Asia, state agencies reportedly pass information to domestic companies that could benefit. “The view of where government interests and where private-sector interests begin is quite different around the world,” says Samuel Porteous, a strategic analyst specializing in economic intelligence at CSIS (commonly pronounced see-sis). The Canadian agency pursues corporate counterespionage operations only when it suspects the perpetrator is a foreign state. For company-to-company spying, the private sector is left to its own security systems and the police (page 35). In the United States, the Clinton administration has pushed the CIA into what policy-makers there consider a defensive rather than offensive pursuit: uncovering corruption and “sharp practices”—bribery, sabotage and other methods foreign corporations use to win international contracts.

The United States is the only country that has made it illegal for its citizens to pay bribes to clinch foreign deals, and it has become increasingly angry about what it views as an unequal playing field. Toronto-area Liberal MP Derek Lee, who heads Parliament’s spywatching subcommittee, is convinced the CIA uncovered information that led to the current RCMP investigation of Brian Mulroney and others for allegedly accepting bribes from the European Airbus Industrie consortium, which sold 34 airplanes to Air Canada in 1988. U.S. giants Boeing and McDonnell Douglas lost out. “Our current circumstance involving Airbus is, I think, a direct result of the American decision to use its agencies to track illegal trade practices abroad,” says Lee.

The divide between public and private interests is even murkier

in other parts of the world. China and Russia now rank among the most aggressive gatherers of economic espionage. When U.S. trade envoy Barshefsky flew into Beijing in June to reprimand Chinese companies for pirating American entertainment and computj er software, the U.S. Embassy sent a security team to “sweep” her j hotel suite for electronic eavesdropping devices. They found so many obvious bugs—not just in the telephone, but also in the bed, the shower and the armchair—that the agents just had to laugh. There was even a hidden camera. In order to save face, no complaint was made. But Barshefsky later told friends that upon jumping out of bed each morning, she “got dressed fast.”

In Russia, the turmoil of recent years has led to a growing economic nationalism among many in the leadership who believe Western countries prefer to keep the former superpower weak. Moscow has again stepped up its intelligence-gathering after a five-year hiatus, during which the former KGB fell into chaotic infighting and was transformed into the current Federal Security Service. Yuri Kobaladze, a major-general in the agency who was himself once expelled from Britain for spying, says Russia has closed about 30 covert stations worldwide. Yet Alexander Lebed, President Boris Yeltsin’s powerful new security chief, has publicly urged more spying on banks and foreign companies and wants to see Russian firms abroad used for corporate espionage. Last February, Yeltsin explicitly ordered officials to make better use of industrial intelligence to close the technology gap with the West.

“There is definitely a chill in American-Russian post-Cold War relations,” ex-CIA director James Woolsey told Maclean’s during a recent visit to Moscow. Adds Sergei Markov, a Moscow analyst for the Carnegie Endowment for International Peace: “The honeymoon is over. Russia is back to a more natural relationship with the West. Relations won’t be as bad as they were under communism, but there is lots of competition.”

The Russian policy was on display during the pre-election month of May, which saw one of the biggest East-West spy scandals since the Cold War. The Russian security service publicly accused nine British diplomats of spying after a Russian official was arrested for selling military information. Moscow eventually expelled four of the envoys. London retaliated by expelling four Russian diplomats.

In the same month in Moscow, an Estonian diplomat was also sent home and an American businessman who admitted buying information was kicked out.

Then in June, Ottawa sent the mysterious “Lamberts” back to Russia. If security officials there feel the pair is too compromised to continue spying in other countries, they will likely teach at the academy of the Federal Security Service or move into a commercial business with secret service links, say Moscow analysts. “I have no reason to believe that they’re in any danger of any kind,” CSIS head Ward Elcock told an Ottawa parliamentary hearing on

national security. Although Elcock gave few details, he confirmed that the couple—whose real names are Dmitriy Vladimirovich Olshanskiy and Yelena Borisovna Olshanskaya—were under surveillance for a long time. And when asked who paid their legal costs, he answered: “Not us, Mr. Chairman.”

In former times, CSIS would have attempted to “turn” the Russians, getting them to spy on Moscow for Ottawa. But in the current environment, it was more useful to send Moscow a message to “clean up their act,” says MP Lee. He is among those who believe CSIS may also have wanted to expose the pair to “show Canadians what is going on” in the world of espionage at a time when pressure is on to downsize the counterintelligence group. Giorgy Arbatov, head of Moscow’s USA-Canada Institute agrees: “Every organization wants to perpetuate itself and hopefully to grow—even if they lose their raison d’être.”

In fact, by 1998, CSIS will have cut its budget to $155 million from its 1993 peak of $244 million, and reduced personnel by more than 700 people—to 2,021—since 1992. But the agency did move into a new $153-million state-of-the-art headquarters in 1995. Although terrorism remains the top priority, Prime Minister Jean Chrétien

has given both CSIS and the CSE an increased mandate

to deal with trade intelligence. According to CSIS, there are 24 countries conducting state-sponsored corporate espionage in Canada. Who they are is classified, but varied reports have identified Russia, China and Japan as

the biggest players, as well as Taiwan, South Korea, France, Germany, Brazil, Israel and even Cuba. “Despite our tendency to downgrade where we fit in the world, we are a member of the G-7, we do have first-class firms in this country, we have technologies that aren’t available elsewhere,” says CSIS analyst Porteous.

In the United States, where the theft of technology and other proprietary information is estimated to cost American business more than $135 billion a year, efforts have gone even further. Members of the Senate introduced three different bills this year that would make it easier for law-enforcement agencies to fight for-

eign corporate espionage. The CIA, which in 1989 had 20,000 people and devoted some 75 per cent of its resources to fighting the Soviet threat, has staved off massive cuts. It reduced personnel to 17,000 and transferred the bulk of agents to the new growth areas: terror, organized crime, arms proliferation, money laundering—and corporate espionage.

An increase in unemployed secret agents since the Cold War ended—and in the mass availability of advanced technology—has made corporate spying much easier. A survey of 325 U.S. corporations done in March for the American Society for Industrial Security found that cases of theft of corporate information tripled between 1992 and 1995. Canada was the leading foreign site for thefts from manufacturers—which appeared to confirm fears that Canada is a prime location for corporate spies from other countries to penetrate U.S. multinationals. The previous month, FBI Director Louis Freeh told a Senate hearing that his agency was investigating about 800 cases of economic spying in the United States involving 23 foreign countries. Individual Canadians were among them, but an FBI source says Ottawa was not in-

Things are tougher and everybody wants to keep an edge'

volved. “When it comes to Canada-U.S. economic espionage, it is companies spying on companies,” he says.

In a recent report on “government-directed” foreign economic espionage in the United States, the CIA named France, Israel, Russia and China as major offenders, but effectively cleared Canada and Japan.

A certain amount of economic espionage has always been around. During the 1987-1988 Canada-U.S. free trade negotiations, for example, Canadian envoys Simon Riesman and Gordon Ritchie were so concerned about the possibility of the Americans spying that they began to confer only in “safe” rooms. But with the common Soviet enemy gone, the delicate diplomatic dance of co-operate and compete has tilted towards compete. Friendly countries used to handle intrusions rather like problems in the family. No more. “What’s ‘friendly’ when you are stealing industrial secrets?” asks Lee. “The line has blurred. The old Cold War paradigms have mutated to the point where we have lost a sense of what’s right and wrong, what’s good and bad, who is a good guy, who is a bad guy. We now have to start defining the spectrum in terms of Canadian interests.”

Protecting those interests means Canada must keep its guard up, even with its closest allies. During his February, 1995, trip to Ottawa, U.S. President Bill Clinton was given a tour of Parliament Hill by Chrétien. In the cabinet room, Clinton peeked through the curtains and remarked: “What a lovely view. Too bad the curtains are drawn.” Chrétien said jokingly: “They’re closed because the U.S. Embassy looks directly inside the room. But since you’re here, we may as well open them.” Perhaps not too wide.

With WILLIAM LOWTHER in Washington and

JENNIFER GOULD in Moscow