MI5, FBI warn on China

Business news |
By Nick Flaherty

The directors of the security services in the UK and US have warned of the growing threat to Europe posed by China.

MI5 Director General Ken McCallum and FBI Director Chris Wray spoke to business and academic leaders in London yesterday about the risks of IP theft, cybersecurity and geopolitical risks.

“The most game-changing challenge we face comes from the Chinese Communist Party. It’s covertly applying pressure across the globe. This might feel abstract.  But it’s real and it’s pressing. We need to talk about it. We need to act,” said McCallum.

“We consistently see that it’s the Chinese government that poses the biggest long-term threat to our economic and national security, and by “our,” I mean both of our nations, along with our allies in Europe and elsewhere,” said Wray. “The Chinese government poses an even more serious threat to Western businesses than even many sophisticated businesspeople realize.”

“The aim here is not to cut off from China – one fifth of humanity, with immense talent. China is central to global issues: economic growth, public health, climate change. Having, for example, almost 150,000 Chinese students in the UK’s universities is, in almost all cases, good for them and good for us. The UK wants to engage with China wherever it’s consistent with our national security and our values,” said McCallum at MI5. “We’re talking about the activities of the Chinese Communist Party and certain parts of the Chinese State. We’re not talking about Chinese people – in whom there is so much to admire. We wholeheartedly welcome the Chinese diaspora’s hugely positive contribution to UK life.”

He points to the world-leading expertise, technology, research and commercial advantage developed and held by business and academia in the West, and called for businesses to protect themselves proportionately, while still engaging with the world, including China.

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“If you are involved in cutting-edge tech, AI, advanced research or product development, the chances are your know-how is of material interest to the CCP,” he said. “If you have, or are trying for, a presence in the Chinese market, you’ll be subject to more attention than you might think. It’s been described as “the biggest wealth transfer in human history”. MI5 teams see the CCP working to extract UK advantage in multiple ways,” he said.

The UK has flagged concerns about the ownership of Nexperia by Wingtech of China and the acquisition of the Newport Wafer fab, and also blocked a recent deal for a Chinese company to buy Perpetuus Applied Materials in Wales.

This ranges from theft of intellectual property to technology transfer.

Late last year Chinese intelligence officer Shu Yenjoon was convicted in a US court on charges of economic espionage and theft of trade secrets from the US aviation sector. Shu was active in Europe too: he’d been part of a prolific Ministry of State Security network targeting the aerospace sector. MI5 worked with those being targeted in the UK to mitigate the risks until the FBI action could solve the problem.

He also points to Smith’s Harlow, a UK-based precision engineering firm, which entered into a deal with a Chinese firm, Futures Aerospace, in 2017. The first of three agreed technology transfers saw Futures pay £3m for quality control procedures and training courses.  After further sharing of valuable IP, Futures abandoned the deal and Smith’s Harlow went into administration in 2020.

Both the UK and US have had to take action to stem CCP acquisition of cutting-edge national security advantage. In 2020 the US stopped issuing new visas in certain fields to researchers from People’s Liberation Army (PLA) universities. The UK has reformed the Academic Technology Approval Scheme to harden defences, and over 50 PLA-linked students have left the UK.

This is a European issue, he says, pointing to a retired political scientist and his wife in Germany who together ran a foreign policy think tank passed information to the Chinese intelligence services for almost ten years. In Estonia a NATO maritime scientist was convicted for passing information to his Chinese handlers, who claimed to be working for a think tank. MI5 also issued a UK espionage alert on an individual working in think tanks and academia who was in regular contact with Chinese intelligence officers.

Then there is cyber security. A wide range of government and commercial targets were attacked by the three so-called ‘Advanced Persistent Threat’ groups which the UK government has attributed to China’s Ministry of State Security. Over the last year the UK has shared intelligence with 37 countries to help defend against such espionage and in May disrupted a threat targeting critical aerospace companies. 

“The Chinese Government sees cyber as the pathway to cheat and steal on a massive scale,” said Wray at the FBI.

Last spring, for instance, Microsoft disclosed some previously unknown vulnerabilities targeting Microsoft Exchange Server software. Chinese hackers had used these vulnerabilities to install more than 10,000 backdoors on US networks, giving them persistent access to data on those systems. “That’s just one example of the Chinese government finding and exploiting vulnerabilities, albeit a big one,” he said.

“Over the last few years, we’ve seen Chinese state-sponsored hackers relentlessly looking for ways to compromise unpatched network devices and infrastructure. And Chinese hackers are consistently evolving and adapting their tactics to bypass defences,” he said. “They even monitor network defender accounts and then modify their campaign as needed to remain undetected. They merge their customized hacking toolset with publicly available tools native to the network environment—to obscure their activity by blending into the “noise” and normal activity of a network. The point being, they’re not just big. They’re also effective.”

In 2020 the FBI learned that a number of U.S. companies operating in China were being targeted through Chinese government- mandated tax software. To comply with Chinese law, these businesses had to use certain government-sanctioned software and discovered that malware was delivered into their networks through this software. “So, by complying with Chinese laws for conducting business in China, they ended up unwittingly installing backdoors into their systems that enabled hackers’ access into what should have been private networks,” he said. “This is all just a small sampling, and I could go on.”

MI5 has more than doubled its efforts against Chinese activity of concern, running seven times as many investigations as in 2018. This is set to grow as much again, while also maintaining significant effort against Russian and Iranian covert threats says McCallum.
The ownership, public or hidden, is a key issue, says Wray at the FBI.  

“To start with, a whole lot of Chinese companies are owned by the Chinese government—effectively the Chinese Communist Party. And often that ownership is indirect and not advertised. And those that aren’t owned outright are effectively beholden to the government all the same,” he said.

“For example, they’re taking advantage of unusual corporate forms like SPACs, or Special Purpose Acquisition Companies, and buying corporate shares with overweight voting rights that let their owners exert control over a company out of proportion with the actual size of their stake in it.

“We’re working with MI5 and other partners to identify these types of hidden investments. In the US, we’ve identified and pulled into our screening hundreds of concerning transactions that participants failed to notify us about.”

He points to potential issues with Taiwan and doing business long term in the region.

“Just as in Russia, Western investments built over years could become hostages, capital stranded, supply chains and relationships disrupted,” he said. “Companies are caught between sanctions and Chinese law forbidding compliance with them. That’s not just geopolitics. It’s business forecasting;

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