Thursday, October 04, 2012

Russian Network Arrested for Illegal Export

Alexander Fishenko from
ARC Electronics Inc
Yesterday, the U.S. District Court for the Eastern District of New York unsealed the indictment of 11 members of an illegal Russian military procurement network. All suspects were arrested on 2 and 3 October and search warrants were executed at seven locations.

With the help of ARC Electronics Inc, based in Texas, and APEX Systems LLC, a firm, based in Moscow Russia, they illegally exported high-tech microelectronics from the United States to Russia, for use in the Russian defense industry. 

Pivotal figure in the case is Alexander Fishenko. Born in the former Soviet Republic of Kazakhstan, Fishenko graduated from the Leningrad Electro-Technical Institute in St. Petersburg, Russia and immigrated in 1994 to the United States where he became a naturalised citizen in 2003.

Fishenko, who headed ARC and partially owned APEX, is also charged with acting as an unregistered agent of the Russian government as he illegally exported the microelectronics for use by Russian government, military and intelligence agencies. Fishenko, now a U.S. citizen, might well be trialed and jailed as an American, working for Russia, and not as a Russian agent working in the United States, making a spy swap, as seen in the large 2010 U.S. spy case, unlikely.

The other indicted members of the network are Alexander Posobilov, Lyudmila Bagdikian, Sevinj Taghiyeva, Shavkat Abdullaev, Anastasia Diatlova, Viktoria Klebanova and Svetalina Zagon, all working for ARC Electronics, Sergey Klinov and Dmitriy Shegurov from APEX and Yuri Savin from ATRILOR Inc, a Russian firm who regularly purchaised electronics from ARC.

The members of the network are charged with the procurement and export of controlled microelectronics without the required licences, falsifying documents and hiding the true destination and application of the microelectronics. By doing so, they violated the Arms Export Control Act. They are also accused of setting up a scheme to obtain the controlled electronics from U.S. manufacturers, misleading them with false end-users documents, and devising ways to export these to Russia.

The exported high-tech electronics, which cannot be produced in Russia, are usable in various military systems (radar, weapons guiding systems, detonation triggers etc.) and are subjected to strict U.S. government control. From 2002 to date, ARC shipped some 50,000,000 dollar worth of these microelectronics to Russia.

From what we can read in the U.S. attorney's letter supporting the motion to detention, the suspicion of a manufacturer about the identity of an alleged end-user forced them to submit a (falsified) Voluntary Self Disclosure with the Department Of Commerce. This probably triggered the criminal investigation which involved the interception of a substantial amount of phone and e-mail conversations, all providing what the investigators call overwhelming evidence.

Only a few days ago I wrote about industrial espionage in my previous blog about the spy couple that was indicted last Thursday: "...espionage has gone global and probably on an even larger scale than before. Especially economical and technological (corporate) espionage...". And what do you know, the ink of my article isn't dry yet, and we encounter another textbook example of this new style espionage.

Technically, this new case is not an espionage operation, ran by a foreign government, but a criminal case about illegal export, falsifying documents and fraud, incidentally to the benefit of a foreign government. Yet, in the end, the techniques used and the final results are very similar to espionage: getting hands on the adversary's technology by means of deception.

Moreover, in this case, they took industrial espionage, in the Cold War era the expertise of the KGB's Directorat T, to another level. In the Soviet era, defense industry espionage was limited to obtaining documents, research papers and theft of limited quantities of equipment or electronics in order to reverse-engineer and copy the technology (copyright as in "the right to copy"). For many years, Soviet technology trailed the West by a decade and Directorat T was to close that gap. However, the Soviet plan economy was unsuitable to timely produce the copied technology and profit of the billions of roubles, saved in R&D costs.

Surprisingly, despite Russia's technological and economical advances, they now didn't even bother trying to reverse-engineer or copy the electronics, but simply imported them in large quantities for immediate application in the defence industry. By doing so they of course again saved themselves the immense R&D costs. The consequences of this industrial espionage are obvious. Nevertheless, most companies are unaware about the risk they are exposed to.

In the Cold War era, defense contractors, and especially those who produced state-of-the-art military technology, were guarded closely by intelligence and security organisations and their personnel was properly screened. In part, this still counts today. However, R&D and production of critical technology is shifted more and more to civilian companies who produce commercial off-the-shelf technology, often controlled by export laws. It's cheaper, but poses more risks.

The trend towards industrial espionage and illegal export is a double-edged sword. It cuts into a nation's security and into its economy. I'm afraid that we will see much more of this type of espionage and industrial theft in the future. Time will tell how devastating the consequences could be. Or how the neo-Cold War heat has increased another few degrees today.

More information about this new case is found in the attorney's motion for detention (pdf), the Fishenko signed indictment (pdf) and the FBI press release. Undoubtedly, more information will soon surface. More about industrial espionage in my post about the Farewell dossier. More new-style espionage in my posts on the German spy case and the 2010 spy ring. As my motto says, we could have predicted this because humans excel in repeating (their errors from) the past. For more on espionage, just select the espionage label.

To end with bit of humour: the slogan on the ARC Electronics website is "we build our business AROUND YOU" (including capitals). I presume with "around you" they meant around the customs. Speaking of hidden messages!

Russia Today's first reports on the case

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