Chinese Espionage Continues with Latest Theft of Trade Secrets

(The following is based on a redacted report obtained by the National Association of Chiefs of Police.)

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Yan Zhu, also known as “Westerly Zhu”, age 31, a Chinese citizen in the U.S. on a work visa, was arrested Friday morning by FBI agents at his residence, 9 Victor Street, Apt 26, Lodi, New Jersey, on charges of theft of trade secrets, conspiracy, wire fraud, and theft of honest services fraud announced Weysan Dun, Special Agent In Charge. The investigation, code named “Westerly Winds”, began in November of 2008 based on a complaint from the victim company. According to the criminal complaint filed in Federal District Court in Trenton, Zhu was employed at “Company A” as a senior environmental engineer from May of 2006 until his termination in July of 2008. Company A is a comprehensive multi-media environmental information management portal that developed a proprietary software program for the Chinese market which allows users to manage air emissions, ambient water quality, and ground water quality. This program source code was protected through encryption as well as restricted security access within Company A in an effort to protect its commercial value and future revenue derived from software sales and upgrades. Research to develop this source code was a costly process. Zhu had signed employment, confidentiality, and non-disclosure agreements as part of his hiring process with Company A, as well as an agreement to return all confidential and proprietary information, including source codes upon his termination in July of 2008. Additionally, Zhu also signed a notarized affidavit alleging he had not provided Company A source codes to anyone and had returned all copies of confidential Company A information in his possession. The criminal complaint alleges that Zhu had two co-conspirators, identified only as Co-conspirators 1 (CC-1) and 2 (CC-2), both Chinese nationals residing in China. CC-1 had been introduced to Company A through Zhu and hired as Company A’s sales representative in the Science and Technology High-Tech Zone in Xian City, Shanxi Province, China. CC-2, together with Zhu and CC-1, were associated with “Company X”, an environmental software company in China. Based on information in the criminal complaint, it appears that Zhu and his co-conspirators took advantage of the trust placed in them by Company A by exploiting an opportunity for Company A to market its product to the Chinese government. Company A had rented office space in Xian City from which CC-1 represented Company A and hosted the subject software on its own computer system. Due to regulations of the Chinese government which prevented payment overseas, Company A also entrusted CC-1 of Company X to accept payment on its behalf for its services. In January of 2008, Company A learned that the Hebei Environmental Protection Administration (Hebei EPA) of China, was interested in its software. This is significant because, based on the criminal complaint, defendant Zhu, CC-1, and CC-2, and another individual believed to be associated with Company X allegedly began exchanging emails about unspecified business meetings. On or about July 17, 2008, Company A terminated Zhu, citing the emails they discovered as a breach of the May 2006 employment, confidentiality, and non-disclosure agreement. Four months later, on November 10, 2008, Company A found a link on Shanxi Province’s internet web site to a program described as a multi-media environmental system — very similar to a description used to describe Company A’s software. When Company A followed this link, it was discovered that the software allegedly consisted of an operational version of module 1 of the Company A software. But the module had been changed from the original version Company A had provided to Shanxi Province. According to Company A, these changes could not have been made without Company A’s source codes. Furthermore, Company A had called the designers of their software into a meeting where they were shown the software on the Shanxi Province web site. These employees allegedly recognized the software on the web site as their own. Another curious change to the software on the website was the contact information for the supplier of the software. The Company A software listed Company A’s address, telephone number and email address as the supplier. The program on the website allegedly listed the contact information for Company X with the address of the office Company X had rented for CC-1, along with a Chinese telephone and fax number, and an email address. Other similarities to the original Company A software were allegedly discovered. In October of 2008, Hebei EPA, the same Chinese government entity that had expressed an interest in Company A’s product in January of 2008, made a public announcement that they had agreed to purchase software from Company X for a specified figure that was approximately one-tenth of what Company A had sought for their software, according to the criminal complaint. Zhu appeared today before the Honorable Tonianne J. Bongiovanni, United States Magistrate Judge, in District Court in Trenton, New Jersey. He was remanded pending a detention hearing on Monday, April 13, 2009 and faces up to ten years imprisonment on the charges of theft of trade secrets and conspiracy, and up to 20 years imprisonment on the eight counts of wire fraud and theft of honest services fraud. A criminal complaint is merely an accusation. Despite this accusation, every defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt. This investigation is ongoing. SAC Weysan Dun said, “Crimes of this nature do not get much public attention. No one is shot, there is no crime scene, no prominent public figures are involved. However, this is an act of economic violence — a paper crime that robs the victim company of the resources they expended to develop a product. Although this crime is white-collar in nature, it is clearly very dangerous to America’s economic infrastructure. If American dollars are spent on research and development of a product, and then that product or research is taken without any compensation to American companies, the value of American companies and American products is significantly reduced in the global marketplace. My thanks to our agents in the Trenton and Newark offices of the FBI as well as the United States Attorney’s office for bringing this matter to justice.”