Hackers love a bad transition
Foreign penetration of private equity endangers America
Alarm bells are ringing over the penetration of America's venture capital and private equity communities by hostile foreign powers.
Much of the public's attention is focused on the vulnerability of America's electoral infrastructure to foreign manipulation or cyberattacks by state-sponsored hackers. But Russian and Chinese shell companies fronting for the state are methodically exploiting loopholes in our financial system to steal sensitive technologies and compromise our national security.
This was one of the striking conclusions of two recent reports by the Pentagon and the National Counterintelligence Security Center (NCSC). According to the NCSC report, "China uses front companies to obscure the hand of the Chinese government and acquire export controlled technology."
Consider the example of Danhua Capital, a venture capital firm based in Silicon Valley that has invested in drones, artificial intelligence and cybersecurity. More than 20 Silicon Valley venture capital firms have close ties to a Chinese government fund or state-owned entity. Chinese VC investment in the United States from January to May 2018 reached almost $2.4 billion, equivalent to the previous full-year high set in 2015. Investment data compiled by Bloomberg show that the value of VC deals with at least one Chinese-domiciled investor reached a record high in 2018.
Russia too has made espionage investing a preferred tool of statecraft. Dr Eric Hazeltine, the former U.S. intelligence community tech chief, expressed his concerns about Russian technological espionage in his new book, "The Spy at Moscow Station."
Until stopped by the FBI in 2018, Alexander Korshunov, a Russia's state-owned aircraft engine manufacturer, attempted to purloin GE engine technology, using an Italian citizen as a cutout.
The U.S. government was concerned about the Russian efforts even before the 2016 presidential election campaign intervention. In 2011, Russia's government-owned venture capital firm Rusnano established Rusnano USA in Menlo Park. Rusnano's focus is nanotechnology.
According to reporting in Politico, former U.S. intelligence officials identified Rusnano as a Russian-run espionage operation. "The Russians treated [Rusnano USA] as an intelligence platform, from which they launched operations," said one. "Some of the ... activities Rusnano USA was involved in were not only related to the acquisition of technology, but also inserting people into venture capital groups, in developing those relationships in Silicon Valley that allowed them to get their tentacles into everything," said another.
The case of former Russian billionaire and minister for open government affairs Mikhail Abyzov is particularly instructive. Abyzov was once the sole shareholder of Promtechnologii, a weapons company that makes sniper rifles used by Russian-backed rebels in the Donbass of Ukraine and in Syria.
In 2010, Abyzov created Bright Capital Fund, a Russian venture capital firm in Moscow. Over the next several years, Bright Capital took financial stakes in a variety of high-tech firms in the U.S. with military applications.
In 2010, Bright Capital invested $15 million in Alion Energy, a U.S.-based manufacturer of robots for assembling solar photo-voltaic plants. In 2011, Bright Capital invested $75 million into Alta Devices, which develops flexible solar panels that allow drones to stay aloft for long periods of time. (Alta Devices has also conducted work for the U.S. Naval Research Laboratory.) In 2016, Bright Capital took a stake in Augmented Pixels, a Palo Alto-based software startup that develops automatic navigation algorithms for unmanned aerial vehicles.
It is examples like these that have awakened the U.S. government to the threat posed by silent foreign investors. Hedge funds, venture capital and private equity provide cover for malign actors to make opaque investments that pose national security risks. According to Joshua Kirschenbaum, a former Treasury Department official: "Anonymous companies are the most pressing weakness in our financial system. They help foreign investors hide their roles in potentially sensitive acquisitions...."
The U.S. Government should be commended for taking enhanced measures to protect U.S. national security and the investor community from hostile foreign powers. For the first time in over a decade, the administration enacted into law amendments to the core statutory authority of Committee on Foreign Investment in the U.S. (CFIUS). The Foreign Investment Risk Review Modernization Act of 2018 gives CFIUS the authority to prohibit non-controlling investments by foreign persons in U.S. business directly related to or potentially affecting critical technologies.
Additional measures should include using the Treasury Department's Office of Foreign Assets Control to freeze the assets of foreign investors implicated in the theft or illegal transfer of critical technologies. Some have argued for creating a "No Fly" list that would prevent travel to the U.S. by designated foreign companies, business persons and academics conducting economic espionage or technology theft.
Much like the approach we take to combatting terrorists, a coordinated interagency approach that integrates State Department visa issuance with the Commerce Department's "Denied Persons List" list of violators of U.S. export law and the Treasury Department's list of "Specially Designated Nationals And Blocked Persons List" could significantly enhance protection of the homeland.
Not that this would affect Bright Capital's Mikhail Abyzov. He's in a Moscow jail, awaiting trial for having crossed his Russian handlers.
Ariel Cohen, Ph.D., is a senior fellow at the Atlantic Council's Eurasia Center and director of the Energy, Growth and Security Program at the International Trade and Investment Center. J. Adam Ereli was an American diplomat and ambassador. He was the State Department deputy spokesman and principal deputy assistant secretary of state for education and cultural affairs.