Corporate Intellectual Property Theft at All-Time High

A survey suggests that instances of intellectual property theft are outpacing physical theft.
Corporate Intellectual Property Theft at All-Time High
12/13/2010
Updated:
12/13/2010
[xtypo_dropcap]T[/xtypo_dropcap]his year marks the first time that global companies are being hit more frequently by information and electronic data theft than physical property theft, according to an industry report.

“Theft of confidential information is on the rise because data is increasingly portable and perpetrators—often departing or disgruntled employees—can remove it with ease absent sufficient controls,” said Robert Brenner, vice president at risk consulting firm Kroll, in a press release regarding the Kroll Annual Global Fraud Report.

The survey findings in the Kroll report do not indicate that physical property theft has taken a backseat to intellectual property theft, but suggest only that instances of intellectual property theft are outpacing physical theft.

“The results of the survey do not suggest other types of fraud are decreasing but merely that the rise in theft of intellectual capital has outstripped other fraudulent activity that has remained constant,” Brenner said.

Valuable Intellectual Property

“There is a growing awareness among thieves of the increasing intrinsic value of an organization’s intellectual property,” according to Brenner.

Intellectual property is the bread and butter of companies in any industry and if stolen, could translate into millions of dollars of revenue losses.

Intellectual property includes copyrighted information, internal company secrets, and sensitive government documents. There is a large market for stolen information throughout the world, and resources that fight such theft are scarcely keeping up. Also, enforcement, especially in emerging markets, is lax, and the regulatory environment may not be well-established.

Intellectual property theft does not only encompass sensitive government and company information, but also creative works, such as movies, literary works, music, and so on. The entertainment industry, led by the Motion Picture Association of America, has been fighting copyright issues for uncounted years.

Recently, hundreds of thousands of copies of sensitive U.S. government information was leaked through Wikileaks, and the implication to diplomatic missions has not yet been fully assessed.

Intelligence gathering has found that sophisticated hacking, especially coming from hackers in China and Africa, is on the rise.

Almost half of the companies interviewed in the Kroll survey refused to do business in foreign countries because of fraud, corruption, and data and physical property theft.

China and countries in North America, Africa, and Latin America are named more frequently than European countries as places with high intellectual property theft, according to the business leaders surveyed.

Firms that have refused to enter China suggested a multitude of reasons, with intellectual property theft cited more often than other reasons.

“Corruption and information theft are the two most widespread issues (34% and 33% respectively), but concerns about intellectual property, a long-standing worry for those operating in the country [China], were a leading factor for 23% of businesses dissuaded from doing business there,” according to the Kroll research report.

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Companies and Regulatory Efforts

“Perhaps the most surprising set of responses in the survey related to the potential lack of awareness of the extraterritorial nature of international corruption regulation,” the Kroll report said.

Despite the U.S. Foreign Corrupt Practices Act (FCPA) and the United Kingdom Bribery Act 2010 being in force and actively pursued, most respondents were unfamiliar with their responsibilities under those laws.

According to the Kroll report, close to half of the respondents said that although they knew about the U.S. and U.K. acts, their management was ill-equipped to deal with them or understand the implications to their businesses.

What’s surprising is that many companies in the United States and the United Kingdom “believe the laws do not apply to them or are unsure” about these laws, the Kroll researchers said.

Global Fraud Issues

“Companies in Latin America report being defrauded at rates second only to Asia,” according to the Kroll report.

Fraud was found to be prevalent in Latin America, and individuals involved in the illegal activities were not just company insiders, but also customers, suppliers, and foreign governments.

In China, local firms—in addition to foreign ones—were also targets of fraud. A total of 98 percent of Chinese companies polled for the Kroll research report reported discovering a multitude of fraudulent activities. Yet, Chinese business practices to this day remain lax, and companies rarely perform employee background checks prior to hiring.

Close to all companies polled in Colombia reported data theft in 2009. “The areas of greatest concern include vendor or procurement fraud, information theft or loss, management conflict and regulatory or compliance fraud,” the Kroll report said.

India’s manufacturing and engineering sectors were found to be riddled with kickback, copyright, and counterfeiting fraud.

In India, “a key driver of fraud and corruption in the manufacturing and engineering sector is the frequently isolated geographical location of operations,” according to the Kroll report, with the majority of fraud perpetrated by vendors, suppliers, agents, and partners.

High Profile Fraud Cases

Two engineers, Clark Alan Roberts and Sean Edward Howley, were convicted in December of pilfering trade secrets from the Goodyear Tire and Rubber Company.

“The ruling in this case will send a message that complicated trade secret violations will be aggressively investigated and prosecuted by U.S. Attorney’s Offices and the Department,” said William C. Killian, U.S. Justice Department attorney, in a statement.

In November, the former information technology director for Transmarx LLC, based in Richmond, Va., was sentenced to a 27-month prison term for hacking the Transmarx website, resulting in great financial loss to the company.

In mid-2010, the U.S. Department of Justice handed down 30 felony convictions after seizing about $143 million worth of counterfeit Cisco Systems Inc. computer products, all from China.

“These cases involve greedy businessmen hocking counterfeit and substandard hardware to any buyer—whether it could affect the health and safety of others in a hospital setting or the security of our troops on the battlefield,” said John Morton, assistant secretary of Homeland Security, in a statement regarding the counterfeit Cisco networking hardware.