Moles Who Burrow for Microchips

By Evan Thomas.

Were it not for a few telltale antennas and a curious whitewashed rooftop coop, the handsome brick edifice in San Francisco's tony Pacific Heights could be easily mistaken for a small, posh hotel. In fact, the owner is the Soviet Union and the occupants are at least 41 Soviet officials. That is an unusually large number of diplomats for a consulate in a medium-size American city, but the Soviets did not come to the Bay Area to stamp tourist visas. About half the consular officials, the FBI estimates, are actually spies.

The Soviets bought the building for its sweeping vistas of the bay, as well as its unobstructed microwave reception. The electronic gadgetry on the roof scans the airwaves and can pluck out conversations when a computer recognizes certain words or phrases. On a clear day, the Soviets can watch Navy aircraft carriers cruising under the Golden Gate Bridge and jets taking off from the Alameda Naval Air Station to the east. But the activity that truly intrigues the Soviets is 40 miles to the south, in Silicon Valley.

There, amid the taco joints and shopping malls, are hundreds of burgeoning high-tech firms that help give the U.S. its essential -- but fast shrinking -- edge over the Soviets in high-technology equipment. From their high-rent spy nest in San Francisco, KGB agents fan out through the valley, looking for Americans who can be bought and secrets that can be stolen.

Moscow's hunger for high tech has transformed the ancient art of spying. No longer are the Soviets principally interested in the traditional fruits of espionage -- the enemy's order of battle, troop movements and codes -- even though, as the Walker case vividly demonstrates, they would dearly like to know the secrets of U.S. antisubmarine warfare. High tech has both raised the stakes and broadened the game. It has made the Silicon Valley microchips as valuable as NATO war plans, and it has made traitors out of civilian engineers as well as Navy code clerks.

Kremlin scientists cannot possibly compete with their U.S. counterparts in % the race of microchips and laser beams that have increasingly become the sinews of modern warfare. The Soviets have long been able to build powerful rockets and sturdy tanks, but their home-designed computers are slow and crude. To close the gap, the Soviets have waged a massive and successful campaign to capture America's technological wizardry. Since the late '70s, estimate U.S. intelligence experts, the Soviets have made off with 30,000 pieces of high-tech equipment and 400,000 technical documents. As a result, declares Assistant Secretary of Defense Richard Perle, they have cut the U.S. technological lead from ten years to as little as three. For the U.S. and its NATO allies, who rely on brains to beat brawn, on "smart weapons" to counter the larger Warsaw Pact forces, the high-tech drain is a factor of consequence in the precarious balance of power.

The Reagan Administration has tried to limit the sale of high-tech equipment that can be put to military use and to crack down on the international "techno-bandits" who purchase or steal for the Soviets what they cannot directly buy. But in an open society that must trade freely with the world, the Reaganauts have about as much chance of preventing high-tech secrets from flowing out of the U.S. as they do of stopping cocaine and marijuana from flooding in.

Stealing high-tech secrets is nothing new; the Soviets have been doing it since at least the 1930s, when Communist agents made off with Western inventions like Eastman Kodak's formula for developing color pictures. In the late '40s the Russians even managed to steal atomic secrets. But in the 1960s, as the U.S. outmatched the Kremlin's big missiles with more accurate ones, Soviet spies were ordered by their masters to make high tech their No. 1 target. It is U.S. computer technology that the Soviets truly covet, for the ability to process masses of information in milliseconds is what makes modern weapons so deadly. Says FBI Counterintelligence Chief Ed O'Malley: "Science and technology is the KGB's largest growth industry."

Detente, with its scientific exchanges and increased East-West trade, was an enormous windfall for the Soviets. Pentagon officials still shake their heads over the guile of Soviet engineers who, as they toured a U.S. aircraft factory during the 1970s, would wear sticky-soled shoes to pick up metal filings. When the U.S. sent young scholars to Moscow to study Slavic languages, the Soviets exchanged "graduate students" who were often middle-age technocrats with a more than academic interest in microcircuitry. A huge truck factory built in the Soviet Kama region with U.S. financing and know-how, all acquired aboveboard, was put to work making the army transports that now convoy Soviet troops over the Afghanistan countryside. Far worse, grinding machines that can craft tiny ballbearings, legally sold to the Soviets by a small Vermont company in 1972, have in the estimate of U.S. intelligence experts saved the Soviets about a decade of R. and D. on improving the accuracy of their ICBMs.

Today many Soviet weapons are reasonable facsimiles if not exact duplicates of American ones. The Soviet AWACS and space shuttles are carbon copies of earlier U.S. models. The Boeing short takeoff and landing (STOL) prototype, a breakthrough aerodynamic design, miraculously appeared just 16 months later as the Soviet AN-72. The SU-15 fighter that shot down the Korean Air Line's Flight 007 two years ago did so with a missile guidance system designed in the U.S. The Soviets do not even attempt to create their own computers anymore: the Kremlin's mainframe RIAD computer is IBM's 360 and 370 series of mainframes, right down to the color of its wires, while the Soviet AGAT personal computer is a copy of the Apple II.

The Soviets decide what to buy or steal by wading through the flood of technical journals and documents freely available in the U.S. Specialized translators at the Soviet State Committee for Science and Technology (GKNT) assess some 1.5 million scientific papers a year. A favorite source: Aviation Week and Space Technology, a trade journal so informative that it is known as "Aviation Leak." Several dozen copies of the magazine are put on a plane to Moscow every week. They are translated in mid-flight.

From such public documents the Kremlin technocrats draw up shopping lists for the KGB and GRU, the chief intelligence directorate of the Soviet military. Last year, for instance, German officials uncovered a secret guide of high- tech items requested by the Kremlin. It was the size of a telephone book. KGB agents, like salesmen with a quota, were required to produce at least four items a year from the list.

The Soviets in the past preferred to wait until the Americans worked the bugs out of a weapons system before stealing it, says retired Admiral Bobby Ray Inman, the former deputy director of the CIA. "They didn't have to worry about competitive bidding, or 'fly before buy' or 'test before buy,' and in three or four years they could have their own version of it in operating forces." But lately the Soviets have become less interested in stealing the finished product than in getting the know-how used to build it. Says a former FBI counterintelligence official: "It's not the cruise missile they want, it's the theory to build it. "Laser technology," he warns, "is next." Unnerved by the threat of the U.S.'s erecting a space-based nuclear umbrella, the Soviets are beginning to zero in on Star Wars devices. This spring British agents caught two GRU officers trying to steal a laser gyroscope made by British Aerospace that can keep killer satellites precisely in orbit.

Many of the items that Moscow desires in order to modernize its arsenal were developed first in the U.S. for commercial use. "Virtually any high-tech advance can be turned by the Soviets into a military use tomorrow," says former CIA Director Richard Helms. The microcircuitry of some video games can be re-engineered to be guided missiles; industrial pipe and tubing can make stronger tank barrels; drilling equipment can be adapted to produce a better armor-piercing shell.

The Soviets would prefer simply to buy this hardware on the open market. Like any careful consumer, they would prefer reliable warranties and servicing and to be able to order spare parts. U.S. export laws, however, ban the sale of more than 200,000 items that might have military application to East bloc countries. So the Soviets have to steal most of what they want or buy it on the black market.

To satisfy the Kremlin's discriminating high-tech palate, the KGB has more than doubled its presence in the U.S. during the past decade. No longer the cloddish thugs of the late-night movies, many are university graduates with smooth manners and fluent English. They can be spotted anywhere military secrets or high-tech gadgets are to be found: trolling night spots outside U.S. military bases or browsing through the booths at trade fairs.

Their most prized hunting ground is Silicon Valley. There they seek out civilians with secrets and a willingness to sell them. The contact often begins with casual friendship, formed in a trendy bar or at a trade show. The agent, perhaps posing as an East European emigre, tries to get his target -- for example, a high-tech engineer who has a security clearance and a large mortgage or heavy alimony payments -- into the habit of handing over information. At first the documents are innocuous, such as an in-house phone directory. Gradually, however, the American is caught on a barbed hook. The cultivation of a turncoat can take months and even years, but, says the FBI's O'Malley, "the KGB is very patient." Christopher Boyce, 32, serving a 40- year sentence for spying, sums it up: "The KGB is forever."

High-tech spying can seem relatively innocuous, at least to those predisposed not to ask too many questions. The Soviets regularly use European middlemen to buy high-tech gadgetry, which itself often seems harmless. "People rationalize," says Herbert Clough, a security consultant. "This little thing can't do any damage. It won't start World War III."

In 1982, Customs officials found the garage of Millie McKee, a divorcee living in the San Francisco suburb of Redwood City, stuffed with high-tech gear. Charged with illegally exporting laser components and sophisticated electronics to Switzerland, where authorities believe it was transshipped to the Soviet Union, McKee was given a six-month work release sentence for making a false statement. She described the crime as "all technical violations," like driving 60 m.p.h. in 55 m.p.h. zones. "There's been little fear of heavy sentences. It's more often a slap on the wrist," says Robert McDiarmid, a Santa Clara County private investigator who handles high-tech security for industry.

The feds are trying to crack down, however. A bureaucratic struggle between free traders in the Commerce Department and Pentagon officials appalled by high-tech transfer has been resolved by the Reagan Administration in favor of tougher export controls. The military won the right to review export licenses, and has blocked sales like the shipment of machinery to test concrete strength to the Soviets, on the grounds that the equipment could be used to help harden missile silos. Since 1981 the Customs Service's Operation Exodus has stopped at the docks some 4,000 illegal shipments abroad, including crates destined for the Soviet Union full of C-130 transport aircraft parts and satellite scanners. "The Russians are sweating," declares Customs Service Commissioner William von Raab. "They used to be able to carry off all our technology by the truckload. Now we're making them pay more and take longer."

Also work harder. Earlier this month, for instance, the Soviets expanded the definition of "diplomatic pouch" to ship 35 tons of cargo marked embassy "household goods" out of Baltimore harbor without the presence of even a single Customs inspector. Pentagon officials blamed the State Department for naively waving the shipment through and failing to notify the proper Customs officials of the impending Soviet move.

The KGB has set up some 400 dummy corporations in Europe to buy high-tech exports. The Soviets can rely on dozens of unscrupulous Western technobandits eager to cash in on the Kremlin's 500% markups by acting as middlemen. So numerous and willing are the technobandits that the Soviets are able to get three or four bids for a single transaction. A valuable piece of high-tech gadgetry can sail a circuitous route before it "jumps the wall," in Customs agents' parlance, to the East bloc. Last month U.S. marshals arrested Marino Pradetto, 46, the Italian operator of a West German electronics firm who was in California for a trade fair, and charged him with illegal diversion of a powerful VAX II/780 mainframe computer to Czechoslovakia through San Jose, Haiti and Switzerland.

What the Kremlin cannot purchase in the U.S. it can often buy from other countries. In 1979 and 1981, the Soviets bought two huge dry docks from Sweden and Japan, promising to use them only for commercial shipping. They are now tenders for Kiev-class aircraft carriers.

The Reaganauts have leaned hard on U.S. allies to tighten their own export restrictions. The Pentagon is not above threatening to withhold export licenses from Western governments if they are not more careful about the re- export of U.S. technology to the Soviets. Western nations have been resentful of pressure from Washington to restrict exports, suspecting that the real motive is economic protectionism rather than national security. Nonetheless, NATO allies and Japan have agreed to ban the export of particularly sensitive high-tech equipment in return for the U.S.'s easing up on the export of less sophisticated gadgetry the Soviets already possess.

The U.S. cannot afford to clamp down too hard on trade. "An important element of national security is a strong economy," says John McTague, deputy director of the White House Office of Science and Technology Policy. "If you try to stop the release of everything, you may slow down our own industrial growth and do some rather serious harm." Cumbersome licensing procedures mean delay; the vagaries of bureaucracy mean inaction. Businessmen complain, for instance, that Texas Instruments' elementary Speak & Spell game, available at toy stores everywhere, was until recently under export controls because of an & embedded microprocessor.

For the Administration, the Kremlin campaign to steal high-tech secrets poses a dilemma. It cannot give the Kremlin carte blanche to buy without endangering security. It cannot simply cut off high-tech trade, or the U.S. will lose valuable markets -- without really thwarting the Soviets, who always seem to find less scrupulous sellers. Worse, if the U.S. restricts access to scientific information, it will dampen the spirit of innovation that gave the country its high-tech edge in the first place. The only answer, albeit a less than perfect one, appears to be heightened vigilance. If, as the old Government posters warned, loose lips sank ships in the last World War, then loose microchips could launch missiles in the next one.

With reporting by Jay Branegan/Washington and Richard Woodbury/Los Angeles