Fed not prepared enough to thwart Chinese intelligence gathering – report

By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve lacks adequate systems to counter a “clever” effort by China to gather inside information about the U.S. economy and monetary policy, according to a report prepared by Republican Senate Committee staff. internal security. , and quickly dismissed by the Fed as “unfair, unsubstantiated and unverified”.

The report, which was released on Tuesday, relies heavily on information provided by the US central bank itself, dating back to a 2015 internal investigation into what has become known as the “P-Network”, a group of 13 people in eight regions. Federal banks whose habits of “foreign travel, e-mail, details in resumes and academic backgrounds” have raised concerns.

The Washington-based Fed Board of Governors and 12 quasi-independent regional banks employ thousands of economists, many of whom come from other countries, including China. This collaborative approach, according to the committee’s report, improves the Fed’s ability to understand the economy and develop policy.

The incidents cited in the document, rather than intellectual collaboration, underscored “a sustained effort by China, over more than a decade, to gain influence over the Federal Reserve,” according to the report.

We don’t know what came of it. The committee’s report provided detailed case studies of five people, four of whom continue to be Fed employees, and said that despite their ties to Chinese officials and universities, the Fed found no cases where information was shared in violation of policies.

In a letter to outgoing Sen. Rob Portman, the top Republican on the Homeland Security Committee, Fed Chairman Jerome Powell said he had “serious concerns about the claims and implications of the report,” and detailed the background checks of Fed personnel and technology. used to prevent security breaches.

“We would be concerned about any justifiable allegations of wrongdoing, regardless of the source,” Powell wrote. “On the other hand, we are deeply troubled by what we believe to be the report’s unfair, unsubstantiated and unverified insinuations about particular members of staff.”

The activities discussed in the document raised red flags at least several years ago within the Fed, according to the report. U.S. central bank officials often talk about the cybersecurity risks they and all financial institutions face, but haven’t mentioned being the target of human intelligence gathering.

Some staffers had remained in contact, for example, with a former regional Fed employee, identified only as “Z”, who had ties to a Chinese “talent recruitment program” used by the Chinese Communist Party to develop sources within US technical institutions, the report said. Recruitment programs, including the “Thousand Talents Program,” were highlighted in a previous Senate report as a key way for China to use research grants, university lectureships and other benefits to trying to learn and export American intellectual property.

In this case, the situation has led Fed officials to worry “about organized efforts by foreign governments … to solicit Federal Reserve researchers,” the report said.

One of the employees involved, the report adds, “attempted to transfer large volumes of data” to an external computer, although a committee aide said it was unclear whether the effort was successful. or what data was involved.

A Fed staffer “provided modeling code to a Chinese university with ties to” China’s central bank, the report said, though again there were no details about the nature of the code. or if its distribution was restricted. Powell in his letter noted that the Fed’s “most important economic models” are in the public domain, available for download on the Fed’s website “so that people can engage with us and these models.”

“FORCED DETAINEE”

In perhaps the most brutal incident, “a senior Federal Reserve Bank official” was “forcibly detained” in 2019 by Chinese officials while traveling in the country and told, under threat of imprisonment, that he “must cooperate … and share sensitive, non-public economic data.

The staffer reported the incident to the Fed, which reported it to the State Department and the FBI, according to the report.

Still, the report argues that the Fed should step up its counterintelligence efforts and work more closely with agencies like the FBI.

“Because we understand that some actors aim to exploit all vulnerabilities, our processes, controls, and technologies are robust and updated regularly,” Powell wrote. “We respectfully reject any suggestion to the contrary.”

(Reporting by Howard Schneider; Editing by Paul Simao)

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